Use these links to rapidly review the documentCARRIAGE SERVICES, INC. INDEXITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ýAnnual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For The Fiscal Year Ended December 31, 2004oTransition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
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Commission File Number: 1-11961
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1900 Saint James Place, 4th Floor, Houston, TX | 77056 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (713) 332-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $.01 Par Value | New York Stock Exchange | |||
(Title Of Class) | (Name of Exchange on which registered) | |||
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’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. oý
Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates (affiliates being, for these purposes only, directors, executive officers and holders of more than 5% of Carriage's Common Stock) of the registrant as of June 30, 20032004 was approximately $40$74.93 million based on the closing price of $3.54$5.04 per share on the New York Stock Exchange.
The number of shares of the registrant'sregistrant’s Common Stock, $.01 par value per share outstanding as of March 15, 20042005 was 17,702,329.17,969,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be delivered in connection with the 20042005 annual meeting of stockholders are incorporated in Part III of this Report.
CAUTIONARY NOTECARRIAGE SERVICES, INC.INDEX
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This annual report contains forward-looking statements of our management regarding factors that we believe may affect our performance in the future. Such statements typically are identified by terms expressing our future expectations or projections of revenues, earnings, earnings per share, cash flow, market share, capital expenditures, effects of operating initiatives, gross profit margin, debt levels, interest costs, tax benefits and other financial items. All forward-looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause our actual results to differ materially from expectations or projections include those described under the heading “Forward-Looking Statements” in Item 7. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.
THE COMPANY
Carriage Services, Inc. (the "Company" or "Carriage") is
GENERAL
We are a leading provider of death care services and productsmerchandise in the United States. We operate two types of businesses: funeral homes, which currently account for approximately 75% of our total revenue, and cemeteries, which currently account for approximately 25% of our total revenue. As of December 31, 2003,2004, we operated 139135 funeral homes in 28 states and 30 cemeteries in 2912 states. Carriage providesFor the year ended December 31, 2004, we had revenues of $150.2 million and earnings from continuing operations of $11.0 million. We primarily serve suburban markets and believe we are a complete rangemarket leader (first or second) in most of those markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.
Our operations are divided into two business segments:
•Funeral Home Operations. Funeral homes are principally service businesses that provide burial and cremation services including planning and coordinating personalized funerals, conducting memorial services, performing cemetery intermentsell related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
• favorable demographic trends in terms of population growth and average age, which impact death rates and number of deaths;
• establishing and maintaining leading market share positions supported by strong local heritage and relationships;
• effectively responding to increasing cremation trends by packaging complementary services and managing and maintaining cemetery properties. We sell productsmerchandise;
• controlling salary and merchandise including caskets, urns, burial vaults, garments, cemeterycosts; and
• exercising pricing leverage related to our at-need business to increase average revenues per contract.
•Cemetery Operations. Cemeteries are primarily a sales business that provides interment rights (grave sites and monumentsmausoleums) and markers.related merchandise, such as markers and memorials. Our cemetery operating results are impacted by the success of our sales organization because approximately 36% of our cemetery revenues during the year ended December 31, 2004 was generated from preneed sales of interment rights. We focusbelieve that changes in the level of consumer confidence (a measure of whether consumers will spend money on distinguishing ourselvesdiscretionary items) also impact the amount of such preneed sales. Cemetery revenues generated from at-need service and merchandise sales generally are subject to many of the same key profitability factors as in our competitors by operating a people development companyfuneral home business. Approximately 8% of our cemetery revenues during the year ended December 31, 2004 was attributable to investment earnings on trust funds and finance charges on installment contracts.
Our business strategy is based on strong, local leadership and entrepreneurial principles that emphasizes: (i) a consistent model to serve client families, (ii) comprehensive employee training, (iii) accountability to customers and each other, and (iv) incentive compensation which shares the benefits ofwe believe drive market share, revenue growth, and profitability with responsible employees.in our local markets. Our operating model emphasizes:
From 1996
• decentralized management of our local businesses;
• financial and operational standards based upon drivers of success of our best businesses;
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• variable compensation that rewards our funeral home managers as if they are owners;
• finding, developing and retaining the best people in our industry; and
• information technology designed to 1999, the Company grew rapidly through a significant numbersupport local business and corporate management decisions, measure performance of acquisitions. In 1999, the level of acquisition activity was sharply curtailed, growth slowedour businesses against our financial and Carriage focused on improving operating results. We initiated Fresh Start in 2000operational standards, and ensure adherence to address the Company's high level of debt. Since then we have sold 37 funeral homes, 12 cemeteriesestablished internal control procedures.
Our near-term objectives for 2005 and 14 parcels of excess real estate for approximately $20 million of net proceeds. By applying the net proceeds from dispositions, income tax refunds and cash flow from operations2006 include:
• continuing to reduce debt and contingent acquisition obligations, the outstanding balance of such obligations has decreased from $205 million in the fourth quarter of 2000 to $135.5 million at year-end 2003.
While the primary goals of the Fresh Start initiatives have been achieved, we will continue to focus on operations and the Company's capital structure in order to reposition Carriage for future growth. Our focus over the next two years is to grow the market share and improve theour operating and financial performance ofby executing our “Being the Best” funeral operations; increase preneed property salesoperating model and implementing a similar operating model in our cemetery segment;
• increasing our profitability and cash flow, in our cemetery operations; further reduce debt; and strengthen our capital structure. We will continuecontinuing to improve our organizational leadershipcredit profile;
• initiating a disciplined acquisition program of funeral businesses that match a profile based on our Being the Best standards.
Our longer-term objectives over the next five years include:
• continuous improvement and quality of personnel. We also expectportfolio optimization driven by our Being the Best operating model;
• increasing market share and profitability;
• formalizing and fully implementing a disciplined acquisition program; and
• raising equity proceeds to divest additional businesses in the future, where those businesses are not meetingenhance our standards.capital structure and support our growth strategy as appropriate opportunities arise.
Carriage is incorporated in Delaware. Our principal executive office is located at 1900 Saint James Place, 4th Floor, Houston, Texas 77056, and our telephone number is (713) 332-8400.
DEATH CARE INDUSTRY
Death care companies provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. The death care industry in the United States is characterized by the following fundamental attributes:
HIGHLY FRAGMENTED OWNERSHIP. A significant majority of death care operators consist of small, family-owned businesses that control one or several funeral homes or cemeteries in a single community. Management estimates that there are approximately 22,000 funeral homes and 10,000 cemeteries in the United States. Approximately 20% of the 2002 U.S. death care industry revenues are represented by Carriage and the three other larger publicly traded domestic death care companies.
HERITAGE AND TRADITION.Death care businesses have traditionally been transferred to successive generations within a family and in most cases have developed a local heritage and tradition that afford an established funeral home or cemetery a local franchise and provide the opportunity for repeat business. In addition, established firms' backlog of preneed, prefunded funerals or presold cemetery andRates
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mausoleum spaces provides a base of future revenue. Since 1999, we have seen new independent competitors capture some local market share. In many cases, these new independent businesses are started by personnel who have left public consolidators or family owned businesses. Often such businesses are attempting to build market share by competing on price rather than heritage and tradition.
DEATH RATES. The deathDeath rates in the United States have been relatively stable on a long-term historical basis. The number of deaths in the United States had increased at a compoundedan annual rate of approximately 1% for the period from 1980 throughto 2000. However, statistics reportedFrom 2001 to 2003, death rates deviated from this long-term trend by declining year-over-year for a three-year period, which is the Centerfirst time year-over-year declines occurred since the mid-1970s. The death rate for Disease Control ("CDC"), as adjusted, indicate that2004 was flat compared to 2003. Despite this recent trend, the number of deaths declined by more than 1%per year in each of the three years from 2001 through 2003. While the number of deaths typically varies from year to year, we believe major medical advances in treating heart, cancer and other major diseases that cause death are resulting in an increase of the average age of the population. This trend is calling into question CDC forecasts of an increasing number of deaths of 0.75% through 2010. Nevertheless, the aging baby-boom generationUnited States is expected to causeincrease from 2.4 million in 2004 to 2.6 million in 2010 according to the numberUnited States Bureau of deathsthe Census. In addition, the segment of the United States population over 65 years of age is expected to increase by over 13% from 34.9 million in the long-term.2000 to 39.6 million in 2010.
DELEVERAGING. Until 1999, the industry experienced consolidation of independent death care operations by a few large, primarily publicly owned death care consolidators that sought to benefit from economies of scale, improved managerial control and more effective strategic planning and greater financial resources. None of the publicly traded companies are currently pursuing significant acquisitions at this time. Since 2000, each of the consolidators have been selling selected properties and other assets and using operating cash flow to reduce their debt levels.
PRENEED MARKETING.Cremation In addition to sales at the time of death or on an "at need" basis, death care products and services are being sold prior to the time of death or on a "preneed" basis. We have developed marketing organizations to actively promote such products and services. Effective marketing of preneed products and services provides a backlog of future business. We believe sales of preneed products and services, including cemetery and interment rights and preneed funeral services, are purchased primarily by people between the ages of 50 and 80. Our preneed funeral sales and marketing program is managed at the local market level by the funeral home managing partner in conjunction with our Director of Preneed Sales. All preneed sales counselors are employed by our local businesses.
CREMATION.
In recent years, there has been a steady, gradual growthincrease in the number of families in the United States that have chosen cremation as an alternative to traditional methods of burial. According to industry studies, cremations represented approximately 10% of the U.S. burial market in 1980 and approximately 28% in 2002 and are projected at 40% for 2010.2002. Cremation rates can vary significantly based upon geographic, religious and cultural traditions. Cremation, historically, hadHistorically, direct cremation has been marketedoffered as a less costly alternative to interment.a traditional burial. However, cremation is being increasingly marketedaccepted as part of a complete package that includes funeral services and memorialization. The percentages of funeral services conducted bythat includes memorials, merchandise and options for the interment of remains.
Highly Fragmented Ownership
We estimate that there are approximately 22,000 funeral homes and 10,000 cemeteries in the United States, and that the domestic funeral service industry generated approximately $15 billion of revenue in 2003. The four largest public operators of both funeral homes and cemeteries in the United States are Service Corporation International, Alderwoods Group (formerly known as The Loewen Group), Stewart Enterprises, and Carriage Services. We believe these four companies collectively represent approximately 20% of death care revenues in which cremation was chosen as the manner in which to disposeUnited States. Independent businesses represent the remaining amount of industry revenue, accounting for an estimated 80% share. During most of the remains were 27%, 28%1990s, there was a trend toward independent firms consolidating with public operators. However, few acquisitions have occurred since 1999 and 30%there have been a number of independent entrants in local markets. As a
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result, the industry continues to be characterized by a large number of locally-owned, independent businesses.
Heritage and Tradition
Death care businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for eachongoing business opportunities from established client family relationships and related referrals. Given the sensitive nature of our business, we believe that relationships fostered at the local level build trust in the community and are a key driver of market share. While new entrants may enter any given market, the time and resources required to develop local heritage and tradition serve as important barriers to entry.
Deleveraging
Until 1999, the industry experienced consolidation of independent death care businesses by a few large, primarily publicly owned death care consolidators that sought to benefit from economies of scale, improved managerial control, more effective operating strategies and greater financial resources. From 2000 to 2004, these consolidators have been divesting selected properties and other assets, and using proceeds from such dispositions, together with free cash flow, to accelerate debt reduction. We expect the level of dispositions to substantially decline in the near-term and anticipate that some of the three yearspublic consolidators may resume acquisition programs.
Preneed Marketing
In addition to at-need sales, we and certain other death care providers sell products and services on a preneed basis. Selling products and services on a preneed basis, if properly executed, provides a backlog of future revenue and enhances the heritage and market share of an established funeral home or cemetery. However, preneed sales lock in the revenue from 2001 through 2003.future services at current prices and result in paying certain costs, such as sales commissions, at the time the preneed contract is originated.
BUSINESS STRATEGY
Implement Operating Initiatives
During the last threefour years, Carriagewe and the other public consolidators have been restructuring theirour organizations and improving theirour financial condition, liquidity and balance sheets by reducing debt. Carriage madeDuring the second half of 2003, we implemented several significant progress in improving operating cash flow and reducing debt under its Fresh Start program. Successful execution of Fresh Start during the last three years has,changes in our view, positioned the Company as a leader in our industryfuneral organization and improved our financial flexibility.
"FRESH START" PROGRAM. During the third quarter of 2000, Carriage initiated a multi-faceted restructuring program termed "Fresh Start" in responseoperations to its leveraged balance sheet resulting from rapid growth, deterioratingimprove operating results and a challenging industry environment. The program began with a
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review of the funeral home and cemetery portfolios, operating strategies, organizational structure, and financial covenants under the Company's credit agreements.
The goals for the restructuring program, announced in November, 2000, were to (1) restore credibility to our operating and consolidation model; (2) increase and better align our earnings and cash flow; (3) restore market value credibility to our balance sheet; (4) reduce our debt; and (5) re-access the capital markets. The principal elements of Fresh Start included the downsizing of our corporate organization, strengthening its corporate and operating leadership, changing our preneed funeral marketing strategy, stratifying by performance the funeral home and cemetery portfolios, implementing action plans to improve or dispose of underperforming businesses, reviewing and adjusting the carrying value of assets, and modifying financial covenants with lenders to facilitate the execution of the program.
We believe the Fresh Start goals have been substantially accomplished. The five Fresh Start goals, together with their impact on the periods covered by this annual report, as well as their continued relevance to future results are as follows:
In Carriage's view, the benefit of integrating acquired businesses is to introduce its innovative service and sales strategies to provide the highest quality funeral experience to client families and to introduce its operating model to improve long-term performance. Carriage continues to invest heavily in employee training in order to enable its field operations to better serve families, especially training on personalization of the funeral ritual to create a unique and emotional experience. The result of successful execution of its service and sales strategies will be to increase customer satisfaction, revenue per experience, and market share.
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per share was $6.04. As Carriage executes its operating model and successfully improves long-term profitability, we expect to continue to increase book value per share.
FUNERAL OPERATING STRATEGY. While Fresh Start has been completed, management recognized that to become the best and increase value for the stockholders, Carriage must improve the operating results of its funeral operations by growing market share and increasing internal earnings growth. We recognized that our funeral operating model must be changed.
During 2003,profitability. On January 1, 2004, we made significant changes in our funeral operations. We introduced a more decentralized and entrepreneurial financial operating model for our funeral homes. The execution of our Being the Best standards-based funeral operating model has resulted in operational improvements in our funeral segment during 2004. Those operational improvements include, among other things, improved showroom presentation and local operating model. At the same time, we introduced operatingmerchandising, achievement of higher prices per service and financial standards developed from our best businesses. We also overhauled our incentive compensation structure to align with the new standards. These new standardsimproved staffing and incentives will challenge and reward the managing partners who thrive on growing the local business and taking responsibility for results.
cost management. Key elements of our operatingoverall business strategy and model include the following:
• BALANCED OPERATING MODEL.Decentralized Funeral Operating Model. Our new funeral We believe that a decentralized operating model called "Beingis best suited to grow market share and improve financial performance in the Best", is based upon lessons we learned from our best businesses and from Fresh Start. We believe a decentralized structure works best in ourfuneral industry. TheThis new operating model focuses on key drivers of a successful funeral business, organized around three primary areas—areas — market share, people, and operatingoperational and financial metrics. Successful execution of theour new operating model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial empowerment and corporate support aligned with the key drivers.
INCENTIVES ALIGNED WITH STANDARDS. Empowering managing partners to do the right things in their operations and local communities and providing appropriate support with operating and financial practices will enable growth and profitability.support. In order to measure reward and recognize success under our new operatingalign this model we had to define it. We analyzed our best businesses (approximately 20% by number) and developed operating andwith financial standards organized around three primary areas—market share, people and operating and financial metrics. Weperformance across the organization, we developed a set of customized standards for each funeral business by comparing it tobased on the financial results and attributes of our best taking into considerationproperties, adjusting for size and cremation mix. Eachpercentage of cremations. Our managing partner willpartners participate in a variable bonus plan wherebyin which they will earn a fixed percentage of their business'business’ earnings based upon the actual standards achieved. WeUnder this new program, we believe eachour managing partner haspartners have the opportunity to be compensated at close to the same level as if they owned the business.
• RIGHT LOCAL LEADERSHIP.Family Service Cemetery Operating Model. Successful execution We view our cemetery operations, which traditionally have been more sales-oriented, as a different business from our funeral operations, which are more service-oriented. We are focusing our efforts in our cemetery segment on building heritage among new client families. A principal initiative has been to emphasize property sales, which strengthen the ties between our cemeteries and these clients. We are also in the process of the newdeveloping a standards-based operating model is highly dependent on strong local leadership, intelligent risk taking and entrepreneurial empowerment. Over time, we expect the managing partner's execution of the operating and financial standards will be a primary performance indicator.
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CYCLE OF SERVICE. The Cycle of Service is a comprehensive approach to the funeral arranging process. It encompasses all of the steps that help build a meaningful and lasting memory picture for our client families.cemeteries. We are reviewing the various stepsexpect to implement a limited operating model in the Cycle2005 and a fully developed standards-based model in 2006.
•Presentation and Packaging of Service in order to updateServices and improve it. The process and activities will align with our strategy to build a meaningful and lasting relationship with each client family. We have also developed a "Best Practices" website where innovative new service ideas will be shared.Merchandise.
PRESENTATION AND PACKAGING OF SERVICES AND MERCHANDISE. We believe packaging funeral services and merchandise offeroffers both simplicity and convenience for our client families. Well conceivedWell-conceived and thoughtful packages eliminate much of the effort and discomfort experienced by client families concerning matters about matters wherewhich they do not have much knowledge during a
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very stressful and emotional time. While clients will always have the option of purchasing services and merchandise separately, we believe the emphasis on personalized services and appropriate merchandise will be valued by many families.
MERCHANDISE STRATEGY AND SUPPLIER ARRANGEMENTS. We are conducting a review of our merchandise strategy for our selection floors. Merchandise selections will be aligned with package options. In addition, the selection floor will be evaluated to determine if it is effective. Key elements of an effective floor would be balanced retail prices with appropriate mark-ups, intelligent layout and choices supported by good presentation. We have entered into updated arrangements with four primary casket suppliers to support our new strategy and control wholesale costs. We also anticipate that our packaging strategy will result in increased revenue per cremation service over time as more families select packages that provide services and merchandise. The percentages of funeral services conducted by us in which cremation was chosen as the manner in which to dispose of remains was 30% for the year ended December 31, 2003 and 31% for the year ended December 31, 2004. For the year ended December 31, 2004, approximately 63% of the number of our total cremation services were direct cremations (where no viewing, visitation, or merchandise is involved, although a memorial service may be held) and 37% included additional services and merchandise.
DECREASE OVERHEAD COSTS.Preneed Funeral Sales Program. We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs. We emphasize insurance-funded contracts over trusted contracts in most markets, as insurance products allow us to earn commission income to improve our cash flow and offset a significant amount of the up-front costs associated with preneed sales. In addition, the cash flow and earnings from insurance contracts are performingmore stable than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by funeral directors with sales sourced by sales counselors and third party sellers.
•Decrease Overhead Costs. We periodically perform targeted reviews of our systems and support services with the objective of improving effectiveness and decreasing overhead costs. We recently completed an upgrade of our funeral services system to improve its features and functions. We planfunctions and expect to implement a new cemetery system during 2004. As we implement new systems, we are reviewingin mid-2005. We will continue to review and changingchange corporate processes to improve efficiency and effectiveness.
•Renewed Corporate Development Efforts. We believe that our improved capital structure, resulting from the $130 million debt offering in January 2005, position us to pursue a strategy of disciplined growth, affording us the flexibility to redeploy our free cash flow toward selective acquisitions that meet our criteria. We expect to continue to improve our credit profile as we invest our cash flow into businesses that will contribute incremental revenues, earnings and cash flow. We will be applying the standards and practices established under our Being the Best operating model to qualify acquisition candidates, ensuring that they are a proper fit and can be readily integrated into our portfolio. Ideal candidates would be those that are demonstrated market leaders, have strong local management, have owners and family members whose objectives are aligned with ours, and have field-level operating margins consistent with our best performing properties. We will look to geographic areas that complement our existing markets, with a primary focus on suburban markets with growing populations of 100,000 or more, preferably in the Northeast and on the West Coast. We expect to give the most serious consideration to firms with at least 200 to 400 calls annually (or at least $1 million in annual revenue).
•Improve Credit Profile Through Cash Flow and Debt Reduction. During 2004 we continued our focus on generating cash from our operations, managing capital expenditures and paying down debt to improve our credit profile. The goal was to reaccess the markets to refinance the long term debt, $76.9 million of which was scheduled to mature in 2006. Cash from operating activities totaled $24.2 million and capital expenditure totaled $5.7 million, the net of which ($18.5 million) along with proceeds from sales of assets and other items, allowed us to reduce long-term debt by $25 million in 2004.
•Accessing Capital Markets. In January 2005 we met our goal of reaccesssing the capital markets by completing an offering of $130 million in senior debt due in 2015 and bears interest of 7.785% per annum. We used the net proceeds to pay off our senior debt. This transaction extended the maturity of our senior debt and provides us more financial flexibility.
OUR STRENGTHS
Market Leader in Our Suburban and Rural Markets. We are the fourth largest publicly traded death care company in the United States. Our operations are located in suburban and rural markets, where we primarily compete with smaller, independent operators with significantly less financial and managerial resources. Most of our suburban markets have populations of 100,000 or more. In over 70% of our funeral home markets, we believe that we are either first or second in local market share.
Partnership Culture. Our funeral homes and cemeteries are managed by individuals with extensive death care experience, often within their local markets. Our funeral home managing partners have responsibility for day-to-day operations but are required to follow our Being the Best operating and financial standards. This strategy allows each local business to maintain its unique identity within its local market and to capitalize on its reputation and heritage while our senior management maintains supervisory controls and provides support services from our corporate headquarters. We believe our culture will be very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.
Flexible Capital Structure. We believe that the capital structure we have had in place since mid-1999 has provided us with financial flexibility, which allowed us to focus our efforts on improving operations and our credit profile. Following the successful execution of our debt reduction initiatives using free cash flow primarily to pay down debt, we used the net proceeds from our debt offering in January 2005 to pay off our existing senior debt, which further improves our capital structure and financial flexibility.
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After completion of the offering, we have four primary components in our capital structure:
• the $130 million senior notes issued in January 2005 which have a 2015 maturity;
• a revolving credit facility, described under the heading “Liquidity and Capital Resources” in Item 7;
• our convertible junior subordinated debenture payable to our affiliate trust, which has the ability to defer payments of interest, and a 2029 maturity; and
• our common stock.
PRENEED FUNERAL SALES PROGRAM.Stable Cash Flow and Debt Reduction. Preneed sales frequently require Since 2000, we have demonstrated the ability to generate stable cash flow and to repay debt with cash flow from operations and asset sales. We have also demonstrated an immediateability to manage capital expenditures to a consistent level. We have reduced senior debt and contingent obligations from previous acquisitions by $86.9 million, or 44%, from $197.2 million at December 31, 2000 to $110.3 million at December 31, 2004. Free cash outlayflow (cash flow from operations less capital expenditures) for 2004 totaled $18.5 million, including the $7.0 million benefit from deferring interest payments on the subordinated debenture to affiliate. We remain committed to using free cash flow to continue to improve our credit profile and to fund a selective growth strategy.
Strong Field-Level Operating Margins. We believe that our field-level operating margins are among the highest reported by the sellerpublic companies in the death care industry and that this performance is a testament to fund commissionsthe success of our business strategies. These strong margins and promotional expenditures. Beginningthe ability to control costs are important advantages in 2000,a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we moved from a national, centralized marketing strategybelieve that our standards-based operating model implemented at the beginning of 2004 will continue to ayield positive improvement in our financial results.
Effective Management of Funeral Preneed Sales. We believe our local, decentralized strategy whereby each business location customized a preneed program to its local needs. We also began selling insurance-funded contracts in most markets that allowallows us to earn commission incomeadapt our preneed sales selectively to best address the competitive situation in our markets. In highly competitive markets, we execute a more aggressive preneed sales program. In less competitive markets where we have a strong market position, we deploy a more passive preneed sales program. In certain of our markets, we do not deploy a formal preneed program. This approach allows us to target the investment in preneed sales to markets where we have the opportunity to reinforce our market share. Because approximately 80% of our revenues are generated from at-need sales, we retain significant pricing leverage in our funeral business.
Integrated Funeral Information Systems. We have implemented sophisticated information systems to support local business decisions and improveto monitor performance of our cash flow. The focusbusinesses compared to financial and performance standards. All of our funeral homes are connected to our corporate headquarters, which allows us to monitor and assess critical operating and financial data in order to analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is suchcritical given our decentralized model and the sensitive nature of our business operations.
Proven Management Team. Our senior management team, headed by Mel Payne for the last 13 years, is characterized by a dynamic culture that in markets that depend on preneed forreacts quickly and proactively to address changing market share, weconditions and emerging trends. We believe this culture has been critical to our successful recent efforts and will supplementprovide an important advantage as the arrangements written by funeral directors with sales sourced by sales counselors and third party sellers.death care industry evolves. We planare committed to continue using insurance-funded contracts asoperating an efficient corporate organization and strengthening our corporate and local business leadership. We believe that our Being the main funding vehicle because cash from the commissions earned offsets a significant amountBest operating model will ensure this commitment at all levels of the up-front costs and because the earnings on the insurance contracts are more stable than traditional trust fund investments.organization.
IMPAIRMENTS AND ASSET DISPOSITION STRATEGY. Reviews of the businesses that we own are performed annually. Long-term cash flow forecasts are prepared to determine whether we would recover our investment through future operations. In those instances in which our investment in a business exceeds the estimated future cash flows (our estimate of fair value), the investment is written down, through an impairment charge, to the present value of those future cash flows. Annually, beginning in 2002, we test goodwill for impairment under the Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. We determined no impairment existed as a result of those tests during the last two years.
OPERATIONS
We conduct our funeral and cemetery operations only in the United States. Carriage'sOur operations are divided into two segments: funeral operations and cemetery operations. Information for each of our segments is presented below and in our financial statements set forth herein.
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FUNERAL HOME OPERATIONS.Funeral Home Operations As of
At December 31, 2003, Carriage2004, we operated 139135 funeral homes, including two funeral homes held for sale, in 2928 states. Funeral home revenues accountedcurrently account for approximately 77%75% of our net revenues for each of the years ended December 31, 2002 and 2003.total revenues. The funeral home operations are managed by a team of experienced death care industry professionals and selected region-level individuals with substantial management experience in service industries. See Note 1317 to the consolidated financial statements for the year ended December 31, 2004, for segment data related to funeral home operations.
Our funeral homes offer a complete range of services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and
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worship, and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and religious services to take place at one location and thereby reduces our transportation costs and inconvenience to the family.
Funeral homes are principally a service business that provides burial and cremation services and sells related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
• favorable demographic trends in terms of population growth and average age, which impact death rates and number of deaths;
• leading market share positions supported by strong local heritage and relationships;
• effectively responding to increasing cremation trends by packaging complementary services and merchandise;
• controlling salary and merchandise costs; and
• exercising pricing leverage related to our at-need business to increase average revenues per contract.
CEMETERY OPERATIONS.Cemetery Operations
As of December 31, 2003,2004, we operated 30 cemeteries, including one cemetery held for sale, in 12 states. The cemetery operations are managed by a team of experienced death care industry and sales professionals. Cemetery revenues accountedcurrently account for approximately 23%25% of our net revenues for each of the years ended December 31, 2002 and 2003.total revenues. See Note 1317 to the consolidated financial statements for the year ended December 31, 2004, for segment data related to cemetery operations.
Our cemetery products and services include interment services, the rights to interment in cemetery sites (including grave sites, mausoleum crypts and niches) and related cemetery merchandise such as memorials and vaults. Cemetery operations generate revenues through sales of interment rights and memorials, installation fees, fees for interment and cremation services, finance charges from installment sales contracts and investment income from preneed cemetery merchandise and perpetual care trusts.
Cemeteries are primarily a sales business. Our cemetery operating results are impacted by the success of our sales organization because approximately 36% of our cemetery revenues was generated from preneed sales of interment rights during the year ended December 31, 2004. An additional 17% of our 2004 cemetery revenues was from deliveries of merchandise and services previously sold on preneed contracts. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) also impact the amount of such preneed sales. Cemetery revenues generated from at-need services and merchandise sales generally are subject to many of the same key profitability factors as in our funeral home business. Approximately 8% of our cemetery revenues was attributable to investment earnings on trust funds and finance charges on installment contracts during the year ended December 31, 2004.
PRENEED PROGRAMS.Preneed Programs
In addition to sales of funeral merchandise and services, cemetery interment rights and cemetery merchandise and services at the time of need, we also market funeral and cemetery services and products on a preneed basis. Therefore, these services and products apply to both segments of our operations. Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services, in accordance with prices prevailing at the time the contract is signed,originated, rather than when the products and services are delivered. Preneed contracts permit families to eliminate issues of making death care plans at the time of need and allow input from other family members before the death occurs.
Preneed funeral contracts are usually paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance policies, intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. ProceedsRevenue from the sale of preneed funeral contracts, along with accumulated earnings, are not recognized as revenue until the time the funeral service is performed. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors). Additionally, we generally earn a commission from the insurance company from the sale of insurance funded contracts. Althoughinsurance-funded policies. The direct marketing costscommissions and commissionscosts incurred from the sale of preneed funeral contracts are a current use of cash, such costs are also deferred and amortized on an actuarial method to match the expected maturity of the preneed contracts. The commission income is recognized as revenue when the period of refund expires (generally one year) and helps us defray the costs we incur, which are primarily commissions we pay to our sales counselors.
6
In addition to preneed funeral contracts, we also offer "preplanned"“preplanned” funeral arrangements whereby a client determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Preplanned funeral arrangements permit a family to avoid issues of making death care plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an at needat-need sale.
Preneed sales of cemetery salesinterment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. We always receive an initial downpayment at the time the contract is signed in substantially all cases. The interest rates generally range between 12% and 14%. Preneed sales of cemetery interment rights are generally recorded as revenue when 10% of the contract amount related to the interment right has been collected. Merchandise and services revenuepreneed contracts are also paid on an installment basis, but over a shorter term. Revenue is recorded when delivery has occurred. Costs related to generating the preneed contracts and delivery of the products and services are recognized concurrentconcurrently with the related revenue. We always receive an initial downpayment at the time the contract is signed. Allowances for customer cancellations and refunds are accrued at the date ofthat the sale is recognized as revenue and periodically evaluated thereafter based upon historical experience.
Carriage sold 5,6745,192 and 5,2304,834 preneed funeral contracts during the years ended December 31, 20022003 and 2003, 2004, respectively. At December 31, 2003,2004, we had a backlog of 62,26960,504 preneed funeral contracts to be delivered in the future. Approximately 18.5% and 19.5%20% of the funeral revenues recognized during each of
7
2002 the last three years and 2003, respectively,during the twelve months ended December 31, 2004 originated through preneed contracts. Cemetery revenues that originated from preneed contracts represented approximately 50% of Carriage'sCarriage’s net cemetery revenues for both 20022003 and 2003.2004.
As of December 31, 2003,2004, we employed a staff of 205196 advance-planning and family service representatives for the sale of preneed products and services.
TRUST FUNDS AND INSURANCE CONTRACTS
We have established a variety of trusts in connection with our funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by us. We also use independent financial advisors to consult with us on investment policies and evaluate investment results.
Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. All preneed funeral sales are deferred until the service is performed. The trust fund income earned and any increase in insurance benefits are also deferred until the service is performed, in order to offset possible inflation in cost when providing the service in the future. The related assets and deferred revenue are reflected on Carriage’s balance sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses, which we defer until the service is provided. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from customers was approximately $231 million as of December 31, 2004.
We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling price) into a merchandise and service trust fund for cemetery merchandise and services preneed sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are generally permitted to withdraw the trust principal and the accrued income when the merchandise is purchased, when service is provided by us or when the contract is cancelled. The merchandise and service trust fund balances, in the aggregate, totaled approximately $53.1 million as of December 31, 2004.
In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides the funds necessary to maintain cemetery property and memorials in perpetuity. The trust fund income is recognized, as earned, in cemetery revenues. While we are entitled to withdraw the income from our perpetual care trust to provide for the maintenance of the cemetery property and memorials, we are not entitled to withdraw any of the principal balance of the trust fund. The perpetual care trust balances totaled approximately $31.2 million at December 31, 2004.
For additional information with respect to our trusts, see Note 4 to the consolidated financial statements for the year ended December 31, 2004.
COMPETITION
The operating environment in the death care industry has been highly competitive. Publicly traded companies operating in the United States are Service Corporation International, Alderwoods Group Inc. (formerly known as The Loewen Group, Inc.)Group), and Stewart Enterprises, Inc.Keystone North America and StoneMor Partners. In addition, a number of smaller, non-public companies have been active in
7
acquiring and operating funeral homes and cemeteries.
Our funeral home and cemetery operations usually face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed an increase in new start-up competition in certain areas of the country, which in any one market may have impacted our profitability because of the high fixed cost nature of funeral homes. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the importance of reputation and heritage, market share increases are usually gained over a long period of time. The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share.
There has been increasing competition from providers specializing in specific services, such as cremations, who offer minimal service and low-end pricing. We also face competition from companies that market products and related information over the Internet and non-traditional casket stores in certain markets. We have feltexperienced relatively limited impact in our specific markets from these competitors to date.
TRUST FUNDS AND INSURANCE CONTRACTS
GENERAL.REGULATION We have established a variety of trusts in connection with our funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by Carriage. We also use independent financial advisors to consult with us on investment policies and evaluate investment results.
PRENEED FUNERAL TRUSTS AND INSURANCE CONTRACTS. Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. All preneed funeral sales are deferred until the service is performed. The trust fund income earned and any increase in insurance benefits are also deferred until the service is performed, in order to offset possible inflation in cost when providing the service in the future. The related assets and deferred revenue are reflected on Carriage's balance sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses, which we defer until the service is provided. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from customers was approximately $235 million and $234 million as of December 31, 2002 and 2003, respectively.
PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling price) into a merchandise and service trust fund for cemetery merchandise and services preneed sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are permitted to withdraw the trust principal and the accrued income when the
8
merchandise is purchased, when service is provided by us or when the contract is cancelled. The merchandise and service trust fund balances, in the aggregate, were approximately $44 million and $48 million as of December 31, 2002 and 2003, respectively.
PERPETUAL CARE TRUSTS. In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in trust. The income from these perpetual care trusts provides the funds necessary to maintain cemetery property and memorials in perpetuity. The trust fund income is recognized, as earned, in cemetery revenues. While we are entitled to withdraw the income from our perpetual care trust to provide for the maintenance of the cemetery property and memorials, we are not entitled to withdraw any of the principal balance of the trust fund and therefore, none of the principal balance is reflected in Carriage's balance sheet. The perpetual care trust balances were approximately $27.8 million and $30.7 million at December 31, 2002 and 2003, respectively.
For additional information with respect to Carriage's trusts, see Note 1 of the Consolidated Financial Statements.
REGULATION
Our funeral home operations are subject to substantial regulation by the Federal Trade Commission (the "FTC"( the “FTC”), as well as other federal, state and local agencies. Certain regulations contain minimum standards for funeral industry practices, require extensive price and other affirmative disclosures to the customer at the time of sale and impose mandatory itemization requirements for the sale of funeral products and services. The FTC is currentlyhas been reviewing the Trade Rule on Funeral Industry Practices (the "Funeral Rule"“Funeral Rule”), which defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. At this time, the FTC has not proposed changes to the regulation. We believe we are in substantial compliance with the Funeral Rule.
We are subject to the requirements of the federal Occupational Safety and Health Act ("OSHA"(“OSHA”) and comparable state statutes. The OSHA hazard communication standard, the United States Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used or produced in our operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens.
Our operations, including our preneed sales activities and the management and administration of preneed trust funds, are also subject to extensive regulation, supervision and licensing under numerous state laws and regulations. We believe that we are in substantial compliance with all such laws and regulations.
In accordance with the rules of the New York Stock Exchange, we submitted a Section 12(a) CEO Certification in 2004, which was not qualified in any manner. In addition, in accordance with the rules, attached as Exhibits 31.1 and 31.2 are our CEO and CFO certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002.
EMPLOYEES
As of December 31, 2003, the Company2004, we and itsour subsidiaries employed 1,9951,814 employees, of whom 1,049873 were full-time and 946941 part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. We believe that our relationship with our employees is good. NoNone of our employees of Carriage or its subsidiaries are membersour subsidiaries’ employees is a member of a collective bargaining unit.
AVAILABLE INFORMATION
The Company's website
Our address iswww.carriageservices.com. www.carriageservices.com. Available on this website under "Investor“Investor Relations-Investor Relations Menu—Menu – SEC Filings,"” free of charge, are Carriage'sCarriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the United States Securities and Exchange Commission ("SEC"(“SEC”).
9
Also posted on the Company'sour website, and available in print upon request, are charters for the Company'sCompany’s Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on the Company'sCompany’s website under the "Corporate Governance"“Corporate Governance” section. Within the time period required by the SEC and the New York Stock Exchange, Inc., the Company will post on its website any modifications to the Codes and any waivers applicable to senior officers as defined in the applicable Code, as required by the Sarbanes-Oxley Act of 2002.
8
At December 31, 2003,2004, we operated 139135 funeral homes and 30 cemeteries in 2928 states. Carriage owns the real estate and buildings for 79% of our funeral homes and leases facilities for the remaining 21%. Carriage owns 25 cemeteries and operates five cemeteries under long-term contracts with municipalities and non-profit organizations at December 31, 2003.2004. Eleven funeral homes are operated in combination with cemeteries. The 30 cemeteries operated by Carriage have an inventory of unsold developed lots totaling approximately 123,000118,000 and 118,000115,000 at December 31, 20022003 and 2003,2004, respectively. In addition, approximately 629619 acres are available for future development. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future. The specialized nature of our business requires that our facilities be well-maintained. Management believes this standard is met.
10
The following table sets forth certain information as of December 31, 2003,2004, regarding Carriage'sCarriage’s properties used by the funeral homes segment and by the cemeteries segment identified by state:
| | Number of Funeral Homes | Number of Cemeteries | ||||||
|---|---|---|---|---|---|---|---|---|
| State | ||||||||
| Owned | Leased(1) | Owned | Managed | |||||
| Alabama | 1 | 0 | 0 | 0 | ||||
| California | 16 | 3 | 4 | 0 | ||||
| Connecticut | 6 | 2 | 0 | 0 | ||||
| Florida | 6 | 3 | 6 | 3 | ||||
| Georgia | 3 | 0 | 0 | 0 | ||||
| Idaho | 4 | 1 | 1 | 0 | ||||
| Illinois | 1 | 5 | 1 | 0 | ||||
| Indiana | 2 | 1 | 1 | 0 | ||||
| Iowa | 2 | 0 | 0 | 0 | ||||
| Kansas | 7 | 0 | 0 | 0 | ||||
| Kentucky | 10 | 3 | 1 | 0 | ||||
| Maryland | 1 | 0 | 0 | 0 | ||||
| Massachusetts | 6 | 0 | 0 | 0 | ||||
| Michigan | 4 | 0 | 0 | 0 | ||||
| Missouri | 0 | 1 | 0 | 0 | ||||
| Montana | 1 | 0 | 0 | 0 | ||||
| Nevada | 2 | 0 | 2 | 1 | ||||
| New Jersey | 4 | 1 | 0 | 0 | ||||
| New Mexico | 1 | 0 | 0 | 0 | ||||
| New York | 2 | 1 | 0 | 0 | ||||
| North Carolina | 1 | 2 | 1 | 0 | ||||
| Ohio | 5 | 3 | 0 | 1 | ||||
| Oklahoma | 1 | 0 | 1 | 0 | ||||
| Rhode Island | 4 | 0 | 0 | 0 | ||||
| Tennessee | 3 | 0 | 0 | 0 | ||||
| Texas | 12 | 0 | 6 | 0 | ||||
| Virginia | 3 | 1 | 1 | 0 | ||||
| Washington | 1 | 1 | 0 | 0 | ||||
| West Virginia | 1 | 1 | 0 | 0 | ||||
| Total | 110 | 29 | 25 | 5 | ||||
|
| Number of |
| Number of Cemeteries |
| ||||
State |
| Owned |
| Leased(1) |
| Owned |
| Managed |
|
California |
| 16 |
| 3 |
| 4 |
| 0 |
|
Connecticut |
| 6 |
| 2 |
| 0 |
| 0 |
|
Florida |
| 5 |
| 3 |
| 6 |
| 3 |
|
Georgia |
| 3 |
| 0 |
| 0 |
| 0 |
|
Idaho |
| 4 |
| 1 |
| 1 |
| 0 |
|
Illinois |
| 1 |
| 5 |
| 1 |
| 0 |
|
Indiana |
| 2 |
| 1 |
| 1 |
| 0 |
|
Iowa |
| 2 |
| 0 |
| 0 |
| 0 |
|
Kansas |
| 7 |
| 0 |
| 0 |
| 0 |
|
Kentucky |
| 10 |
| 3 |
| 1 |
| 0 |
|
Maryland |
| 1 |
| 0 |
| 0 |
| 0 |
|
Massachusetts |
| 6 |
| 0 |
| 0 |
| 0 |
|
Michigan |
| 4 |
| 0 |
| 0 |
| 0 |
|
Missouri |
| 0 |
| 1 |
| 0 |
| 0 |
|
Montana |
| 1 |
| 0 |
| 0 |
| 0 |
|
Nevada |
| 2 |
| 0 |
| 2 |
| 1 |
|
New Jersey |
| 4 |
| 1 |
| 0 |
| 0 |
|
New Mexico |
| 1 |
| 0 |
| 0 |
| 0 |
|
New York |
| 2 |
| 1 |
| 0 |
| 0 |
|
North Carolina |
| 1 |
| 2 |
| 1 |
| 0 |
|
Ohio |
| 4 |
| 3 |
| 0 |
| 1 |
|
Oklahoma |
| 1 |
| 0 |
| 1 |
| 0 |
|
Rhode Island |
| 4 |
| 0 |
| 0 |
| 0 |
|
Tennessee |
| 3 |
| 0 |
| 0 |
| 0 |
|
Texas |
| 11 |
| 0 |
| 6 |
| 0 |
|
Virginia |
| 3 |
| 1 |
| 1 |
| 0 |
|
Washington |
| 1 |
| 1 |
| 0 |
| 0 |
|
West Virginia |
| 1 |
| 1 |
| 0 |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
| 106 |
| 29 |
| 25 |
| 5 |
|
(1)The leases, with respect to these funeral homes, have remaining terms ranging from one to fifteen years, and, generally, we have the right to renew past the initial terms and a right of first refusal on any proposed sale of the property where these funeral homes are located.
Carriage's
Carriage’s corporate headquarters occupy approximately 32,500 square feet of leased office space in Houston, Texas. At December 31, 2003,2004, we operated 611575 vehicles, of which 600570 are owned and 115 are leased.
9
Carriage and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on the financial statements.
11
We carry insurance with coverages and coverage limits consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that such insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that our insurance provides reasonable coverage for known asserted or unasserted claims. In the event the Company sustained a loss from a claim and the insurance carrier disputed coverage or coverage limits, the Company may record a charge in a different period than the recovery, if any, from the insurance carrier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Carriage's
Carriage’s Common Stock is traded on the New York Stock Exchange under the symbol "CSV"“CSV”. The following table presents the quarterly high and low sale prices as reported by the New York Stock Exchange:
| | High | Low | ||||
|---|---|---|---|---|---|---|
| 2002 | ||||||
First Quarter | $ | 5.54 | $ | 4.64 | ||
| Second Quarter | $ | 5.10 | $ | 3.85 | ||
| Third Quarter | $ | 4.50 | $ | 2.90 | ||
| Fourth Quarter | $ | 4.65 | $ | 3.01 | ||
2003 | ||||||
First Quarter | $ | 4.58 | $ | 3.20 | ||
| Second Quarter | $ | 4.10 | $ | 3.25 | ||
| Third Quarter | $ | 3.64 | $ | 2.99 | ||
| Fourth Quarter | $ | 3.75 | $ | 3.13 | ||
|
| High |
| Low |
| ||
2003 |
|
|
|
|
| ||
First Quarter |
| $ | 4.58 |
| $ | 3.20 |
|
Second Quarter |
| $ | 4.10 |
| $ | 3.25 |
|
Third Quarter |
| $ | 3.64 |
| $ | 2.99 |
|
Fourth Quarter |
| $ | 3.75 |
| $ | 3.13 |
|
|
|
|
|
|
| ||
2004 |
|
|
|
|
| ||
First Quarter |
| $ | 5.25 |
| $ | 3.72 |
|
Second Quarter |
| $ | 5.50 |
| $ | 4.75 |
|
Third Quarter |
| $ | 5.25 |
| $ | 4.31 |
|
Fourth Quarter |
| $ | 5.10 |
| $ | 4.30 |
|
As of March 15, 2004,2005, there were 17,702,32917,969,000 shares of Carriage'sCarriage’s Common Stock outstanding. The Common Stock shares outstanding are held by approximately 270290 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 4,7005,000 beneficial owners of the Common Stock.
We have never paid a cash dividend on our Common Stock. Carriage currently intends to retain earnings to financefund the growth and development of our business and does not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We are currently prohibited from paying dividends under the terms of our credit agreements and our preferred security agreements as long as distributions are deferred on the preferred securities.business. Any future change in our dividend policy will be made at the discretion of our Board of Directors in light of the financial condition, capital requirements, earnings and prospects of Carriage and any restrictions under credit and preferred security agreements,limitations imposed by lenders or investors, as well as other factors the Board of Directors may deem relevant. We are also prohibited
Carriage has a compensation policy for fees paid to its directors under which our directors may choose to receive director compensation fees either in repurchasing anythe form of cash compensation or equity compensation based on the fair market value of our outstanding common stock underbased on the termsclosing price published by the New York Stock Exchange on the date the fees are earned. On January 12, 2005, Carriage issued 10,288 shares of our credit agreements.its common stock to three of its directors who elected to receive their fourth quarter 2004 fees in equity compensation. No underwriter was used in connection with this issuance. Carriage relied on the Section 4(2) exemption from the registration requirements of the Securities Act of 1993, as amended.
12
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for Carriage that has been derived from the audited consolidated financial statements of Carriage as of and for each of the years ended December 31, 2000, 2001, 2002, 2003, and 2004. These historical results are not necessarily indicative of our future performance.
Our historical financial data included in the table below as of and for the years ended December 31, 2000 and 2001 is derived from our consolidated financial statements audited by Arthur Andersen LLP, independent public accountants, which has ceased operations. The historical financial data included in the table below as of and for the years ended December 31, 2002, 2003 and 2004 is derived from our consolidated financial statements audited by KPMG LLP, independent registered public accounting firm.
We adopted FASB Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin (ARB) No. 51” as of March 31, 2004. The adoption of FIN 46R resulted in the consolidation of funeral and cemetery merchandise and service, and perpetual care trusts in our consolidated balance sheet at fair value. We do not consolidate certain funeral trusts for which we do not absorb a majority of their expected losses and, therefore, are not considered a primary beneficiary of these funeral trusts under FIN 46R. The adoption of FIN 46R also resulted in the deconsolidation of Carriage Services Capital Trust, the issuer of TIDES preferred securities. Instead, we now report as a liability the junior subordinated debenture payable to the Trust. Amounts and balances prior to March 31, 2004 have not been restated to reflect the adoption of FIN 46R. The adoption of FIN 46R has not impacted our consolidated statements of operations or cash flows. Certain financial information has been restated from information presented in the Company’s Form 10-K for the year ended December 31, 2003. See notes 2 and 4 of Notes to Consolidated Financial Statements.
We adopted Statement of Financial Accounting’s Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) during 2004. The income statementapplication of that standard resulted in, among other things, the presentation of the revenues and expenses, as well as gains, losses and impairments, from business units sold, discontinued or held for sale in the discontinued operations section of the consolidated statements of operations for all periods presented.
You should read this historical financial data presented hereundertogether with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report and Carriage’s consolidated financial statements and notes thereto included elsewhere in this report.
|
| Year ended December 31, |
| |||||||||||||
|
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| |||||
|
| (in thousands, except per share and operating data) |
| |||||||||||||
INCOME STATEMENT DATA: |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
| |||||
Funeral |
| $ | 122,686 |
| $ | 120,039 |
| $ | 115,100 |
| $ | 112,588 |
| $ | 112,816 |
|
Cemetery |
| 34,552 |
| 37,245 |
| 34,217 |
| 34,351 |
| 37,390 |
| |||||
Total net revenues |
| 157,238 |
| 157,284 |
| 149,317 |
| 146,939 |
| 150,206 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
| |||||
Funeral |
| 24,746 |
| 30,559 |
| 33,407 |
| 29,098 |
| 29,429 |
| |||||
Cemetery |
| 5,630 |
| 8,435 |
| 8,221 |
| 8,521 |
| 8,874 |
| |||||
Total gross profit |
| 30,376 |
| 38,994 |
| 41,628 |
| 37,619 |
| 38,303 |
| |||||
General and administrative expenses |
| 10,256 |
| 8,698 |
| 10,557 |
| 10,492 |
| 10,665 |
| |||||
Special charges and other |
| 102,250 |
| — |
| 871 |
| 432 |
| 495 |
| |||||
Operating income (loss) |
| (82,130 | ) | 30,296 |
| 30,200 |
| 26,695 |
| 27,143 |
| |||||
Interest expense |
| (20,655 | ) | (20,300 | ) | (19,715 | ) | (17,935 | ) | (17,058 | ) | |||||
Other income |
| — |
| — |
| 865 |
| 657 |
| 940 |
| |||||
Income (loss) before income taxes |
| (102,785 | ) | 9,996 |
| 11,350 |
| 9,417 |
| 11,025 |
| |||||
Provision (benefit) for income taxes |
| (8,382 | ) | 1,999 |
| (8,429 | ) | 3,519 |
| 71 |
| |||||
Net income (loss) from continuing operations |
| (94,404 | ) | 7,997 |
| 19,779 |
| 5,898 |
| 10,954 |
| |||||
Cumulative effect of the change in accounting, net |
| (38,993 | ) | — |
| — |
| — |
| — |
| |||||
Income (loss) from discontinued operations |
| 1,400 |
| 1,005 |
| 499 |
| 727 |
| (1,720 | ) | |||||
Net income (loss) |
| (131,996 | ) | 9,002 |
| 20,278 |
| 6,625 |
| 9,234 |
| |||||
Preferred stock dividends |
| 81 |
| 37 |
| — |
| — |
| — |
| |||||
Net income (loss) available to common stockholders |
| $ | (132,077 | ) | $ | 8,965 |
| $ | 20,278 |
| $ | 6,625 |
| $ | 9,234 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic: |
|
|
|
|
|
|
|
|
|
|
| |||||
Continuing operations |
| $ | (5.88 | ) | $ | 0.48 |
| $ | 1.17 |
| $ | 0.34 |
| $ | 0.62 |
|
Cumulative effect of the change in accounting principle |
| (2.43 | ) | — |
| — |
| — |
| — |
| |||||
Discontinued operations |
| .08 |
| 0.06 |
| 0.03 |
| 0.04 |
| (0.10 | ) | |||||
Basic earnings (loss) per share |
| $ | (8.23 | ) | $ | 0.54 |
| $ | 1.20 |
| $ | 0.38 |
| $ | 0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Diluted: |
|
|
|
|
|
|
|
|
|
|
| |||||
Continuing operations |
| $ | (5.88 | ) | $ | 0.46 |
| $ | 1.13 |
| $ | 0.33 |
| $ | 0.60 |
|
Cumulative effect of the change in accounting principle |
| (2.43 | ) | — |
| — |
| — |
| — |
| |||||
Discontinued operations |
| .08 |
| 0.05 |
| 0.03 |
| 0.04 |
| (0.09 | ) | |||||
Diluted earnings (loss) per share |
| $ | (8.23 | ) | $ | 0.51 |
| $ | 1.16 |
| $ | 0.37 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common and common equivalent shares outstanding: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 16,056 |
| 16,696 |
| 16,973 |
| 17,444 |
| 17,786 |
| |||||
Diluted |
| 16,056 |
| 17,492 |
| 17,433 |
| 17,808 |
| 18,260 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
OPERATING AND FINANCIAL DATA: |
|
|
|
|
|
|
|
|
|
|
| |||||
Funeral homes at end of period |
| 172 |
| 148 |
| 144 |
| 139 |
| 135 |
| |||||
Cemeteries at end of period |
| 38 |
| 30 |
| 30 |
| 30 |
| 30 |
| |||||
Atneed funeral service contracts performed |
| 27,178 |
| 24,724 |
| 24,071 |
| 23,397 |
| 22,732 |
| |||||
Preneed funeral contracts sold |
| 7,377 |
| 5,378 |
| 5,455 |
| 5,192 |
| 4,834 |
| |||||
Backlog of preneed funeral contracts |
| 86,710 |
| 67,320 |
| 59,594 |
| 59,872 |
| 60,504 |
| |||||
Depreciation and amortization |
| $ | 18,003 |
| $ | 15,716 |
| $ | 9,565 |
| $ | 9,975 |
| $ | 10,830 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| $ | 541,651 |
| $ | 552,167 |
| $ | 549,948 |
| $ | 538,917 |
| $ | 565,156 |
|
Working capital (deficit) |
| 13,892 |
| (1,006 | ) | (1,598 | ) | (14,285 | ) | 4,933 |
| |||||
Long-term debt, net of current maturities |
| 176,662 |
| 148,508 |
| 141,207 |
| 105,355 |
| 102,714 |
| |||||
Convertible junior subordinated debenture (1) |
| — |
| — |
| — |
| — |
| 93,750 |
| |||||
Redeemable convertible preferred stock (TIDES) |
| 91,100 |
| 90,058 |
| 90,193 |
| 90,327 |
| — |
| |||||
Stockholders’ equity |
| $ | 77,237 |
| $ | 81,578 |
| $ | 98,091 |
| $ | 105,930 |
| $ | 116,438 |
|
(1) When the TIDES were issued in 1999, we reported the securities as a component of temporary equity because they have predominantly equity-like characteristics which are not normally found in debt securities (including traditional subordinated debt). In 2004, we changed that classification to report the securities as subordinated debt in order to comply with a new accounting standard. The securities continue to be treated as equity for 1999 was prepared usingpurposes of the accounting principles employed prior to the implementation of SAB 101 which was effective January 1, 2000.financial covenants under our existing senior notes and our existing credit facility.
| | | Year ended December 31, | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||
| | (in thousands, except per share and operating data) | |||||||||||||||
| INCOME STATEMENT DATA: | ||||||||||||||||
| Revenues, net: | ||||||||||||||||
| Funeral | $ | 125,264 | $ | 127,261 | $ | 124,284 | $ | 119,299 | $ | 115,737 | ||||||
| Cemetery | 43,203 | 35,345 | 38,209 | 34,877 | 35,086 | |||||||||||
| Total net revenues | 168,467 | 162,606 | 162,493 | 154,176 | 150,823 | |||||||||||
| Gross profit: | ||||||||||||||||
| Funeral | 35,539 | 26,891 | 31,471 | 34,374 | 29,535 | |||||||||||
| Cemetery | 10,945 | 5,285 | 8,824 | 8,714 | �� | 9,159 | ||||||||||
| Total gross profit | 46,484 | 32,176 | 40,295 | 43,088 | 38,694 | |||||||||||
| General and administrative expenses | 9,265 | 10,256 | 8,698 | 10,815 | 10,861 | |||||||||||
| Special charges and other | 2,500 | 102,250 | — | 361 | (577 | ) | ||||||||||
| Operating income (loss) | 34,719 | (80,330 | ) | 31,597 | 31,912 | 28,410 | ||||||||||
| Interest expense | (17,709 | ) | (20,705 | ) | (20,344 | ) | (19,750 | ) | (17,811 | ) | ||||||
| Other income | 2,000 | — | — | — | — | |||||||||||
| Income (loss) before income taxes | 19,010 | (101,035 | ) | 11,253 | 12,162 | 10,599 | ||||||||||
| Provision (benefit) for income taxes | 8,323 | (8,032 | ) | 2,251 | (8,116 | ) | 3,974 | |||||||||
| Net income (loss) before cumulative effect of the change in accounting principle | 10,687 | (93,003 | ) | 9,002 | 20,278 | 6,625 | ||||||||||
| Cumulative effect of the change in accounting, net | — | (38,993 | ) | — | — | — | ||||||||||
| Net income (loss) | 10,687 | (131,996 | ) | 9,002 | 20,278 | 6,625 | ||||||||||
| Preferred stock dividends | 93 | 81 | 37 | — | — | |||||||||||
| Net income (loss) available to common stockholders | $ | 10,594 | $ | (132,077 | ) | $ | 8,965 | 20,278 | 6,625 | |||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic: | ||||||||||||||||
| Continuing operations | $ | .67 | $ | (5.80 | ) | $ | .54 | $ | 1.20 | $ | 0.38 | |||||
| Cumulative effect of the change in accounting principle | — | (2.43 | ) | — | — | — | ||||||||||
| Basic earnings (loss) per share | $ | .67 | $ | (8.23 | ) | $ | .54 | $ | 1.20 | $ | 0.38 | |||||
| Diluted: | ||||||||||||||||
| Continuing operations | $ | .66 | $ | (5.80 | ) | $ | .51 | $ | 1.16 | $ | 0.37 | |||||
| Cumulative effect of the change in accounting principle | — | (2.43 | ) | — | — | — | ||||||||||
| Diluted earnings (loss) per share | $ | .66 | $ | (8.23 | ) | $ | .51 | $ | 1.16 | $ | 0.37 | |||||
| Weighted average number of common and common equivalent shares outstanding: | ||||||||||||||||
| Basic | 15,875 | 16,056 | 16,696 | 16,973 | 17,444 | |||||||||||
| Diluted | 16,136 | 16,056 | 17,492 | 17,433 | 17,808 | |||||||||||
| OPERATING AND FINANCIAL DATA: | ||||||||||||||||
| Funeral homes at end of period | 182 | 172 | 148 | 144 | 139 | |||||||||||
| Cemeteries at end of period | 41 | 38 | 30 | 30 | 30 | |||||||||||
| Atneed funeral service contracts performed | 28,707 | 28,483 | 25,779 | 25,044 | 24,121 | |||||||||||
| Preneed funeral contracts sold | 9,814 | 7,651 | 5,459 | 5,674 | 5,230 | |||||||||||
| Backlog of preneed funeral contracts | 83,754 | 89,391 | 64,947 | 63,402 | 62,269 | |||||||||||
| Depreciation and amortization | $ | 16,992 | $ | 21,407 | $ | 16,968 | $ | 11,108 | $ | 11,112 | ||||||
BALANCE SHEET DATA: | ||||||||||||||||
| Total assets | $ | 539,590 | $ | 709,051 | $ | 699,902 | $ | 703,754 | $ | 699,611 | ||||||
| Working capital (deficit) | 22,185 | 13,892 | (1,006 | ) | (1,598 | ) | (19,421 | ) | ||||||||
| Long-term debt, net of current maturities | 178,942 | 176,662 | 148,508 | 141,207 | 105,575 | |||||||||||
| Redeemable preferred stock | 91,026 | 91,100 | 90,058 | 90,193 | 90,327 | |||||||||||
| Stockholders' equity | $ | 212,009 | $ | 77,237 | $ | 81,578 | $ | 98,091 | $ | 105,930 | ||||||
13
11
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We operate two types of businesses: funeral homes, which account for approximately 77%75% of our revenues, and cemeteries, which account for approximately 23%25% of our revenues. Funeral homes are principally a service business that provide funeral services (burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells real estate (grave sites and mausoleums) and related merchandise such as markers and memorials. As of February 29, 2004, we operated 139 funeral homes and 30 cemeteries in 29 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.
Factors affecting our funeral operating results include the number of deaths in the markets we serve; whether we gain or lose market share relative to our competitors in the markets we operate; the price that we sell our services and merchandise; and the cost of providing services, primarily the salaries and benefits expense related to our professional and support staff, and the cost of merchandise. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately 35% less than37% of the average revenue earned from a traditional funeral service. During each ofservice during the last three years, funeral revenue has decreased because we have sold 33 funeral homes, the death rate has decreased year over year from 2001 to 2003, lost market share in certain markets, and experienced an increasing number of cremation services at lower average revenue per service and nominal increase in the average revenue per burial service.ended December 31, 2004. Funeral homes have a high fixed cost structure, thusstructure. Thus, small changes in revenues, up or down, normallymay cause significantdisproportionate changes to our profitability.
During the second half of 2003, we implemented several significant changes in our funeral operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model. At the same time, we introduced operating and financial standards developed from our best funeral operations. The new operating model and standards focus on the key drivers of a successful funeral operation, organized around three primary areas—areas – market share, people and operating and financial metrics. Important elements A portion of local management’s compensation is variable based on their success as measured against these standards. We first began operating under this model in 2004. We have experienced benefits from the new operating model during the last half of 2004. For example, better merchandising, the implementation of packages in certain locations and areas of focus during 2004 include:
12
The cemetery operating results are affected by the size and success of our sales organization becauseas currently approximately 50%36% of our cemetery revenues relate to preneed sales of grave sites and mausoleums and related merchandise before the time of need.interment rights. We believe that changes in the low level of consumer confidence (a measure of
14
whether consumers will spend for discretionary items) duringalso affects the last three years has limited the growthamount of cemetery revenues.preneed sales. Approximately 10%8% of our cemetery revenues are currently attributable to investment earnings on trust funds and finance charges on installment contracts. WeaknessesChanges in the equitycapital markets and declining interest rates have had a negative affect on this component of our cemetery revenues.
Cash flow
From 1996 to 2000, we accumulated a large amount of debt and contingent obligations from operations and from the sales of businessesacquisitions. Our business strategy during the last threefour years focused on increasing operating cash flow and improving our financial condition by reducing debt to lower our interest expense and improve our credit profile. We have provided usnot been actively seeking businesses to acquire since 1999; instead we have been focused on selling underperforming businesses and reducing our debt. From September 2000, when we initiated a process to identify underperforming businesses, to December 31, 2004, we sold 36 funeral homes and 12 cemeteries along with 20 parcels of excess real estate. We used the fundsproceeds of approximately $26 million from those sales to reduce our debt. We have reduced our debt and contingent purchase obligations by $63approximately $87 million sinceduring the period January 1, 2001 through December 31, 2000. Lower2004. During January 2005 we refinanced our senior debt by issuing $130 million of Senior Notes due in 2015. This refinancing represented a milestone. The refinancing was the culmination of the effort to reaccess the capital markets and to extend the maturities of our senior debt and declining interest rates have allowed us to incur lower interest expense duringgain the three year period ending December 31, 2003. Our focus during 2004flexibility to reinvest our free cash flow in our core business. We can now use the net cash proceeds from the offering and our free cash flow to grow our Company through selective acquisitions. We also intend to amend our existing bank credit facility, which initially will not be drawn on. We expect the amended credit facility to continue to improve our financial condition by paying down debt, improve the market sharebe secured and profitability of our funeral homes, and increase the preneed sales of cemetery property.contain more favorable covenants.
The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, asbecause there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be sustained consistently from year to year.
Management's
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with accounting principles generally accepted in the United States of America.States. Our significant accounting policies are summarized in Note 1.1 to the consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Funeral and Cemetery Operations
We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No. 66, "Accounting“Accounting for Sales of Real Estate"Estate”. This method generally provides for the recognition of revenue in the period in which the customer'scustomer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.
Allowances for customer cancellations, refunds and bad debts are provided at the date ofthat the sale is recognized as revenue based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues when the commission is no longer subject to refund, which is typicallyusually one year after the policy is issued.
15
Preneed Funeral Contracts & Deferred Preneed Funeral Contracts Revenue
Cash proceeds from preneed funeral sales are deposited to a trust or to purchase of a third-party insurance product. Unperformed guaranteed preneed funeral contracts are included in the consolidated balance sheets as preneed funeral contracts. The balance in this asset account represents amounts due from customer receivables and third-party insurance companies, and the amounts deposited with the trustee and the accumulated earnings on these deposits. A corresponding credit is recorded to deferred preneed funeral contracts revenue. The funeral revenue is not recorded until the service is performed. The trust income earned and the increases in insurance benefits on the insurance products are also deferred until the service is performed, in order to offset inflation in cost to provide the service in the future.13
Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses asover the period we expect to perform the services andor deliver the merchandise are expected to be delivered. Effective October 1, 2001, we changed from the straight-line amortization method to an actuarial method that more closely matches the expected maturity ofcovered by the preneed contracts. The periods over which the costs are recognized are based on actuarial statistics for the actual contracts we hold, provided by a third-party administrator.
Goodwill and Other Intangible Assets
The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142, we discontinued amortizing goodwill as of January 1, 2002, and instead we review the carrying value of goodwill at least annually on a regional basisreporting units (aggregated geographically) to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each regionreporting unit at the Company'sCompany’s weighted average cost of capital less debt allocable to the regionreporting unit and by reference to recent sales transactions of similar businesses. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs and the Company'sCompany’s cost of capital, which is impacted by long-term interest rates. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return and separate income tax returns as required in certainthe states wherein which we operate. We record a provision for income taxes based upon an estimated effective tax rate that considers the federal and states statutory tax rates and any permanent differences such as the federal deduction of state taxes, nondeductible expenses and nonreportable income. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. Aliabilities, in accordance with SFAS No. 109, “Accounting for Income Taxes”, (Note 12). The Company records a valuation allowance would be recordedto reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that the realization of a deferred tax asset is uncertain. Each quarter the allowance is reviewed and adjusted if it is more likely than not that the deferred tax assetbenefits will be realized.
ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 142 addresses how intangible assets that are acquired individually or
16
with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.Stock Compensation Plans
The Company adopted SFAS No. 142 as of the beginning of the first quarter of 2002. The effect of SFAS No. 142 on the Company is the elimination of the amortization of goodwill, which prior to 2002 was amortized over 40 years, and the testing for impairment of goodwill on an annual basis. Had the adoption of SFAS No. 142 occurred at the beginning of the previous year, the results would have been as follows (in thousands, except per share amounts):
| | For the year ended December 31, 2001 | ||
|---|---|---|---|
| Income before taxes | $ | 15,720 | |
| Net income | 13,469 | ||
Diluted earnings per share | $ | 0.77 | |
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting of long-lived assets, other than goodwill, that are to be held and used or disposed by sale or otherwise, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 in 2002 which had no effect on the Company's results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains and losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 when it reported the results for the year 2002 and reclassified extraordinary items previously reported, which represented losses on the early extinguishment of debt, to interest expense.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)," required an exit cost liability to be recognized at the date of an entity's commitment to an exit plan. The provisions of this statement were effective for exit or disposal activities that were initiated by a company after December 31, 2002. The Company adopted SFAS No. 146 at the beginning of 2003, which has had no impact because no exit or disposed activities occurred in 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to
17
the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement was effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148plans in the first quarter report (on Form 10-Q)form of stock option and employee stock purchase plans, which are more fully described in 2003.Note 13. The Company accounts for stock options and shares issued pursuant to its employee stock purchase planstock-based compensation under APB Opinion No. 25, under which“Accounting for Stock Issued to Employees” whereby no compensation expense is recognized in the Consolidated Statement of Operations.Operations and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values and the pro forma disclosure alternative is no longer allowable under Statement 123 (R). The difference betweenrevised standard is effective for public entities in the two acceptable methodsfirst interim or annual reporting period beginning after June 15, 2005, which for the Company will be the third quarter of accountingfiscal 2005 ending September 30, 2005. The Company is disclosedcurrently evaluating the impact of the adoption of Statement 123(R), which will result in Note 9additional pre-tax compensation expense beginning in the third quarter of 2005 for remaining unvested stock options, any future stock option grants and the employee stock purchase plan. Management believes that the adoption of SFAS 123R will provide results similar to the pro-forma disclosure for SFAS 123 (Note 1).
We have also granted restricted stock to certain officers of the Company, which vest over a period of four years. These shares are valued at the dates granted and the value is charged to operations as the shares vest.
Impairment of Investments
In March 2004, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (EITF 03-1), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF 03-1 specifies that an impairment would be considered
14
other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence of the contrary. EITF 03-1 was scheduled to be effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The disclosure requirements continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. We adopted the disclosure provisions during the period ended June 30, 2004. The adoption of the measurement and recognition provisions will not have a material impact on the consolidated financial statements.statements, result of operations or liquidity of the Company.
Impairment of Long-Lived Assets
Except as noted for Goodwill and deferred obtaining costs, the Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the net asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell. The revenues and expenses, as well as gains, losses and impairments, from those assets are reported in the discontinued operations section of the Consolidated Statement of Operations for all periods presented which represents a change in classification to our previously issued consolidated financial statements in prior filings including our annual reports on Form 10-K for the years reflected in our consolidated financial statements included in this annual report.
(f)Goodwill
The effect of SFAS No. 142 on the Company, which was adopted as of the beginning of 2002, included eliminating the amortization of goodwill, the identifying reporting units for the purpose of assessing potential future impairments of goodwill and the testing for impairments of goodwill on an annual basis. The Company performs an annual review of goodwill by comparing the fair value of the Company’s reporting units (funeral home businesses by region) to the carrying value of the reporting units. No impairment was indicated for 2004.
Consolidation of Variable Interest Entities
In January 2003, the
The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, "Consolidationas revised, (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51". 51.” This interpretation clarifies the application of ARB 51, "Consolidated Financial Statements", tocircumstances in which certain entities in which equity investorsthat do not have the characteristics ofequity investors with a controlling financial interest or do not have sufficient equity and risk for the entity to financemust be consolidated by its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R) which allows companies with certain typessponsor. The Company implemented FIN 46R as of variable interest entities to defer implementation until March 31, 2004.
We are currently2004, which resulted, for financial reporting purposes, in discussions with the Staffconsolidation of the SecuritiesCompany’s preneed and Exchange Commission relatedperpetual care trust funds. The investments of such trust funds have been reported at market value and the Company’s future obligations to deliver merchandise and services have been reported at estimated settlement amounts. The Company has also recognized the non-controlling financial interests of third parties in the trust funds. There was no cumulative effect of an accounting change recognized by the Company as a result of the implementation of FIN 46R. The discussions relateimplementation of FIN 46R affected certain accounts on the Company’s balance sheet beginning March 31, 2004 as described below; however, it did not affect cash flow, net income or the manner in which the Company recognizes and reports revenues.
Although FIN 46R requires consolidation of preneed and perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to whether we should consolidateaccess the corpus in the perpetual care trusts. For these reasons, the Company has recognized non-controlling interests in our financial statements to reflect third party interests in these consolidated trust funds.
Both the preneed funeral trusts, preneed cemetery trusts and the cemetery perpetual care trusts hold investments in marketable securities which have been classified as available-for-sale. The investments are reported at fair value, with unrealized gains and if we arelosses allocated to consolidate these trusts, when would we recognizeNon-controlling interests in trust investments in the associated earningsCompany’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise is allocated to deferred revenues.
Also beginning March 31, 2004, the Company recognizes realized income, gains and losses of the trusts.
Currently, we defer investment earnings associated with prearranged funeralpreneed trusts and preneed cemetery merchandise and service trust funds until the corresponding merchandise is delivered or the service is performed. It is unclear at this time whether this revenue recognition policy will continue upon implementation of FIN 46R, or if we will have to recognize these trust fund earnings in a revised manner, such as at the time the trust funds themselves earn such investment earnings.
Realized distributable investment earnings from cemetery perpetual care trust funds are currently recognizedtrusts. The Company recognizes a corresponding expense equal to the realized earnings of these trusts attributable to the non-controlling interest holders. When such earnings attributable to the Company have not been earned through the performance of services or delivery of merchandise, the Company will record such earnings as deferred revenue.
For preneed trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company, including accumulated realized earnings, when the contracted services have been performed and merchandise delivered.
15
For cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues as theywhen such earnings are realized and distributable. Such earnings are intended to defray cemetery maintenance costs. We expectcosts incurred by the Company.
Also, the Company was required to continue recognizing these investment earnings under this new accounting policy.
deconsolidate Carriage Services Capital Trust (the “Trust”), a trust established in 1999 to issue redeemable convertible preferred securities. The Company’s obligation to the Trust consists of convertible junior subordinated debentures. The preferred securities of the Trust were previously classified as temporary equity in the consolidated balance sheet. As a result of deconsolidating the Trust, the Company will implementnow reports its obligation to the provisions of FIN 46R as of March 31, 2004 and currently expects to consolidate into its balance sheetTrust, the preneed funeral, preneed cemetery and perpetual care trusts at fair value, which would have the effect of increasing trust assets and total assets by approximately $32.5 million. The offsetting credit is expected to be recorded in deferred revenue orconvertible junior subordinated debentures, as a component of stockholders' equity. The ultimate resolution of the accounting for the associated trust income has not been determined and could potentially result in a material change as to when the trust earnings are recognized. The Company has not been able to quantify the impact, if any, at this time.long-term liability.
18
The following table sets forth certain income statement data for Carriage expressed as a percentage of net revenues for the periods presented:
| | Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||
| Total revenues, net | 100.0 | % | 100.0 | % | 100.0 | % | |
| Total gross profit | 24.8 | 27.9 | 25.7 | ||||
| General and administrative expenses | 5.4 | 7.0 | 7.2 | ||||
| Operating income, excluding special charges | 19.4 | 20.9 | 18.5 | ||||
| Interest expense, net | 12.5 | 12.8 | 11.8 | ||||
|
| Year Ended December 31, |
| ||||
|
| 2002 |
| 2003 |
| 2004 |
|
Total revenues, net |
| 100.0 | % | 100.0 | % | 100.0 | % |
Total gross profit |
| 27.9 |
| 25.6 |
| 25.5 |
|
General and administrative expenses |
| 7.1 |
| 7.1 |
| 7.1 |
|
Operating income |
| 20.2 |
| 18.2 |
| 18.1 |
|
Interest expense |
| 13.2 |
| 12.2 |
| 11.4 |
|
The following table sets forth the number of funeral homes and cemeteries owned and operated by Carriage for the periods presented:
| | Year Ended December 31, | |||||
|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | |||
| Funeral homes at beginning of period | 172 | 148 | 144 | |||
| Acquisitions or openings | 2 | 2 | — | |||
| Divestitures, mergers or closures of existing funeral homes | 26 | 6 | 5 | |||
| Funeral homes at end of period | 148 | 144 | 139 | |||
| Cemeteries at beginning of period | 38 | 30 | 30 | |||
| Acquisitions | — | — | — | |||
| Divestitures | 8 | — | — | |||
| Cemeteries at end of period | 30 | 30 | 30 | |||
|
| Year Ended December 31, |
| ||||
|
| 2002 |
| 2003 |
| 2004 |
|
Funeral homes at beginning of period |
| 148 |
| 144 |
| 139 |
|
Acquisitions |
| 2 |
| — |
| — |
|
Divestitures, mergers or closures of existing funeral homes |
| 6 |
| 5 |
| 4 |
|
Funeral homes at end of period |
| 144 |
| 139 |
| 135 |
|
|
|
|
|
|
|
|
|
Cemeteries at beginning of period |
| 30 |
| 30 |
| 30 |
|
Acquisitions |
| — |
| — |
| — |
|
Divestitures |
| — |
| — |
| — |
|
Cemeteries at end of period |
| 30 |
| 30 |
| 30 |
|
The following is a discussion of Carriage'sCarriage’s results of operations for 2001, 2002, 2003, and 2003.2004. The term "same-store"“same-store” or "existing operations"“existing operations” refers to funeral homes and cemeteries owned and operated for the entirety of each period being compared.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
The following is a discussion of the Company’s results of operations for the years ended December 31, 2003 and 2004.
Diluted earnings per share from continuing operations were $0.60. Excluding the reduction in the deferred tax valuation allowance of $4.1 million or $0.22 per diluted share, the 15.2 percent improvement from $0.33 to $0.38 per share was attributable to lower interest expense and improvements in both funeral and cemetery profitability. Net income, which includes the effect of discontinued operations, totaled $0.51 per diluted share ($0.29 per share excluding the reduction in the deferred tax valuation allowance equal to $0.22 per share) compared to $0.37 per share for 2003. A significant portion of the decrease is attributable to impairment charges before taxes of $ 3.7 million, equal to $ 0.13 per diluted share, net of gains totaling $1.0 million pretax, equal to $0.03 per diluted share, from the sales in 2004 of three funeral home businesses.
16
Funeral Home Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the funeral home operations for the year ended December 31, 2004 compared to the year ended December 31, 2003. For purposes of our discussion, the revenue and gross profit of our businesses identified to be sold are included in the same-store classification up to the quarter prior to their sale.
|
| Year Ended |
| Change |
| |||||||
|
| 2003 |
| 2004 |
| Amount |
| Percent |
| |||
|
| (dollars in thousands) |
| |||||||||
Total same-store revenue |
| $ | 111,737 |
| $ | 112,304 |
| $ | 567 |
| 0.5 | % |
Less businesses held for sale |
| (757 | ) | (807 | ) | 50 |
|
| * | |||
Preneed insurance commissions revenue |
| 1,608 |
| 1,319 |
| (289 | ) | (18.0 | )% | |||
Revenues from continuing operations |
| $ | 112,588 |
| $ | 112,816 |
| $ | 228 |
| 0.2 | % |
Revenues from discontinued operations |
| $ | 3,148 |
| $ | 1,660 |
| $ | (1,488 | ) | (47.3 | )% |
Total same-store gross profit |
| $ | 27,602 |
| $ | 28,212 |
| $ | 610 |
| 2.2 | % |
Less businesses held for sale |
| (112 | ) | (102 | ) | (10 | ) |
| * | |||
Preneed insurance commissions revenue |
| 1,608 |
| 1,319 |
| (289 | ) | (18.0 | )% | |||
Gross profit from continuing operations |
| $ | 29,098 |
| $ | 29,429 |
| $ | 331 |
| 1.1 | % |
Gross profit from discontinued operations |
| $ | 412 |
| $ | 263 |
| $ | (149 | ) | (36.2 | )% |
* not meaningful
Funeral same-store revenues for the year ended December 31, 2004 increased $0.6 million, or 0.5%, when compared to the year ended December 31, 2003, as we experienced an increase of 3.4% to $4,903 in the average revenue per service for those existing operations and the number of services declined by 659, or 2.9%. Cremation services represented 31.9% of the number of funeral services during 2004, compared to 30.7% for 2003.
Total funeral same-store gross profit for the year ended December 31, 2004 increased $0.6 million, or 2.2% from 2003, as a result of the increase in same-store revenues given the predominately fixed cost structure of our businesses. Funeral costs and expenses remained constant from 2003.
Cemetery Segment. The following table sets forth certain information regarding the net revenues and gross profit of the Company from the cemetery operations for the year ended December 31, 2004 compared to the year ended December 31, 2003:
|
| Year Ended |
| Change |
| |||||||
|
| 2003 |
| 2004 |
| Amount |
| Percent |
| |||
|
| (dollars in thousands) |
| |||||||||
Total same-store revenue |
| $ | 35,086 |
| $ | 38,030 |
| $ | 2,944 |
| 8.4 | % |
Less businesses held for sale |
| (735 | ) | (640 | ) | 95 |
|
| * | |||
Revenues from continuing operations |
| $ | 34,351 |
| $ | 37,390 |
| $ | 3,039 |
| 8.8 | % |
Revenues from discontinued operations |
| $ | 735 |
| $ | 640 |
| $ | (95 | ) | (12.9 | )% |
Total same-store gross profit |
| $ | 8,791 |
| $ | 9,023 |
| $ | 232 |
| 2.6 | % |
Less businesses held for sale |
| (270 | ) | (149 | ) | 121 |
|
| * | |||
Gross profit from continuing operations |
| $ | 8,521 |
| $ | 8,874 |
| $ | 353 |
| 4.1 | % |
Gross profit from discontinued operations |
| $ | 270 |
| $ | 149 |
| $ | (121 | ) | (44.8 | )% |
* not meaningful
No cemetery businesses were acquired or sold during the two years; one cemetery is held for sale.
Cemetery same-store revenues for the year ended December 31, 2004 increased $2.9 million, or 8.4%, over the year ended December 31, 2003, and cemetery same store gross profit increased $0.2 million, or 2.6%, over 2003. Revenues from preneed
17
interment sales increased $2.6 million. Though the number of interments sold on a preneed basis remained the same, the average price per space increased 15.1%. Continuing gross margin decreased from 24.8% for the year ended December 31, 2003 to 23.7% for the year ended December 31, 2004 due to higher sales discounts, bad debts and facilities and grounds costs. Higher sales discounts on property negatively impacted revenues and gross profit by $0.8 million year-over-year. Bad debts were $1.0 million higher than the prior year and facilities and grounds expenses increased $0.3 million, primarily due to higher property taxes, insurance and utilities.
Other. General and administrative expenses increased $0.2 million for the year ended December 31, 2004 primarily because 2004 included higher depreciation on computer and software additions during the last 12 months and higher professional fees, a large portion of which related to compliance with the Sarbanes-Oxley Act of 2002.
Other charges consist primarily of a pretax charge of $0.5 million to write off capitalized costs of a cemetery accounting system development project that the Company terminated.
Included in other income for 2004 are pretax gains totaling $0.9 million from the sales of real estate and other assets.
Interest expense for the year ended December 31, 2004 declined $0.9 million, or 4.9%, compared to the year ended December 31, 2003. While the debt outstanding has decreased by approximately $25 million, or 19.2%, during 2004, we are not reporting a proportional decrease in interest expense because the current year expense is negatively impacted by higher loan fees and compound interest on the deferred interest on the convertible subordinated debentures.
Income Taxes. The Company recorded income taxes for continuing operations at the effective rate of 38.5 percent and 37.6 percent (excluding the effect of the change in the valuation allowance) for the years ended December 31, 2003 and 2004, respectively. For federal income tax reporting purposes, Carriage has had net operating loss carryforwards to offset Federal taxable income in 2003 and 2004. Carriage also has approximately $67 million of state net operating loss carryforwards. When the Company incurred restructuring costs and write-downs in late 2000 and proceeded to dispose of low performing businesses, it could not be assured that it would generate enough future taxable income to utilize the tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty, the Company recorded a valuation allowance to offset these tax benefits until such time that it could be determined it would be more likely than not the Company would be able to realize the tax benefits. The Company recognized tax benefits related to the change in the valuation allowance related to its deferred tax assets of $0.1 million and $4.1 million in 2003 and 2004, respectively. The remaining valuation allowance at December 31, 2004 is attributable to the deferred tax asset related to the state operating losses.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Funeral Home Segment. The following sets forth certain information regarding Carriage'sCarriage’s net revenues and gross profit from our funeral home operations during the years ended December 31, 2002 and 2003:
| | Year Ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | Amount | Percent | ||||||||
| | (dollars in thousands) | |||||||||||
| Total same-store revenue | $ | 114,496 | $ | 112,593 | $ | (1,903 | ) | (1.7 | )% | |||
| Acquired, sold and discontinued | 3,265 | 1,536 | (1,729 | ) | (53.0 | )% | ||||||
| Preneed insurance commissions revenue | 1,538 | 1,608 | 70 | 4.6 | % | |||||||
| Total revenues | $ | 119,299 | $ | 115,737 | $ | (3,562 | ) | (3.0 | )% | |||
| Gross profit: | ||||||||||||
| Same-store gross profit | $ | 32,307 | $ | 27,727 | $ | (4,580 | ) | (14.2 | )% | |||
| Acquired, sold and discontinued | 529 | 200 | (329 | ) | (62.2 | )% | ||||||
| Preneed insurance commissions revenue | 1,538 | 1,608 | 70 | 4.6 | % | |||||||
| Total gross profit | $ | 34,374 | $ | 29,535 | $ | (4,839 | ) | (14.1 | )% | |||
19
|
| Year Ended |
| Change |
| |||||||
|
| 2002 |
| 2003 |
| Amount |
| Percent |
| |||
|
| (dollars in thousands) |
| |||||||||
Total same-store revenue |
| $ | 114,496 |
| $ | 112,593 |
| $ | (1,903 | ) | (1.7 | )% |
Acquired |
| 478 |
| 700 |
| 222 |
|
| * | |||
Less businesses held for sale |
| (1,412 | ) | (2,313 | ) | (901 | ) |
| * | |||
Preneed insurance commissions revenue |
| 1,538 |
| 1,608 |
| 70 |
| 4.6 | % | |||
Revenues from continuing operations |
| $ | 115,100 |
| $ | 112,588 |
| $ | (2,512 | ) | 2.2 | % |
Revenues from discontinued operations |
| $ | 4,199 |
| $ | 3,148 |
| $ | (1,051 | ) |
| * |
Total same-store gross profit |
| $ | 32,307 |
| $ | 27,727 |
| $ | (4,580 | ) | (14.2 | )% |
Acquired |
| 145 |
| 183 |
| 38 |
|
| * | |||
Less businesses held for sale |
| (583 | ) | (420 | ) | 163 |
|
| * | |||
Preneed insurance commissions revenue |
| 1,538 |
| 1,608 |
| 70 |
| 4.6 | % | |||
Gross profit from continuing operations |
| $ | 33,407 |
| $ | 29,098 |
| $ | (4,309 | ) | 12.9 | % |
Gross profit from discontinued operations |
| $ | 932 |
| $ | 412 |
| $ | (520 | ) |
| * |
* not meaningful
18
Funeral same-store revenues for the year ended December 31, 2003 were 1.7% less when compared to the year ended December 31, 2002, as we experienced a decrease of 2.3% in the number of funeral service contracts from 24,293 to 23,740 and an increase of 0.6% in the average revenue per contract from $4,713 to $4,743 for those existing operations. The decline in the number of funeral service contracts of 2.3% was due we believe, in part to the decline in the number of deaths of 1.4% in 2003 compared to 2002 based on statistics published by the Center of Disease Control,CDC, as adjusted for non-reporting cities. We also believe that we lost market share in certain areas based on our analysis of obituary reports for those markets. Approximately 30% of the funeral services were cremation services compared to 28% in 2002. The average revenue per cremation services increased 0.7% compared to 2002. The change in mix from traditional to cremation services resulted in a decline of $1.7 million in revenue for 2003 compared to 2002. Of the funeral services performed during 2002 and 2003, approximately 18.5% and 19.5%, respectively, were previously prearranged.
Though total funeral revenues including discontinued operations declined by $3.5 million, funeral costs and expenses actually increased by $1.3 million, resulting in a decline in gross profit including discontinued operations of $4.8 million. From an operational perspective, the funeral business is a relatively fixed cost business. If variable costs had remained constant as a percentage of net revenues, the $3.5 million reduction in revenue would have been associated with a reduction in cost of approximately $0.7 million to $1.0 million. The negative cost and expense variance iswas due primarily to increases in merchandise costs, bad debts and property casualty and general liability insurance. Merchandise costs were approximately $0.8 million higher as vendors increased their prices to Carriage at the beginning of 2003 at a rate higher than the Company was able to increase its prices to the public. Bad debts were $0.8 million higher than 2002 because the Company realized some significant recoveries during 2003 from a centralized collection process installed in 2002. Property casualty and general liability insurance costs increased $0.7 million due to higher premium costs and claims.
Cemetery Segment. The following sets forth certain information regarding Carriage'sCarriage’s net revenues and gross profit from cemetery operations for the years ended December 31, 2002 and 2003:
| | Year ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | Amount | Percent | ||||||||
| | (dollars in thousands) | |||||||||||
| Total same-store revenue and total net revenues | $ | 34,877 | $ | 35,086 | $ | 209 | 0.6 | % | ||||
| Total same-store gross profit and total gross profit | $ | 8,714 | $ | 9,159 | $ | 445 | 5.1 | % | ||||
|
| Year Ended |
| Change |
| |||||||
|
| 2002 |
| 2003 |
| Amount |
| Percent |
| |||
|
| (dollars in thousands) |
| |||||||||
Total same-store revenues |
| $ | 34,877 |
| $ | 35,086 |
| $ | 209 |
| 0.6 | % |
Less businesses held for sale |
| (660 | ) | (735 | ) | (75 | ) |
| * | |||
Revenues from continuing operations |
| $ | 34,217 |
| $ | 34,351 |
| $ | 134 |
| 0.4 | % |
Revenues from discontinued operations |
| $ | 660 |
| $ | 735 |
| $ | 75 |
| 11.4 | % |
Total same-store gross profit |
| $ | 8,456 |
| $ | 8,791 |
| $ | 335 |
| 4.0 | % |
Less businesses held for sale |
| (235 | ) | (270 | ) | (35 | ) |
| * | |||
Gross profit from continuing operations |
| $ | 8,221 |
| $ | 8,521 |
| $ | 300 |
| 3.6 | % |
Gross profit from discontinued operations |
| $ | 235 |
| $ | 270 |
| $ | 35 |
| 14.9 | % |
* not meaningful
No cemetery businesses were acquired or sold during the two years.years; one cemetery is held for sale.
The higher cemetery net revenues resulted in part from a $0.4 million increase in at need revenues as a result of an increase in the average value per contract of 5.8% from $942 to $997, though the volume of at needat-need contracts declined 2.5% from 14,681 to 14,311. We also experienced an increase in preneed property sales of $0.7 million, primarily the result of a 10.2% increase in the number of preneed contracts written from 7,729 to 8,521. The average preneed contract value declined 7.6% from $2,196 to $2,029. These increases were offset in part by $0.4 million less trust income and $0.4 million less in deliveries of previously prearranged merchandise and services. Cemetery gross profit increased on a year-over-year basis primarily due to $0.4 million less bad debt expense in 2003.
Other
Other. General and administrative expenses for the year ended December 31, 2003 increaseddecreased slightly from 2002. Lower ($0.6 million) lease expense from the buyout of a computer lease obligation in early 2003 was mitigated in part by higher ($0.3 million) depreciation expense. Higher overall salaries and wages in 2003 offset the $0.5 million officer termination cost in 2002. Higher legal fees and franchise taxes in 2003 totaling $0.6 million compared to $0.5 million incurred for professional fees related to a change in tax accounting methods.
20
19
The following table describes the components of special charges and other items of the Company for the years ended December 31, 2002 and 2003:
| | December 31, 2002 | December 31, 2003 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount (000s) | Diluted EPS impact | Amount (000s) | Diluted EPS impact | |||||||||
| Net gains (losses) from the dispositions /impairments of business assets | $ | (361 | ) | $ | (0.01 | ) | $ | 1,156 | $ | 0.04 | |||
| Costs of early terminations of lease obligation and bank credit facility | — | — | (579 | ) | (0.02 | ) | |||||||
| Total special charges and other items | $ | (361 | ) | $ | (0.01 | ) | $ | 577 | $ | 0.02 | |||
Interest expense and other financing costs for the year ended December 31, 2003 declined $1.9$1.8 million compared to the year ended 2002.2002 primarily because outstanding debt declined period over period. Cash flow from operations and proceeds from the sales of business assets have provided the source of funds to reduce the debt outstanding during 2002 and 2003. Since December 31, 2002,During 2003, total outstanding debt has beenwas reduced by $13.6 million. Reductions in interest rates over the last two yearsduring 2002 and 2003 and the expiration of a floating for fixed interest rate swap in May 2003 also contributed (to a lesser degree) in reducing interest expense.
Income TaxesTaxes.
The Company recorded income taxes at the effective rate of 38.5% (excluding the affect of the change in valuation allowance) and 37.5% for the years ended December 31, 2002 and 2003, respectively. See Note 812 to the consolidated financial statements.
The Company has net operatingslightly lower tax rate in 2003, compared to 2002, is based on the utilization of certain state loss carryforwards totaling approximately $21.8 million for Federal income tax purposes, as well as significant operating loss carryforwards in certain states.carryforwards. Because of the ability to use the net operating loss to offset taxable income and the timing of when revenue and expenses are recognized for tax purposes, we did not pay Federal income taxes in 2002 and 2003. The slightly lower tax rate in 2003, compared to 2002, is based on the utilization of certain state loss carryforwards, a portion of the benefits of which have not yet been recognized.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Funeral Home Segment. The following sets forth certain information regarding Carriage's net revenues and gross profit from our funeral home operations during the years ended December 31, 2001 and 2002:
| | Year Ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | Amount | Percent | ||||||||
| | (dollars in thousands) | |||||||||||
| Total same-store revenue | $ | 115,700 | $ | 116,292 | $ | 592 | 0.5 | % | ||||
| Acquired, sold and closed | 4,914 | 1,469 | (3,445 | ) | (70.1 | )% | ||||||
| Preneed insurance commissions revenue | 3,670 | 1,538 | (2,132 | ) | (58.1 | )% | ||||||
| Total net revenues | $ | 124,284 | $ | 119,299 | $ | (4,985 | ) | (4.0 | )% | |||
| Gross profit: | ||||||||||||
| Same-store gross | $ | 27,126 | $ | 32,546 | $ | 5,420 | 20.0 | % | ||||
| Acquired, sold and closed | 675 | 290 | (385 | ) | (57.0 | )% | ||||||
| Preneed insurance commissions revenue | 3,670 | 1,538 | (2,132 | ) | (58.1 | )% | ||||||
| Total gross profit | $ | 31,471 | $ | 34,374 | $ | 2,903 | 9.2 | % | ||||
21
Funeral same-store revenues for the year ended December 31, 2002 increased 0.5% when compared to the year ended December 31, 2001, as we experienced an increase of 0.3% in the number of services and an increase of 0.2% in the average revenue per service for those existing operations. The increase in the average revenue per service was hampered by an increase from 27% to 28% in the percentage of funeral services involving cremations, which generally have a lower sales value. The average revenue for cremation services increased 3.8% from year to year. In addition to the net revenues from funeral location operations above, insurance commission revenues from preneed funeral contract sales totaled $1.5 million for 2002, as compared to $3.7 million for 2001, primarily due to nonrecurring commissions in the prior year period on the conversion of trust funded contracts to insurance funded contracts.
Total funeral same-store gross profit for the year ended December 31, 2002 increased $5.4 million or 20% from the comparable year of 2001. The higher gross profit is primarily due to the elimination of goodwill amortization which totaled $4.5 million during the year ended December 31, 2001.
Cemetery Segment. The following sets forth certain information regarding Carriage's net revenues and gross profit from cemetery operations for the years ended December 31, 2001 and 2002:
| | Year ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | Amount | Percent | ||||||||
| | (dollars in thousands) | |||||||||||
| Total same-store revenue | $ | 37,654 | $ | 34,877 | $ | (2,777 | ) | (7.4 | )% | |||
| Acquired or sold | 555 | — | (555 | ) | * | |||||||
| Total net revenues | $ | 38,209 | $ | 34,877 | (3,332 | ) | (8.7 | )% | ||||
| Same-store gross profit | $ | 8,820 | $ | 8,691 | $ | (129 | ) | (1.5 | )% | |||
| Acquired or sold | 4 | 23 | 19 | * | ||||||||
| Total gross profit | $ | 8,824 | $ | 8,714 | $ | (110 | ) | (1.3 | )% | |||
Cemetery same-store net revenues for the year ended December 31, 2002 decreased $2.8 million, or 7.4%, over the year ended December 31, 2001, and cemetery same-store gross profit decreased $0.1 million, or 1.5%, over the comparable year of 2001. No cemetery locations were sold or discontinued in 2002. Sales of property merchandise and services on an at need basis increased 4.0% from $13.3 million in 2001 to $13.8 million in 2002. Preneed cemetery sales have been negatively affected by the weak economy and internal challenges in restaffing the preneed sales group. In particular, we experienced a 15.0% decrease in preneed sales of interment and entombment sites from $12.2 million to $10.4, and a decrease of $0.4 million in finance charges earned on preneed receivables. Income from trust funds was substantially the same in both years. Total gross margin increased from 23.1% for the year ended December 31, 2001 to 25% for the year ended December 31, 2002. Gross margin in the current year period benefited by a lower bad debt experience.
Other
General and administrative expenses for the year ended December 31, 2002 increased $2.1 million as compared to the year ended December 31, 2001. These expenses, as a percentage of net revenues, increased from 5.4% to 7.0% primarily because of a $0.7 million charge related to the termination of an employment agreement with a former officer and $0.5 million in professional fees incurred in connection with changes in tax accounting methods during 2002. Excluding these two unusual charges, general and administrative expenses totaled 6.2% of net revenues. Higher salaries and benefits accounted for the remaining increase in year-over-year expenses.
22
Interest expense and other financing costs for the year ended December 31, 2002 declined slightly compared to the year ended December 31, 2001 primarily because average debt outstanding was less than the average debt outstanding in the same period for 2001. Additional amortization in the amount of $0.5 million was recorded in 2002 because of the reduction in the maximum principal available under the Company's revolving credit facility from $100 million to $75 million and paydowns on the senior notes.
Income Taxes
The following table sets forth the components of the provision (benefit) of income taxes for the Company for the years ended December 31, 2001 and 2002.
| | Year Ended December 31, 2001 | Year Ended December 31, 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Percent of Pretax Income | Amount | Percent of Pretax Income | |||||||
| Provision for income taxes before the reduction of the deferred tax asset valuation allowance | $ | 2,251 | 20 | % | $ | 4,684 | 38.5 | % | |||
| Reduction of deferred tax asset valuation allowance | — | — | (12,800 | ) | (105.3 | )% | |||||
| Total provision (benefit) for income taxes | $ | 2,251 | 20 | % | $ | (8,116 | ) | (66.8 | )% | ||
See Note 8 to the consolidated financial statements for a discussion of income taxes for these years.
Cash and cash equivalents totaled $2.0$1.9 million at December 31, 2003 and $2.72004, representing a decrease of $0.1 million atfrom December 31, 2002.2003. It is Carriage'shas been Carriage’s practice to apply available cash balances against its revolving line of credit, described below, to minimize interest expense. If the Company needs cash for working capital or investment purposes, it canmay draw upon available capacity under its $40 million revolvingon the line of credit such availability being $17.8 millionso long as of December 31, 2003.the Company is in compliance with the loan covenants and committed funds are available. For the year ended December 31, 2003,2004, cash provided by operationsoperating activities was $14.7$24.2 million as compared to $18.9$14.7 million for the year ended December 31, 2002, a decrease of $4.22003, in part because pretax income from continuing operations increased $1.6 million. The $4.2current year period also benefited from the deferral of interest payments in the amount of $7.0 million decrease is primarily dueon the convertible junior subordinated debenture compared to $3.3 million in the prior year period. Additionally, the cost of originating preneed contracts declined $1.3 million compared to the $2.8 million decrease in net income, adjusted for deferred taxes. The deferral of the TIDES distributions (discussed in the following section) provided $3.3 million of cash flow from operations. Uses of working capital for accounts receivable and trust funds totaled $7.2 million for 2003 compared to $1.0 million for 2002.prior year. Cash used in investing activities was $1.3 million for the year ended December 31, 2004 compared to cash used in the amount of $1.8 million for the year ended December 31, 2003 compared to cash2003. Cash used in investing activities in the amount of $6.0for capital expenditures declined $0.5 million for December 31, 2002, the change being primarily due to the $1.5from $6.2 million receipt of cash in 2003 related to an adjustment to the purchase cost$5.7 million in 2004. The majority of a 1999 acquisition versus a use of $2.2 million for acquisitionsour cashflow in 2002. Cash used in financing activities was $13.6 million for the year ended December 31, 2003 compared to cash used in financing activities in the amount of $13.0 million for December 31, 2002, most of which2004 was used for debt reduction.to reduce debt.
Debt
The Company'soutstanding principal of our senior debt at December 31, 20032004 totaled $135.5$110.3 million and consisted of $96.3$70.5 million in aggregate principal amount under our existing senior notes, a $40$25.6 million revolvingoutstanding under our existing unsecured credit facility, ($21.1 million outstanding at December 31, 2003) and $18.1$14.2 million in acquisition indebtedness and capital lease obligations. Additionally, the Company has used $1.2$1.1 million of the credit facility forin letters of credit have been issued under the majority of which secures arrangements with the Company's insurance provider. Carriage replaced the $75 millionexisting unsecured credit facility that was in placeand were outstanding at December 31, 2002 with a $40 million2004.
Our existing unsecured revolving credit facility, thatas amended, provides for borrowings up to $45 million and matures in March 2006. Interest is payable at either prime rate plus 1.25% or a rate indexed to LIBOR options. Initially,at the Company’s option. Currently, the LIBOR option is set at LIBOR plus 300275 basis points and the margin above LIBOR can decline in the future with reductions in Carriage's debt to EBITDA ratio, if any, as defined in the credit agreement.points. The newCompany’s credit facility reduces by
23
$7.5 million in March 2005, and by an additional $7.5 million in September 2005. was amended subsequent to year end to permit the issuance of Senior Notes. In addition, the Company entered into a letter of commitment underwith Bank of America, its lead lender, for a $35 million Senior Secured Credit Facility. The Senior Secured Credit Facility would mature five years from the credit facility reducesclosing date, would be secured by upthe Company’s assets (including certain funeral home real property) and would include financial covenants and limitations on stock redemptions, dividends and acquisitions. The commitment is subject to $5certain conditions precedent to closing and completion of definitive documentation.
In January 2005, the Company issued $130 million for the banks' pro-rata share of 7.875% Senior Notes due in 2015. The proceeds from dispositionsthese notes were used to refinance all of assets, if any.the senior debt, bring current the deferred distributions on the convertible junior subordinated debentures and the TIDES, and for general corporate purposes. In order to complyconnection with the conditionsearly retirement of the new credit facility,senior debt, the Company began deferringmade a required “make whole” payment of $6.0 million in the form of additional interest and recorded a charge to write off $0.7 million of unamortized loan costs. These charges equal $4.2 million after tax, or $0.23 per diluted share, and will be reported in the first quarter of 2005.
20
The following table sets forth the consolidated capitalization as of December 31, 2004 on an actual basis and on an as adjusted basis to give effect to the $130 million offering of 7.875% Senior Notes due in 2015 and the transactions paying off our senior debt and accrued interest.
|
| As of |
| ||||
|
| Actual |
| As Adjusted |
| ||
|
| (in millions) |
| ||||
Senior Debt: |
|
|
|
|
| ||
Existing Unsecured Credit Facility |
| $ | 25.6 |
| $ | — |
|
Existing Senior Notes |
| 70.5 |
| — |
| ||
New Senior Notes |
| — |
| 130.0 |
| ||
Acquisition Debt |
| 8.7 |
| 8.7 |
| ||
Capital Leases |
| 5.5 |
| 5.5 |
| ||
Total Senior Debt |
| $ | 110.3 |
| $ | 144.2 |
|
Subordinated Debt: |
|
|
|
|
| ||
Subordinated Debt to Affiliate |
| $ | 93.8 |
| $ | 93.8 |
|
Deferred Interest |
| 10.9 |
| — |
| ||
Total Subordinated Debt |
| $ | 104.7 |
| $ | 93.8 |
|
Total Debt |
| $ | 215.0 |
| $ | 238.0 |
|
Total Stockholders’ Equity |
| 116.4 |
| 112.2 |
| ||
Total Capitalization |
| $ | 331.4 |
| $ | 350.2 |
|
The net proceeds of this offering, which were approximately $125.5 million after deducting the initial purchasers’ discount and offering expenses, were used to pay in full the principal, accrued but unpaid interest, and “make-whole” payments on the subordinated debentures held by its affiliated trust. As a result, cash distributionsexisting senior notes; repay all outstanding borrowings under our existing unsecured credit facility; pay the cumulative deferred interest on the Company-obligated mandatorily redeemablesubordinated debt to affiliate current; and fund general corporate purposes.
Subsequent to the above-described refinancing transactions, we will enjoy the extended maturity of our debt, a more flexible covenant package and the continuing right to defer distributions payable in respect of the TIDES for up to five years. Notwithstanding our ability to defer payment of distributions in respect of the TIDES, we resumed cash payments of interest on the TIDES on March 1, 2005, which aggregate approximately $6.5 million on an annual basis. While we will have the ability to borrow additional amounts under our amended senior secured credit facility, our intention is to fund anticipated capital expenditures, acquisitions, if any, and other operating requirements from existing cash balances and cash flow from operations.
A total of $93.8 million was outstanding on December 31, 2004 on our convertible preferred securities ofjunior subordinated debentures. Amounts outstanding under the debentures are payable to the Company’s affiliate trust, Carriage Services Capital Trust, were deferred for at least the term of the new credit facility beginning with the September 1, 2003 payment.
The senior notes are unsecured, mature in traunches of $22.3 million in 2004, $52.4 million in 2006 and $21.6 million in 2008 and bear interest at 7.0% and mature in 2029. Substantially all the fixed ratesassets of 7.73%, 7.96% and 8.06%, respectively.the Trust consist of the convertible junior subordinated debentures of the Company. The senior note agreement additionally requires that a significant portionTrust issued 1.875 million shares of any proceeds fromTIDES. The rights of the salesdebentures are functionally equivalent to those of assets be offeredthe TIDES.
The convertible junior subordinated debentures payable to the note holders as prepaymentaffiliated trust and the TIDES each contain a provision for the deferral of the amounts outstanding. These prepayments are made at par value. Prepayments were made in the amounts of $8.0 million, $2.7 millioninterest payments and $3.0 million during 2001, 2002 and 2003, respectively, related to the proceeds from sales of assets.
The credit facility is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires that we maintain certain financial ratios. The Company met all financial covenants at December 31, 2003. As of December 31, 2003, the Company's debt to total capitalization was 40.8 percent as compared to 44.2 percent at December 31, 2002.
We do not have any liquidity sources or financing arrangements with unconsolidated or limited purpose entities in which we may be economically or legally required or reasonably likely to fund losses, provide it with additional funding, issue securities pursuant to a call option held by that entity, purchase the entity's capital stock or assets, or otherwise may be financially affected by the performance or non-performance of an entity or counterparty to a transaction or arrangement. In particular, we do not expect to be required to fund any unrealized or realized losses in the preneed trust funds.
Preferred Stock
The Company's subsidiary, Carriage Services Capital Trust, has issued and outstanding 1,875,000 units of 7% convertible preferred securities, that mature in 2029, resulting in approximately $90 million of proceeds that are included in the Company's consolidated balance sheets as Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust ("TIDES"). Distributions are tax deductible and may be deferred at our optiondistributions for up to 20 consecutive quarters. For purposes of debt ratios, under our revolving credit and senior note agreements, the convertible preferred securities are treated as equity.
Since the Company has deferred the TIDES distributions, current payments have not been made to holders since September 1, 2003. During the period in which distribution payments are deferred, distributions will continue to accumulate at the 7 percent7.0% annual rate. Also, the deferred distributions will themselves accumulate distributions at the annual rate of 7 percent.7.0% and are recorded as a liability. During the deferral period, in which distributionswe are deferred, Carriage is prohibited from paying dividends on itsthe common stock or repurchasing its common stock, withsubject to limited exceptions. In complying with the conditions of our existing unsecured credit facility, we began deferring interest payments on the subordinated debentures payable to our affiliated trust. As a result, cash distributions on the TIDES have been deferred and recorded as a liability, beginning with the September 1, 2003 payment. The deferred distributions become due in full atcondition was imposed by the earlierlenders to ensure that we had sufficient available borrowings under our existing unsecured credit facility to retire the Series A maturities of the date thatexisting senior notes in July 2004 and to accommodate the Company elects to reume paying distributions or September 1, 2008.two commitment reductions in 2005.
Significant Uses of Cash
The Company markets preneed funeral contracts and a cash investment has been required to generate this backlog of business, primarily to fund sales commissions and other selling expenses. In 2001, $23.9 million of preneed funeral sales were generated for a cash outlay of $2.1 million. In 2002, $25.1 million of preneed sales were generated for a cash outlay of $1.9 million. In 2003, $23.5 million of preneed funeral sales were generated for a cash outlay of $2.0 million.
2421
During the twelve months ended December 31, 2003, the Company incurred approximately $6.2 million in capital expenditures, primarily related to refurbishing and improving funeral home facilities and construction of lawn crypts and mausoleums at cemeteries. The Company believes that cash flow from operations and borrowings under the credit facility should be sufficient to fund anticipated capital expenditures as well as other ongoing operating requirements. The Company anticipates that the capital expenditures in 2004 will primarily be limited to those that are required to maintain the revenue capability of its existing businesses. It does not anticipate making significant capital expenditures to grow or enhance new revenue streams or acquire new businesses.
Contractual Obligations and Commitments
The following table summarizes our obligations and commitmentsbalance sheet liabilities to make future payments under contracts, such as debt and lease agreements, as well as other financial commitments.of December 31, 2004. Where appropriate we have indicated the footnote to our annual consolidated financial statements where additional information is available.
| | Payments By Period | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Note Reference | Total | 2004 | 2005 | 2006 | 2007 | 2008 | After 5 Years | |||||||||
| | (in millions) | ||||||||||||||||
| Long-term debt | 4 | $ | 129.9 | 24.4 | 2.2 | 75.6 | 2.9 | 23.7 | 1.1 | ||||||||
| Capital lease obligations | 7 | 9.5 | 0.4 | 0.4 | 0.4 | 0.5 | 0.5 | 7.3 | |||||||||
| Mandatorily redeemable convertible preferred securities* | 5 | 90.3 | — | — | — | — | — | 90.3 | |||||||||
| Dividends payable on convertible preferred securities | 5 | 3.9 | — | — | — | — | 3.9 | — | |||||||||
| Operating leases | 7 | 11.8 | 2.0 | 1.9 | 1.5 | 1.5 | 1.4 | 3.5 | |||||||||
| Noncompete agreements | 7 | 4.1 | 1.5 | 1.0 | 0.7 | 0.4 | 0.3 | 0.2 | |||||||||
| Total contractual cash obligations | $ | 249.5 | 28.3 | 5.5 | 78.2 | 5.3 | 29.8 | 102.4 | |||||||||
|
|
|
|
|
| Payments By Period |
| |||||||||||
|
| Note |
| Total |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| After |
| |
Long-term debt |
| 8 |
| $ | 110.3 |
| 2.2 |
| 76.9 |
| 1.5 |
| 23.4 |
| 0.6 |
| 5.7 |
|
Capital lease obligations |
| 11 |
| 11.3 |
| 0.5 |
| 0.4 |
| 0.4 |
| 0.5 |
| 0.5 |
| 9.0 |
| |
Convertible junior subordinated debenture (a) |
| 9 |
| 93.8 |
| — |
| — |
| — |
| — |
| — |
| 93.8 |
| |
Deferred interest on convertible junior subordinated debenture |
| 9 |
| 10.9 |
| 10.9 |
| — |
| — |
| — |
| — |
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total contractual obligations |
|
|
| $ | 226.3 |
| 13.6 |
| 77.3 |
| 1.9 |
| 23.9 |
| 1.1 |
| 108.5 |
|
(a) Matures in 2029
We expect to retire the Series A maturities of Senior Notes due in July 2004 (outstanding balance of $22.3 million at December 31, 2003) using funds available from our unsecured credit facility. At December 31, 2003, the Company had approximately $18 million of available borrowings on its $40 million commitment under the credit facility. We believe that cash flow from operations and proceeds from planned disposals of certain locations will generate sufficient funds through July 2004 to pay down the unsecured credit facility to a level that will create sufficient credit capacity to retire the Series A maturities. However, if events or circumstances beyond the Company's control result in insufficient available credit capacity, the credit facility contains a provision whereby the Company may increase the commitment available under its credit facility to $45 million, thus increasing the available borrowings by an additional $5 million.
The Company believes that additional debt and equity financing may be required in the future to fund capital needs and longer term debt maturities. The availability and terms of these capital sources will depend on prevailing market conditions, interest rates and the then-existing financial condition of the Company.
Off-Balance Sheet Arrangements
Our
The following table summarizes our off-balance sheet arrangements as of December 31, 2003 consist of2004. Where appropriate we have indicated the footnote to our preneed arrangements which are discussed in sectionsPreneed Funeral Contracts and Deferred Preneed Funeral Contracts Revenue, Amounts Due From Preneed Cemetery Merchandise and Services Trust Funds and Perpetual and Memorial Care Trust of Note 1 to theannual consolidated financial statements includedwhere additional information is available.
|
|
|
|
|
| Payments By Period |
| |||||||||||
|
| Note |
| Total |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| After |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating leases |
| 11 |
| 8.0 |
| 2.3 |
| 1.7 |
| 1.4 |
| 1.2 |
| 0.7 |
| 0.7 |
| |
Interest on refinanced long-term debt(a) |
| 19 |
| 107.4 |
| 5.2 |
| 10.2 |
| 10.2 |
| 10.2 |
| 10.2 |
| 61.4 |
| |
Noncompete agreements |
| 11 |
| 5.8 |
| 1.3 |
| 1.1 |
| 0.8 |
| 0.7 |
| 0.5 |
| 1.4 |
| |
Consulting agreements |
| 11 |
| 1.0 |
| 0.4 |
| 0.2 |
| 0.2 |
| 0.1 |
| 0.1 |
| — |
| |
Software agreements |
| 11 |
| 0.5 |
| 0.5 |
| — |
| — |
| — |
| — |
| — |
| |
Executive Management agreements |
| 11 |
| 2.6 |
| 1.0 |
| 0.9 |
| 0.2 |
| 0.2 |
| 0.3 |
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total contractual cash obligations |
|
|
| $ | 125.3 |
| 10.7 |
| 14.1 |
| 12.8 |
| 12.4 |
| 11.8 |
| 63.5 |
|
(a) Calculated on the $130 million of Senior Notes after January 2005
The obligations related to our off-balance sheet arrangements are significant to our future liquidity; however, although we can provide no assurances, we anticipate that these obligations will be funded from cash provided from our operating activities. If we are not able to meet these obligations with cash provided for by our operating activities, we may be required to access the capital markets or draw down on our credit facilities.
Additionally, we are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the purchase or sale of business assets, commercial contracts and operating leases and arose through representations and warranties (e.g., ownership of assets or environmental matters). The terms of these indemnifications range in Item 8.duration and may not be explicitly defined.
25
As an incentive, the Company entered into arrangements with onetwo former owners, both of itswhich have served as directors and a current director nomineeduring the past three years, to pay them each 10% of the amount by which the annual field level cash flow exceeds predetermined targets on certain businesses in their respective geographic region through 2007, with a final payment equal to a multiple of six times the average of the last three years payments. The business purpose of the arrangements was to incentivise the individuals to provide Carriage with high quality acquisition targets and to have input in the competitive strategies of those businesses post-acquisition so that cash flows grow over time. The terms were determined by reference to similar arrangements within the death care industry. The incentives earned by the two individuals totaled approximately $135,000, $120,000, $60,000 and $60,000$110,000 for the years 2001, 2002, 2003 and 2003,2004, respectively.
In connection with the 1997 acquisitionacquisitions of twocertain funeral homes, from a group of individuals, one of which is one of the directors referred to in the preceding paragraph, a portion of the purchase price of each of those funeral homes was to be payable to one of the former owners referred to in the preceding paragraph based on a formula related to the annual field level cash flows subsequent to the year of acquisition. The business purpose was to determine the final purchase prices of the acquisitions since boththey were expected to show strong growth in cash flow. The terms were negotiated bywith the sellers, one of which later was appointed toas a director of Carriage. The contingent purchase price payments paid to the director totaled $47,673 and $572,243 during the years 2001 and 2002, respectively.2002.
The Company rents office space, at an annual rate of $19,000 per year through 2005, from an entity in which one of
During 2003, the Company's directors has a financial interest. The terms were determined by reference to rentals of similar office space in the area.
The Company was reimbursed for the cost of personnel and office expenses totaling approximately $87,000 from an entity in which the Company ownsowned a minority (12%) interest and one of the entity'sentity’s directors is our Chief Executive Officer.
In connection with The Company sold its interest in the productionentity and our CEO resigned as director of the Company's annual report, printing costs of approximately $20,000 were paid to an entity in which one of the Company's directors is the Chief Executive Officer. Such services were competitively bid and the amount paid represents a market cost of the services.during 2004.
22
Although the death care business is relatively stable and fairly predictable, ourThe Company’s business can be affected by seasonal fluctuations in the death rate. Generally, death rates arethe rate is higher during the winter months.months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.
INFLATION
Inflation has not had a significant impact on the results of Carriage'sCarriage’s operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operation; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may"“may”, "will"“will”, "estimate"“estimate”, "intend"“intend”, "believe"“believe”, "expect"“expect”, "project"“project”, "forecast"“forecast”, "plan"“plan”, "anticipate"“anticipate” and other similar words.
26
CAUTIONARY STATEMENTSRISKS RELATED TO OUR COMPANY
Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenues and margins.
We caution readers thatface competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Certain of the following important factors, among others,recent entrants are individuals who were formerly employed by us or by our competitors and have relationships and name recognition within our markets. As a group, independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenues. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue as well as to incur costs in response to competition to vary the types or mix of products or services offered by us.
Price competition could also reduce our market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.
We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some casesmarkets. In other markets, we have affected, andhad to reduce prices thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could affect,further reduce revenues, profit margins and our actual consolidated resultsbacklog.
Improved performance in our funeral segment is highly dependent upon successful execution of our standards-based Being the Best operating model.
At the beginning of 2004, we implemented our new standards-based Being the Best operating model to improve and better measure performance in our funeral operations. We developed standards according to nine criteria, each with a different weighting, designed around market share, people, and operational and financial metrics. We also incentivise our location managing partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation is that, over time, the Being the Best operating model will result in our maintaining or improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met.
Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.
Declines in preneed sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in preneed sales can have a negative impact on cash flow as a result of commissions and other costs incurred without corresponding revenues.
23
As we have localized our preneed sales strategies, we are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause our actual consolidated resultsus to experience declines in preneed sales in the short-run. In addition, economic conditions at the local or national level could cause declines in preneed sales either as a result of less discretionary income or lower consumer confidence. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.
Preneed sales of cemetery property and funeral and cemetery merchandise and services are generally cash flow negative initially, primarily due to differ materially from the goalscommissions paid on the sale, the portion of the sales proceeds required to be placed into trust or escrow and expectations expressed in the forward-looking statements aboveterms of the particular contract such as the size of the down payment required and in anythe length of the contract. As a result, preneed sales reduce cash flow available for other forward-looking statements made by us or on our behalf.activities, and, to the extent preneed activities are increased, cash flow will be further reduced.
RISKS RELATED TO OUR BUSINESS
Earnings from and principal of trust funds and insurance contracts could be reduced by changes in stock and bond prices and interest and dividend rates.financial markets.
Earnings and investment gains and losses on trust funds and insurance contracts are affected by financial market conditions that are not withinlargely outside our control. Earnings are also affected by the mix of fixed-income and equity securities that we choose to maintain in the funds, and we may not choose the optimal mix for any particular market condition. The size of the funds depends upon the level of preneed sales and maturities, the amount of investment gains or losses and funds added through acquisitions, if any. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds and insurance contracts could cause a decline in future cash flows and revenues. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on our financial condition. As of December 31, 2003, net unrealized depreciation in the funeral trust fund was $0.6 million. Unrealized gains in the cemetery merchandise and perpetual care trust funds amounted to $0.2 million, $0.4 million, respectively. See Note 1 in our consolidated financial statements.
Unrealized gains and losses in the funeral trust funds and cemetery merchandise trust funds have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the funds were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to record the expected loss currently. Over time, gains and losses realized in the funds are allocated to underlying preneed contracts and affect the amount of the trust fund earnings to be recognized when we deliver the underlying product or service. Accordingly, if current marketDepending on conditions do not improve,in the financial markets, the funds may eventually realize losses, and our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when we deliver the underlying products and services. In addition, any significant
Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.
There has been little acquisition activity by us or sustained investment losses could result in there being insufficient fundsthe other public companies in the trustsdeath care industry over the preceding four years, and there is no assurance that we will be able to coveridentify candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us. We intend to apply standards established under our Being the cost of delivering servicesBest operating model in qualifying acquisition candidates, and merchandisethere is no assurance that we will be successful in doing so or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on our financial condition and results of operations. (See Note 1.)that we will find attractive candidates that satisfy these standards.
Increased costs may have a negative impact on our earnings and cash flows.
Cost increases may impair our ability to achieve revenue growth that exceeds our cost increases. Our 20042005 plan assumes that we will be successful in increasing revenues at a rate that is greater than the growth in the cost of sales. Although we believe we can achieve that goal, weWe can give no assurance that we will be successful in doing so in 2004.achieving such increases.
We expect insurance costs, in particular, to remain high or increase in 2004. The volume of claims made over the past two years resulted in liquidity challenges that many insurers have passed on to their policyholders. Additionally, insurers have increased premiums to offset losses in equity and debt markets due to recent economic conditions. While our insurance costs are expected to remain high or increase, any actual increase in insurance costs cannot be predicted.
27
Our ability to achieve our debt reduction targets and to service our debt in the future depends upon our ability to generate sufficient cash, which depends on many factors, some of which are beyond our control.
Our ability to achieve our debt reduction targets in the time frame projected by us depends upon our ability to generate sufficient cash from two main sources: (1) disposing of underperforming assets and locations, and (2) our ongoing operations. We expect to generate cash proceeds from disposing of assets and locations which depends upon our ability to negotiate transactions on acceptable terms and conditions with qualified buyers who can obtain third party financing. Our ability to generate cash flow from operations depends upon, among other things, the number of deaths in our markets, competition, the level of preneed sales and their maturities, our ability to control our costs, stock and bond market conditions, and general economic, financial and regulatory factors, most of which is beyond our control.
We may experience declines in preneed sales due to numerous factors ranging from changes to sales force compensation to a weakening economy. Declines in preneed sales would reduce our backlog and revenue and could reduce our future market share.
In an effort to enhance our local preneed sales strategies, we are evaluating new insurance products, marketing strategies and the compensation structure for our preneed sales force. Although we anticipate changes in these areas could improve preneed sales, we could experience declines in preneed sales in the short-run. In addition, a weakening economy that causes customers to have less discretionary income could cause a decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.
Increased preneed sales may have a negative impact on cash flow.
Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust or escrow and the terms of the particular contract such as the size of the down payment required and the length of the contract. In fiscal year 2000, we changed the terms and conditions of preneed sales contracts and commissions and moderated our preneed sales effort in order to reduce the initial negative impact on cash flow. Nevertheless, we will continue to invest a portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow will be further reduced, and our ability to service debt could be adversely affected.
Price competition could reduce market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.
Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. In the past, this price competition has resulted in losing market share in some markets. In other markets, we have had to reduce prices thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and the backlog.
28
Increased advertising or better marketing by competitors, or increased activity by competitors offering products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs in order to retain or recapture our market share.
In recent years, marketing through television, radio and print advertising, direct mailings and personal sales calls has increased with respect to the sales of preneed funeral services. Extensive advertising or effective marketing by competitors in local markets could cause us to lose market share and revenues or cause us to increase marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue or to incur costs in response to competition to vary the types or mix of products or services offered by us. Also, increased use of the Internet by customers to research and/or purchase products and services could cause us to lose market share to competitors offering to sell products or services over the Internet.
Increases in interest rates would increase interest costs on our variable-rate long-term debtindebtedness and could have a material adverse effect on our net income and earnings per share.income.
As of December 31, 2003, $21.12004, $25.6 million of our long-term debtindebtedness was subject to variable interest rates. Accordingly, any significant increaserates, all under our existing credit facility. We intend to amend our credit facility, which will also likely be at variable rates, although initially there is no outstanding balance following the repayment of borrowings from the proceeds of the $130 million Senior Notes offering. Our current Senior Notes are fixed-rate debt instruments, as is the subordinated debt to affiliate debentures. Nevertheless, if we borrow under our proposed amended credit facility, we will become subject to greater exposure to increases in interest rates, could increaseand increases in our interest costs on our variable-rate long-term debt, which could decrease our net income and earnings per share.income.
Covenant restrictions under our revolving credit facility and senior notesdebt instruments may limit our flexibility in operating our business.
Our revolving
The terms of our credit facility, including the amendment we intend to obtain, and the senior notes contain covenants thatindenture governing the Senior Notes will limit our ability and the ability of our subsidiaries to, among other things, our ability to: borrow money; things:
• incur additional debt;
24
• pay dividends or distributions; purchasemake distributions or redeem or repurchase stock;
• make investments; engage in
• grant liens;
• make capital expenditures;
• enter into transactions with affiliates; engage in sale leaseback
• enter into sale-leaseback transactions; effect a consolidation or merger or
• sell transfer, lease, or otherwise dispose of all or substantially all assets; and create liens on assets. We must
•acquire the assets of, or merge or consolidate with, other companies.
Our credit facility also stay within specified limits ofrequires us to maintain certain financial ratios. Complying with these restrictive covenants and financial ratios, such as well as those that may be contained in any future debt agreements, may impair our ability to finance our future operations or capital needs or to take advantage of other favorable business opportunities. They may also limit our ability to pay interest or principal on the notes. Our ability to comply with these restrictive covenants and financial ratios will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions when they apply will result in a debt-to-EBITDA ratiodefault under the particular debt instrument, which could permit acceleration of the debt under that instrument and, fixed charge coverage ratio.
We expect to borrow from our revolving credit facility in July 2004 to retiresome cases, the Series A maturitiesacceleration of Senior Notes.debt under other instruments that contain cross-default or cross-acceleration provisions. In the event we are not in compliance with the covenants under the revolving credit facility we could be prevented from drawing on our credit facility to retire the senior notes. This would constituteof an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our amended senior secured credit facility, the lenders thereunder may be entitled to sell most or substantially all of our assets and the assets of many of our lenders could electsubsidiaries to declare all amounts immediately due and payable.
Our projections for 2004 include adjustments to earnings and cash flow for estimated disposition activity. Several important factors, among others, may affectsatisfy our ability to consummate dispositions.
Our projections for 2004 include adjustments to earnings and cash flow for estimated disposition activity. The actual level of disposition activity, if any, will depend not only on the number of properties sold, but also on the size of the businesses sold. Several important factors, among others, may affect our ability to consummate sales. Weobligations under those agreements. In such event, we may not be able to find a sufficient number of buyersfully repay the notes, if at prices we are willing to sell.all.
RISKS RELATED TO THE DEATH CARE INDUSTRY
Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.
Declines in the number of deaths could cause at needat-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. Although studies estimatethe United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately 1 percent per year tothrough 2010, longer lifespans could reduce the rate of deaths, and appear to be doing so currently. For example, data obtained from the Centers for Disease Control and Prevention ("CDC") indicate a decrease in deaths in the United States of
29
1.4 percent during our fiscal year ended December 31, 2003, compared to the same period in the prior year.deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations canmay cause our revenues to fluctuate.fluctuate and our results of operations to lack predictability.
Our comparisons of the change in the number of families served to the change in the number of deaths reported by the CDC from time to time may not necessarily be meaningful. The CDC receives weekly mortality reports from 122 cities and metropolitan areas in the United States within two to three weeks from the date of death and reports the total number of deaths occurring in these areas each week based on the reports received from state health departments. The comparability of our funeral calls to the CDC data is limited, as reports from the state health departments are often delayed, and the 122 cities reporting to the CDC are not necessarily comparable with the markets in which we operate. Nonetheless, we believe that the CDC data is the most comprehensive data of this kind available.
The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, basicdirect cremations produce no revenues for cemetery operations and lesserlower funeral revenues and, in certain cases, lesser profit margins than traditional funerals.revenues.
Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 40 percent35% of the United StatesU.S. burial market by the year 2010, compared to approximately 30%28% in 2003.2002. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basicdirect cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.
If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.
Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. During the last threefour years, we have implemented new product and service strategies based on results of customer surveys that we conduct on a continuous basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these
25
trends may prove incorrect or ineffective.
Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.
Companies in the funeral home and cemetery business must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.
30
Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.
The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the Federal Trade Commission, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming and cremation facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations or facing costly and burdensome investigations from regulatory authorities, regardless of the merit thereof.authorities.
In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, local and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. In November 2002, legislation was proposed that, if adopted, would more heavily regulate the death care industry. If adopted, this legislation could result in an increase in our costs. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations and our future prospects. For additional information regarding the regulation of the death care industry, see "Regulation."“Business — Regulation”.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
Carriage is exposed to market risk primarily related to potential increases in interest rates related to the Company'sCompany’s debt and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks including commodity price risk, nor foreign currency exchange risk.
Carriage monitors current and forecasted interest rate risk incurred in the ordinary course of business and seeks to maintain optimal financial flexibility, quality and solvency. Carriage strives to obtain the optimal cost of capital through a diverse range of funding alternatives and a mix of floating and fixed rate debt. As of December 31, 2003,2004, approximately 84%88% of seniortotal debt (approximately 91% of all interest bearing obligations) areis fixed rate obligations. Given the current outlook for increasing interest rates, we believe the current bias to fixed rate debt is appropriate.
Our floating rate long-term borrowings consist of the $21.1$25.6 million outstanding under our $40$45 million floating rate line of credit. Any change in the floating rate will cause a change in interest expense. For example, each increase in the LIBOR of 1% would increase interest expense by $0.2 million$260,000 per year based on the current outstanding balance.balance at December 31, 2004. The remainder of Carriage'sCarriage’s long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market, or otherwise have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease.
The mandatorily redeemable convertible preferred securities ofjunior subordinated debenture payable to Carriage Services Capital Trust pay interest at the fixed rate of 7% and are carried on the Company'sCompany’s balance sheet at a cost of approximately $90$93.8 million. These securities haveWe estimate a market value of $51$53 million and $53$84 million at December 31, 20022003 and 2003,2004, respectively, based on available broker quotes.quotes of the corresponding preferred securities issued by the Trust. While thesecorresponding preferred securities are very thinly traded, increases in market interest rates may cause the value of these securitiesinstruments to decrease but such changes will not affect the Company'sCompany’s interest costs.
31
Securities subject to market risk consist of investments held by our preneed funeral, cemetery merchandise and services and perpetual care trust funds. See Note 13 to our consolidated financial statements for the estimate of the fair values of those securities.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
32
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
ACCOUNTING FIRM
The Board of Directors Carriage Services, Inc.:
We have audited the 20032004 and 20022003 consolidated financial statements of Carriage Services, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2001 consolidated financial statements of Carriage Services, Inc. and subsidiaries as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated March 10, 2002.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carriage Services, Inc. and subsidiaries as of December 31, 20032004 and 2002,2003, and the consolidated results of their operations and their cash flows for each of the years thenin the three-year period ended December 31, 2004, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed, effective January 1, 2002, its method of accounting for goodwill and other intangible assets as required by Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets.
KPMG LLP
Houston, TexasFebruary 19, 2004
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Carriage Services, Inc.:
We have audited The Company adopted, effective January 1, 2002, the accompanying consolidated balance sheetsmethod of Carriage Services, Inc. (a Delaware corporation)accounting and subsidiariesreporting for asset impairments and discontinued operations as required by SFAS No. 144, Accounting for the Impairment or Disposal of December 31, 2000Long-Lived Assets. Accordingly, as discussed in Notes 2 and 20013, the 2003 and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these2002 consolidated financial statements based on our audits.
We conducted our auditshave been restated for funeral homes identified for disposal that were reported as discontinued operations in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carriage Services, Inc., and subsidiaries as of December 31, 2000 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
2004. As explaineddiscussed in Note 2 to the consolidated financial statements,5, in 2004 the Company changed effective January 1, 2000, its method of accounting for revenue and costs related to sales of cemetery interment rights, together with the associated merchandise and services, and the related trust earnings, as well as the balance sheet presentation of preneed funeral contracts to conform tosecured by life insurance contracts. Accordingly, the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
ARTHUR ANDERSEN LLP
Houston, TexasMarch 10, 2002
34
been restated as discussed in Note 5.
/s/ KPMG LLP | |
Houston, Texas | |
February 24, 2005 | |
28
CARRIAGE SERVICES, INC.
INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | ||||||||
| ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 2,702 | $ | 2,024 | ||||||
| Accounts receivable- | ||||||||||
| Trade, net of allowance for doubtful accounts of $2,844 in 2002 and $1,807 in 2003 | 14,640 | 15,564 | ||||||||
| Other | 746 | 505 | ||||||||
| 15,386 | 16,069 | |||||||||
| Inventories and other current assets | 8,777 | 9,797 | ||||||||
| Total current assets | 26,865 | 27,890 | ||||||||
| Property, plant and equipment, at cost net of accumulated depreciation of $30,449 in 2002 and $35,671 in 2003 | 114,002 | 110,964 | ||||||||
| Cemetery property | 64,570 | 64,124 | ||||||||
| Goodwill | 161,095 | 159,672 | ||||||||
| Deferred charges and other non-current assets | 57,910 | 54,324 | ||||||||
| Preneed funeral contracts | 235,347 | 234,400 | ||||||||
| Amounts due from preneed cemetery merchandise and service trust funds | 43,965 | 48,237 | ||||||||
| Total assets | $ | 703,754 | $ | 699,611 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable and accrued liabilities | $ | 26,115 | $ | 22,911 | ||||||
| Current portion of long-term debt and obligations under capital leases | 2,348 | 24,400 | ||||||||
| Total current liabilities | 28,463 | 47,311 | ||||||||
| Deferred cemetery revenue and preneed liabilities | 96,794 | 99,108 | ||||||||
| Deferred preneed funeral contracts revenue | 243,067 | 241,980 | ||||||||
| Long-term debt, net of current portion | 141,207 | 105,575 | ||||||||
| Obligations under capital leases, net of current portion | 5,539 | 5,504 | ||||||||
| Dividends payable on convertible preferred securities | — | 3,876 | ||||||||
| Total liabilities | 515,070 | 503,354 | ||||||||
| Commitments and contingencies | ||||||||||
| Minority interest in consolidated subsidiary | 400 | — | ||||||||
| Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust | 90,193 | 90,327 | ||||||||
| Stockholders' equity: | ||||||||||
| Common Stock, $.01 par value; 80,000,000 shares authorized; 17,075,000 and 17,545,000 issued and outstanding in 2002 and 2003, respectively | 171 | 175 | ||||||||
| Additional paid-in capital | 185,100 | 186,679 | ||||||||
| Accumulated deficit | (86,915 | ) | (80,290 | ) | ||||||
| Unrealized loss on interest rate swaps, net of tax benefit | (265 | ) | — | |||||||
| Deferred compensation | — | (634 | ) | |||||||
| Total stockholders' equity | 98,091 | 105,930 | ||||||||
| Total liabilities and stockholders' equity | $ | 703,754 | $ | 699,611 | ||||||
|
| December 31, |
| ||||
|
| 2003 |
| 2004 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,024 |
| $ | 1,948 |
|
Accounts receivable- |
|
|
|
|
| ||
Trade, net of allowance for doubtful accounts of $1,807 in 2003 and $940 in 2004 |
| 15,376 |
| 12,941 |
| ||
Assets held for sale |
| 7,272 |
| 4,021 |
| ||
Inventories and other current assets |
| 11,434 |
| 12,815 |
| ||
Total current assets |
| 36,106 |
| 31,725 |
| ||
Preneed receivables and trust investments; |
|
|
|
|
| ||
Cemetery |
| — |
| 65,855 |
| ||
Funeral |
| — |
| 49,494 |
| ||
Receivables from preneed funeral contracts |
| 73,701 |
| 18,074 |
| ||
Preneed cemetery merchandise and service trust funds |
| 46,506 |
| — |
| ||
Property, plant and equipment, net of accumulated depreciation of $34,587 in 2003 and $40,531 in 2004 |
| 107,257 |
| 104,893 |
| ||
Cemetery property |
| 63,658 |
| 62,649 |
| ||
Goodwill |
| 159,672 |
| 156,983 |
| ||
Deferred obtaining costs |
| 32,524 |
| 35,701 |
| ||
Deferred charges and other non-current assets |
| 19,493 |
| 8,581 |
| ||
Cemetery perpetual care trust investments |
| — |
| 31,201 |
| ||
Total assets |
| $ | 538,917 |
| $ | 565,156 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable and accrued liabilities |
| $ | 22,703 |
| $ | 22,039 |
|
Liabilities associated with assets held for sale |
| 3,288 |
| 2,598 |
| ||
Current portion of long-term debt and obligations under capital leases |
| 24,400 |
| 2,155 |
| ||
Total current liabilities |
| 50,391 |
| 26,792 |
| ||
|
|
|
|
|
| ||
Senior long-term debt, net of current portion |
| 105,355 |
| 102,714 |
| ||
Convertible junior subordinated debenture due in 2029 to an affiliated trust |
| — |
| 93,750 |
| ||
Obligations under capital leases, net of current portion |
| 5,504 |
| 5,424 |
| ||
Distributions payable on convertible preferred securities |
| 3,876 |
| — |
| ||
Deferred interest on convertible junior subordinated debentures |
| — |
| 10,891 |
| ||
Deferred cemetery revenue |
| 96,796 |
| 46,787 |
| ||
Deferred preneed funeral contracts revenue |
| 80,738 |
| 30,973 |
| ||
Non-controlling interests in funeral and cemetery trust investments |
| — |
| 98,652 |
| ||
Total liabilities |
| 342,660 |
| 415,983 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
Non-controlling interests in perpetual care trust investments |
| — |
| 32,212 |
| ||
Non-controlling interests in perpetual care trust investments associated with assets held for sale |
| — |
| 523 |
| ||
Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust |
| 90,327 |
| — |
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Common Stock, $.01 par value; 80,000,000 shares authorized; 17,545,000 and 17,910,000 issued and outstanding in 2003 and 2004, respectively |
| 175 |
| 179 |
| ||
Additional paid-in capital |
| 186,679 |
| 188,029 |
| ||
Accumulated deficit |
| (80,290 | ) | (71,056 | ) | ||
Deferred compensation |
| (634 | ) | (714 | ) | ||
Total stockholders’ equity |
| 105,930 |
| 116,438 |
| ||
Total liabilities and stockholders’ equity |
| $ | 538,917 |
| $ | 565,156 |
|
The accompanying notes are an integral part of these consolidated financial statements.
35
29
CARRIAGE SERVICES, INC.
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | For the years ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||||||
| Revenues, net | |||||||||||
| Funeral | $ | 124,284 | $ | 119,299 | $ | 115,737 | |||||
| Cemetery | 38,209 | 34,877 | 35,086 | ||||||||
| 162,493 | 154,176 | 150,823 | |||||||||
Costs and expenses | |||||||||||
| Funeral | 92,813 | 84,925 | 86,202 | ||||||||
| Cemetery | 29,385 | 26,163 | 25,927 | ||||||||
| 122,198 | 111,088 | 112,129 | |||||||||
| Gross profit | 40,295 | 43,088 | 38,694 | ||||||||
General and administrative expenses | 8,698 | 10,815 | 10,861 | ||||||||
| Special charges and other | — | 361 | (577 | ) | |||||||
| Operating income | 31,597 | 31,912 | 28,410 | ||||||||
Interest expense | (13,579 | ) | (13,053 | ) | (11,066 | ) | |||||
| Financing costs of company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust | (6,765 | ) | (6,697 | ) | (6,745 | ) | |||||
| Income before income taxes | 11,253 | 12,162 | 10,599 | ||||||||
Provision (benefit) for income taxes | 2,251 | (8,116 | ) | 3,974 | |||||||
| Net income | 9,002 | 20,278 | 6,625 | ||||||||
Preferred stock dividend requirements | 37 | — | — | ||||||||
| Net income available to common stockholders | $ | 8,965 | $ | 20,278 | $ | 6,625 | |||||
| Basic earnings per share: | $ | .54 | $ | 1.20 | $ | 0.38 | |||||
| Diluted earnings per share: | $ | .51 | $ | 1.16 | $ | 0.37 | |||||
| Weighted average number of common and common equivalent shares outstanding | |||||||||||
| Basic | 16,696 | 16,973 | 17,444 | ||||||||
| Diluted | 17,492 | 17,433 | 17,808 | ||||||||
|
| For the years ended December 31, |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
Revenues, net |
|
|
|
|
|
|
| |||
Funeral |
| $ | 115,100 |
| $ | 112,588 |
| $ | 112,816 |
|
Cemetery |
| 34,217 |
| 34,351 |
| 37,390 |
| |||
|
| 149,317 |
| 146,939 |
| 150,206 |
| |||
Costs and expenses |
|
|
|
|
|
|
| |||
Funeral |
| 81,693 |
| 83,490 |
| 83,387 |
| |||
Cemetery |
| 25,996 |
| 25,830 |
| 28,516 |
| |||
|
| 107,689 |
| 109,320 |
| 111,903 |
| |||
Gross profit |
| 41,628 |
| 37,619 |
| 38,303 |
| |||
|
|
|
|
|
|
|
| |||
General and administrative expenses |
| 10,557 |
| 10,492 |
| 10,665 |
| |||
Other charges |
| 871 |
| 432 |
| 495 |
| |||
Operating income |
| 30,200 |
| 26,695 |
| 27,143 |
| |||
|
|
|
|
|
|
|
| |||
Interest expense |
| (19,715 | ) | (17,935 | ) | (17,058 | ) | |||
Other income |
| 865 |
| 657 |
| 940 |
| |||
Total interest and other income |
| (18,850 | ) | (17,278 | ) | (16,118 | ) | |||
|
|
|
|
|
|
|
| |||
Income from continuing operations before income taxes |
| 11,350 |
| 9,417 |
| 11,025 |
| |||
|
|
|
|
|
|
|
| |||
Provision (benefit) for income taxes |
| (8,429 | ) | 3,519 |
| 71 |
| |||
|
|
|
|
|
|
|
| |||
Net income from continuing operations |
| 19,779 |
| 5,898 |
| 10,954 |
| |||
|
|
|
|
|
|
|
| |||
Discontinued operations: |
|
|
|
|
|
|
| |||
Operating income from discontinued operations |
| 1,167 |
| 682 |
| 412 |
| |||
Gain on sales and (impairments) of discontinued operations |
| (355 | ) | 499 |
| (2,630 | ) | |||
Income tax (provision) benefit |
| (313 | ) | (454 | ) | 498 |
| |||
Income (loss) from discontinued operations |
| 499 |
| 727 |
| (1,720 | ) | |||
Net income |
| $ | 20,278 |
| $ | 6,625 |
| $ | 9,234 |
|
|
|
|
|
|
|
|
| |||
Basic earnings (loss) per share: |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | 1.17 |
| $ | 0.34 |
| $ | 0.62 |
|
Discontinued operations |
| $ | 0.03 |
| $ | 0.04 |
| $ | (0.10 | ) |
Net income |
| $ | 1.20 |
| $ | 0.38 |
| $ | 0.52 |
|
|
|
|
|
|
|
|
| |||
Diluted earnings (loss) per share: |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | 1.13 |
| $ | 0.33 |
| $ | 0.60 |
|
Discontinued operations |
| $ | 0.03 |
| $ | 0.04 |
| $ | (0.09 | ) |
Net income |
| $ | 1.16 |
| $ | 0.37 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
| |||
Weighted average number of common and common equivalent shares outstanding: |
|
|
|
|
|
|
| |||
Basic |
| 16,973 |
| 17,444 |
| 17,786 |
| |||
Diluted |
| 17,433 |
| 17,808 |
| 18,260 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
36
30
CARRIAGE SERVICES, INC.
INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | For the years ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||||||
| Net income | $ | 9,002 | $ | 20,278 | $ | 6,625 | |||||
Other comprehensive income (loss): | |||||||||||
| Cumulative effect on prior years of the change in accounting principle, net of income tax benefit of $1 | 1 | — | — | ||||||||
| Unrealized gain (loss) on interest rate swaps arising during period | (1,059 | ) | 394 | 165 | |||||||
| Related income tax benefit (provision) | 212 | (145 | ) | (66 | ) | ||||||
| Amortization of accumulated unrealized loss on interest rate swap | — | 332 | 166 | ||||||||
| Total other comprehensive income (loss) | (846 | ) | 581 | 265 | |||||||
| Comprehensive income | $ | 8,156 | $ | 20,859 | $ | 6,890 | |||||
|
| For the years |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
|
|
|
|
|
|
|
| |||
Net income |
| $ | 20,278 |
| $ | 6,625 |
| $ | 9,234 |
|
|
|
|
|
|
|
|
| |||
Other comprehensive income: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Unrealized gain on interest rate swaps arising during period |
| 394 |
| 165 |
| — |
| |||
Related income tax provision |
| (145 | ) | (66 | ) | — |
| |||
|
|
|
|
|
|
|
| |||
Amortization of accumulated unrealized loss on interest rate swap |
| 332 |
| 166 |
| — |
| |||
Total other comprehensive income |
| 581 |
| 265 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Comprehensive income |
| $ | 20,859 |
| $ | 6,890 |
| $ | 9,234 |
|
The accompanying notes are an integral part of these consolidated financial statements.
37
31
CARRIAGE SERVICES, INC.
INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(in thousands)
| | Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Comprehensive Income (Loss) | Deferred Compensation | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance—December 31, 2000 | 16,146 | $ | 161 | $ | 193,234 | $ | (116,158 | ) | — | — | $ | 77,237 | |||||||||
| Net income—2001 | — | — | — | 9,002 | — | — | 9,002 | ||||||||||||||
| Issuance of common stock | 563 | 6 | 690 | — | — | — | 696 | ||||||||||||||
| Exercise of stock options | 102 | 1 | 460 | — | — | — | 461 | ||||||||||||||
| Payment of contingent stock price guarantees | — | — | (4,935 | ) | — | — | — | (4,935 | ) | ||||||||||||
| Unrealized loss on interest rate swaps, net of tax benefit | — | — | — | — | $ | (846 | ) | — | (846 | ) | |||||||||||
| Preferred stock dividends | — | — | — | (37 | ) | — | — | (37 | ) | ||||||||||||
| Balance—December 31, 2001 | 16,811 | 168 | 189,449 | (107,193 | ) | (846 | ) | — | 81,578 | ||||||||||||
| Net income—2002 | — | — | — | 20,278 | — | — | 20,278 | ||||||||||||||
| Issuance of common stock | 97 | 1 | 789 | — | — | — | 790 | ||||||||||||||
| Exercise of stock options | 167 | 2 | 148 | — | — | — | 150 | ||||||||||||||
| Payment of contingent stock price guarantees | — | — | (5,286 | ) | — | — | — | (5,286 | ) | ||||||||||||
| Unrealized gain on interest rate swaps, net of tax benefit | — | — | — | — | 581 | — | 581 | ||||||||||||||
| Balance—December 31, 2002 | 17,075 | 171 | 185,100 | (86,915 | ) | (265 | ) | — | 98,091 | ||||||||||||
| Net income—2003 | — | — | — | 6,625 | — | — | 6,625 | ||||||||||||||
| Issuance of common stock | 133 | 1 | 458 | — | — | — | 459 | ||||||||||||||
| Exercise of stock options | 100 | 1 | 190 | — | — | — | 191 | ||||||||||||||
| Issuance of restricted common stock | 247 | 2 | 971 | — | — | (973 | ) | — | |||||||||||||
| Cancellation and retirement of restricted common stock | (10 | ) | — | (40 | ) | — | — | 40 | — | ||||||||||||
| Amortization of deferred compensation | — | — | — | — | — | 299 | 299 | ||||||||||||||
| Unrealized gain on interest rate swaps, net of tax benefit | — | — | — | — | 265 | — | 265 | ||||||||||||||
| Balance—December 31, 2003 | 17,545 | $ | 175 | $ | 186,679 | $ | (80,290 | ) | $ | — | $ | (634 | ) | $ | 105,930 | ||||||
|
| Shares |
| Common |
| Additional |
| Accumulated |
| Comprehensive |
| Deferred |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance – December 31, 2001 |
| 16,811 |
| $ | 168 |
| $ | 189,449 |
| $ | (107,193 | ) | $ | (846 | ) | $ | — |
| $ | 81,578 |
|
Net income – 2002 |
| — |
| — |
| — |
| 20,278 |
| — |
| — |
| 20,278 |
| ||||||
Issuance of common stock |
| 97 |
| 1 |
| 789 |
| — |
| — |
| — |
| 790 |
| ||||||
Exercise of stock options |
| 167 |
| 2 |
| 148 |
| — |
| — |
| — |
| 150 |
| ||||||
Payment of contingent stock price guarantees |
| — |
| — |
| (5,286 | ) | — |
| — |
| — |
| (5,286 | ) | ||||||
Unrealized gain on interest rate swaps, net of tax benefit |
| — |
| — |
| — |
| — |
| 581 |
| — |
| 581 |
| ||||||
Balance – December 31, 2002 |
| 17,075 |
| 171 |
| 185,100 |
| (86,915 | ) | (265 | ) | — |
| 98,091 |
| ||||||
Net income – 2003 |
| — |
| — |
| — |
| 6,625 |
| — |
| — |
| 6,625 |
| ||||||
Issuance of common stock |
| 133 |
| 1 |
| 458 |
| — |
| — |
| — |
| 459 |
| ||||||
Exercise of stock options |
| 100 |
| 1 |
| 190 |
| — |
| — |
| — |
| 191 |
| ||||||
Issuance of restricted common stock |
| 247 |
| 2 |
| 971 |
| — |
| — |
| (973 | ) | — |
| ||||||
Cancellation and retirement of restricted common stock |
| (10 | ) | — |
| (40 | ) | — |
| — |
| 40 |
| — |
| ||||||
Amortization of deferred compensation |
| — |
| — |
| — |
| — |
| — |
| 299 |
| 299 |
| ||||||
Unrealized gain on interest rate swaps, net of tax benefit |
| — |
| — |
| — |
| — |
| 265 |
| — |
| 265 |
| ||||||
Balance – December 31, 2003 |
| 17,545 |
| 175 |
| 186,679 |
| (80,290 | ) | — |
| (634 | ) | 105,930 |
| ||||||
Net income – 2004 |
| — |
| — |
| — |
| 9,234 |
| — |
| — |
| 9,234 |
| ||||||
Issuance of common stock |
| 130 |
| 2 |
| 577 |
| — |
| — |
| — |
| 579 |
| ||||||
Exercise of stock options |
| 135 |
| 1 |
| 308 |
| — |
| — |
| — |
| 309 |
| ||||||
Issuance of restricted common stock |
| 100 |
| 1 |
| 465 |
| — |
| — |
| (466 | ) | — |
| ||||||
Amortization of deferred compensation |
| — |
| — |
| — |
| — |
| — |
| 386 |
| 386 |
| ||||||
Balance – December 31, 2004 |
| 17,910 |
| $ | 179 |
| $ | 188,029 |
| $ | (71,056 | ) | $ | — |
| $ | (714 | ) | $ | 116,438 |
|
The accompanying notes are an integral part of these consolidated financial statements.
38
32
CARRIAGE SERVICES, INC.
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | For the years ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | ||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 9,002 | $ | 20,278 | $ | 6,625 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
| Depreciation and amortization | 16,968 | 11,108 | 11,112 | ||||||||||
| Gain on sales of business assets | (187 | ) | (910 | ) | (1,156 | ) | |||||||
| Impairment of assets | — | 1,271 | — | ||||||||||
| Provision for losses on accounts receivable | 4,030 | 1,018 | 1,649 | ||||||||||
| Stock-related compensation | — | — | 345 | ||||||||||
| Loss on early extinguishment of debt | — | — | 147 | ||||||||||
| Deferred income taxes (benefit) | 4,221 | (7,003 | ) | 3,829 | |||||||||
| Other | 180 | 11 | (145 | ) | |||||||||
| Changes in assets and liabilities, net of effects from acquisitions and dispositions: | |||||||||||||
| (Increase) decrease in accounts receivable | (1,992 | ) | 1,758 | (1,669 | ) | ||||||||
| (Increase) decrease in inventories and other current assets | 1,557 | (1,715 | ) | (43 | ) | ||||||||
| (Increase) decrease in deferred charges and other | (261 | ) | 32 | (534 | ) | ||||||||
| Increase in preneed funeral and cemetery costs | (3,918 | ) | (4,136 | ) | (3,954 | ) | |||||||
| Increase in preneed cemetery trust funds | (4,530 | ) | (2,791 | ) | (5,567 | ) | |||||||
| Decrease in accounts payable and accrued liabilities | (4,933 | ) | (3,865 | ) | (1,027 | ) | |||||||
| Income tax refunds (payments), net | 4,541 | 1,600 | (81 | ) | |||||||||
| Increase in deferred revenue and preneed liabilities | 3,071 | 2,289 | 1,821 | ||||||||||
| Increase in distributions payable on convertible preferred securities | — | — | 3,329 | ||||||||||
| Net cash provided by operating activities | 27,749 | 18,945 | 14,680 | ||||||||||
| Cash flows from investing activities: | |||||||||||||
| Acquisitions and cost adjustments related to acquisitions | (212 | ) | (2,160 | ) | 1,500 | ||||||||
| Proceeds from sale of business assets | 11,878 | 1,987 | 2,918 | ||||||||||
| Sale of minority interest in subsidiary | 200 | 200 | — | ||||||||||
| Capital expenditures | (5,046 | ) | (6,034 | ) | (6,204 | ) | |||||||
| Net cash provided by (used in) investing activities | 6,820 | (6,007 | ) | (1,786 | ) | ||||||||
| Cash flows from financing activities: | |||||||||||||
| Net payments under revolving bank credit facility | (17,000 | ) | (3,000 | ) | (6,400 | ) | |||||||
| Payments on long-term debt and obligations under capital leases | (13,760 | ) | (5,225 | ) | (7,090 | ) | |||||||
| Payment of contingent stock price guarantees | (4,935 | ) | (5,286 | ) | — | ||||||||
| Proceeds from issuance of common stock | 236 | 381 | 345 | ||||||||||
| Proceeds from exercise of stock options | 461 | 150 | 191 | ||||||||||
| Payment of debt origination costs | — | — | (618 | ) | |||||||||
| Payment of preferred stock dividends | (37 | ) | — | — | |||||||||
| Net cash used in financing activities | (35,035 | ) | (12,980 | ) | (13,572 | ) | |||||||
| Net decrease in cash and cash equivalents | (466 | ) | (42 | ) | (678 | ) | |||||||
| Cash and cash equivalents at beginning of year | 3,210 | 2,744 | 2,702 | ||||||||||
| Cash and cash equivalents at end of year | $ | 2,744 | $ | 2,702 | $ | 2,024 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||||
| Cash paid for interest | $ | 18,388 | $ | 19,153 | $ | 14,145 | |||||||
| Cash paid for income taxes | $ | 473 | $ | 300 | $ | 137 | |||||||
| Stock issued to directors or officers | $ | 438 | $ | 67 | $ | 1,018 | |||||||
|
| For the years ended December 31, |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income from continuing operations |
| $ | 19,779 |
| $ | 5,898 |
| $ | 10,954 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 9,565 |
| 9,975 |
| 10,830 |
| |||
Loan cost amortization |
| 1,344 |
| 954 |
| 924 |
| |||
Impairment of assets |
| 741 |
| — |
| — |
| |||
Provision for losses on accounts receivable |
| 1,014 |
| 1,580 |
| 2,243 |
| |||
Net gain on sale of business assets |
| (865 | ) | (657 | ) | (940 | ) | |||
Stock-related compensation |
| — |
| 345 |
| 464 |
| |||
Loss on sale of trust investments |
| — |
| 147 |
| 235 |
| |||
Deferred income taxes (benefit) |
| (7,316 | ) | 3,374 |
| (70 | ) | |||
Other |
| (79 | ) | (145 | ) | 481 |
| |||
Changes in assets and liabilities, net of effects from dispositions |
|
|
|
|
|
|
| |||
Decrease (increase) in accounts receivable |
| 1,758 |
| (1,672 | ) | (1,796 | ) | |||
Decrease (increase) in inventories and other current assets |
| (1,920 | ) | (115 | ) | (899 | ) | |||
Decrease (increase) in deferred charges and other |
| 49 |
| (521 | ) | (270 | ) | |||
(Increase) in deferred obtaining costs |
| (4,479 | ) | (3,702 | ) | (2,405 | ) | |||
(Increase) in preneed trust investments |
| (2,791 | ) | (5,567 | ) | (5,063 | ) | |||
(Decrease) in accounts payable and accrued liabilities |
| (2,147 | ) | (965 | ) | (1,184 | ) | |||
Increase in deferred preneed revenue |
| 2,289 |
| 1,821 |
| 2,786 |
| |||
Increase in deferred interest on convertible junior subordinated debenture |
| — |
| 3,329 |
| 7,015 |
| |||
Net cash provided by operating activities of continuing operations |
| 16,942 |
| 14,079 |
| 23,305 |
| |||
Net cash provided by operating activities of discontinued operations |
| 2,003 |
| 601 |
| 891 |
| |||
Net cash provided by operating activities |
| 18,945 |
| 14,680 |
| 24,196 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Net proceeds from sales of businesses and other assets |
| 1,350 |
| 1,804 |
| 1,215 |
| |||
Cost adjustments related to acquisitions |
| (2,160 | ) | 1,500 |
| — |
| |||
Sale of minority interest in subsidiary |
| 200 |
| — |
|
|
| |||
Capital expenditures |
| (6,031 | ) | (6,204 | ) | (5,746 | ) | |||
Net cash used in investing activities of continuing operations |
| (6,641 | ) | (2,900 | ) | (4,531 | ) | |||
Net cash provided by investing activities of discontinued operations |
| 634 |
| 1,114 |
| 3,237 |
| |||
Net cash used in investing activities |
| (6,007 | ) | (1,786 | ) | (1,294 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Proceeds (payments) under bank line of credit |
| (3,000 | ) | (6,400 | ) | 4,500 |
| |||
Payments on senior long-term debt and obligations under capital leases |
| (5,127 | ) | (6,924 | ) | (27,927 | ) | |||
Payment of contingent price guarantees |
| (5,286 | ) | — |
| — |
| |||
Payment of debt origination costs |
| — |
| (618 | ) | — |
| |||
Proceeds from issuance of common stock |
| 381 |
| 345 |
| 377 |
| |||
Proceeds from the exercise of stock options |
| 150 |
| 191 |
| 309 |
| |||
Net cash used in financing activities of continuing operations |
| (12,882 | ) | (13,406 | ) | (22,741 | ) | |||
Net cash used in financing activities of discontinued operations |
| (98 | ) | (166 | ) | (237 | ) | |||
Net cash used in financing activities |
| (12,980 | ) | (13,572 | ) | (22,978 | ) | |||
|
|
|
|
|
|
|
| |||
Net decrease in cash and cash equivalents |
| (42 | ) | (678 | ) | (76 | ) | |||
Cash and cash equivalents at beginning of period |
| 2,744 |
| 2,702 |
| 2,024 |
| |||
Cash and cash equivalents at end of period |
| $ | 2,702 |
| $ | 2,024 |
| $ | 1,948 |
|
The accompanying notes are an integral part of these consolidated financial statements.
39
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
Business
Carriage Services, Inc. ("Carriage"(“Carriage” or the "Company"“Company”) was founded in 1991 and incorporated under the laws of the State of Delaware in 1993. The Company owns and operates 139135 funeral homes and 30 cemeteries in 2928 states at December 31, 2003.2004. Carriage provides a complete range of preneed and at need services and products related to funerals, burials and cremations.
Principles of Consolidation and Basis of Presentation
The financial statements include the consolidated financial statements of Carriage Services, Inc. and its subsidiaries, after eliminating all significant intercompany balances and transactions. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentation.
The accounting policies and procedures reflected herein have been consistently followed during the periods presented, except for the change in accounting principle discussed in Notes 1 andNote 2 related to the discontinuanceadoption of amortizationan interpretation related to the consolidation of goodwill,variable interest entities, which occurred at the beginning of 2002.during 2004.
Funeral and Cemetery Operations
We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in the period in which the customer'scustomer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.
Allowances for customer cancellations, refunds and bad debts are provided at the date ofthat the sale is recognized as revenue based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Net trade accounts receivable consists of approximately $8.6$8.8 million and $9.0$7.9 million of funeral receivables and approximately $6.0$6.6 million and $6.6$5.0 million of current cemetery receivables at December 31, 20022003 and 2003,2004, respectively. Non-current cemetery receivables, those payments expected to be received beyond one year from the balance sheet date, are classified as deferred charges and other non-current assets.assets for 2003. The non-current cemetery accounts receivable balances were approximately $15.6 million and $14.0 million at December 31, 20022003. Non-current cemetery receivables at December 31, 2004 are included in Preneed cemetery receivables and 2003, respectively (see Note 3)trust investments in accordance with the new accounting policy, FIN 46R (Note 2).
Preneed Funeral Contracts
Funeral merchandise and Deferred Preneed Funeral Contracts Revenue
services are also sold on a preneed basis and in many instances the customer pays the contract over a period of time. The funeral revenue is not recorded until the service is performed. Cash proceeds from preneed funeral sales less amounts that the Company may retain under state regulations are deposited to a trust or used to purchase a third-party insurance product. Unperformed guaranteed preneed funeral contracts are included in the consolidated
40
balance sheets as preneed funeral contracts. The balance in this asset account represents amounts due from customer receivables and third-party insurance companies, and the amounts deposited with the trustee and the accumulated earnings on these deposits. A corresponding credit is recorded to deferred preneed funeral contracts revenue. The funeral revenue is not recorded until the service is performed.policy. The trust income earned and the increases in insurance benefits on the insurance products are also deferred until the service is performed. At December 31, 2003, the value of the receivable from the customer and the trust fund are included in Receivables from preneed funeral contracts. Beginning in 2004, the customer receivables and amounts deposited in trusts that Carriage controls are included in Preneed funeral receivables and trust investments. The preneed contracts secured by third party insurance policy are not recorded as assets or liabilities of the Company (Note 5).
In the opinion of management, the proceeds from the funeral trust assets or the insurance policy at the time the preneed policycontract matures will exceed the estimated future cost to perform services and provide products under such arrangements. The types of instruments in which the trusts may invest are regulated by state agencies.
The components of preneed funeral contracts in the consolidated balance sheet at December 31 are as follows (in thousands):
34
| | 2002 | 2003 | |||||
|---|---|---|---|---|---|---|---|
| Amounts due from insurance companies | $ | 151,232 | $ | 158,088 | |||
| Amount due from preneed funeral trust funds | 90,708 | 87,580 | |||||
| Receivables from customers | 20,160 | 15,364 | |||||
| Less: allowance for cancellation | (26,753 | ) | (26,632 | ) | |||
| $ | 235,347 | $ | 234,400 | ||||
The following summary reflects the composition of the assets held in trust to satisfy Carriage's future obligations under preneed funeral arrangements. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets.
| | Historical Cost Basis | Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||
| As of December 31, 2002: | ||||||||
| Cash and cash equivalents | $ | 18,215 | $ | 18,215 | ||||
| Fixed income investments contract | 32,892 | 33,825 | ||||||
| Mutual funds and stocks | 19,938 | 15,499 | ||||||
| Annuities | 19,663 | 19,663 | ||||||
| Total | $ | 90,708 | $ | 87,202 | ||||
| As of December 31, 2003: | ||||||||
| Cash and cash equivalents | $ | 16,169 | $ | 16,169 | ||||
| Fixed income investments contract | 31,028 | 31,836 | ||||||
| Mutual funds and stocks | 19,925 | 19,777 | ||||||
| Annuities | 20,458 | 20,458 | ||||||
| Total | $ | 87,580 | $ | 88,240 | ||||
41
Amounts Due From Preneed Cemetery Merchandise and Service Trust Funds
Carriage is also generally required, by most states, to deposit a specified amount into a merchandise and service trust fund for cemetery merchandise and service contracts sold on a preneed basis. The principal and accumulated earnings of the trust may generally be withdrawn upon maturity (usually the death of the purchaser) or the cancellation of the contracts. Trust fund investment income is recorded to deferred revenue as trust earnings accrue in the trusts, and recognized in current revenues in the period the service is performed or merchandise delivered. The merchandise and service trust funds were investedSee Note 2 for more detailed discussions of the Company’s accounting policies beginning in 2004 as result of the following at December 31, 2002 and 2003, respectively:adoption of FIN 46R.
| | Historical Cost Basis | Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||
| As of December 31, 2002: | ||||||||
| Cash and cash equivalents | $ | 6,812 | $ | 6,812 | ||||
| Fixed income investments contract | 13,543 | 14,385 | ||||||
| Mutual funds and stocks | 23,610 | 20,056 | ||||||
| Total | $ | 43,965 | $ | 41,253 | ||||
| As of December 31, 2003: | ||||||||
| Cash and cash equivalents | $ | 6,140 | $ | 6,140 | ||||
| Fixed income investments contract | 17,901 | 18,679 | ||||||
| Mutual funds and stocks | 24,196 | 24,604 | ||||||
| Total | $ | 48,237 | $ | 49,423 | ||||
Perpetual and Memorial Care Trust
In accordance with respective state laws, the Company is required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and memorial sold. Income from the trust funds is used to provide care and maintenance for the cemeteries and mausoleums and is periodically distributed to Carriage and recognized as revenue when realized by the trust. The perpetual and memorial care trust assets were approximately $27.8 million and $30.7 million at December 31, 2002 and 2003, respectively, which, at the time, was not recorded as an asset of the Company. Beginning in 2004, the opinionCompany adopted the provisions of management, will cover future obligations to provideFIN 46R which among other things, resulted in recording the perpetual care and maintenance for our cemeteries and mausoleums.trust investments as assets of the Company. The Company does not have the right to withdraw any of the principal balances of these funds and, accordingly, these trust fund balances are not reflected infunds. See Note 2 for more detailed discussions of the accompanying consolidated balance sheets.Company’s accounting change as a result of the adoption of FIN 46R.
Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses to coincide with the expected timing of the performance of the services or delivery of the merchandise covered by the preneed contracts. The pattern of the periods over which the costs are recognized is based on actuarial statistics, provided by a third party administrator, based on the actual contracts we hold.
42
Cash and Cash Equivalents
Carriage considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Derivative Financial Securities
Carriage entered into interest rate swap agreements to reduce the impact of changes in interest rates on our floating rate debt. The swap agreements were agreements to exchange floating rates for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The differential paid or received iswas recognized as an adjustment to interest expense. The Company does not hold or issue financial instruments for trading purposes. The swaps terminated in May 2003.
The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities", for which the effective date was deferred to years beginning after June 15, 2000 by SFAS No. 137, and amended by SFAS No. 138 to establish accounting and financial reporting standards for certain derivative instruments and certain hedging activities. The key provisions of SFAS No. 133, as amended, are that every derivative will be recognized as an asset or liability at its fair value and that later changes in fair value are generally reported in earnings or other comprehensive income. As interest rates change, the value of the interest rate swaps change. The recorded value of the interest rate swaps is adjusted on the balance sheet through other comprehensive income for swaps that are designated as hedges and through current earnings for swaps that are not designated as hedges.
Goodwill and Other Intangible Assets
Many of the acquired funeral homes and former owners have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Such amounts were amortized over 40 years using the straight-line method in years prior to 2002.
In June 2001, the FASBFinancial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”. SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition, requires the use of the purchase method of accounting and requires the recognition of acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements.
The effect of SFAS No. 142 on the Company, which was adopted as of the beginning of 2002, included the elimination of the amortization of goodwill, the identification of reporting units (aggregated geographically) for the purpose of assessing potential future impairments of goodwill and the testing for impairments of goodwill on an annual basis. See Note 2 for transitional disclosures required by SFAS No. 142.
43
35
Inventory
Inventory
Inventory is recorded at the lower of its cost basis (determined by the specific identification method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Capitalized interest totaled approximately $184,000$131,000 and $131,000$24,000 in 20022003 and 2003,2004, respectively. Depreciation of property, plant and equipment is computed based on the straight-line method over the following estimated useful lives of the assets:
Years | ||||||
Buildings and improvements | 15 to 40 | |||||
Furniture and fixtures | 7 to 10 | |||||
Machinery and equipment | 5 to 10 | |||||
Automobiles | 5 to 7 |
Property, plant and equipment was comprised of the following at December 31, 2003 and 2004:
|
| 2003 |
| 2004 |
| ||
|
| (in thousands) |
| ||||
Property, plant and equipment, at cost: |
|
|
|
|
| ||
Land |
| $ | 26,734 |
| $ | 25,783 |
|
Buildings and improvements |
| 83,397 |
| 81,379 |
| ||
Furniture, equipment and automobiles |
| 36,504 |
| 38,955 |
| ||
|
| 146,635 |
| 146,117 |
| ||
Less: accumulated depreciation |
| (35,671 | ) | (40,831 | ) | ||
|
| $ | 110,964 |
| $ | 105,286 |
|
Less: Property, plant and equipment included in assets held for sale |
| 3,707 |
| 393 |
| ||
|
| $ | 107,257 |
| $ | 104,893 |
|
During 2002, 2003 and 2003:
| | 2002 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||
| Property, plant and equipment, at cost: | ||||||||
| Land | $ | 27,292 | $ | 26,734 | ||||
| Buildings and improvements | 83,744 | 83,397 | ||||||
| Furniture, equipment and automobiles | 33,415 | 36,504 | ||||||
| 144,451 | 146,635 | |||||||
| Less: accumulated depreciation | (30,449 | ) | (35,671 | ) | ||||
| $ | 114,002 | $ | 110,964 | |||||
During 2001, 2002 and 2003,2004, the Company recorded $6,335,000, $6,566,000$6,401,000, $6,810,000 and $6,943,000,$6,973,000, respectively, in depreciation expense in the accompanying consolidated statements ofincome from continuing operations.
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.sell.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences
44
between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS No. 109, "Accounting“Accounting for Income Taxes"Taxes”, (see Note 8)(Note 12). The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
Employee Stock Options and Employee Stock Purchase Plan
The Company has stock-based employee compensation plans in the form of stock option and employee stock purchase plans, which are more fully described in Note 9.13. The Company accounts for stock-based compensation under APB Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees"Employees” whereby no compensation expense is recognized in the Consolidated Statement of
36
Operations and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation"Compensation” and SFAS No. 148, "Accounting“Accounting for Stock-Based Compensation—Compensation – Transition and Disclosure."”
Had
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values and the pro forma disclosure alternative is no longer allowable under Statement 123 (R). The revised standard is effective for public entities in the first interim or annual reporting period beginning after June 15, 2005, which for the Company will be the third quarter of fiscal 2005 ending September 30, 2005. The Company is currently evaluating the impact of the adoption of Statement 123(R), which will result in additional pre-tax compensation expense beginning in the third quarter of 2005 for remaining unvested stock options, any future stock option grants and the employee stock purchase plan. Management believes that had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation"Compensation”, net income and income per share would have been the following pro forma amounts:
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | |||||||
| | (in thousands, except per share data) | |||||||||
| Net income available to common stockholders: | ||||||||||
| As reported | $ | 8,965 | $ | 20,278 | $ | 6,625 | ||||
| Pro forma | 8,201 | 19,544 | 6,134 | |||||||
| Net income per share available to common stockholders: | ||||||||||
| Basic | ||||||||||
| As reported | .54 | 1.20 | .38 | |||||||
| Pro forma | .49 | 1.15 | .35 | |||||||
| Diluted | ||||||||||
| As reported | .51 | 1.16 | .37 | |||||||
| Pro forma | .47 | 1.12 | .34 | |||||||
|
| Year ended December 31, |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
|
| (in thousands, except per share data) |
| |||||||
Net income available to common stockholders: |
|
|
|
|
|
|
| |||
As reported |
| $ | 20,278 |
| $ | 6,625 |
| $ | 9,234 |
|
Pro forma |
| 19,544 |
| 6,134 |
| 8,794 |
| |||
|
|
|
|
|
|
|
| |||
Net income per share available to common stockholders: |
|
|
|
|
|
|
| |||
Basic |
|
|
|
|
|
|
| |||
As reported |
| 1.20 |
| 0.38 |
| 0.52 |
| |||
Pro forma |
| 1.15 |
| 0.35 |
| 0.49 |
| |||
Diluted |
|
|
|
|
|
|
| |||
As reported |
| 1.16 |
| 0.37 |
| 0.51 |
| |||
Pro forma |
| 1.12 |
| 0.34 |
| 0.48 |
| |||
Computation of Earnings Per Common Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares have consistedconsist of stock options and convertible preferred stock (see Note 12)(Note 16).
Fair Value of Financial Instruments
Carriage believes that the carrying value approximates fair value for cash and cash equivalents and trade receivables and payables. Additionally, our floating rate credit facility approximates its fair value. Management also believes that the carrying value of our fixed ratesenior long-term debt approximates fair value. Management estimates that the fair valuesvalue of the company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital TrustConvertible junior subordinated debenture at December 31, 2002 and 2003 were2004 was approximately $51$84 million, and $53 million, respectively, based on available broker quotes.quotes of the corresponding convertible preferred securities at Carriage Services Capital Trust.
45
Use of Estimates
The preparation of the consolidated financial statements requires us to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, intangible assets, property and equipment and deferred tax assets and marketable securities.assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative
37
of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be sustained consistently from year to year.
2. ACCOUNTING PRINCIPLE CHANGES
Impairment of Investments
In March 2004, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1 (EITF 03-1), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence of the contrary. EITF 03-1 was scheduled to be effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The disclosure requirements continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. We adopted the disclosure provisions during the period ended June 30, 2004. The adoption of the measurement and recognition provisions will not have a material impact on the consolidated financial statements, result of operations or liquidity of the Company.
Goodwill
Impairment of Long-Lived Assets
Except as noted for Goodwill and deferred obtaining costs, the Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the net asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 requires that long-lived assets to be held and used be reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell. The revenues and expenses, as well as gains, losses and impairments, from those assets are reported in the discontinued operations section of the Consolidated Statement of Operations for all periods presented.
Goodwill
The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements. The effect of SFAS No. 142 on the Company, which was adopted as of the beginning of 2002, included the elimination of the amortization of goodwill, the identification of reporting units for the purpose of assessing potential future impairments of goodwill and the testing for impairments of goodwill on an annual basis. The Company performed aan annual review of goodwill during 2002 and 2003 by comparing the fair value of the Company'sCompany’s reporting units (funeral home businesses by region) to the carrying value of the reporting units and no impairment was indicated.
Had the adoption of SFAS No. 142 occurred at the beginning of 2001, costs and expenses would have been reduced by $4.5 million for 2001 and the results for 2001 would have been as follows (in thousands, except per share amounts):
| | For the year ended December 31, 2001 | ||
|---|---|---|---|
| Income before taxes | $ | 15,720 | |
| Net income | 13,469 | ||
Diluted earnings per share | $ | 0.77 | |
Consolidation of Variable Interest Entities
In January 2003, the
The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, "Consolidationas revised, (FIN 46R), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51". 51.” This interpretation clarifies the application of ARB 51, "Consolidated Financial Statements", tocircumstances in which certain entities in which equity investorsthat do not have the characteristics ofequity investors with a controlling financial interest or do not have sufficient equity and risk for the entity to financemust be consolidated by its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R) which allows companies with certain typessponsor. The Company implemented FIN 46R as of variable interest entities to defer implementation until March 31, 2004.
46
We are currently discussing2004, which resulted, for financial reporting purposes, in the consolidation of the Company’s preneed and perpetual care trust funds. The investments of such trust funds have been reported at market value and the Company’s future obligations to deliver merchandise and services have been reported at estimated settlement amounts. The Company has also recognized the non-controlling financial interests of third parties in the trust funds. There was no cumulative effect of an accounting change recognized by the Company as a result of the implementation of FIN 46R. The implementation of FIN 46R withaffected certain accounts on the StaffCompany’s balance sheet beginning March 31, 2004 as described below; however, it did not affect cash flow, net income or the manner in which the Company recognizes and reports revenues.
38
Although FIN 46R requires consolidation of preneed and perpetual care trusts, it does not change the Securitieslegal relationships among the trusts, the Company and Exchange Commission. The discussions relateits customers. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to whether we should consolidateaccess the corpus in the perpetual care trusts. For these reasons, the Company has recognized non-controlling interests in our financial statements to reflect third party interests in these consolidated trust funds.
Both the preneed funeral trusts, preneed cemetery trusts and the cemetery perpetual care trusts hold investments in marketable securities which have been classified as available-for-sale. The investments are reported at fair value, with unrealized gains and if we arelosses allocated to consolidateNon-controlling interests in trust investments in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise is allocated to deferred revenues.
Also beginning March 31, 2004, the Company recognizes realized income, gains and losses of the preneed trusts and cemetery perpetual care trusts. The Company recognizes a corresponding expense equal to the realized earnings of these trusts attributable to the non-controlling interest holders. When such earnings attributable to the Company have not been earned through the performance of services or delivery of merchandise, the Company will record such earnings as deferred revenue.
For preneed trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company, including accumulated realized earnings, when would we recognize the associatedcontracted services have been performed and merchandise delivered. For cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and distributable. Such earnings are intended to defray cemetery maintenance costs incurred by the Company.
Also, the Company was required to deconsolidate Carriage Services Capital Trust (the “Trust”), a trust established in 1999 to issue redeemable convertible preferred securities. The Company’s obligation to the Trust consists of convertible junior subordinated debentures. The preferred securities of the trusts.Trust were previously classified as temporary equity in the consolidated balance sheet. As a result of deconsolidating the Trust, the Company now reports its obligation to the Trust, the convertible junior subordinated debentures, as a long-term liability.
Currently, we defer
3. ASSETS HELD FOR SALE
During 2004, the Company identified five funeral home businesses and one cemetery business to be sold. Unique circumstances that developed during the year influenced decisions to sell rather than operate these businesses. The carrying value of the assets of the businesses had been analyzed and the carrying value of four funeral home businesses was reduced to management’s estimate of fair value less estimated costs to sell by providing impairment charges totaling $3.7 million, a substantial portion of which is related to specifically identified goodwill. The fair value less estimated costs to sell for the remaining two businesses were determined to be greater than its carrying value. In estimating fair value, management considered, among other things, the range of preliminary prices being discussed with potential buyers.
The company closed on the sale of three funeral home businesses during the year. Those transactions generated net cash proceeds totaling $3.3 million and a gain of approximately $1.1 million.
At December 31, 2004, assets and liabilities associated with the remaining two funeral home businesses and one cemetery business held for sale in the accompanying balance sheet consisted of the following (in thousands). The December 31, 2003 balance sheet has been reclassified to conform to current year presentation.
39
|
| December 31, |
| December 31, |
| ||
Assets: |
|
|
|
|
| ||
Current assets |
| $ | 289 |
| $ | 200 |
|
Property, plant and equipment, net |
| 3,707 |
| 393 |
| ||
Preneed receivables and trust investments |
| — |
| 2,378 |
| ||
Preneed funeral contracts |
| 5 |
| — |
| ||
Preneed cemetery merchandise and service trust funds |
| 1,731 |
| — |
| ||
Cemetery property, net |
| 466 |
| 462 |
| ||
Cemetery perpetual care trust investments |
| — |
| 455 |
| ||
Deferred obtaining costs |
| 615 |
| 133 |
| ||
Deferred charges and other assets |
| 459 |
| — |
| ||
Total |
| $ | 7,272 |
| $ | 4,021 |
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Current liabilities |
| 208 |
| 32 |
| ||
Senior long-term debt, net of current portion |
| 220 |
| — |
| ||
Deferred cemetery revenue |
| 2,312 |
| 515 |
| ||
Deferred preneed funeral contracts revenue |
| 548 |
| — |
| ||
Non-controlling interests in funeral and cemetery trust investments |
| — |
| 2,051 |
| ||
Total |
| $ | 3,288 |
| $ | 2,598 |
|
|
|
|
|
|
| ||
Noncontrolling interests in perpetual care trust investments with assets held for sale |
| $ | — |
| $ | 523 |
|
The operating results of the five funeral home businesses and one cemetery business held for sale, as well as the impairment charges and gains on disposal are presented in the discontinued operations section, along with the income tax effect, in the consolidated statements of operations on a comparative basis. Likewise, the operating results and gains or losses from businesses sold in the prior year have been similarly reported for comparability. Revenues and operating income for the businesses presented in the discontinued operations section are as follows (in thousands):
|
| For the years ended December 31, |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
|
|
|
|
|
|
|
| |||
Revenues, net |
| $ | 4,859 |
| $ | 3,884 |
| $ | 2,300 |
|
|
|
|
|
|
|
|
| |||
Operating income |
| $ | 1,167 |
| $ | 682 |
| $ | 412 |
|
In January 2005, the Company closed on the sale of the fourth funeral home business which generated net cash proceeds totaling $0.5 million and a gain of approximately $0.4 million.
40
4. PRENEED RECEIVABLES AND TRUST INVESTMENTS
Preneed Cemetery Receivables and Trust Investments
Preneed cemetery receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables (net of unearned finance charges) for contracts sold in advance of when the merchandise or services are needed. The components of Preneed cemetery receivables and trust investments in the consolidated balance sheet at December 31, 2004 are as follows (in thousands):
|
| December 31, |
| |
Trust assets |
| $ | 53,095 |
|
Receivables from customers, net |
| 15,915 |
| |
Unearned finance charges |
| (3,155 | ) | |
Preneed cemetery receivables and trust investments |
| $ | 65,855 |
|
Preneed cemetery receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. Preneed cemetery sales are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. The interest rates generally range between 12 percent and 14 percent.
The cost and market values associated with prearrangedcemetery preneed trust assets at December 31, 2004 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments are temporary in nature. Net unrealized gains increased $0.6 million from March 31, 2004, the date of adoption, through December 31, 2004.
|
| Cost |
| Unrealized |
| Unrealized |
| Market |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash, money market and other short-term investments |
| $ | 5,025 |
| $ | — |
| $ | — |
| $ | 5,025 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
| 156 |
| — |
| (4 | ) | 152 |
| ||||
U.S. Agency obligations |
| 3,311 |
| 17 |
| (19 | ) | 3,309 |
| ||||
State obligations |
| 15,695 |
| 339 |
| (39 | ) | 15,995 |
| ||||
Corporate |
| 3,177 |
| 92 |
| (15 | ) | 3,254 |
| ||||
Equity securities: |
|
|
|
|
|
|
|
|
| ||||
Common stock |
| 10,580 |
| 1,980 |
| (63 | ) | 12,497 |
| ||||
Mutual funds: |
|
|
|
|
|
|
|
|
| ||||
Equity |
| 8,360 |
| 646 |
| (7 | ) | 8,999 |
| ||||
Fixed income |
| 3,572 |
| 71 |
| (37 | ) | 3,606 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Trust investments |
| $ | 49,876 |
| $ | 3,145 |
| $ | (184 | ) | $ | 52,837 |
|
|
|
|
|
|
|
|
|
|
| ||||
Accrued investment income |
| $ | 258 |
|
|
|
|
| 258 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Trust assets |
|
|
|
|
|
|
| $ | 53,095 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Market value as a percentage of cost |
|
|
|
|
|
|
| 106.5 | % | ||||
The estimated maturities of the fixed income securities included above are as follows:
Due in one year or less |
| $ | 1,112 |
|
Due in one to five years |
| 7,474 |
| |
Due in five to ten years |
| 14,036 |
| |
Thereafter |
| 88 |
| |
|
| $ | 22,710 |
|
41
Preneed Funeral Receivables and Trust Investments
Preneed funeral receivables and trust investments, net of allowance for cancellations, represent trust fund assets and customer receivables related to contracts sold in advance of when the services or merchandise is needed. Such contracts are secured by funds paid by the customer to the Company. Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws.
The components of Preneed funeral receivables and trust investments in the consolidated balance sheet at December 31, 2004 are as follows (in thousands):
|
| December 31, |
| |
|
|
|
| |
Trust assets |
| $ | 45,557 |
|
Receivables from customers |
| 9,824 |
| |
Allowance for contract cancellations |
| (5,887 | ) | |
|
|
|
| |
Preneed funeral receivables and trust investments |
| $ | 49,494 |
|
The cost and market values associated with funeral preneed trust assets at December 31, 2004 are detailed below (in thousands). The Company believes the unrealized losses related to trust investments are temporary in nature. Net unrealized gains increased $0.2 million from March 31, 2004, the date of adoption, through December 31, 2004.
|
| Cost |
| Unrealized |
| Unrealized |
| Market |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash, money market and other short-term investments |
| $ | 12,885 |
| $ | — |
| $ | — |
| $ | 12,885 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
| 2,463 |
| 9 |
| (19 | ) | 2,453 |
| ||||
U.S. Agency obligations |
| 199 |
| — |
| (3 | ) | 196 |
| ||||
State obligations |
| 1,953 |
| 105 |
| — |
| 2,058 |
| ||||
Corporate |
| 1,601 |
| 60 |
| (8 | ) | 1,653 |
| ||||
Equity securities: |
|
|
|
|
|
|
|
|
| ||||
Common stock |
| 2,258 |
| 635 |
| (74 | ) | 2,819 |
| ||||
Mutual funds: |
|
|
|
|
|
|
|
|
| ||||
Equity |
| 6,486 |
| 648 |
| (101 | ) | 7,033 |
| ||||
Fixed income |
| 16,579 |
| 44 |
| (163 | ) | 16,460 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Trust investments |
| $ | 44,424 |
| $ | 1,501 |
| $ | (368 | ) | $ | 45,557 |
|
|
|
|
|
|
|
|
|
|
| ||||
Market value as a percentage of cost |
|
|
|
|
|
|
| 102.6 | % | ||||
The estimated maturities of the fixed income securities included above are as follows:
Due in one year or less |
| $ | 398 |
|
Due in one to five years |
| 2,921 |
| |
Due in five to ten years |
| 2,308 |
| |
Thereafter |
| 733 |
| |
|
| $ | 6,360 |
|
Upon cancellation of a preneed funeral or cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of
42
the trust, in which case a loss provision would be recorded. No loss amounts have been required to be recognized for the periods presented in the consolidated financial statements.
Cemetery Perpetual Care Trust Investments
The Company is required by state law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. As a result of the implementation of FIN 46R, the Company has consolidated the perpetual care trust funds with a corresponding amount as Non-controlling interests in perpetual care trusts. Realized and distributable earnings from these perpetual care trust investments are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. The cost and market values associated with the trust investments held in perpetual care trust funds at December 31, 2004 are detailed below (in thousands). The cost basis of the cemetery perpetual care trust investments below reflects an other than temporary decline in the trust assets of $0.1 million at December 31, 2004. The Company believes the unrealized losses related to the trust investments are temporary in nature. Net unrealized gains increased $0.5 million from March 31, 2004, the date of adoption, through December 31, 2004.
|
| Cost |
| Unrealized |
| Unrealized |
| Market |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash, money market and other short-term investments |
| $ | 4,239 |
| $ | — |
| $ | — |
| $ | 4,239 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
| 1,722 |
| 21 |
| (4 | ) | 1,739 |
| ||||
U.S. Agency obligation |
| 4,511 |
| 25 |
| (6 | ) | 4,530 |
| ||||
State obligations |
| 4,007 |
| — |
| — |
| 4,007 |
| ||||
Corporate |
| 2,940 |
| 179 |
| (12 | ) | 3,107 |
| ||||
Equity securities: |
|
|
|
|
|
|
|
|
| ||||
Common stock |
| 7,488 |
| 983 |
| (56 | ) | 8,415 |
| ||||
Mutual funds: |
|
|
|
|
|
|
|
|
| ||||
Equity |
| 1,621 |
| 140 |
| (4 | ) | 1,757 |
| ||||
Fixed income |
| 3,221 |
| 38 |
| (36 | ) | 3,223 |
| ||||
Other assets |
| 167 |
| — |
| (117 | ) | 50 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Trust investments |
| $ | 29,916 |
| $ | 1,386 |
| $ | (235 | ) | $ | 31,067 |
|
|
|
|
|
|
|
|
|
|
| ||||
Accrued investment income |
| $ | 134 |
|
|
|
|
| 134 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Trust assets |
|
|
|
|
|
|
| $ | 31,201 |
| |||
|
|
|
|
|
|
|
|
|
| ||||
Market value as a percentage of cost |
|
|
|
|
|
|
| 104.3 | % | ||||
The estimated maturities of the fixed income securities included above are as follows:
Due in one year or less |
| $ | 2,022 |
| |
Due in one to five years |
| 6,620 |
| ||
Due in five to ten years |
| 4,606 |
| ||
Thereafter |
| 135 |
| ||
|
| $ | 13,383 |
| |
Receivables from Preneed Funeral Contracts
The receivables from preneed funeral contracts at December 31, 2004 represent assets in commingled trusts in which the Company does not have a controlling financial interest in the trust assets. The Company accounts for these investments at cost.
43
The components of the receivables from preneed funeral contracts in the consolidated balance sheet at December 31, 2004 are as follows (in thousands):
Amount due from preneed funeral trust funds |
| $ | 18,430 |
|
Receivables from customers |
| 1,695 |
| |
Less: allowance for cancellation |
| (2,051 | ) | |
|
| $ | 18,074 |
|
The following summary reflects the composition of the assets held in trust to satisfy Carriage’s future obligations under preneed funeral arrangements related to the preceding contracts. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets.
|
| Historical |
| Fair Value |
| ||
|
| (in thousands) |
| ||||
As of December 31, 2004: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 3,172 |
| $ | 3,172 |
|
Fixed income investments contract |
| 11,021 |
| 10,798 |
| ||
Mutual funds and stocks |
| 3,973 |
| 4,278 |
| ||
Annuities | �� | 264 |
| 264 |
| ||
Total |
| $ | 18,430 |
| $ | 18,512 |
|
Receivables From Preneed Funeral Contracts
The components of the receivables from preneed funeral contracts in the consolidated balance sheet at December 31, 2003 were as follows (in thousands):
Amount due from preneed funeral trust funds |
| $ | 87,580 |
|
Receivables from customers |
| 15,364 |
| |
Less: allowance for cancellation |
| (29,243 | ) | |
|
| $ | 73,701 |
|
The following summary reflects the composition of the assets held in trust at December 31, 2003 to satisfy Carriage’s future obligations under preneed funeral arrangements. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets.
|
| Historical |
| Fair Value |
| ||
|
| (in thousands) |
| ||||
Trust fund investments: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 16,169 |
| $ | 16,169 |
|
Fixed income investments contract |
| 31,028 |
| 31,836 |
| ||
Mutual funds and stocks |
| 19,925 |
| 19,777 |
| ||
Annuities |
| 20,458 |
| 20,458 |
| ||
Total |
| $ | 87,580 |
| $ | 88,240 |
|
44
Cemetery Merchandise and Service Trust Funds
The cemetery merchandise and service trust funds untilwere invested in the corresponding merchandise is delivered orfollowing at December 31, 2003:
|
| Historical |
| Fair Value |
| ||
|
| (in thousands) |
| ||||
Trust fund investments: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 6,140 |
| $ | 6,140 |
|
Fixed income investments contract |
| 17,901 |
| 18,679 |
| ||
Mutual funds and stocks |
| 24,196 |
| 24,604 |
| ||
Total |
| $ | 48,237 |
| $ | 49,423 |
|
Trust Investment Security Transactions
Investment security transactions recorded in Other income in the service is performed. It is unclear at this time whether this revenue recognition policy will continue upon implementationConsolidated Statements of Operations for period beginning with the adoption of FIN 46R or if wethrough December 31, 2004 are as follows (in thousands):
Investment income |
| $ | 3,121 |
|
Realized gains |
| 1,897 |
| |
Realized losses |
| (904 | ) | |
Expenses |
| (676 | ) | |
Increase in non-controlling interests in trust investments |
| (3,438 | ) | |
|
| $ | — |
|
5. PRENEED CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance policies. The proceeds of the life insurance policies have been assigned to the Company and will havebe paid upon the death of the insured. The proceeds will be used to recognize investment earnings whensatisfy the trust funds realize such investment earnings.
Realized distributable investment earnings from cemetery perpetual care trust funds are currently recognized in cemetery revenues as they are intended to defray cemetery maintenance costs.beneficiary’s obligations under the preneed contract for services and merchandise. We expect to continue recognizing these investment earnings under this newchanged our method of accounting policy.
The Company will implement the provisions of FIN 46R as offor preneed funeral contracts secured by insurance at March 31, 2004 because we concluded that they are not assets and currently expectsliabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” Therefore, we have eliminated amounts relating to consolidate into itssuch preneed funeral contracts along with the corresponding deferred revenue from our consolidated balance sheets. The elimination of these amounts had no impact on our consolidated stockholders’ equity, results of operations or cash flows.
The preneed funeral contracts secured by insurance totaled $159.9 million at December 31, 2004. The effect of the elimination of these amounts on our previously issued balance sheet the preneedat December 31, 2003 is as follows (in thousands):
|
| December 31, |
| |
|
|
|
| |
Total assets as previously reported |
| $ | 699,611 |
|
Elimination of preneed contracts secured by insurance |
| (160,694 | ) | |
Total assets as revised |
| $ | 538,917 |
|
|
|
|
| |
Total liabilities as previously reported |
| $ | 503,354 |
|
Elimination of deferred revenue |
| (160,694 | ) | |
Total liabilities as revised |
| $ | 342,660 |
|
45
6. NON-CONTROLLING INTERESTS IN FUNERAL AND CEMETERY TRUSTS AND IN PERPETUAL CARE TRUSTS
The components of Non-controlling interests in funeral preneedand cemetery trustsandNon-controlling interests in perpetual care trusts at fair value, which would have the effect as of increasing trust assets and total assets by approximately $32.5 million. The offsetting credit is expected to be recorded in deferred revenue orDecember 31, 2004 are as a component of stockholders' equity. The ultimate resolution of the accounting for the associated trust income has not been determined and could potentially result in a material change as to when trust earnings are recognized. The Company has not been able to quantify the impact, if any, at this time.follows:
|
| Non-controlling Interests |
| ||||||||||
|
| Preneed Funeral |
| Preneed Cemetery |
| Total |
| Cemetery Perpetual |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Trust assets, at market value |
| $ | 45,557 |
| $ | 53,095 |
| $ | 98,652 |
| $ | 31,201 |
|
Pending withdrawals of income |
| — |
| — |
| — |
| (436 | ) | ||||
Debt due to a perpetual care trust |
| — |
| — |
| — |
| 1,117 |
| ||||
Pending deposits |
| — |
| — |
| — |
| 330 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-controlling interests |
| $ | 45,557 |
| $ | 53,095 |
| $ | 98,652 |
| $ | 32,212 |
|
|
|
|
|
|
|
|
|
|
| ||||
Non-controlling interest in assets held for sale |
| $ | — |
| $ | 2,051 |
| $ | 2,051 |
| $ | 523 |
|
3.7. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS
Deferred charges and other non-current assets at December 31, 20022003 and 20032004 were as follows:
| | 2002 | 2003 | ||||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| Agreements not to compete, net of accumulated amortization of $3,107 and $3,280, respectively | $ | 1,594 | $ | 1,294 | ||
| Non-current cemetery accounts receivable | 15,556 | 13,983 | ||||
| Deferred obtaining costs, net of accumulated amortization of $8,009 and $9,002, respectively | 30,540 | 33,139 | ||||
| Other | 10,220 | 5,908 | ||||
| $ | 57,910 | $ | 54,324 | |||
|
| 2003 |
| 2004 |
| ||
|
| (in thousands) |
| ||||
Agreements not to compete, net of accumulated amortization of $3,280 and $3,659, respectively |
| $ | 1,294 |
| $ | 1,080 |
|
Non-current cemetery accounts receivable |
| 13,983 |
| — |
| ||
Deferred tax asset |
| 1,459 |
| 1,733 |
| ||
Other |
| 3,216 |
| 5,768 |
| ||
|
| $ | 19,952 |
| $ | 8,581 |
|
Less: Deferred charges on assets held for sale |
| 459 |
| — |
| ||
|
| $ | 19,493 |
| $ | 8,581 |
|
The cost of agreements not to compete with former owners of businesses acquired is amortized over the term of the respective agreements, ranging from four to ten years. Deferred debt origination costs (included in "other"“other” above) are being amortized over the term of the related debt. Non-current cemetery receivables result from the multi-year payment terms in the underlying contracts.
Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses to coincide with the expected timing of the performance of the services or delivery of the merchandise covered by the preneed contracts.
47
4.8. LONG-TERM DEBT AND RELATED DERIVATIVES
Long-Term Debt
The Company'sCompany’s long-term debt consisted of the following at December 31:
| | 2002 | 2003 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
| Credit Facility, unsecured floating rate $75 million line at December 31, 2002 and $40 million line at December 31, 2003. Interest is due on a quarterly basis for prime rate borrowings and on the maturity dates for the LIBOR borrowings at the LIBOR rate plus 3% (weighted average interest rate including the effect of the interest rate swaps was 7.781% and 4.75% at December 31, 2002 and 2003, respectively) matures in March, 2006 | $ | 29,000 | $ | 21,100 | |||
| Senior Notes | 99,317 | 96,337 | |||||
| Acquisition debt | 10,442 | 8,130 | |||||
| Other | 4,757 | 4,372 | |||||
| Less: current portion | (2,309 | ) | (24,364 | ) | |||
| $ | 141,207 | $ | 105,575 | ||||
|
| 2003 |
| 2004 |
| ||
|
| (in thousands) |
| ||||
Credit Facility, unsecured floating rate $40 million line at December 31, 2003 and $45 million line at December 31, 2004. Interest is due on a quarterly basis for prime rate indexed borrowings and on the maturity dates for the LIBOR indexed borrowings (weighted average interest rate was 5.36% at December 31, 2004), matures in March, 2006 |
| $ | 21,100 |
| $ | 25,600 |
|
Senior Notes |
| 96,337 |
| 70,479 |
| ||
Acquisition debt |
| 8,130 |
| 6,066 |
| ||
Other |
| 4,372 |
| 2,657 |
| ||
Less: current portion |
| (24,364 | ) | (2,088 | ) | ||
|
| $ | 105,575 |
| $ | 102,714 |
|
46
In August 2003, Carriage replaced its $75 million revolving bank credit facility with a new $40 million unsecured revolving credit facility which matures in March 2006. In May 2004, Carriage exercised the option within its existing bank credit facility to increase the available commitment by $5 million to $45 million. The two existing banks proportionately increased their commitments under the arrangement. Interest is payable at botheither the prime rate andplus 1.25% or a rate indexed to LIBOR, options. Initially,at the option of the Company. Currently, the LIBOR option is set at LIBOR plus 300275 basis points. The margin above LIBOR can declinevary from 200 basis points to 300 basis points in the future with reductionschanges in Carriage'sCarriage’s debt to EBITDA ratio, if any, as defined in the credit agreement. The credit facility contains customary restrictive covenants, including a restriction on the payments of dividends on common stock and requires Carriage to maintain certain financial ratios. The new credit facility reduces by $7.5$8.4375 million in March 2005 and by an additional $7.5$8.4375 million in September 2005. In addition, the commitment reduces by up to $5 million for the banks'banks’ pro-rata share of proceeds from dispositions of assets. In order to comply with the conditions of the new credit facility, the Company began deferring interest payments on the $93.75 million of convertible junior subordinated debentures held bydebenture payable to its affiliated trust.trust, Carriage Services Capital Trust. As a result, cash distributions on the Company-obligated mandatorily redeemable convertible preferred securities ("TIDES"(“TIDES”) of Carriage Services Capital Trust arehave been deferred and recorded as a liability for at least the term of the new credit facility beginning with the September 1, 2003 payment. Additionally at December 31, 2004, the Company has used $1.1 million of the credit facility for letters of credit, the majority of which secures arrangements with the Company’s insurance provider. At December 31, 2003, $17.82004, $18.1 million was available under the credit facility.
Carriage recorded a pretax charge in the amount of $147,000 in the third quarter of 2003 in connection with replacing the previous credit facility. The change represents the unamortized loan origination costs related to the replaced credit facility.
Additionally,
On July 30, 2004, the Company has used $1.2 millionpaid the outstanding principal and interest on its Series A Senior Notes, which had an outstanding principal balance of the credit facility for letters of credit, the majority of which secures arrangements with the Company's insurance provider.
$22.0 million. The Series B and C Senior Notes mature in tranches of $22.3 million in 2004, $52.4$49.2 million in 2006 and $21.6$21.3 million in 2008 and bear interest at the fixed rates of 7.73%, 7.96% and 8.06%, respectively. The Senior Notes contain restrictive covenants similar to the credit facility (described above) and additionally require that a significant portion of any proceeds from the sales of assets be offered to the noteholders as prepayment of the amounts outstanding. During 20022003 and 2003,2004, prepayments were made in the amounts of $2.7$3.0 million and $3.0$2.7 million, respectively, related to proceeds from the sale of assets.
48
The Company was in compliance with the covenants contained in the credit facility and the Senior Notes as of and for the years ended December 31, 20022003 and 2003.2004.
Acquisition debt consists of deferred purchase prices payable to sellers. The deferred purchase price notes bear interest at 0%, discounted at imputed interest rates ranging from 6% to 8%, with maturities from three to 15 years.
The aggregate maturities of long-term debt for the next five years as of December 31, 20032004 are approximately $24,364,000, $2,281,000, $75,650,000, $2,870,000$2,155,000, $76,873,000, $1,580,000, $23,420,000 and $23,680,000,$534,000, respectively and $1,094,000$5,729,000 thereafter.
Derivative Financial Instruments
In July 1999, Carriage entered into interest rate swap agreementsJanuary 2005, the Company issued $130 million of a notional amountten-year Senior Notes to refinance all of $30 million with financial institutionsthe senior debt and to manage interest costsbring current the deferred distributions on the floating rate credit facility. As a hedge against rising interest rates,convertible junior subordinated debenture and the Company agreed to exchange the floating rate payments for fixed rate payments, at 90-day intervals, calculated by reference to agreed-upon notional principal amounts. The swaps terminated in December 2001 and in May 2003.TIDES securities (Note 19).
5.9. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURE PAYABLE TO AFFILIATE AND COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST
During June 1999, Carriage, through itsCarriage’s wholly-owned subsidiary, Carriage Services Capital Trust, completed the sale of 1,875,000 units of 7% convertible preferred securities (TIDES), resulting in approximately $90 million in net proceeds, and the Company issued a 7% convertible junior subordinated debenture to the Company.Trust in the amount of $93.75 million. The convertible preferred securities have a liquidation amount of $50 per unit, and are convertible into Carriage'sCarriage’s Common Stock at the equivalent conversion price of $20.4375 per share of Common Stock. The securitiessubordinated debentures and the TIDES mature in 2029 and the TIDES are guaranteed on a subordinated basis by the Company. TheBoth the subordinated debentures and the TIDES contain a provision for the deferral of distributions for up to 20 consecutive quarters. During the period in which distribution payments are deferred, distributions will continue to accumulate at the 7 percent annual rate. Also, the deferred distributions will themselves accumulate distributions at the annual rate of 7 percent. During the period in which distributions are deferred, Carriage is prohibited from paying dividends on its common stock or repurchasing its common stock, with limited exceptions. The Company has deferred the September 1 and December 1, 2003 distributions, which with interest on the unpaid distributions totals $3.9 million at December 31, 2003.
6. SPECIAL CHARGES AND OTHER2003 and $10.9 at December 31, 2004 (Note 19).
Special charges
47
10. OTHER INCOME
Other income is comprised of net gains from the disposition of various business assets in the amount of $865,000, $657,000 and other consisted of$940,000 for the following (in thousands):years ending December 31, 2002, 2003 and 2004, respectively.
| | For the year ended December 31, 2002 | For the year ended December 31, 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Impairment charges on businesses held for use | $ | 1,271 | $ | — | ||||
| Gain on sale of businesses and other assets | (910 | ) | (1,156 | ) | ||||
| Early termination of lease obligation and bank credit facility | — | 579 | ||||||
| Total | $ | 361 | $ | (577 | ) | |||
49
7.11. COMMITMENTS AND CONTINGENCIES
Leases
Leases
Carriage leases certain office facilities, vehicles and equipment under operating leases for terms ranging from one to 15 years. Certain of these leases provide for an annual adjustment and contain options for renewal. Rent expense was approximately $4,547,000, $4,587,000, $3,663,000 and $3,663,000$3,625,477 for 2001, 2002, 2003 and 2003,2004, respectively. Assets acquired under capital leases are included in property, plant and equipment in the accompanying consolidated balance sheets in the amount $2,782,000 in 2001, $2,341,000 in 2002, and $2,019,000 in 2003 and $1,918,000 in 2004, net of accumulated depreciation. RelatedCapital lease obligations are included in current and long-term debt.debt as indicated below.
At December 31, 2003,2004, future minimum lease payments under noncancellable lease agreements were as follows:
| | Future Minimum Lease Payments | |||||||
|---|---|---|---|---|---|---|---|---|
| | Operating Leases | Capital Leases | ||||||
| | (in thousands) | |||||||
| Years ended December 31, | ||||||||
| 2004 | $ | 2,021 | $ | 426 | ||||
| 2005 | 1,908 | 427 | ||||||
| 2006 | 1,491 | 428 | ||||||
| 2007 | 1,463 | 428 | ||||||
| 2008 | 1,444 | 429 | ||||||
| Thereafter | 3,521 | 7,332 | ||||||
| Total future minimum lease payments | $ | 11,848 | 9,470 | |||||
| Less: amount representing interest | (3,930 | ) | ||||||
| Less: current portion of obligations under capital leases | (36 | ) | ||||||
| Long-term obligations under capital leases | $ | 5,504 | ||||||
|
| Future Minimum Lease |
| ||||
|
| Operating |
| Capital |
| ||
|
| (in thousands) |
| ||||
Years ended December 31, |
|
|
|
|
| ||
2005 |
| $ | 2,306 |
| $ | 450 |
|
2006 |
| 1,681 |
| 439 |
| ||
2007 |
| 1,451 |
| 439 |
| ||
2008 |
| 1,221 |
| 447 |
| ||
2009 |
| 657 |
| 459 |
| ||
Thereafter |
| 710 |
| 9,090 |
| ||
|
|
|
|
|
| ||
Total future minimum lease payments |
| $ | 8,026 |
| 11,322 |
| |
Less: amount representing interest |
|
|
| (5,830 | ) | ||
Less: current portion of obligations under capital leases |
|
|
| (67 | ) | ||
Long-term obligations under capital leases |
|
|
| $ | 5,424 |
| |
Agreements and Employee Benefits
Carriage has entered intoobtained various agreements not to compete withfrom former owners of businesses acquired. Payments for such agreements are generally not made in advance. These agreements are generally for one to 10 years and provide for future payments annually, quarterly or monthly. The aggregate payments due under these agreements for the next five years are approximately $1,504,000, $1,016,000, $677,000, $398,000$1,306,000, $1,076,000, $803,000, $676,000 and $267,000,$478,000, respectively and $226,000$1,432,000 thereafter.
The Company has entered into various consulting agreements with former owners of businesses acquired. Payments for such agreements are generally not made in advance. These agreements are generally for one to 10 years and provide for future payments monthly or bi-weekly. The aggregate payments for the next five years are approximately $441,000, $222,000, $156,000, $99,000, $62,000, respectively and $38,000 thereafter.
The Company has entered into employment agreements with the executive officers. These agreements are generally for two to five years and provide for future payments bi-weekly plus discretionary bonus payments. These payments due under these agreements for the next five years are approximately $1,000,000, $850,000, $225,000, $225,000 and $225,000, respectively.
Carriage sponsors a defined contribution plan (401k) and an employee stock purchase plan for the benefit of its employees. The Company'sCompany’s matching contributions and plan administrative expenses totaled approximately $231,000, $336,000, $395,000 and $395,000$365,000 for 2001, 2002, 2003 and 2003,2004, respectively. In addition, theThe Company does not offer any other post-retirement or post-employment benefits.
Litigation
48
Other Commitments
The Company has also entered into cancellable consulting agreements to modify and implement software to be used in our cemetery operations. This project is estimated to be completed in 2005. Progress payments are made based on the percentage of completion of the project. The aggregate payments due under these agreements are approximately $500,000 at December 31, 2004.
Litigation
Carriage and ourits subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on the financial statements.
50
We carry insurance with coverages and coverage limits consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that such insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that our insurance provides reasonable coverage for known asserted or unasserted claims. In the event the Company sustained a loss from a claim and the insurance carrier disputed coverage or coverage limits, the Company may record a charge in a different period than the recovery, if any, from the insurance carrier.
8.12. INCOME TAXES
The provision (benefit) for income taxes from continuing operations for 2001, 2002, 2003 and 20032004 consisted of:
| | 2001 | 2002 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||
| Current: | |||||||||||
| U. S. Federal | $ | (2,212 | ) | $ | (1,410 | ) | $ | — | |||
| State | 242 | 297 | 145 | ||||||||
| Total current provision (benefit) | (1,970 | ) | (1,113 | ) | 145 | ||||||
| Deferred: | |||||||||||
| U. S. Federal | 3,871 | (6,688 | ) | 3,574 | |||||||
| State | 350 | (315 | ) | 255 | |||||||
| Total deferred provision (benefit) | 4,221 | (7,003 | ) | 3,829 | |||||||
| Total income tax provision (benefit) | $ | 2,251 | $ | (8,116 | ) | $ | 3,974 | ||||
|
| 2002 |
| 2003 |
| 2004 |
| ||||
|
| (in thousands) |
| ||||||||
Current: |
|
|
|
|
|
|
| ||||
U. S. Federal |
| $ | (1,410 | ) | $ | — |
| $ | — |
| |
State |
| 297 |
| 145 |
| 141 |
| ||||
Total current provision (benefit) |
| (1,113 | ) | 145 |
| 141 |
| ||||
Deferred: |
|
|
|
|
|
|
| ||||
U. S. Federal |
| (6,987 | ) | 3,174 |
| (165 | ) | ||||
State |
| (329 | ) | 200 |
| 95 |
| ||||
Total deferred provision (benefit) |
| (7,316 | ) | 3,374 |
| (70 | ) | ||||
Total income tax provision (benefit) |
| $ | (8,429 | ) | $ | 3,519 |
| $ | 71 |
| |
A reconciliation of taxes to the U.S. federal statutory rate to those reflected in the consolidated statements of operations for 2001, 2002, 2003 and 20032004 is as follows:
| | 2001 | 2002 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |
| Effect of state income taxes, net of federal benefit | 1.7 | 2.0 | 2.5 | ||||
| Effect of non-deductible expenses and other, net | 6.6 | 1.5 | 1.0 | ||||
| Change in valuation allowance | (23.3 | ) | (105.3 | ) | (1.0 | ) | |
| 20.0 | % | (66.8 | )% | 37.5 | % | ||
51
|
| 2002 |
| 2003 |
| 2004 |
|
Federal statutory rate |
| 35.0 | % | 35.0 | % | 34.0 | % |
Effect of state income taxes, net of federal benefit |
| 2.0 |
| 2.5 |
| 2.5 |
|
Effect of non-deductible expenses and other, net |
| 1.5 |
| 1.0 |
| 1.1 |
|
Change in valuation allowance |
| (112.8 | ) | (1.1 | ) | (37.0 | ) |
|
| (74.3 | )% | 37.4 | % | 0.6 | % |
49
The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities at December 31, 20022003 and 20032004 were as follows:
| | 2002 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Net operating loss carryforwards | $ | 5,814 | $ | 9,260 | ||||
| Accrued liabilities and other | 1,678 | 1,031 | ||||||
| Amortization of non-compete agreements | 2,306 | 1,933 | ||||||
| Amortization and depreciation | (3,267 | ) | (8,182 | ) | ||||
| Preneed revenue and costs, net | 2,374 | 934 | ||||||
| 8,905 | 4,976 | |||||||
| Valuation allowance | (1,353 | ) | (1,253 | ) | ||||
| Total net deferred tax assets | $ | 7,552 | $ | 3,723 | ||||
| Current deferred tax asset | $ | 400 | $ | 1,031 | ||||
| Non-current deferred tax asset | 7,152 | 2,692 | ||||||
| Total net deferred tax assets | $ | 7,552 | $ | 3,723 | ||||
|
| 2003 |
| 2004 |
| ||
|
| (in thousands) |
| ||||
Deferred tax assets (liabilities): |
|
|
|
|
| ||
Net operating loss carryforwards |
| $ | 4,852 |
| $ | 5,527 |
|
Accrued liabilities and other |
| 2,264 |
| 2,681 |
| ||
Amortization of non-compete agreements |
| 2,027 |
| 1,923 |
| ||
Amortization and depreciation |
| (8,784 | ) | (11,372 | ) | ||
Preneed revenue and costs, net |
| 8,680 |
| 6,908 |
| ||
|
| 9,039 |
| 5,667 |
| ||
Valuation allowance |
| (5,316 | ) | (1,253 | ) | ||
Total net deferred tax assets |
| $ | 3,723 |
| $ | 4,414 |
|
|
|
|
|
|
| ||
Current deferred tax asset |
| $ | 2,264 |
| $ | 2,681 |
|
Non-current deferred tax asset |
| 1,459 |
| 1,733 |
| ||
Total net deferred tax assets |
| $ | 3,723 |
| $ | 4,414 |
|
The current deferred tax asset is included in Inventories and other current assets at December 31, 20022003 and 2003.2004. The non-current deferred tax asset is included in Deferred charges and other non-current assets at December 31, 20022003 and 2003.2004.
Carriage records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
When the Company incurred the Fresh Start restructuring costs and write-downs in late 2000 and proceededimplemented a plan to dispose of lowunder performing businesses, itthere could not be assured that it would generateno assurance enough future taxable income would be generated to utilize the tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty, the Company recorded a valuation allowance to offset these tax benefits until such time that it could be determined it would be more likely than not the Company would be able to realize the tax benefits. During 2001, the Company reduced the valuation allowance and recognized an income tax benefit in the amount of $3.0 million for tax deductions taken in 2001 for which the expense was recorded in 2000 for accounting purposes.allowance. Based on the positive operating results subsequent to 2000 and management'sa forecast of future positive operating results, management determined in the first quarter of 2002 that it iswas more likely than not the Company willwould be able to utilize substantially alla substantial portion of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Companyassets and recorded a tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which eliminated substantially allshare. The Company has continued to reassess the amount of realizable deferred tax asset, updated through the filing of the valuation allowance.2003 tax return. Based on continuing profitable operating results, a stable capital structure and a forecast of future profitable operating results, management concluded it was more likely than not that the remaining federal deferred tax asset would be realized. A tax benefit in the amount of $4.1 million, equal to $0.22 per diluted share, was recorded in the fourth quarter of 2004.
For Federalfederal income tax reporting purposes, Carriage has net operating loss carryforwards totaling $21.8$10.6 million available at December 31, 20032004 to offset future Federal taxable income, of which $9.6$3.9 million expires in 2021, $6.9$5.4 million in 2022, and $5.3$1.3 million expires in 2023.2024. Carriage also has approximately $47$67 million of state net operating loss carryforwards that will expire between the years 20042005 and 2023,2024, if not utilized. Based on management’s assessment of the various state net operating losses, it was determined that it is more likely than not that the Company will not be able to realize tax benefits on a substantial amount of the state losses. The valuation allowance at December 31, 2004 is attributable to the deferred tax asset related to the state operating losses.
52
9. STOCKHOLDERS'13. STOCKHOLDERS’ EQUITY
Stock Option Plans
Carriage has four stock benefit plans currently in effect under which stock option grants may be issued: the 1995 Stock Incentive Plan (the "1995 Plan"“1995 Plan”), the 1996 Stock Option Plan (the "1996 Plan"“1996 Plan”), the 1996 Directors'Directors’ Stock Option Plan (the "Directors' Plan"“Directors’ Plan”) and the 1998 Stock Option Plan for Consultants (the "Consultants' Plan"“Consultants’ Plan”). Substantially all of the options granted under the four stock benefit plans have ten-year terms. The options generally vest over periods that range from two to four years.
50
Options under each of the plans at December 31, 20032004 are as follows (in thousands):
| | Reserved | Outstanding | Available to Issue | ||||
|---|---|---|---|---|---|---|---|
| 1995 Plan | 1,450 | 668 | 243 | ||||
| 1996 Plan | 1,300 | 871 | 307 | ||||
| Directors' Plan | 350 | 225 | 75 | ||||
| Consultants' Plan | 100 | 8 | 92 | ||||
| Total | 3,200 | 1,772 | 717 | ||||
|
| Reserved |
| Outstanding |
| Available to |
|
|
|
|
|
|
|
|
|
1995 Plan |
| 1,450 |
| 687 |
| 111 |
|
1996 Plan |
| 1,300 |
| 760 |
| 307 |
|
Directors’ Plan |
| 350 |
| 255 |
| 45 |
|
Consultants’ Plan |
| 100 |
| 8 |
| 92 |
|
Total |
| 3,200 |
| 1,710 |
| 555 |
|
Each of the plans is administered by the Compensation Committee appointed by the Board of Directors. The plans allow for options to be granted as non-qualified options, incentive stock options, reload options, alternative appreciation rights and stock bonus options. Additionally, the 1995 Plan allowsand 1996 Plans allow for the issuance of restricted common stock bonus grants. The options are granted with an exercise price equal to or greater than the then fair market value of Carriage'sCarriage’s Common Stock as determined by the Board of Directors based on trading prices on the date of the option grant.
A summary of the status of the plans at December 31, 2002, 2003 and 20032004 and changes during the years ended is presented in the table and narrative below:
| | Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | ||||||||||
| | Shares (000) | Wtd. Avg. Ex Price | Shares (000) | Wtd. Avg. Ex Price | ||||||||
| Outstanding at beginning of period | 1,709 | $ | 3.35 | 1,782 | $ | 3.65 | ||||||
| Granted | 375 | 4.68 | 144 | 3.73 | ||||||||
| Exercised | (167 | ) | 1.92 | (101 | ) | 1.90 | ||||||
| Canceled | (135 | ) | 4.97 | (53 | ) | 5.65 | ||||||
| Outstanding at end of year | 1,782 | 3.65 | 1,772 | 3.70 | ||||||||
| Exercisable at end of year | 1,352 | 3.47 | 1,421 | 3.62 | ||||||||
| Weighted average fair value of options granted | $ | 2.40 | $ | 1.67 | ||||||||
|
| Year ended December 31, |
| ||||||||||||||||
|
| 2002 |
| 2003 |
| 2004 |
| ||||||||||||
|
| Shares |
| Wtd. Avg. |
| Shares |
| Wtd. Avg. |
| Shares |
| Wtd. Avg. |
| ||||||
Outstanding at beginning of period |
| 1,709 |
| $ | 3.35 |
| 1,782 |
| $ | 3.65 |
| 1,772 |
| $ | 3.70 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Granted |
| 375 |
| 4.68 |
| 144 |
| 3.73 |
| 110 |
| 4.74 |
| ||||||
Exercised |
| (167 | ) | 1.92 |
| (101 | ) | 1.90 |
| (134 | ) | 2.46 |
| ||||||
Canceled |
| (135 | ) | 4.97 |
| (53 | ) | 5.65 |
| (38 | ) | 8.27 |
| ||||||
Outstanding at end of year |
| 1,782 |
| 3.65 |
| 1,772 |
| 3.70 |
| 1,710 |
| 3.64 |
| ||||||
Exercisable at end of year |
| 1,352 |
| 3.47 |
| 1,421 |
| 3.62 |
| 1,455 |
| 3.50 |
| ||||||
Weighted average fair value of options granted |
| $ | 2.40 |
|
|
| $ | 1.67 |
|
|
| $ | 2.21 |
|
|
| |||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2002, 2003 and 2003,2004, respectively: risk-free interest rates of 4.27%, 2.89% and 2.89%3.00%; expected dividend yield of 0% for each year; expected termination rate of 5%; expected lives of five years; expected volatility of 54%, 47% and 47%50%.
53
The following table further describes the Company'sCompany’s outstanding stock options at December 31, 20032004 (shares in thousands):
|
| Options Outstanding |
| Options Exercisable |
| |||||||||||
Actual |
| Number |
| Weighted- |
| Weighted-Average |
| Number |
| Weighted-Average |
| |||||
$ | 1.19- | 1.56 |
|
| 745 |
| 6.0 |
| $ | 1.20 |
| 745 |
| $ | 1.20 |
|
$ | 2.06- | 3.09 |
|
| 238 |
| 5.6 |
| $ | 2.89 |
| 231 |
| $ | 2.88 |
|
$ | 3.12- | 4.56 |
|
| 280 |
| 8.2 |
| $ | 4.11 |
| 109 |
| $ | 3.97 |
|
$ | 4.77- | 6.19 |
|
| 324 |
| 7.2 |
| $ | 4.93 |
| 247 |
| $ | 4.91 |
|
$ | 7.56- | 11.00 |
|
| 10 |
| 2.4 |
| $ | 8.70 |
| 10 |
| $ | 8.70 |
|
$ | 13.25- | 19.88 |
|
| 100 |
| 3.7 |
| $ | 15.34 |
| 100 |
| $ | 15.34 |
|
$ | 21.00- | 27.50 |
|
| 13 |
| 2.5 |
| $ | 21.53 |
| 13 |
| $ | 21.53 |
|
$ | 1.19- | 27.50 |
|
| 1,710 |
| 6.3 |
| $ | 3.64 |
| 1,455 |
| $ | 3.50 |
|
51
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Actual Range of Exercise Prices 150% increment | ||||||||||||
| Number Outstanding at 12/31/03 | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number Exercisable at 12/31/03 | Weighted-Average Exercise Price | ||||||||
| $ 1.19— 1.56 | 796,250 | 7.0 | $ | 1.45 | 761,875 | $ | 1.46 | |||||
| $ 2.06— 3.09 | 314,299 | 6.6 | $ | 2.89 | 288,174 | $ | 2.88 | |||||
| $ 3.12— 4.56 | 217,400 | 8.8 | $ | 3.92 | 78,625 | $ | 4.03 | |||||
| $ 4.77— 6.19 | 308,950 | 7.9 | $ | 4.92 | 156,587 | $ | 4.90 | |||||
| $ 7.56—11.00 | 10,050 | 3.4 | $ | 9.34 | 10,050 | $ | 9.34 | |||||
| $13.25—19.88 | 109,887 | 4.6 | $ | 15.38 | 109,887 | $ | 15.38 | |||||
| $21.00—27.50 | 15,375 | 3.5 | $ | 21.69 | 15,375 | $ | 21.69 | |||||
| $ 1.19—27.50 | 1,772,211 | 7.1 | $ | 3.70 | 1,420,573 | $ | 3.62 | |||||
Employee Stock Purchase Plan
Carriage provides all employees the opportunity to purchase Common Stock through payroll deductions. Purchases are made quarterly; the price being 85% of the lower of the price on the grant date or the purchase date. In 2002, employees purchased a total of 107,870 shares at a weighted average price of $3.43 per share. During 2003, employees purchased a total of 111,638 shares at a weighted average price of $3.01 per share. During 2004, employees purchased a total of 120,195 shares at a weighted average price of $3.51 per share.
Deferred Compensation and Stock-Related Compensation
In January 2003, the
The Company issued 227,000 and 100,000 shares of restricted common stock to certain officers of the Company from the 1995 Plan.Plan in January 2003 and February 2004, respectively. Twenty-five percent of the shares vest annually on each of the next four anniversary dates of the grant. The value of the stock at the date of grant was $3.97 per share, for a total of $901,000, which is amortized into expense over the vesting period.
The Company also has a compensation plan for its outside directors under which directors may choose to accept fully vested shares of the Company'sCompany’s common stock for all or a portion of their annual retainer and meeting fees, and under which new directors receive an award of 20,000 shares of common stock at the time of their initial election to the Board, 50% of which are vested at the grant date and 25% of which vests on the first and second anniversary of the grant. The value of the shares at the grant date is charged to expense as the shares vest. During 2003 and 2004, the Company issued shares of common stock to directors in lieu of payment in cash for their fees, the value of which was charged to operations. A new director was elected on May 13, 2003, at which time he received an award of 20,000 shares of common stock, the value of which at the grant date wasis charged to operations as the shares vest.
Stock Price Guarantees
As part of the purchase price consideration in the acquisition of certain funeral homes and cemeteries, the Company issued shares of Common Stock and guaranteed the stock would trade at certain agreed-upon levels during defined future periods ranging from one to three years. Should the stock not trade at these levels, then the Company would makeup the difference by issuing additional shares or paying the seller additional cash during the years 2000 through 2002. The present value of these price guarantees has been recorded as part of the purchase price of these acquisitions. During 2001 and 2002,
54
the Company paid $4,935,000 and $5,286,000, respectively, in satisfaction of the guarantee obligations that matured in those years. There are no remaining obligations outstanding under these arrangements.
10.14. PREFERRED STOCK
The Company has 40,000,000 authorized shares of preferred stock, none of which is currently issued and outstanding. During 2001, the Company exchanged and redeemed a total of 1,182,250 that was previously outstanding.
11.15. RELATED PARTY TRANSACTIONS
As an incentive, the Company entered into arrangements with onetwo former owners, both of itswhich have served as directors and a current director nomineeduring the past three years, to pay them each 10% of the amount by which the annual field level cash flow exceeds predetermined targets on certain businesses in their respective geographic region through 2007, with a final payment equal to a multiple of six times the average of the last three years payments. The business purpose of the arrangements was to incentivise the individuals to provide Carriage with high quality acquisition targets and to have input in the competitive strategies of those businesses post-acquisition so that cash flows grow over time. The terms were determined by reference to similar arrangements within the death care industry. The incentives earned by the two individuals totaled approximately $135,000, $120,000, $60,000 and $60,000$110,000 for the years 2001, 2002, 2003 and 2003,2004, respectively.
In connection with the 1997 acquisition of two funeral homes, from a group of individuals, one of which is one of the directors referred to in the preceding paragraph, a portion of the purchase price of each of those funeral homes was to be payable to one of the former owners referred to in the preceding paragraph based on a formula related to the annual field level cash flows subsequent to the year of acquisition. The business purpose was to determine the final purchase prices of the acquisitions since boththey were expected to show strong growth in cash flow. The terms were negotiated bywith the sellers, one of whichwhom later was appointed toas a director of Carriage. The contingent purchase price paymentspayment paid to the director totaled $47,673 and $572,243 during the years 2001 and 2002, respectively.2002.
The Company rents office space, at an annual rate of $19,000 per year through 2005, from an entity in which one of
During 2003, the Company's directors has a financial interest. The terms were determined by reference to rentals of similar office space in the area.
The Company was reimbursed for the cost of personnel and office expenses totaling approximately $87,000 from an entity in which the Company owns a minority (12%) interest and one of the entity'sentity’s directors is our Chief Executive Officer.
In connection with The Company sold its interest in the productionentity and our CEO resigned as director of the Company's annual report, printing costs of approximately $20,000 were paid to an entity in which one of the Company's directors is the Chief Executive Officer. Such services were competitively bid and the amount paid represents a market cost of the services.during 2004.
55
52
12.16. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for 2001, 2002, 2003 and 2003:2004:
| | 2001 | 2002 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands, except per share data) | ||||||||||
| Numerator: | |||||||||||
| Net income | $ | 9,002 | $ | 20,278 | $ | 6,625 | |||||
| Preferred stock dividends | (37 | ) | — | — | |||||||
| Numerator for basic earnings per share — net income available to common stockholders | $ | 8,965 | $ | 20,278 | $ | 6,625 | |||||
| Effect of dilutive securities: | |||||||||||
| Preferred stock dividends | 37 | — | — | ||||||||
| Numerator for diluted earnings per share — net income available to common stockholders after assumed conversions | $ | 9,002 | $ | 20,278 | $ | 6,625 | |||||
| Denominator: | |||||||||||
| Denominator for basic earnings per share — weighted average shares | 16,696 | 16,973 | 17,444 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Series D convertible preferred stock | 38 | — | — | ||||||||
| Stock options | 758 | 460 | 364 | ||||||||
| Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversions | 17,492 | 17,433 | 17,808 | ||||||||
| Basic earnings per share: | |||||||||||
| Net income | $ | .54 | $ | 1.20 | $ | 0.38 | |||||
| Diluted earnings per share: | |||||||||||
| Net income | $ | .51 | $ | 1.16 | $ | 0.37 | |||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
|
| (in thousands, except per share data) |
| |||||||
Numerator: |
|
|
|
|
|
|
| |||
Net income from continuing operations available to common stockholders |
| $ | 19,779 |
| $ | 5,898 |
| $ | 10,954 |
|
Net income (loss) from discontinued operations |
| 499 |
| 727 |
| (1,720 | ) | |||
Numerator for earnings per share — net income available to common stockholders |
| $ | 20,278 |
| $ | 6,625 |
| $ | 9,234 |
|
Denominator: |
|
|
|
|
|
|
| |||
Denominator for basic earnings per share — weighted average shares |
| 16,973 |
| 17,444 |
| 17,786 |
| |||
Effect of dilutive securities: |
|
|
|
|
|
|
| |||
Stock options |
| 460 |
| 364 |
| 474 |
| |||
Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversions |
| 17,433 |
| 17,808 |
| 18,260 |
| |||
Basic earnings per share: |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | 1.17 |
| $ | 0.34 |
| $ | 0.62 |
|
Discontinued operations |
| 0.03 |
| 0.04 |
| (0.10 | ) | |||
Net income |
| $ | 1.20 |
| $ | 0.38 |
| $ | 0.52 |
|
Diluted earnings per share: |
|
|
|
|
|
|
| |||
Continuing operations |
| $ | 1.13 |
| $ | 0.33 |
| $ | 0.60 |
|
Discontinued operations |
| 0.03 |
| 0.04 |
| (0.09 | ) | |||
Net income |
| $ | 1.16 |
| $ | 0.37 |
| $ | 0.51 |
|
Options to purchase 0.2 million shares, 0.4 million shares, 0.6 million shares and 0.60.2 million shares were not included in the computation of diluted earnings per share for 2001, 2002, 2003 and 2003,2004, respectively, because the exercise prices of the options were greater than the average market price of the common shares during those periods.
56
53
13.17. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States.
|
| Funeral |
| Cemetery |
| Corporate |
| Consolidated |
| |||||||||
|
| (in thousands, except number of operating locations) |
| |||||||||||||||
External revenues from continuing operations: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 112,816 |
| $ | 37,390 |
| $ | — |
| $ | 150,206 |
| |||||
2003 |
| 112,588 |
| 34,351 |
| — |
| 146,939 |
| |||||||||
2002 |
| 115,100 |
| 34,217 |
| — |
| 149,317 |
| |||||||||
Net income from continuing operations: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 17,685 |
| $ | 5,582 |
| $ | (12,313 | ) | $ | 10,954 |
| |||||
2003 |
| 20,574 |
| 5,370 |
| (20,046 | ) | 5,898 |
| |||||||||
2002 |
| 23,228 |
| 5,685 |
| (9,134 | ) | 19,779 |
| |||||||||
Total assets: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 344,940 |
| $ | 205,230 |
| $ | 14,986 |
| $ | 565,156 |
| |||||
2003 |
| 361,206 |
| 167,747 |
| 9,964 |
| 538,917 |
| |||||||||
2002 |
| 371,839 |
| 163,750 |
| 14,359 |
| 549,948 |
| |||||||||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 6,372 |
| $ | 3,198 |
| $ | 1,260 |
| $ | 10,830 |
| |||||
2003 |
| 6,010 |
| 2,851 |
| 1,114 |
| 9,975 |
| |||||||||
2002 |
| 5,940 |
| 2,848 |
| 777 |
| 9,565 |
| |||||||||
Capital expenditures: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 3,450 |
| $ | 1,154 |
| $ | 1,142 |
| $ | 5,746 |
| |||||
2003 |
| 3,983 |
| 1,066 |
| 1,155 |
| 6,204 |
| |||||||||
2002 |
| 4,446 |
| 805 |
| 780 |
| 6,031 |
| |||||||||
Number of operating locations at year end: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| 135 |
| 30 |
| — |
| 165 |
| |||||||||
2003 |
| 139 |
| 30 |
| — |
| 169 |
| |||||||||
2002 |
| 144 |
| 30 |
| — |
| 174 |
| |||||||||
Interest expense and financing costs: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 940 |
| $ | 205 |
| $ | 15,913 |
| $ | 17,058 |
| |||||
2003 |
| 1,106 |
| 215 |
| 16,614 |
| 17,935 |
| |||||||||
2002 |
| 1,239 |
| 243 |
| 18,233 |
| 19,715 |
| |||||||||
Income tax expense (benefit) from continuing operations: |
|
|
|
|
|
|
|
|
| |||||||||
2004 |
| $ | 11,057 |
| $ | 3,087 |
| $ | (14,073 | ) | $ | 71 |
| |||||
2003 |
| 8,075 |
| 2,936 |
| (7,492 | ) | 3,519 |
| |||||||||
2002 |
| 9,025 |
| 2,293 |
| (19,747 | ) | (8,429 | ) | |||||||||
54
| | Funeral | Cemetery | Corporate | Consolidated | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands, except number of operating locations) | |||||||||||||
| External revenues: | ||||||||||||||
| 2003 | $ | 115,737 | $ | 35,086 | $ | — | $ | 150,823 | ||||||
| 2002 | 119,299 | 34,877 | — | 154,176 | ||||||||||
| 2001 | 124,284 | 38,209 | — | 162,493 | ||||||||||
| Profit (loss): | ||||||||||||||
| 2003 | $ | 24,874 | $ | 7,954 | $ | (26,564 | ) | $ | 6,264 | |||||
| Plus-special charges and other, net of tax(a) | 361 | |||||||||||||
| 6,625 | ||||||||||||||
| 2002 | 23,919 | 6,235 | (9,654 | ) | 20,500 | |||||||||
| Less-special charges and other, net of tax(a) | (222 | ) | ||||||||||||
| $ | 20,278 | |||||||||||||
| 2001 | 16,748 | 5,271 | (13,017 | ) | 9,002 | |||||||||
| Total assets: | ||||||||||||||
| 2003 | $ | 521,900 | $ | 167,747 | $ | 9,964 | $ | 699,611 | ||||||
| 2002 | 525,645 | 163,750 | 14,359 | 703,754 | ||||||||||
| 2001 | 533,494 | 162,882 | 3,526 | 699,902 | ||||||||||
| Depreciation and amortization: | ||||||||||||||
| 2003 | $ | 6,188 | $ | 2,854 | $ | 2,070 | $ | 11,112 | ||||||
| 2002 | 6,043 | 2,846 | 2,219 | 11,108 | ||||||||||
| 2001 | 10,897 | 4,443 | 1,628 | 16,968 | ||||||||||
| Capital expenditures: | ||||||||||||||
| 2003 | $ | 3,983 | $ | 1,066 | $ | 1,155 | $ | 6,204 | ||||||
| 2002 | 4,449 | 805 | 780 | 6,034 | ||||||||||
| 2001 | 2,495 | 1,884 | 667 | 5,046 | ||||||||||
| Number of operating locations at year end: | ||||||||||||||
| 2003 | 139 | 30 | — | 169 | ||||||||||
| 2002 | 144 | 30 | — | 174 | ||||||||||
| 2001 | 148 | 30 | — | 178 | ||||||||||
| Interest expense and financing costs: | ||||||||||||||
| 2003 | $ | 1,129 | $ | 215 | $ | 16,467 | $ | 17,811 | ||||||
| 2002 | 1,274 | 243 | 18,233 | 19,750 | ||||||||||
| 2001 | 1,542 | 179 | 18,623 | 20,344 | ||||||||||
| Income tax expense (benefit): | ||||||||||||||
| 2003 | $ | 8,210 | $ | 3,040 | $ | (7,492 | ) | $ | 3,758 | |||||
| Plus-tax expense on special items (a) | 216 | |||||||||||||
| $ | 3,974 | |||||||||||||
| 2002 | 9,284 | 2,229 | (19,747 | ) | (8,234 | ) | ||||||||
| Less-tax benefits on special charges (a) | 118 | |||||||||||||
| $ | (8,116 | ) | ||||||||||||
| 2001 | 11,749 | 3,075 | (12,573 | ) | 2,251 | |||||||||
57
14.18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below set forth consolidated operating results by fiscal quarter for the years ended December 31, 20022003 and 2003,2004, in thousands, except earnings per share.
|
| First |
| Second |
| Third |
| Fourth |
| ||||
2004 |
|
|
|
|
|
|
|
|
| ||||
Net revenue from continuing operations |
| $ | 40,388 |
| $ | 37,434 |
| $ | 35,808 |
| $ | 36,576 |
|
Gross profit from continuing operations |
| 11,791 |
| 8,711 |
| 8,100 |
| 9,701 |
| ||||
Income from continuing operations |
| $ | 2,954 |
| $ | 1,663 |
| $ | 471 |
| $ | 5,866 |
|
Income (loss) from discontinued operations |
| 98 |
| (2,121 | ) | 686 |
| (383 | ) | ||||
Net income (loss) |
| $ | 3,052 |
| $ | (458 | ) | $ | 1,157 |
| $ | 5,483 |
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
| $ | 0.17 |
| $ | 0.09 |
| $ | 0.03 |
| $ | 0.33 |
|
Income (loss) from discontinued operations |
| — |
| (0.12 | ) | 0.04 |
| (0.02 | ) | ||||
Net income (loss) per basic share |
| $ | 0.17 |
| $ | (0.03 | ) | $ | 0.07 |
| $ | 0.31 |
|
Diluted earnings per common share: |
|
| �� |
|
|
|
|
|
| ||||
Income from continuing operations |
| $ | 0.16 |
| $ | 0.09 |
| $ | 0.03 |
| $ | 0.32 |
|
Income (loss) from discontinued Operations |
| 0.01 |
| (0.12 | ) | 0.04 |
| (0.02 | ) | ||||
Net income (loss) per diluted share |
| $ | 0.17 |
| $ | (0.03 | ) | $ | 0.07 |
| $ | 0.30 |
|
2003(a) |
|
|
|
|
|
|
|
|
| ||||
Net revenue from continuing operations |
| $ | 37,496 |
| $ | 36,756 |
| $ | 34,941 |
| $ | 37,746 |
|
Gross profit from continuing operations |
| 10,707 |
| 9,374 |
| 7,984 |
| 9,554 |
| ||||
Income from continuing operations |
| $ | 1,871 |
| $ | 2,009 |
| $ | 665 |
| $ | 1,353 |
|
Income from discontinued operations |
| 185 |
| 287 |
| 181 |
| 74 |
| ||||
Net income |
| $ | 2,056 |
| $ | 2,296 |
| $ | 846 |
| $ | 1,427 |
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
| $ | 0.11 |
| $ | 0.12 |
| $ | 0.04 |
| $ | 0.08 |
|
Income from discontinued operations |
| 0.01 |
| 0.01 |
| 0.01 |
| 0.01 |
| ||||
Net income per basic share |
| $ | 0.12 |
| $ | 0.13 |
| $ | 0.05 |
| $ | 0.09 |
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
| $ | 0.11 |
| $ | 0.11 |
| $ | 0.04 |
| $ | 0.08 |
|
Income from discontinued operations |
| 0.01 |
| 0.02 |
| 0.01 |
| — |
| ||||
Net income per diluted share |
| $ | 0.12 |
| $ | 0.13 |
| $ | 0.05 |
| $ | 0.08 |
|
| | 2002 | 2003(a) | |||||
|---|---|---|---|---|---|---|---|
| First Quarter: | |||||||
| Revenues, net | $ | 40,922 | $ | 38,706 | |||
| Gross profit | 13,384 | 11,100 | |||||
| Net income available to common stockholders | 16,560 | 2,056 | |||||
| Basic earnings per common share | $ | 0.98 | $ | 0.12 | |||
| Diluted earnings per common share | $ | 0.95 | $ | 0.12 | |||
Second Quarter: | |||||||
| Revenues, net | $ | 37,850 | $ | 37,867 | |||
| Gross profit | 9,688 | 9,668 | |||||
| Net income available to common stockholders | 1,477 | 2,296 | |||||
| Basic earnings per common share | $ | 0.09 | $ | 0.13 | |||
| Diluted earnings per common share | $ | 0.08 | $ | 0.13 | |||
Third Quarter: | |||||||
| Revenues, net | $ | 36,122 | $ | 35,701 | |||
| Gross profit | 9,240 | 8,100 | |||||
| Net income available to common stockholders | 520 | 846 | |||||
| Basic earnings per common share | $ | 0.03 | $ | 0.05 | |||
| Diluted earnings per common share | $ | 0.03 | $ | 0.05 | |||
Fourth Quarter: | |||||||
| Revenues, net | $ | 39,282 | $ | 38,549 | |||
| Gross profit | 10,776 | 9,826 | |||||
| Net income available to common stockholders | 1,721 | 1,427 | |||||
| Basic earnings per common share | $ | 0.10 | $ | 0.08 | |||
| Diluted earnings per common share | $ | 0.10 | $ | 0.08 | |||
(a)
58
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information is supplemental disclosure as required for the Consolidated Statement of Cash Flows (in thousands):
|
| Year Ended December 31, |
| |||||||
|
| 2002 |
| 2003 |
| 2004 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid for interest and financing costs |
| $ | 19,153 |
| $ | 14,145 |
| $ | 9,854 |
|
Cash paid (refunded) for income taxes |
| $ | 300 |
| $ | 137 |
| $ | (2 | ) |
Stock issued to directors or officers |
| $ | 67 |
| $ | 1,018 |
| $ | — |
|
Restricted cash investing and financing activities: |
|
|
|
|
|
|
| |||
Proceeds from the sale of available for sale securities of the funeral and cemetery trusts |
|
|
|
|
| $ | 20,784 |
| ||
Purchase of available for sale securities of the funeral and cemetery trusts |
|
|
|
|
| $ | 20,931 |
| ||
Net deposits (withdrawals) in trust accounts increasing (decreasing) noncontrolling interests |
|
|
|
|
| $ | (878 | ) | ||
55
20. SUBSEQUENT EVENT
In January 2005, the Company issued $130 million of Senior Notes due in 2015. The proceeds from these notes were used to refinance all senior debt, bring current the cumulative deferred distributions on the convertible junior subordinated debentures and the TIDES, and for general corporate purposes. The Company’s bank credit facility was amended subsequent to year-end to permit the issuance of the Senior Notes. In addition, the Company entered into a letter of commitment with Bank of America, its lead lender, for a $35 million Senior Secured Credit Facility. The Senior Secured Credit Facility would mature five years from the closing date, would be secured by the Company’s assets (including certain funeral home real property) and would include financial covenants and limitations on stock redemptions, dividends and acquisitions. The commitment is subject to certain conditions precedent to closing and completion of definitive documentation.
In connection with the early retirement of the senior debt from the proceeds, the Company made a required “make whole” payment of $6.0 million in the form of additional interest and recorded a charge to write off $0.7 million of unamortized loan costs. These charges equal $4.2 million after tax, or $0.23 per diluted share, and will be reported in the first quarter of 2005.
The following table sets forth the consolidated capitalization as of December 31, 2004 on an actual basis and on an as adjusted basis to give effect to the $130 million offering of 7.875% of Senior Notes due in 2015 and the transactions paying off our senior debt and accrued interest.
|
| As of |
| ||||
|
| Actual |
| As Adjusted |
| ||
|
| (in millions) |
| ||||
Senior Debt: |
|
|
|
|
| ||
Existing Unsecured Credit Facility |
| $ | 25.6 |
| $ | — |
|
Existing Senior Notes |
| 70.5 |
| — |
| ||
New Senior Notes |
| — |
| 130.0 |
| ||
Acquisition Debt |
| 8.7 |
| 8.7 |
| ||
Capital Leases |
| 5.5 |
| 5.5 |
| ||
Total Senior Debt |
| $ | 110.3 |
| $ | 144.2 |
|
Subordinated Debt: |
|
|
|
|
| ||
Subordinated Debt to Affiliate (TIDES) |
| $ | 93.8 |
| $ | 93.8 |
|
TIDES Deferred Interest |
| 10.9 |
| — |
| ||
Total Subordinated Debt |
| $ | 104.7 |
| $ | 93.8 |
|
Total Debt |
| $ | 215.0 |
| $ | 238.0 |
|
Total Stockholders’ Equity |
| 116.4 |
| 112.2 |
| ||
Total Capitalization |
| $ | 331.4 |
| $ | 350.2 |
|
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To Carriage Services, Inc.:
We have audited in accordance with auditingthe standards generally accepted inof the United States of America,Public Company Accounting Oversight Board (United States), the consolidated financial statements of Carriage Services, Inc. and subsidiaries for 20032004 and 20022003 included in this Form 10-K, and have issued our report thereon dated February 19, 2004.24, 2005. Our audits for the years ended December 31, 2004, 2003 and 2002, were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Part IV, Item 15 (a)(2) for Carriage Services, Inc. and subsidiaries is the responsibility of the Company'sCompany’s management and is presented for purposes of complying with the Securities and Exchange Commission'sCommission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
KPMG LLP
Houston, TexasFebruary 19, 2004
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSON FINANCIAL STATEMENT SCHEDULE
To Carriage Services, Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Carriage Services, Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated March 10, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Part IV, Item 14 (a)(2) for Carriage Services, Inc. and subsidiaries is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, TexasMarch 10, 2002
60
February 24, 2005
57
SCHEDULE II—II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| Description | Beginning of Year | Acquisition Reserves | Charged to Costs and Expenses | Divestitures | Deduction | Balance End of Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, 2001: | ||||||||||||||||||
| Allowance for bad debts and contract cancellations | $ | 4,572 | $ | 4,030 | $ | 100 | $ | 4,987 | $ | 3,515 | ||||||||
| Litigation reserves | $ | 180 | $ | 154 | $ | 26 | ||||||||||||
| Environmental remediation reserves | $ | 525 | $ | 2 | $ | 523 | ||||||||||||
| Employee severance accruals | $ | 3,794 | $ | 1,430 | $ | 2,364 | ||||||||||||
| Office closing and other Fresh Start accruals | $ | 3,673 | $ | 1,686 | $ | 1,987 | ||||||||||||
Year ended December 31, 2002: | ||||||||||||||||||
| Allowance for bad debts and contract cancellations | $ | 3,515 | $ | 1,018 | $ | 1,689 | $ | 2,844 | ||||||||||
| Litigation reserves | $ | 26 | $ | 26 | ||||||||||||||
| Environmental remediation reserves | $ | 523 | $ | 403 | $ | 120 | ||||||||||||
| Employee severance accruals | $ | 2,364 | $ | 700 | $ | 719 | $ | 2,345 | ||||||||||
| Office closing and other Fresh Start accruals | $ | 1,987 | $ | 583 | $ | 1,404 | ||||||||||||
Year ended December 31, 2003: | ||||||||||||||||||
| Allowance for bad debts and contract cancellations | $ | 2,844 | $ | 1,198 | $ | 2,235 | $ | 1,807 | ||||||||||
| Litigation reserves | $ | 26 | $ | 26 | $ | — | ||||||||||||
| Environmental remediation reserves | $ | 120 | $ | 18 | $ | 17 | $ | 121 | ||||||||||
| Employee severance accruals | $ | 2,345 | $ | 82 | $ | 992 | $ | 1,435 | ||||||||||
| Office closing and other Fresh Start accruals | $ | 1,404 | $ | 565 | $ | 839 | ||||||||||||
61
Description |
| Beginning |
| Charged to |
| Deduction |
| Balance |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2002: |
|
|
|
|
|
|
|
|
| ||||
Allowance for bad debts and contract cancellations |
| $ | 3,515 |
| $ | 1,018 |
| $ | 1,689 |
| $ | 2,844 |
|
Litigation reserves |
| $ | 26 |
| $ | — |
| $ | — |
| $ | 26 |
|
Environmental remediation reserves |
| $ | 523 |
| $ | — |
| $ | 403 |
| $ | 120 |
|
Employee severance accruals |
| $ | 2,364 |
| $ | 700 |
| $ | 719 |
| $ | 2,345 |
|
Office closing and other accruals |
| $ | 1,987 |
| $ | — |
| $ | 583 |
| $ | 1,404 |
|
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2003: |
|
|
|
|
|
|
|
|
| ||||
Allowance for bad debts and contract cancellations |
| $ | 2,844 |
| $ | 1,198 |
| $ | 2,235 |
| $ | 1,807 |
|
Litigation reserves |
| $ | 26 |
| $ | — |
| $ | 26 |
| $ | — |
|
Environmental remediation reserves |
| $ | 120 |
| $ | 18 |
| $ | 17 |
| $ | 121 |
|
Employee severance accruals |
| $ | 2,345 |
| $ | 82 |
| $ | 992 |
| $ | 1,435 |
|
Office closing and other accruals |
| $ | 1,404 |
| $ | — |
| $ | 565 |
| $ | 839 |
|
|
|
|
|
|
|
|
|
|
| ||||
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
| ||||
Allowance for bad debts and contract cancellations |
| $ | 1,807 |
| $ | 1,968 |
| $ | 2,835 |
| $ | 940 |
|
Environmental remediation reserves |
| $ | 121 |
| $ | — |
| $ | 18 |
| $ | 103 |
|
Employee severance accruals |
| $ | 1,435 |
| $ | 395 |
| $ | 808 |
| $ | 1,022 |
|
Office closing and other accruals |
| $ | 839 |
| $ | — |
| $ | 507 |
| $ | 332 |
|
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We have evaluated
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. The evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on thetheir evaluation, our Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that ourthe Company’s disclosure controls and procedures are effective asat the end of the end ofperiod. During the period covered by this report, in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in reports we file with or submit to the Securities and Exchange Commission under the Securities Act of 1934. There have beenthere were no changes in our internal control over financial reporting, that occurred during our most recent fiscal quarteras such term is defined under Rule 13a-15(f) of the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We currently expect the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 will be effective for the Company for its year ending December 31, 2005. In order to comply with the Act, we are currently undergoing a comprehensive effort to document, verify and test key internal controls. During the documentation and verification phases, which are still underway, we have identified certain internal control issues which management concluded should be improved. However, to date we have not identified any material weaknesses in our internal controls as defined by the Public Company Accounting Oversight Board. Nonetheless, we are making improvements to our internal controls by revising or updating policies and procedures; training field personnel on procedures and best practices; improving segregation of duties when possible; enhancing information technology systems controls; and improving preventative controls. If additional internal control issues are identified by our continuing compliance efforts, management will address the matter in a timely manner.
None.
PART III
ITEM 10. DIRECTORS DIRECTIORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the registrant'sregistrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which proxy statement will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), within 120 days after the end of the last fiscal year.
We have adopted the Code of Business Conduct and Ethics (the "code"), a code of ethics that applies to all employees, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller. The code is being filed as Exhibit 14 in this annual report on Form 10-K. Any substantive amendments to the code, or any waivers granted for any directors or our Chief Executive Officer, Chief Financial Officer or Corporate Controller, will be disclosed in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the registrant'sregistrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which proxy statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference to the registrant'sregistrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which proxy statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the registrant'sregistrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which proxy statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the last fiscal year.
62
59
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the Registrant'sregistrant’s definitive proxy statement relating to its 20042005 annual meeting of stockholders, which proxy statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the last fiscal year.
60
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
The following financial statements and the Report of Independent Registered Public AccountantsAccounting Firm are filed as a part of this report on the pages indicated:
(a)
The following Financial Statement Schedule and the Report of Independent AccountantsRegistered Public Accounting Firm on Financial Statement Schedule are included in this report on the pages indicated:
| |||
| Report of Independent Registered Public | |||
Financial Statement Schedule |
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)
The exhibits to this report have been included only with the copies of this report filed with the Securities and Exchange Commission. Copies of individual exhibits will be furnished to stockholders upon written request to Carriage Services, Inc. and payment of a reasonable fee.
Exhibit No. | Description | ||||
3.1 | Amended and Restated Certificate of Incorporation, as amended, of the Company. Incorporated herein by reference to Exhibit 3.1 to the | ||||
3.2 | Certificate of Amendment dated May 7, 1997. Incorporated by reference to Exhibit 10.2 to the | ||||
63
3.3 | Certificate of Amendment dated May 7, 2002. Incorporated by reference to Exhibit 3.1 to the | |
3.4 | Certificate of Designation of the | |
3.5 | Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the | |
3.6 | Amendments to the Bylaws of the Company effective December 18, 2000. Incorporated by reference to Exhibit 3.9 to the |
61
4.1 | Certificate of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.6 to the | |
4.2 | Amended and Restated Declaration of Trust of Carriage Services Capital Trust, dated June 3, 1999 among the Company, Wilmington Trust Company, Wilmington Trust Company, and Mark W. Duffey, Thomas C. Livengood and Terry E. Sanford. Incorporated by reference to Exhibit 4.7 to the | |
4.3 | Indenture for the Convertible Junior Subordinated Debentures due 2029 dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.8 to the | |
4.4 | Form of Carriage Services Capital Trust 7% Convertible Preferred Securities. Incorporated by reference to Exhibit 4.10 to the | |
4.5 | Form of the | |
4.6 | Preferred Securities Guarantee dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.12 to the | |
4.7 | Common Securities Guarantee, dated June 3, 1999 by Carriage Services, Inc. as Guarantor. Incorporated by reference to Exhibit 4.13 to the | |
4.8 | Amendment No. 1 to Amended and Restated Declaration of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.14 to the | |
4.9 | Rights Agreement with American Stock Transfer & Trust Company dated December 18, 2000. Incorporated by reference to Exhibit 1 to the | |
4.10 | Credit Agreement dated August 4, 2003 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, As Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.1 to the | |
64
10.1 | Note Purchase Agreement dated July 1, 1999, for Senior Notes Issuable in Series. Incorporated by reference to Exhibit 10.1 to the | |
10.2 | Amendment No. 1 to Note Purchase Agreement dated November 6, 2000. Incorporated by reference to Exhibit 10.1 to the | |
10.3 | Amended and Restated 1995 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.23 to the | |
10.4 | Amendment No. 2 to 1995 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 to the | |
10.5 | Amended and Restated 1996 Stock Option Plan. Incorporated herein by reference to Exhibit 10.24 to the | |
10.6 | Amendment No. 2 to 1996 Stock Option Plan. Incorporated by reference to Exhibit 10.2 to the | |
10.7 | Second Amended and Restated 1996 |
62
10.8 | Second Amended and Restated 1996 | |
10.9 | 1998 Stock Option Plan for Consultants. Incorporated by reference to Exhibit 10.1 to the | |
10.10 | Amendment No. 1 to the 1997 Employee Stock Purchase Plan. Incorporated by reference to Appendix B to the Company’s 2004 Schedule 14A. | |
10.11 | Employment Agreement with Melvin C. Payne, dated November 8, 1999. Incorporated by reference to Exhibit 10.11 to the | |
10.12 | Indemnity Agreement with Melvin C. Payne dated December 18, 2000. Incorporated by reference to Exhibit 10.20 to the | |
10.13 | Indemnity Agreement with Mark F. Wilson dated December 18, 2000. Incorporated by reference to Exhibit 10.24 to the | |
10.14 | Indemnity Agreement with Stuart W. Stedman dated December 18, 2000. Incorporated by reference to Exhibit 10.26 to the | |
65
10.15 | Indemnity Agreement with Ronald A. Erickson dated December 18, 2000. Incorporated by reference to Exhibit 10.27 to the | |
10.16 | Indemnity Agreement with Vincent D. Foster dated December 18, 2000. Incorporated by reference to Exhibit 10.28 to the | |
10.17 | ||
Employment Agreement with George J. Klug dated May 7, 2002. Incorporated by reference to Exhibit 10.1 to the |
63
10.18 | ||
Employment Agreement with Joseph Saporito, III dated September 16, 2002. Incorporated by reference to Exhibit 10.3 to the | ||
10.19 | Letter to Bank of America reducing capacity of revolving credit facility. Incorporated by reference to Exhibit 4.1 to the | |
10.20 | Indemnity Agreement with Joe R. Davis dated May 13, 2003. Incorporated by reference to Exhibit 10.1 to the | |
10.21 | Indemnity Agreement with Joseph Saporito dated May 13, 2003. Incorporated by reference to Exhibit 10.2 to the | |
66
10.22 | Indemnity Agreement with James J. Benard dated May 13, 2003. Incorporated by reference to Exhibit 10.3 to the | |
10.23 | Indemnity Agreement with George J. Klug dated May 13, 2003. Incorporated by reference to Exhibit 10.5 to the | |
10.24 | Employment agreement with James J. Benard dated January 1, 2004. Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended March 31, 2004. | |
10.25 | Amendment No. 2 to Note Purchase Agreement among the Company and each of the holders of the Notes of the Company named therein dated May 28, 2004, Incorporated by reference to exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2004. | |
*10.26 | Employment agreement with Charles D. Sidun dated December 10, 2004. | |
*12 | Calculation of Ratio of Earnings to Fixed Charges. | |
14 | Code of Business Conduct and Ethics. Incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2003. | |
*21.1 | Subsidiaries of the Company. | |
*23.1 | Consent of KPMG LLP. | |
*31.1 | Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. | |
*32.2 | Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. |
(*)
A report on Form 8-K Current Report was filed with the SEC on December 5, 2003 in connection with the press release dated December 3, 2003 reporting changes to the Company and Investment Profile dated December 2003 and the Slide Presentation at investor meetings in December 2003.
67
64
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 ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 26, 2004.29, 2005.
CARRIAGE SERVICES, INC. | |||||
By: |
| ||||
Melvin C. Payne | |||||
Chairman of the Board, Chief Executive Officer, | |||||
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.
Signature | Title | Date | |||||||
/s/ Melvin C. Payne | Chairman of the Board, Chief Executive | ||||||||
Melvin C. Payne | Officer, President and Director (Principal Executive | March | |||||||
/s/ Joseph Saporito | Executive Vice President, Chief Financial | ||||||||
Joseph Saporito | Officer and Secretary (Principal Financial | March | |||||||
/s/ Joe R. Davis | Director | March 29, 2005 | |||||||
Joe R. Davis | |||||||||
/s/ Ronald A. Erickson | Director | March 29, 2005 | |||||||
| |||||||||
/s/ Vincent D. Foster | Director | March 29, 2005 | |||||||
Vincent D. Foster | |||||||||
/s/ Stedman | Director | March 29, 2005 | |||||||
Stuart W. Stedman | |||||||||
/s/ | Director | March | |||||||
Mark E. Wilson |
65