SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------
FORM 10-Q
(MARK ONE)
[X]/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000MARCH 31, 2001
OR
[ ]/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO
________------ --------
COMMISSION FILE NUMBER: 1-11961
-------------------------
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0423828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 ST.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
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]X No__
The number of shares of the Registrant's Class A Common Stock, $.01 par
value per share, and Class B Common Stock, $.01 par value per share, outstanding
as of November 8, 2000May 10, 2001 was 14,229,60114,804,927 and 1,903,2121,789,618 respectively.
1
CARRIAGE SERVICES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 19992000 and September 30, 2000March 31, 2001 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1999 andMarch 31, 2000 and the
Nine2001 4
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 1999March 31, 2000 and 2000 42001 5
Consolidated Statements of Cash Flows for the
NineThree Months Ended September 30, 1999March 31, 2000 and 2000 52001 6
Notes to Consolidated Financial Statements 67
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1110
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK 1714
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 1815
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1916
Signature 2017
2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1999MARCH 31,
2000 --------------- ---------------2001
-----------------------------------
ASSETS (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 2,5173,210 $ 6,4265,039
Accounts receivable --
Trade, net of allowance for doubtful accounts of $6,058 in
1999 and $6,283$4,572 in
2000 ...................................................... 23,036 19,256and $4,711 in 2001 16,167 14,503
Other ............................................................................. 4,941 5,053
--------------- ---------------
27,977 24,3093,828 3,730
-----------------------------------
19,995 18,233
Assets held for sale, net ............................................................ -- 5,50410,018 2,503
Inventories and other current assets ................................................. 13,851 14,320
--------------- ---------------9,152 9,343
-----------------------------------
Total current assets ........................................................ 44,345 50,55942,375 35,118
-----------------------------------
Property, plant and equipment, at cost, net of accumulated
depreciation of $17,250 in
1999 and $20,861$19,156 in 2000 .............................................................. 153,347 148,436and $20,594 in 2001 119,252 118,392
Cemetery property, at cost ................................................................. 65,920 63,80961,529 61,823
Names and reputations, net of accumulated amortization of
$14,339 in 1999 and $17,967$17,984 in 2000 ............................................................................... 231,393 222,699and $19,156 in 2001 166,585 165,499
Deferred charges and other noncurrentnon-current assets ............................................... 44,585 45,463
--------------- ---------------58,506 55,453
Preneed funeral contracts 231,874 236,444
Preneed cemetery trust funds 30,164 33,054
-----------------------------------
Total assets $ 539,590710,285 $ 530,966
=============== ===============705,783
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 4,7264,240 $ 5,1013,842
Accrued liabilities ................................................................... 11,938 14,31521,007 18,395
Current portion of long-term debt and obligations under capital
leases ............................................................................. 5,496 2,559
--------------- ---------------Leases 3,236 3,723
-----------------------------------
Total current liabilities .................................................... 22,160 21,975
Preneed28,483 25,960
Deferred cemetery revenue and preneed liabilities net .................................................................... 9,099 6,46199,623 99,412
Deferred preneed funeral contracts revenue 231,874 236,444
Long-term debt, net of current portion ...................................................... 178,942 182,323176,662 166,312
Obligations under capital leases, net of current portion .................................... 3,333 3,222
Deferred income taxes ....................................................................... 23,021 24,762
--------------- ---------------5,306 5,338
-----------------------------------
Total liabilities ............................................................ 236,555 238,743
--------------- ---------------541,948 533,466
-----------------------------------
Commitments and contingencies
Redeemable preferred stock .................................................................. 1,172 1,172
Company-obligated mandatorily redeemable convertible preferred
securitiesSecurities of Carriage Services Capital Trust holding solely Carriage Services, Inc. 7%
convertible junior subordinated debentures ............................................. 89,854 89,88489,928 89,997
Minority interest in consolidated subsidiary --- 200
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 13,912,000Authorized;
14,302,000 and 14,179,00014,724,000 issued and outstanding at
December 31, 19992000 and September 30, 2000,March 31, 2001, respectively ........................... 139 142143 148
Class B Common Stock,Stock; $.01 par value; 10,000,000 shares
authorized;
2,030,000Authorized; 1,845,000 and 1,906,0001,793,000
issued and outstanding at
December 31, 19992000 and September 30, 2000,March 31, 2001, respectively ........................... 20 1918 18
Contributed capital ................................................................... 195,931 193,127193,234 193,664
Retained earnings ..................................................................... 15,919 7,879
--------------- ---------------(116,158) (112,380)
Unrealized gain (loss) on interest rate swaps, net of tax benefit -- (502)
-----------------------------------
Total stockholders' equity ................................................... 212,009 201,167
--------------- ---------------77,237 80,948
-----------------------------------
Total liabilities and stockholders' equity $ 539,590710,285 $ 530,966
=============== ===============705,783
===================================
The accompanying notes are an integral part of these consolidated
financial statements.
3
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1999MARCH 31,
-------------------------------------
2000 1999 2000
------------ ------------ ------------ ------------2001
----------------- ------------------
Revenues, net
Funeral ......................................................... $ 29,08335,535 $ 29,665 $ 93,411 $ 94,93234,887
Cemetery ........................................................ 11,387 10,359 31,400 34,596
------------ ------------ ------------ ------------
40,470 40,024 124,811 129,5289,676 8,993
----------------- ------------------
45,211 43,880
Costs and expenses
Funeral ......................................................... 21,991 24,871 66,161 75,39226,131 24,873
Cemetery ........................................................ 8,440 8,527 23,319 26,308
------------ ------------ ------------ ------------
30,431 33,398 89,480 101,700
------------ ------------ ------------ ------------7,712 6,891
----------------- ------------------
33,843 31,764
----------------- ------------------
Gross profit .................................................... 10,039 6,626 35,331 27,82811,368 12,116
General and administrative expenses ................................. 2,202 4,237 6,915 9,106
Impairment/losses on assets held for sale or sold ................... -- 12,449 -- 12,449
------------ ------------ ------------ ------------2,488 2,041
----------------- ------------------
Operating income (loss) ......................................... 7,837 (10,060) 28,416 6,2738,880 10,075
Interest expense, net ............................................... 3,145 3,562 10,105 10,7163,719 3,686
Financing costcosts of company-obligated mandatorily
Redeemable convertible preferred securities of Carriage
Services Capital Trust ................................ 1,641 1,641
2,151 4,922
------------ ------------ ------------ ----------------------------- ------------------
Total interest and financing costs ............................ 4,786 5,203 12,256 15,6385,360 5,327
Income (loss) before income taxes and extraordinary item ......................................... 3,051 (15,263) 16,160 (9,365)cumulative effect of the change in
accounting principles 3,520 4,748
Provision (benefit) for income taxes ................................ 1,312 (4,212) 6,949 (1,386)
------------ ------------ ------------ ------------
Income (loss)1,760 950
----------------- ------------------
Net income before extraordinary item ......................... 1,739 (11,051) 9,211 (7,979)
Extraordinary item:
Losscumulative effect of the change in accounting
principle 1,760 3,798
Cumulative effect on early extinguishmentprior years of debt,the change in accounting
principle, net of income tax benefit of $151 .................................$20,755 (38,993) --
-- (200) --
------------ ------------ ------------ ----------------------------- ------------------
Net income (loss) ................................................... 1,739 (11,051) 9,011 (7,979)(37,233) 3,798
Preferred stock dividend requirements ............................... 2521 20
78 61
------------ ------------ ------------ ----------------------------- ------------------
Net income (loss) available to common stockholders .............. $ 1,714(37,254) $ (11,071) $ 8,933 $ (8,040)
============ ============ ============ ============3,778
================= ==================
Basic earnings (loss) per common share:
Continuing operations $ .11 $ .23
Cumulative effect of the change in accounting principle, net (2.44) --
----------------- ------------------
Net income (loss) before extraordinary item ..................... $ 0.11(2.33) $ (0.69).23
================= ==================
Diluted earnings (loss) per common share:
Continuing operations $ 0.58.11 $ (0.50)
Extraordinary item .............................................. $.22
Cumulative effect of the change in accounting principle, net (2.44) --
$ -- $ (0.01) $ --
------------ ------------ ------------ ----------------------------- ------------------
Net income (loss) ............................................... $ 0.11(2.33) $ (0.69) $ 0.57 $ (0.50)
============ ============ ============ ============
Diluted earnings per share:
Net income (loss) before extraordinary item ..................... $ 0.11 $ (0.69) $ 0.57 $ (0.50)
Extraordinary item .............................................. $ -- $ -- $ (0.01) $ --
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 0.11 $ (0.69) $ 0.56 $ (0.50)
============ ============ ============ ============.22
================= ==================
Weighted average number of common and common equivalent shares
outstanding:
Basic ........................................................... 15,906 16,084 15,864 16,030
============ ============ ============ ============15,977 16,511
================= ==================
Diluted ......................................................... 15,983 16,084 16,049 16,030
============ ============ ============ ============16,235 17,368
================= ==================
The accompanying notes are an integral part of these
consolidated financial statements.
4
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------------
2000 2001
----------------- ------------------
Net income (loss) $ (37,233) $ 3,798
Other comprehensive income (loss):
Cumulative effect on prior years of the change in accounting
principle, net of income tax benefit of $1 --- 1
Unrealized gains (losses) on interest rate swaps arising during
period --- (629)
Related income tax benefit --- 126
----------------- ------------------
Total other comprehensive income (loss) $ --- $ (502)
----------------- ------------------
Comprehensive income (loss) $ (37,233) $ 3,296
================= ==================
The accompanying notes are an integral part of these consolidated
financial statements.
5
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE NINETHREE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1999MARCH 31,
----------------------------------
2000 ---------- ----------
2001
----------------- ----------------
Cash flows from operating activities:
Net income (loss) ................................................................................. $ 9,011(37,233) $ (7,979)3,798
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and Amortization .................................................................. 12,044 14,161
Loss on early extinguishmentCumulative effect of debt,the change in accounting principle, net of income taxes ...................................... 200 --
Loss on sale of business assets ................................................................ -- 1,349
Impairment on assets held for sale ............................................................. -- 11,100tax
benefits 38,993 ---
Depreciation 1,961 1,546
Amortization 3,132 2,699
Provision for losses on accounts receivable .................................................... 3,294 4,0041,078 1,185
Deferred income taxes .......................................................................... 2,161 1,675
---------- ----------2,646 1,430
----------------- ----------------
Net cash provided by operating activities before 10,577 10,658
changes in assets and liabilities ......................................................... 26,710 24,310
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivables ............................................................. (7,003) (5,496)receivable (2,805) 660
(Increase) decrease in inventories and other current assets ............................................. (1,486) (160)1,956 3,705
(Increase) decrease in deferred charges and other .............................................. (1,185) 323313 (17)
(Increase) decrease in preneed cemetery trust funds 824 (2,890)
Increase (decrease) in accounts payable ........................................................ (703) 375
Increase824 (398)
(Decrease) in accrued liabilities ................................................................ 3,474 1,303
(Decrease)(1,871) (2,656)
Increase (decrease) in deferred revenue and preneed liabilities .............................................................. (3,190) (2,160)
---------- ----------1,860 (213)
----------------- ----------------
Net cash provided by operating activities ............................................. 16,617 18,49510,854 8,849
Cash flows from investing activities:
PrearrangedPreneed funeral and cemetery costs ......................................................................... (5,695) (2,830)(2,699) (958)
Purchase of note receivable .......................................................................(566) ---
Proceeds from sales of businesses -- (566)6,224
Sale of minority interest in subsidiary -- 200
Acquisitions, net of cash acquired ................................................................. (37,551) (1,516)
Proceeds from sale of business assets .............................................................. -- 2,199(1,291) (212)
Capital expenditures ............................................................................... (13,405) (9,472)
---------- ----------(3,007) (1,388)
----------------- ----------------
Net cash used inprovided by (used in) investing activities ................................................. (56,651) (12,185)(7,563) 3,866
Cash flows from financing activities:
Proceeds from long-term debt ....................................................................... 133,357 34,94312,224 ---
Proceeds from issuance of common stock 342 ---
Payments on long-term debt and obligations under capital leases .................................... (180,866) (34,415)
Payment of acquisition-related obligation .......................................................... -- (3,297)
Proceeds from issuance of common stock ............................................................. 659 500
Proceeds from issuance of company-obligated mandatorily
redeemable convertible preferred securities ...................................................... 89,881 --(16,634) (10,866)
Payment of preferred stock dividends ............................................................... (78) (61)
Payment of deferred debt charges and other ......................................................... (1,934) (71)
---------- ----------(21) (20)
----------------- ----------------
Net cash provided (used) byused in financing activities ...................................... 41,019 (2,401)(4,089) (10,886)
Net increase (decrease) in cash and cash equivalents ............................................................ 985 3,909(798) 1,829
Cash and cash equivalents at beginning of period ..................................................... 2,892 2,517 ---------- ----------3,210
----------------- ----------------
Cash and cash equivalents at end of period ........................................................... $ 3,8771,719 $ 6,426
========== ==========5,039
================= ================
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs ......................................................... $ 11,5787,753 $ 17,680
========== ==========6,214
================= ================
Cash paid for income taxes ......................................................................... $ 7,499194 $ 530
========== ==========
Non-cash consideration for acquisitions ............................................................ $ 1,914 $ --
========== ==========---
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
56
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
(a) The Company
Carriage Services, Inc., ("Carriage" or the(the "Company") is the fourth largest
publicly-tradeda leading provider of products
and services in the death care industry in the United States. As of September 30, 2000,March 31,
2001, the Company owned and operated 176161 funeral homes and 4233 cemeteries in 31
states.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information for the three and nine months ended September 30, 1999March 31, 2000 and 20002001 is
unaudited, but in the opinion of management, reflects all adjustments which are
of a normal, recurring nature necessary for a fair presentation of financial
position and results of operations for the interim periods. The accompanying
consolidated financial statements have been prepared consistent with the
accounting policies described in the Company'sour annual report on Form 10-K for the year
ended December 31, 1999,2000, and should be read in conjunction therewith. Certain
prior period amounts in the consolidated financial statements have been
reclassified to conform with current period presentation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(e) Accounting Changes2. ACCOUNTING CHANGES
(a) Preneed Revenues and Costs
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff
Accounting Bulletin No. 101 Revenue- "Revenue Recognition in Financial Statements,Statements" (SAB
101). This SAB deals with various revenue recognition issues; certain ones of
which are pertinent to the death care industry. As a result, we have changed our
method of recognizing preneed revenues and certain related costs of originating
preneed cemetery contracts. SAB 101 was effective as amended, isof the beginning of 2000,
but because of extensions to beallow for implementation, we implemented forthe
changes beginning with the fourth quarter of 2000 and applied retroactivelyrestated quarters 1
through 3 in our annual report on Form 10-K for the year ended December 31,
2000.
Previously, we had recognized sales of cemetery interment rights, together
with associated merchandise and services as revenues at the time contracts were
signed. Costs related to the first three quarterssales of
this fiscal year,7
interment rights were charged to provide guidance related to recognizingoperations using the specific identification
method. The costs for cemetery merchandise and services sold, but not delivered,
was previously accrued as an expense at the time the cemetery revenue in circumstances in which no
specific authoritative literature exists. Members of the death care industry, in
consultation with the Commission, have agreed to certain changes in the manner
in which cemetery preneed sales and costs are recorded. The changes that are
meaningful to the Company are a change from recordingwas
recognized. Trust income on cemetery merchandise and service trusts was
recognized when earned by the trust.
Under the new accounting principle, we will follow Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate", in
recognizing the revenue and their related costs atfrom the timesales of cemetery interment rights. This method
is generally characterized as the period when the customer's payments equal or
exceed 10% of the contract is executed,price related to the interment right. Costs related
to the sales of interment rights are charged to operations using the specific
identification method in the period in which they are delivered. The industry participants are
continuing to review the applicationsale of the Staff Accounting Bulletin with the
Commissioninterment right is
recognized as it relatesrevenue. Revenues and costs related to the mannersales of cemetery
merchandise and services, and earnings from the related trust funds, are
deferred until the period in which we record preneed trusts and
related trust earnings and costs. All accounting changes are not expectedthe merchandise is delivered or the service
is provided.
The Company recorded a non-cash charge of approximately $39.0 million, after
reduction for income taxes of approximately $21 million, or $2.44 per share, to
result in a materialreflect the cumulative effect of the change in net
6
cash flows noraccounting principle as of the
amountbeginning of revenues we ultimately expect to realize. However,
they may have a material impact on our consolidated financial statements and2000. The effect of this change on the mannerthree months ended March 31,
2000, before the cumulative effect of the accounting change was to decrease net
income $1.1 million, or $.07 per diluted share. The revenue not recognized is
included in which we record certainthe consolidated balance sheet in the caption "Deferred cemetery
revenue and preneed activities. We anticipate
discussions to be finalized and the financial impact calculated during the
fourth quarter of 2000. Implementation, using the new accounting guidance, would
include adjustments to the first three quarters' financial statements as well as
proforma adjustments to the prior year comparative financial statements.liabilities".
(b) Derivative Financial Instruments
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (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 which was 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 derivativecertain derivatives will be recognized as an asset or
liability at itstheir fair value and that later changes in fair value are generally
reported in earnings or other comprehensive income. The Company is currently
engaged in interest rate swaps which have a notional amount of $50$30 million to
hedge against rising interest rates on its variable rate long-term debt.
The swaps, which haveCompany recorded a fair valuenon-cash benefit of $1.4 million and $2.2 million at
September 30, 2000 and December 31, 1999, respectively, are currently carried
off-balance sheet, but will be recordedapproximately $1,000, after
reduction for income taxes in the consolidated statement of comprehensive income
to reflect the cumulative effect of the change in accounting principle as an asset whenof the
Company implements
SFAS 133 in its first quarterbeginning of 2001.
3. PROPOSED ACCOUNTING CHANGE
The Financial Accounting Standards Board has issued an exposure draft
which would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be
a
reduction in the periodelimination of the amortization of Names and Reputations, which Carriage
has been amortizing over 40 years.
2. ACQUISITIONS
Acquisition activitieswould have
virtually ceased within the publicly
traded companies in the deathcare industry, including the Company. During the
nine months ended September 30, 2000, the Company's new business acquisition
activities were limitedan estimated pre-tax impact of approximately $4 million per year, and testing to
a long-term agreement to manage a municipal cemetery.
Acquisition adjustments, primarily related to contingent consideration, were
made during the first nine months of 2000determine impairments, if any, for certain acquisitions completed in
prior years. Fifteen funeral homes and fourteen cemeteries were acquired during
the nine months ended September 30, 1999. These acquisitions have been accounted
for by the purchase method, and their results of operations are included in the
accompanying consolidated financial statementslong-lived assets. The final pronouncement
may change from the dates of acquisition.
7
The effect of the above acquisitions on the Consolidated Balance Sheets was as
follows:
SEPTEMBER 30,
----------------------
1999 2000
-------- --------
(IN THOUSANDS)
Current assets, net of cash acquired ............... $ 9,682 $ (1,712)
Cemetery property .................................. 4,215 --
Property, plant and equipment ...................... 12,386 14
Deferred charges and other noncurrent assets ....... 907 249
Names and reputations .............................. 17,325 3,474
Current liabilities ................................ (2,200) (140)
Other liabilities .................................. (2,850) (369)
-------- --------
Total acquisitions ............................ 39,465 1,516
Consideration:
Debt ............................................... 1,914 --
Common stock issued ................................ -- --
-------- --------
Cash used for acquisitions .................... $ 37,551 $ 1,516
======== ========
The following table represents, on an unaudited pro forma basis, the combined
operations of the Company and the above noted acquisitions, as if such
acquisitions had occurred as of January 1, 1999. Appropriate adjustments have
been made to reflect the accounting basis used in recording these acquisitions,
however, these unaudited pro forma results are based on the acquired businesses'
historical financial results and do not assume any additional profitability
resulting from the application of the Company's revenue enhancement measures or
cost reduction programs to the historical results of the acquired businesses.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would have
resulted had the combinations been in effect on the dates indicated, that have
resulted since the dates of acquisition or that may result in the future.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues, net ........................................ $ 135,707 $ 129,712
Net income before income taxes and extraordinary item 15,589 (9,522)
Net income available to common stockholders .......... 8,608 (8,174)
Earnings per common share:
Basic ........................................... 0.54 (0.51)
Diluted ......................................... 0.55 (0.51)exposure draft.
8
3.4. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States
(table inStates. The
following table presents external revenue, profit and loss and total assets by
segment (in thousands).:
FUNERAL CEMETERY CORPORATE CONSOLIDATED
------------ ------------ ------------Funeral Cemetery Corporate Consolidated
------- -------- --------- ------------
External revenues:
NineThree months ended September 30, 2000 .......................March 31, 2001 $ 93,51634,887 $ 36,012 --8,993 --- $ 129,528
Nine43,880
Three months ended September 30, 1999 ....................... 91,707 33,104 -- 124,811March 31, 2000 35,535 9,676 --- 45,211
Profit and Loss before extraordinary item:
Ninecumulative effect of the
change in accounting principle:
Three months ended September 30, 2000 .......................March 31, 2001 $ 3,3928,011 $ 3,7231,682 $ (15,094)(5,895) $ (7,979)
Nine3,798
Three months ended September 30, 1999 ....................... 15,189 5,345 (11,323) 9,211March 31, 2000 4,702 982 (3,924) 1,760
Total Assets:
September 30,March 31, 2001 $ 545,658 $ 158,532 $ 1,593 $705,783
March 31, 2000 ......................................... $ 384,510 $ 130,317 $ 16,139 $ 530,966
September 30, 1999 ......................................... 384,940 128,057 14,228 527,225632,325 131,909 9,785 774,019
4. ASSETS HELD FOR SALE
During the third quarter of 2000, management identified certain
underperforming funeral home and cemetery businesses for possible sale. Two
funeral home businesses with a carrying value of $3.5 million were sold for
cash during the third quarter resulting in a loss of $1.3 million.
Additionally, eight funeral home businesses and three cemetery businesses
with a carrying value of approximately $16.6 million were segregated and
classified as assets held for sale, net of impairment charges of $11.1
million and liabilities to reduce the carrying value to net realizable value.
The impairment charges were based on management's best estimate of net
proceeds, and the ultimate proceeds received may differ.
5. LONG-TERM DEBT
During September 2000, the Company restructured its existing credit facility,
decreasing the line of credit from $260 million to $100 million, changing
certain financial covenants and ratio calculations, and narrowing the pricing
grid which determines the applicable borrowing margin for LIBOR and prime
rate borrowings. The credit facility is unsecured and has a remaining term of
approximately four years.
In November 2000, the Company amended the Note Purchase Agreement under which
it previously issued $110 million of senior notes. The amendments changed
certain financial covenants and ratio calculations, and included terms
requiring proceeds from asset dispositions to be applied pro rata with other
senior debt to reduce outstanding principal on the senior notes.
9
The most significant changes to the debt covenants relate to the following:
o Flexibility in the minimum net worth requirement to allow for
restructuring charges to reduce the minimum net worth requirement;
o The addition of a ratio of debt to earnings before interest, taxes,
depreciation and amortization, which becomes more restrictive over time;
and
o The addition of a provision limiting acquisitions above a certain size
without prior approval.
6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST
Carriage Services Capital Trust, a wholly-owned subsidiary of the Company,
has issued and has outstanding 1,875,000 units of 7% convertible preferred
securities. These convertible preferred securities have a liquidation amount
of $50 per unit and mature in 2029. The sole assets of the Trust are 7%
Convertible Junior Subordinated Debentures of Carriage Services, Inc.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Carriage is a leading provider of death care services and products in
the United States. Historically, our focus has been on operational enhancements at
facilities currently ownedCarriage provides a complete range of services relating to
increase revenuesfunerals, burials, and gross profit,cremations, including the use of funeral homes and motor
vehicles, the performance of cemetery interment services and the management and
maintenance of cemetery grounds. We also sell related products and merchandise
including caskets, burial vaults, garments, cemetery interment rights, stone and
bronze memorials, as well as other items. From 1993 to 1999, the Company grew
rapidly as a result of a high level of acquisition activity. During this period,
we made many highly successful acquisitions, but in others we made market share
and revenue growth through acquisitions. That focus resultedassumptions that proved overly optimistic. Fiscal 2000 was a
transitional year that included a decline in operating profitability, the
adoption of a track recordsubstantially changed accounting method for preneed cemetery
sales, and the implementation of growth
from acquisition opportunities; high standardsa multi-element "Fresh Start" restructuring
program, announced in the latter half of service, operational2000.
The goals of Fresh Start are restoring credibility to our operating and
financial performance;consolidation model, increasing and an infrastructure containing measurementbetter aligning our earnings and
management systems. This focus included institutionalizing internal training,
internal growth, and making quality initiatives an integral part of the culture.
As previously announced for 2000, the operating focus was revised to emphasize
increasing operating cash flow,
restoring market credibility to our balance sheet; reducing our debt; and
growth through strategies that do not require
investment of new capital.
Duringre-accessing the third quarter of 2000, we initiated a major restructuring program
termed "Fresh Start" in response to the current industry environment and
deterioration of the Company's operating results this year. The program began
with a review of the funeral home and cemetery portfolios, operating strategies,
organizational structure, and financial covenants under the Company debt
agreements.capital markets.
The principal elements of Fresh Start include downsizing theour corporate
organization,organization; changing theour operating leadership,leadership; changing theour preneed funeral
marketing strategy,organizational strategy; stratifying by performance theour funeral home and cemetery
portfolios,portfolios; implementing action plans to improve underperforming businesses,businesses;
disposing of some underperforming businesses, reviewingbusinesses; adjusting the carrying basis of
other underperforming businesses,businesses; and modifying financial covenants with lenders
to facilitate the execution of Fresh Start. ManyMost of the elements of Fresh Start have
been accomplished and we are well underway. Duringbeginning to see the monthbenefits of September, there was a considerable downsizing of the Houston corporate support
staff, and the corporate headquarters were moved to more modest facilities. The
preneed funeral strategy was changed from a national, centralized strategy to a
local decentralized strategy, whereby each business will have a program
customized to its local needs which will be managed by the local funeral home
manager. As a result, the national preneed funeral sales organization was
eliminated and funeral preneed trust investments arethese actions in
the process of being
consolidated with one trustee. Changes in personnel were also made at the senior
management level in the funeral home and cemeteryour operating segments.
As a result of the initial review of the funeral home and cemetery
portfolios, the businesses were divided into two groups: core and
underperforming. At the conclusion of the initial review, we made the decision
to sell ten funeral home businesses and three cemetery businesses. The Company
recorded impairment charges and related losses for the sale of two of the
businesses totaling $12.4 million. Our continued assessment of the
underperforming properties may result in additional impairment losses in the
fourth quarter, which may be material.
Working directly with the Company's banks and senior note holders, we were
able to modify the financial covenants on the debt to allow for all elements of
Fresh Start to be executed and any adjustments resulting from the adoption of
SAB 101 to be made.
11
RESULTS OF OPERATIONSresults.
Income from operations, which the Company defineswe define as earnings before interest and
income taxes, decreased,increased, as a percentage of net revenues, from 19.4%19.6% for the
thirdfirst quarter of 19992000 to (25.1)%23.0% for the thirdfirst quarter of 2000.2001. This decreaseimprovement
was largely due largely to asset impairment chargesthe cost savings that resulted from Fresh Start initiatives
and losses on sale totaling
approximately $12.4 million and other nonrecurring charges totaling
approximately $1.8 million. Excludingfrom the impairment charges and other
nonrecurring charges, income from operations for the third quarter 2000 was
10.5%sales of net revenue.businesses that had previously performed below standard.
Gross margins for the funeral homes decreasedincreased from 24.4%26.5% in the third quarter of 1999 to 16.2% in the thirdfirst quarter of
2000 while
revenues increased 2%to 28.7% in the first quarter of 2001, on a decrease in revenue of 1.8%. As
a percentage of cemetery net revenues, cemetery gross profitmargin was 17.7%23.4% in the
thirdfirst quarter of 20002001 compared to 25.9%20.3% in the thirdfirst quarter in 1999.2000. Revenues and gross profits
from cemeteries decreased 9% and
38%, respectively,7.1% in the thirdfirst quarter of 20002001 compared to the same
period in 1999.2000.
During the first quarter of 2001 we sold, closed or combined with other
existing locations, eleven funeral homes and five cemeteries. Proceeds from the
sales totaling $6.2 million and cash flow from operations enabled us to reduce
our debt by $10.9 million during the first quarter of 2001.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the three and nine month periods ended September 30, 1999March 31, 2000 and 2000.2001. For purposes of this
discussion, the Company's locations are in three groups, as a result of the
stratification of our funeral homeshome and cemeteries ownedcemetery portfolios in 2000. A "core"
group which represents a large majority of our revenues and operatedcash flow, a second
"underperforming" group, and a third group consisting of businesses that are
"targeted for the
entirety of each period being compared are referred to as "existing operations."
Operations acquired or opened during either period being compared are referred
to as "acquired operations."sale".
10
FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations for the three and nine months ended September 30, 1999March 31, 2000 compared to the three
and nine months ended September 30, 2000.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ ------------------
1999 2000 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ........ $28,834 $28,753 $ (81) (0.3%)
Acquired operations ........ 249 912 663 *
------- ------- ------
Total net revenues $29,083 $29,665 582 2.0%
======= ======= ======
Gross profit:
Existing operations ........ $ 7,070 $ 4,633 $(2,437) (34.5%)
Acquired operations ........ 22 161 139 *
------- ------- ------
Total gross profit $ 7,092 $ 4,794 $(2,298) (32.4%)
======= ======= ======
- --------------------
* Not meaningful.
12
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000.March 31, 2001.
NINETHREE MONTHS ENDED
SEPTEMBER 30,MARCH 31, CHANGE
------------------------- --------------------------
1999--------------------------- -----------------------------
2000 2001 AMOUNT PERCENT
---------- ---------- ---------- --------------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Net location revenues:
Existing operations .......................................Core $ 86,43821,307 $ 82,48921,223 $ (3,949) (4.6%)
Acquired operations ....................................... 6,973 12,443 5,470(84) 0.0 %
Underperforming 10,684 10,250 (434) (4.1)%
Targeted for sale 1,545 1,694 149 9.6 %
Sold and discontinued 1,476 418 (1,058) *
---------- ---------- --------------------- ------------ -------------
Total location revenues $ 35,012 $ 33,585 $ (1,427) (4.1)%
Preneed insurance commissions revenue 523 1,302 779 *
----------- ------------ -------------
Total net revenues .............................. $ 93,41135,535 $ 94,93234,887 $ 1,521 1.6%
========== ========== ==========(648) (1.8)%
=========== ============ =============
Gross profit:
Existing operations .......................................Core $ 25,0876,422 $ 16,8536,087 $ (8,234) (32.8%)
Acquired operations ....................................... 2,163 2,687 524(335) (5.2)%
Underperforming 2,320 2,283 (37) (1.6)%
Targeted for sale 107 367 260 *
---------- ---------- ----------Sold and discontinued 32 (25) (57) *
----------- ------------ -------------
Total location gross profit $ 8,881 $ 8,712 $ (169) (1.9)%
Preneed insurance commissions revenue 523 1,302 779 *
----------- ------------ -------------
Total gross profit .............................. $ 27,2509,404 $ 19,54010,014 $ (7,710) (28.3%)
========== ========== ==========610 6.5 %
=========== ============ =============
- ------------------------
* Not meaningful.
Total funeral netFuneral location revenues for the three months ended September 30, 2000
increased $582,000March 31, 2001
decreased $1.4 million or 2.0%4.1% over the three months ended September 30, 1999.March 31, 2000.
The higherlower net revenues reflect an increasewere primarily a result of $663,000 in net revenues from
acquired operations and a decrease of $81,000 in net revenues from existing
operations. Total funeral net revenues for the nine months ended September 30,
2000 increased $1.5 million or 1.6% over the nine months ended September 30,
1999. The higher net revenues reflect an increase of $5.5 million in net
revenues from acquired operations and a decrease in net revenues of $3.9$1.1 million
from existing operations.businesses that were sold in the first quarter of 2001. The number of
funeral service callsservices decreased 1.3% for existing
operations was relatively unchangedthe core group in comparing the first
quarter of 2001 to the first quarter of 2000, while the average revenue per
service for those existing locations increased 0.8% in comparing those same
periods. The number of funeral services for the underperforming group
decreased 8.0% while the average revenue per service increased 3.5% in
comparing the first quarter 2001 to the first quarter of 2000. In addition to
the net revenues from funeral location operations above, insurance commission
revenues from preneed funeral contract sales totaled $1.3 million for the
three months of 2001 as compared to $.5 million for the three months ended
September 30, 2000March 31, 2000. The increase in commission revenues is due primarily to
the three months ended September 30, 1999, and was 4.3%
lower in comparing the nine month periods ended September 30, 2000 to 1999. The
average revenue per call declined 0.3% for each of the three and nine month
periods in 2000 to 1999.nonrecurring commissions on rollover transactions.
Total funeral location gross profit for the three months ended September 30, 2000March 31,
2001 decreased $2.3$.2 million or 32.4% over1.9% from the comparable three months of 1999. The
decrease was largely impacted by higher salary and casket costs in 2000 and
adjustments to previously recorded field incentive compensation in the 1999
quarter.2000.
The lower total gross profit reflected anis due primarily to the lower net revenues and
higher utility costs due to the recent increase of $139,000 from
acquired operationsin energy prices. These
negative factors were mitigated in part by depreciation and a decreaseamortization that
was $.9 million less than the prior period due to the impairments recorded in
gross profit from existing operations of
$2.4 million. Total funeral gross profit for the nine months ended September 30,
2000 decreased $7.7 million or 28.3% over the comparable nine months of 1999.
The higher total gross profit reflected an increase of $524,000 from acquired
operations and decrease of $8.2 million from existing operations. Total gross
margin decreased from 24.4% for the third quarter of 1999 to 16.2% for the third
quarterlatter half of 2000 and decreasedlower overhead and administrative costs resulting
from 29.2% for the first nine months of 1999 to
20.6% for the first nine months of 2000.Fresh Start initiatives.
11
CEMETERY SEGMENT. The following table sets forth certain information regarding
the net revenues and gross profit of the Company from its cemetery operations
for the three and nine months ended September 30, 1999March 31, 2000 compared to the three and nine months ended
September 30, 2000.
13
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000.March 31, 2001.
THREE MONTHS ENDED
SEPTEMBER 30,MARCH 31, CHANGE
------------------------- --------------------------
1999--------------------------- -----------------------------
2000 2001 AMOUNT PERCENT
---------- ---------- ---------- --------------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations .......................................Core $ 11,3408,257 $ 9,3828,007 $ (1,958) (17.3%)
Acquired operations ....................................... 47 977 930(250) (3.0)%
Targeted for sale 907 900 (.7) (7)%
Sold 512 86 (426) *
---------- ---------- ---------------------- ----------- ------------ -------------
Total net revenues .............................. $ 11,3879,676 $ 10,3598,993 $ (1,028) (9.0%)
========== ========== ==========(683) (7.1)%
=========== ============ =============
Gross profit:
Existing operations .......................................Core $ 2,9141,819 $ 1,7971,931 $ (1,117) (38.3%)
Acquired operations ....................................... 33 35 2112 6.2%
Targeted for sale 113 202 89 78.8%
Sold 32 (31) (63) *
---------- ---------- --------------------- ------------ ------------- ------------
Total gross profit .............................. $ 2,9471,964 $ 1,832 ($ 1,115) (37.8%)
========== ========== ==========2,102 $ 138 7.0%
=========== ============ =============
- ---------
* Not meaningful.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000.
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------------- --------------------------
1999 2000 AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ....................................... $ 25,844 $ 23,265 $ (2,579) (10.0%)
Acquired operations ....................................... 5,556 11,331 5,775 *
---------- ---------- ----------
Total net revenues .............................. $ 31,400 $ 34,596 $ 3,196 10.2%
========== ========== ==========
Gross profit:
Existing operations ....................................... $ 6,591 $ 5,743 $ (848) (12.9%)
Acquired operations ....................................... 1,490 2,545 1,055 *
---------- ---------- ----------
Total gross profit .............................. $ 8,081 $ 8,288 $ 207 2.6%
========== ========== ==========
- ------------------------
* Not meaningful.
Total cemetery net revenues for the three months ended September 30, 2000March 31, 2001
decreased $1.0$.7 million over the three months ended September 30, 1999March 31, 2000, and total
cemetery gross profit decreased $1.1increased $.1 million over the comparable three months of
1999.2000. The lower net revenues reflect an increasea decrease of $0.9 million in net revenues$250,000 from acquiredcore operations
and a decrease of $2.0 million in revenues$433,000 from existing operations. Total cemetery net revenuesthe cemeteries that have been sold or are
targeted for the nine months ended
September 30, 2000 increased $3.2 million over the nine months ended September
30, 1999, and total cemeterysale. The higher gross profit increased $207,000 over the comparable
nine monthsreflected an increase of 1999.$112,000
from core operations and $26,000 from cemeteries that have been sold or are
targeted for sale. Total gross margin decreasedincreased from 25.8%20.3% for the three months
ended September 30, 1999March 31, 2000 to 17.7%23.4% for the three months ended September
30, 2000. Total gross margin decreased from 25.7% forMarch 31, 2001, due
primarily to the nine months ended
September 30, 1999reduction in personnel costs related to 24.0% for the nine months ended September 30, 2000. The
lower gross margins in 2000 are due to lower amounts from preneed salesdownsizing in the
current year, which generally carry a higher gross margin.
14
Fresh Start program.
OTHER. General and administrative expenses for the three and nine month periodsquarter ended September 30, 2000 increased $2.0March 31, 2001
decreased $.3 million and $2.2 million over the
respective three and nine month periods of 1999. The increase for the periods
consists primarily of severance charges relatedas compared to the termination of certain
officers and employees in the thirdfirst quarter of 2000 (including $1.1 million
related2000. These expenses,
as a percentage of net revenues, decreased from 5.5% to a former executive officer),4.6% due to the
downsizing of the corporate organization and other nonrecurring expenses related
to the movecost savings initiatives of
the Company's home office, the Company's e-commerce initiative
and costs related to preparing for adoption of SAB 101.Fresh Start.
Interest expense and other financing costs for the ninethree months ended September 30, 2000 increased $3.4 million overMarch
31, 2001 was approximately the same as in the first ninethree months of 19992000. While
the average debt outstanding during the 2001 quarter was less than the
outstanding debt in the 2000 quarter, the rate paid on the Company's line of
credit was slightly higher due to borrowingsthe debt modification in late 2000 as was also
the amortization of loan costs due to fund acquisitions during 1999, and the restructuringpayment of the
Company's debt during mid-1999 to reflect longer maturities, carrying higher
rates.modification fees.
12
Preferred stock dividends of $61,000$20,000 were subtracted from the $8.0$3.8 million
of net lossincome in computing the net loss attributableincome available to common stockholders. The
reduction in preferred stock dividends from 1999 to 2000 was due to conversions
of preferred stock to common stock.stockholders for
the three months ended March 31, 2001.
For the ninethree months ended September 30, 2000, the CompanyMarch 31, 2001, we provided for income tax benefitstaxes on
the pre-tax lossincome before income taxes at a combined state and federal rate of 14.8%20% compared
with a provision for50% on income taxes on pre-tax income of 43%from continuing operations for the same period in 1999.2000. The
effective rate recordedfor the first quarter of 2000 was negatively impacted by the effects of
non-deductible amortization, while the rate for the first quarter of 2001
benefited by $1.2 million from the utilization of tax benefits that were
generated from the losses in the current year is lower duelatter part of 2000, such tax benefits are
being recognized when realized through taxable income. We will continue to
evaluate the impactrealizability of nondeductible costs, primarily nondeductible goodwill
amortization, which reduce the pre-tax loss in 2000.valuation allowance for deferred taxes at each
reporting period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $6.4$5.0 million at September 30, 2000,March 31, 2001,
representing an increase of $3.9$1.8 million from December 31, 1999.2000. For the
ninethree months ended September 30, 2000,March 31, 2001, cash provided by operations was $18.5$8.8
million as compared to $10.9 million for the three months ended March 31,
2000. The decrease in cash provided by operations of $16.6was primarily due to the
changes in the working capital accounts period to period. Cash provided by
investing activities was $3.9 million for the ninethree months ended September 30, 1999. The increase in netMarch 31,
2001 compared to cash provided by operating
activities was largely due to a decreaseused in the growthamount of receivables, inventory
and preneed funeral costs. Cash used in investing activities was $12.2 million
for the nine months ended September 30, 2000 compared to $56.7$7.6 million for the first ninethree
months of 1999,2000, the change being primarily due to the cessationproceeds from the sale
of acquisitions duringbusinesses in the current year.first quarter of 2001 in the amount of $6.2 million.. In
the first ninethree months of 2000,2001, cash flow used byin financing activities
amounted to approximately $2.4$10.9 million, primarily due to paymentsthe reduction of the
Company's debt. We intend to prior
owners on acquisition related obligations.
Historically, we have financed our acquisitions withutilize the majority of free cash flow and
proceeds from the sale of assets to reduce the amount of debt outstanding and
thereby improve credit ratios.
The Company's debt and other sources of capital include $108 million in
senior debt notes, approximately $90 million in mandatorily redeemable
convertible preferred securities, a $100 million revolving line of credit,
approximately $1 million of redeemable preferred stock, and approximately $25
million in acquisition indebtedness and capital lease obligations.
The $108 million in senior debt notes are unsecured, mature in traunches of
$24.5 million in 2004, $59 million in 2006 and $24.5 million in 2008 and bear
interest at the issuancefixed rates of $7.73%, 7.96% and 8.06%, respectively.
The approximately $90 million in mandatorily redeemable convertible
preferred securities mature in 2029 and pay a fixed rate of 7%.
Carriage has a credit facility with a group of banks for a $100 million
revolving line of credit. The credit facility, maturing in 2004, is unsecured
and contains customary restrictive covenants, including a restriction on the
payment of dividends on common stock, and preferred stock.requires that we maintain certain
financial ratios. Interest under the credit facility is provided at both LIBOR
and prime rate options. The Company has the ability under the credit facility to
increase its total debt outstanding to as much as 60 percent of its total
capitalization. As of September 30, 2000,March 31, 2001, $42 million was outstanding under the
credit facility and the Company's debt to total capitalization was 51 percent.
As of March 31, 2001, the Company had 1,182,500 shares outstanding of
Series D Preferred Stock. The Series D Preferred Stock is convertible into Class
B Common Stock. The holders of Series D Preferred Stock are entitled to receive
cash dividends at an annual rate of $.06-$.07 per share depending upon the date
such shares were issued. The Company may, at its option, redeem all or any
portion of the shares of the Series D Preferred Stock at a redemption price of
$1.00 per share, together with all accrued
13
and unpaid dividends. Such redemption is subject to the right of each holder of
Series D Preferred Stock to convert such holder's shares into shares of Class B
Common Stock. On December 31, 2001, the Company must redeem all shares of Series
D Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends.
Prior to September 15, 2000, the Company had a credit facility with a
group of banks for a $260 million revolving line of credit. During September
2000, we reduced the credit facility to $100 million and amended certain
restrictive covenants and financial ratio calculations, and narrowed the pricing
grid
15
which determines the applicable borrowing margin for LIBOR and prime rate
borrowings. The credit facility is unsecured and has a remaining term of
approximately four years. We have the ability under the credit facility to
increase total debt outstanding to as much as 60 percent of total
capitalization. As of September 30, 2000, $53.0 million was outstanding under
the credit facility and our debt to total capitalization was 39 percent.
During November 2000, we also amended the Note Purchase Agreement under which
we had previously issued $110 million of senior private notes. The amendments
changed certain financial covenants and ratio calculations, and include terms
requiring proceeds from asset dispositions to be applied pro rata with other
senior debt to reduce outstanding principal on the senior private notes.
The most significant changes to the debt covenants relate to the following:
o Flexibility in the minimum net worth requirement to allow for
restructuring charges to reduce the minimum net worth
requirement;
o The addition of a ratio of debt to earnings before interest,
taxes, depreciation and amortization, which becomes more
restrictive over time; and
o The addition of a provision limiting acquisitions above a certain
size without prior approval.
We believe that cash flow from operations and borrowings under the credit
facility should be sufficient to fund anticipated capital expenditures as well
as other operating requirements. Acquisition spending during the remainder of
2000, if any,2001 is anticipated
to be significantlyrelatively insignificant and capital expenditures should be less than the
amounts during
either of the two preceding years.2000 amount. Because future cash flows and the availability of financing are
subject to a number of variables, such as the number and size of acquisitions
made by the Company, there can be no assurance that the Company's capital
resources will be sufficient to fund its capital needs. Additional debt and
equity financingsfinancing may be required in the future. The availability and terms of
these capital sources will depend on prevailing market conditions and interest
rates and the then-existing financial condition of the Company.
ACCOUNTING CHANGES
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, Revenue"Revenue Recognition in Financial
Statements,Statements", which, as amended, is to bewas implemented forduring the fourth quarter of
2000, and applied retroactively to the first three quarters of this fiscal year,2000, to provide
guidance related to recognizing revenue in circumstances in which no specific
authoritative literature exists. Members of the death care industry, in
consultation with the Commission, have agreed to certain changes in the manner in
which cemetery preneed sales and costs are recorded. The changeschange that areis most
meaningful to the Company areis a change from recording cemetery merchandise and
service revenue and their related costs at the time the contract is executed, to
the period in which they are delivered. The industry participants are
continuing to review the application of the Staff Accounting Bulletin with the
Commission as it relates to the manner in which we record preneed trusts and
related trust earnings and costs. AllThese accounting changes aredo not expected to result
in a material change in net cash flows nor the amount ofor revenues we ultimately
expect to realize. However, they may have a material impact on our
consolidated financial statements and on the manner in which we record certain
preneed activities. We anticipate discussions to be finalized and the financial
impact calculated during the fourth quarter of 2000. Implementation, using the
new accounting guidance, would include adjustments to the first three quarters'
financial statements as well as proforma adjustments to the prior year
comparative financial statements.
16
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (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 which was amended by SFAS No. 138,139, 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. The Company is currently
engaged in interest rate swaps whichthat have a notional amount of $50$30 million to
hedge against rising interest rates on its variable rate long-term debt. The
swaps which haveare recorded as a fair valueliability in the amount of $1.4 million and $2.2$.6 million at September 30, 2000 and DecemberMarch 31,
1999, respectively, are currently carried
off-balance sheet, but will be recorded as an asset when the Company implements
SFAS 133 in its first quarter of 2001.
POTENTIAL ACCOUNTING CHANGE
The Financial Accounting Standards Board has issued an exposure draft which
would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be
a
reduction in the periodelimination of the amortization of Names and Reputations, which Carriage
has been amortizing over 40 years.would have
an estimated pre-tax impact of approximately $4 million per year, and testing to
determine impairments, if any, for long-lived assets. The final pronouncement
may change from the exposure draft.
SEASONALITY
The Company's business can be affected by seasonal fluctuations in the
death rate. Generally, death rates are higher during the winter months.
14
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There has been no material change in the Company's position regarding
quantitative and qualitative disclosures of market risk from that disclosed in
the Company's 1999 Form2000 form 10-K.
17
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
CertainIn addition to historical information, this Quarterly Report contains
forward-looking statements made hereinby the management of Carriage Services, Inc.(the
"Company" or elsewhere"Carriage"). Such statements are typically identified by terms
expressing future expectations or on behalf of, the Company
that are not historical facts are intended to begoals. These forward-looking statements,
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statementsalthough made in good faith, are based on assumptionssubject to certain risks and uncertainties that
the Company believes are reasonable; however, many important factors
could cause the Company's actual results in the future to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include
Carriage's inability to sell businesses and properties held for sale for their
carrying value, to maintain or increase free cash flow from operations, or to
achieve internal growth from our businesses; adverse changes in economic and
financial market conditions, including declining stock prices, increasing
interest rates, and restricted credit availability; lower death rates; changing
consumer preferences; competition in our markets; Carriage's inability to
maintain operating ratios within the limits set out within our financing
arrangements; and changes in government regulation of the death care industry.
Readers are cautioned not to place undue reliance on these forward-looking
statements, made hereinwhich reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision of these forward-looking statements. Readers should carefully review
the Cautionary Statements described in this and in any other documents or oral
presentations madewe file from
time to time with the Securities and Exchange Commission, including Annual
Reports on Form 10-K and Current Reports on Form 8-K filed by or on behalf of, the Company.Carriage
throughout 2001.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed herein and in any other forward-looking statements made
by or on behalf of the Company.
(1) AchievingMaintaining or achieving growth in free cash flow from operations
depends primarily on achieving anticipated levels of earnings before
depreciation, amortization and other non-cash charges, controlling capital
expenditures to budgeted levels, collecting accounts receivable and reducing
preneed funeral costs.
(2) Achieving the Company's revenue goals also is affected by the volume
and prices of the products and services sold, as well as the mix of products and
services sold. The annual sales targets set by the Company are aggressive, and
the inability of the Company to achieve planned volume or prices could cause the
Company not to meet anticipated levels of revenue. In certain markets the
Company
15
expects to increase prices, while in other markets prices will be
lowered. The ability of the Company to achieve volume or price targets at any
location depends on numerous factors, including the capabilities of the local
operating staff, the local economy, the local death rate, competition and
changes in consumer preferences, including cremations.
(3) Revenue also is affected by the level of prearrangedpreneed sales in both current
and prior periods. The level of prearrangedpreneed sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income, as well as changes in marketing
approach, commission practices and contractual terms. Future revenue will also
be affected by the Company's recent decision to eliminate its national preneed
sales and marketing organization and to manage future preneed activities at the
local business level.
(4) In addition to the factors discussed above, financial performance may
be affected by other important factors, including the following:
(a) The ability of the Company to retain or attract key personnel.
(b) The amount and rate of growth in the Company's general and
administrative expenses.
(c) Changes in interest rates, which can increase or decrease the
amount the Company pays on borrowings with variable rates of
interest.
(d) The Company's ability to stay within the limits of the credit
ratios set out in the debt covenants, such as the
debt-to-capital ratio, debt-to-EBITDA ratio, and the fixed
charge coverage ratio.
18
(e) Availability and related terms of debt and equity financing to
fund operating needs.
(f) The impact on the Company's financial statements of accounting
charges that may result from the Company's evaluation of its
business strategies, asset valuations and organizational
structures as part of the Fresh Start restructuring program.
(g) The amount of net proceeds actually realized on assets held
for sale.
(h) Changes in government regulation, including tax rates and
their effects on corporate structure.
(i) Changes in inflation and other general economic conditions
domestically, affecting financial markets (e.g. marketable
security values).
(j) Unanticipated legal proceedings and unanticipated outcomes of
legal proceedings.
(k) Changes in accounting policies and practices required by
generally accepted accounting principles or the Securities and
Exchange Commission, such as amortization periods and asset
carrying values for long-lived intangible assets and revenue or cost recognition in the preneed cemetery or
funeral business.assets.
The Company also cautions readers that it assumes no obligation to update
or publicly release any revisions to forward-looking statements made herein or
any other forward-looking statements made by, or on behalf of, the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 -- Amendment No. 3 to Credit10.1--Note Termination Agreement by and among the Company and Bank
of America, N.A. and the lenders identified therein,with Russell Allen dated as of
September 15, 2000.
*10.2 -- Amendment No. 1 to Note PurchaseMarch 9, 2001
10.2--Tax Indemnity Agreement by and between the Company
and the senior note holders identified therein,with Russell Allen dated as of November 6,
2000.
*11.1 -- StatementMarch 9, 2001
11.1--Statement regarding computation of per share earnings.
*12 -- Calculationearnings
12 --Computation of Ratio of Earnings to Fixed Charges
*27.1 -- Financial Data Schedule.
- ---------
(*) Filed herewith.
(b) Reports on Form 8-K
None.
1916
Carriage filed a Current Report on Form 8-K on March 28, 2001, with
respect to the correspondence to the Securities and Exchange Commission
regarding Staff Accounting Bulletin No. 101.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRIAGE SERVICES, INC.
November 14, 2000May 15, 2001 /s/Thomas C. Livengood
- ------------------ ------------------------------------------------------------- ------------------------------------
Date Thomas C. Livengood, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
2017