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INDEXSECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549------------------------FORM 10-Q
(MARK ONE) /X/
(Mark One)ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________ COMMISSION FILE NUMBER:
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto
Commission file number: 1-11961
------------------------CARRIAGE SERVICES, INC.
(Exact
(Exact name of registrant as specified in its charter)DELAWARE 76-0423828 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation ororganization) 1900 SAINT JAMES PLACE, 4TH FLOOR, HOUSTON, TX 77056 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
DELAWARE
(State or other jurisdiction of incorporation or organization)76-0423828
(I.R.S. Employer Identification No.)
1900 Saint James Place, 4th Floor, Houston, TX
(Address of principal executive offices)
77056
(Zip Code)Registrant's telephone number, including area code: (713) 332-8400
------------------------SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Class A Common Stock, $.01 Par Value
(Title Of Class)New York Stock Exchange
(Name of Exchange on which registered)SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NoneIndicate 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
Xý No--- ---oThe 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 ofOctober 31, 2001April 30, 2002 was15,735,215 and 1,066,880 respectively. 116,941,292. CARRIAGE SERVICES, INC.
INDEX2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30, 2000 2001 ------------ ------------ ASSETS (UNAUDITED)Current assets: Cash and cash equivalents $ 3,210 $ 3,618 Accounts receivable -- Trade, net of allowance for doubtful accounts of $4,572 in 2000 and $2,702 in 2001 16,167 15,704 Other 3,828 3,272 ------------ ------------ 19,995 18,976 Assets held for sale, net 10,018 1,538 Inventories and other current assets 9,152 8,516 ------------ ------------ Total current assets 42,375 32,648 ------------ ------------ Property, plant and equipment, at cost, net of accumulated depreciation of $19,156 in 2000 and $23,538 in 2001 119,252 117,541 Cemetery property, at cost 61,529 61,456 Names and reputations, net of accumulated amortization of $17,984 in 2000 and $21,763 in 2001 166,585 162,784 Cemetery installment accounts receivable 20,383 18,157 Deferred charges and other non-current assets 38,123 34,683 Preneed funeral contracts 231,874 232,671 Preneed cemetery trust funds 30,164 33,984 ------------ ------------ Total assets $ 710,285 $ 693,924 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 25,247 $ 25,105 Current portion of long-term debt and obligations under capital leases 3,236 2,386 ------------ ------------ Total current liabilities 28,483 27,491 Deferred revenue and preneed liabilities 99,623 100,964 Deferred preneed funeral contracts revenue 231,874 232,671 Long-term debt and obligations under capital leases 181,968 163,717 ------------ ------------ Total liabilities 541,948 524,843 ------------ ------------ Commitments and contingencies Redeemable preferred stock 1,172 181 Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust 89,928 90,024 Minority interest in consolidated subsidiary -- 200 Stockholders' equity: Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 14,302,000 and 15,675,000 issued and outstanding at December 31, 2000 and September 30, 2001, respectively 143 157 Class B Common Stock; $.01 par value; 10,000,000 shares authorized; 1,845,000 and 1,067,000 issued and outstanding at December 31, 2000 and September 30, 2001, respectively 18 11 Contributed capital 193,234 189,297 Retained deficit (116,158) (109,727) Unrealized loss on interest rate swaps, net of tax benefit -- (1,062) ------------ ------------ Total stockholders' equity 77,237 78,676 ------------ ------------ Total liabilities and stockholders' equity $ 710,285 $ 693,924 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands, except share data)
December 31,
2001March 31,
2002(unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,744 $ 3,226 Accounts receivable— Trade, net of allowance for doubtful accounts of $3,515 in 2001 and $3,722 in 2002 15,660 15,640 Other 773 776 16,433 16,416 Assets held for sale, net 2,287 2,158 Inventories and other current assets 6,983 7,101 Total current assets 28,447 28,901 Property, plant and equipment, at cost, net of accumulated depreciation of $24,176 in 2001 and $25,695 in 2002 114,217 111,622 Cemetery property, at cost 61,630 63,927 Goodwill 160,576 162,564 Deferred charges and other non-current assets 49,159 63,220 Preneed funeral contracts 219,975 228,461 Preneed cemetery merchandise and service trust funds 38,108 45,727 Total assets $ 672,112 $ 704,422 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 26,551 $ 24,760 Current portion of long-term debt and obligations under capital leases 2,488 2,469 Total current liabilities 29,039 27,229 Deferred cemetery revenue and preneed liabilities 89,894 99,493 Deferred preneed funeral contracts revenue 227,658 237,879 Long-term debt, net of current portion 148,508 150,925 Obligations under capital leases, net of current portion 5,093 5,084 Total liabilities 500,267 520,610 Commitments and contingencies Minority interest in consolidated subsidiary 209 440 Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust 90,058 90,092 Stockholders' equity: Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 16,811,000 and 16,913,000 issued and outstanding at December 31, 2001 and March 31, 2002, respectively 168 169 Contributed capital 189,449 184,381 Retained deficit (107,193 ) (90,633 ) Unrealized loss on interest rate swaps, net of tax benefit (846 ) (637 ) Total stockholders' equity 81,578 93,280 Total liabilities and stockholders' equity $ 672,112 $ 704,422 The accompanying condensed 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, ------------------------- ------------------------- 2000 2001 2000 2001 --------- -------- --------- --------Revenues, net: Funeral $ 29,702 $ 28,256 $ 94,839 $ 94,290 Cemetery 8,401 9,413 26,755 28,265 --------- -------- --------- -------- 38,103 37,669 121,594 122,555 Costs and expenses: Funeral 24,886 22,333 75,336 70,990 Cemetery 7,506 7,096 22,549 21,421 --------- -------- --------- -------- 32,392 29,429 97,885 92,411 --------- -------- --------- -------- Gross profit 5,711 8,240 23,709 30,144 General and administrative expenses 3,137 2,473 8,006 6,702 Special charges 12,970 -- 12,970 -- --------- -------- --------- -------- Operating income (10,396) 5,767 2,733 23,442 Interest expense, net 3,562 3,447 10,714 10,436 Financing costs of company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust 1,641 1,641 4,923 4,923 --------- -------- --------- -------- Total interest and financing costs 5,203 5,088 15,637 15,359 Income (loss) before income taxes and cumulative effect of the change in accounting principle (15,599) 679 (12,904) 8,083 Provision (benefit) for income taxes (3,309) 136 (1,604) 1,617 Net income (loss) before cumulative effect of the --------- -------- --------- -------- change in accounting principle (12,290) 543 (11,300) 6,466 Cumulative effect on prior years of the change in accounting principle, net of income tax benefit -- -- (38,993) -- --------- -------- --------- -------- Net income (loss) (12,290) 543 (50,293) 6,466 Preferred stock dividends 20 3 61 35 --------- -------- --------- -------- Net income (loss) available for common stockholders $ (12,310) $ 540 $ (50,354) $ 6,431 ========= ======== ========= ======== Basic earnings (loss) per common share: Continuing operations $ (0.77) $ .03 $ (0.70) $ .39 Cumulative effect of the change in accounting principle, net -- -- (2.44) -- --------- -------- --------- -------- Net income (loss) $ (0.77) $ .03 $ (3.14) $ .39 ========= ======== ========= ======== Diluted earnings (loss) per common share: Continuing operations $ (0.77) $ .03 $ (0.70) $ .37 Cumulative effect of the change in accounting principle, net -- -- (2.44) -- --------- -------- --------- -------- Net income (loss) $ (0.77) $ .03 $ (3.14) $ .37 ========= ======== ========= ======== Weighted average number of common and common equivalent shares outstanding: Basic 16,084 16,699 16,030 16,600 ========= ======== ========= ======== Diluted 16,084 17,851 16,030 17,648 ========= ======== ========= ======== The accompanying notes are an integral part of these condensed consolidated financial statements.4
CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED AND IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2000 2001 ---------- ---------$ (50,293) $ 6,466 Net income (loss) Other comprehensive (loss): Cumulative effect on prior years of the change in accounting principle, net of income tax benefit of $1 -- 1 Unrealized (losses) on interest rate swaps arising during period -- (1,329) Related income tax benefit -- 266 ---------- --------- Total other comprehensive (loss) $ -- $ (1,062) ---------- --------- Comprehensive income (loss) $ (50,293) $ 5,404 ========== ========= The accompanying notes are an integral part of these condensed consolidated financial statements.5
CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2000 2001 ---------- ---------Cash flows from operating activities: Net income (loss) $ (50,293) $ 6,466 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of the change in accounting principle, net of income tax benefit 38,993 -- Depreciation 5,801 4,724 Amortization 9,353 8,097 Loss on sale of business assets 1,349 --- Impairment of assets 11,100 --- Provision for losses on accounts receivable 4,004 2,047 Deferred income taxes 1,457 2,557 ---------- --------- Net cash provided by operating activities before changes in assets and liabilities 21,764 23,891 Changes in assets and liabilities, net of effects from acquisitions and dispositions: (Increase) decrease in accounts receivable (5,496) 1,064 (Increase) decrease in inventories and other current assets (160) 2,200 (Increase) decrease in deferred charges and other non-current assets 323 (207) (Increase) in preneed cemetery trust funds (8,743) (3,564) Increase in accounts payable and accrued liabilities 1,099 263 Increase in deferred revenue and preneed liabilities 13,012 1,553 ---------- --------- Net cash provided by operating activities 21,799 25,200 Cash flows from investing activities: Preneed funeral and cemetery costs (6,134) (3,388) Purchase of note receivable (566) -- Proceeds from sales of businesses 2,199 8,442 Sale of minority interest in subsidiary -- 200 Acquisitions, net of cash acquired (1,516) (212) Capital expenditures (9,472) (4,588) ---------- --------- Net cash provided by (used in) investing activities (15,489) 454 Cash flows from financing activities: Proceeds from long-term debt 3,118 -- Payments on long-term debt and obligations under capital leases (2,590) (20,843) Proceeds from issuance of common stock 500 567 Payment of acquisition-related obligations (3,297) (4,935) Payment of preferred stock dividends (61) (35) Other (71) -- ---------- --------- Net cash used in financing activities (2,401) (25,246) Net increase in cash and cash equivalents 3,909 408 Cash and cash equivalents at beginning of period 2,517 3,210 ---------- --------- Cash and cash equivalents at end of period $ 6,426 $ 3,618 ========== ========= Supplemental disclosure of cash flow information: Cash paid for interest and financing costs $ 17,680 $ 15,797 ========== ========= Cash paid for income taxes $ 530 $ 65 ========== ========= The accompanying notes are an integral part of these condensed consolidated financial statements.6
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
For the three months
ended March 31,2001 2002 Revenues, net: Funeral $ 34,887 $ 32,707 Cemetery 8,978 8,215 43,865 40,922 Costs and expenses: Funeral 24,847 21,024 Cemetery 6,877 6,514 31,724 27,538 Gross profit 12,141 13,384 General and administrative expenses 2,050 2,527 Operating income 10,091 10,857 Interest expense, net 3,669 3,103 Financing costs of company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust 1,674 1,674 Total interest and financing costs 5,343 4,777 Income before income taxes 4,748 6,080 Provision (benefit) for income taxes 950 (10,480 ) Net income 3,798 16,560 Preferred stock dividends 20 — Net income available for common stockholders $ 3,778 $ 16,560 Basic earnings per share $ .23 $ .98 Diluted earnings per share $ .22 $ .95 Weighted average number of common and common equivalent shares outstanding: Basic 16,511 16,894 Diluted 17,368 17,429 The accompanying condensed notes are an integral part of these consolidated financial statements.
4
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
For the three months
ended March 31,2001 2002 Net income $ 3,798 $ 16,560
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 (629 ) 178 Amortization of accumulated unrealized loss — 83 Related income tax (provision) benefit 126 (52 ) Total other comprehensive income (loss) $ (502 ) $ 209 Comprehensive income $ 3,296 $ 16,769 The accompanying condensed 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 three months
Ended March 31,2001 2002 Cash flows from operating activities: Net income $ 3,798 $ 16,560 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,546 1,643 Amortization 2,699 952 Provision for losses on accounts receivable 1,185 588 Deferred income taxes (benefit) 1,430 (11,907 ) Other — (20 ) Changes in assets and liabilities, net of effects from acquisitions and dispositions: Decrease in accounts receivable 660 1,016 (Increase) decrease in inventories and other current assets 3,205 (841 ) (Increase) in deferred charges and other (17 ) (61 ) (Increase) in preneed funeral and cemetery costs (958 ) (864 ) (Increase) in preneed cemetery trust funds (2,890 ) (1,075 ) (Decrease) in accounts payable and accrued liabilities (3,283 ) (1,988 ) Income tax (payments) refunds, net 729 (49 ) Increase (decrease) in deferred revenue and preneed liabilities (213 ) 1,504 Net cash provided by operating activities 7,891 5,458
Cash flows from investing activities:
Proceeds from sales of businesses 6,224 67 Costs incurred for divested businesses — (110 ) Sale of minority interest in subsidiary 200 200 Acquisitions (212 ) (1,040 ) Capital expenditures (1,388 ) (1,398 ) Net cash provided by (used in) investing activities 4,824 (2,281 ) Cash flows from financing activities: Proceeds (payments) under bank line of credit (7,000 ) 6,000 Payments on long-term debt and obligations under capital leases (3,866 ) (3,628 ) Proceeds from issuance of common stock — 222 Payment of contingent stock price guarantees — (5,289 ) Payment of preferred stock dividends (20 ) — Net cash used in financing activities (10,886 ) (2,695 ) Net increase in cash and cash equivalents 1,829 482 Cash and cash equivalents at beginning of period 3,210 2,744 Cash and cash equivalents at end of period $ 5,039 $ 3,226 Supplemental disclosure of cash flow information: Cash paid for interest and financing costs $ 6,214 $ 6,811 Cash paid for income taxes $ — $ 156 The accompanying condensed notes are an integral part of these consolidated financial statements.
6
CARRIAGE SERVICES, INC.
CONDENSED NOTES TOCONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
(unaudited)1. BASIS OF PRESENTATION
- (a)
- The Company
Carriage Services, Inc., (the "Company") is a leading provider of products and services in the death care industry in the United States. As of
September 30, 2001,March 31, 2002, the Company owned and operated154147 funeral homes and3230 cemeteries in3029 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 Condensed Disclosures
The information for the three
and ninemonth periods endedSeptember 30, 2000March 31, 2001 and20012002 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. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to the rules of the SEC. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31,2000,2001, and should be read in conjunction therewith. Certain priorperiodyear amounts in the consolidated financial statements have been reclassified to conformwithto currentperiodyear 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.
2. ACCOUNTING CHANGES
- (a)
Preneed Revenues and Costs In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 - "Revenue Recognition in Financial 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 of the beginning of 2000, but because of extensions to allow for implementation, we implemented the changes beginning with the fourth quarter of 2000 and restated quarters 1 through 3 in our annual report on Form 10-K for the year ended December 31, 2000. 7Previously, 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 sales of interment rights were charged to operations 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 was recognized. Trust income on cemetery merchandise and service trusts was recognized when earned by the trust. Under the new accounting principle, we follow Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate", in recognizing the revenue from the sales of cemetery interment rights. This method is generally characterized as the period when the customer's payments equal or exceed 10% of the contract 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 the sale of the interment right is recognized as revenue. Revenues and costs related to the sales of cemetery merchandise and services, and earnings from the related trust funds, are deferred until the period in which the 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 reflect the cumulative effect of the change in accounting principle as of the beginning of 2000. The effect of this change on the nine months ended September 30, 2000, before the cumulative effect of the accounting change, was to decrease net income $3.3 million, or $.21 per diluted share. The revenue not recognized is included in the accompanying consolidated balance sheet in the caption "Deferred revenue and preneed 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 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 certain derivatives will be recognized as an asset or liability at their 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 $30 million to hedge against rising interest rates on its variable rate long-term debt. The Company recorded a non-cash charge of approximately $1.1 million, net of related income tax benefit, in the consolidated statement of comprehensive income to record the liability for the interest rate swaps during the nine months ended September 30, 2001. (c)- Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board 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 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 provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.
8The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements. 7
The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001.
Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately toThe company adopted SFAS No. 142 as of theamortization provisionsbeginning ofthis Statement.the first quarter of 2002. The effect of SFAS No. 142 on the Companywill beis the elimination of the amortization of goodwill, whichis currently beingprior to 2002 was amortized over 40 years, and the testing forimpairmentsimpairment of goodwill on an annual basis.The Company estimates thatHad theproformaadoption of SFAS No. 142 occurred at the beginning of the previous year, net income before taxes, net income and diluted earningsexcluding goodwill amortization, for the third quarter of 2001per share would have been $5,920,000, $4,736,000 and $0.27, respectively from the proforma elimination of the amortization of goodwill. The proforma net income and diluted earnings per share are calculated using the 20 percent tax rate reported in 2001. See Management's Discussion and Analysis of$0.08 per diluted share, comparedFinancial Condition and Results of Operations for proforma disclosure of this accounting change and the change in the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill as of January 1, 2002 by comparing the fair value of the Company's reporting units (funeral home business by region) to the carrying value of the reporting units, and no impairment was required to be recorded at the implementation date of the new accounting standard. Goodwill acquired during the three months ended March 31, 2002, totaled $1,040,000 which were performance-based contingent consideration payments on aproforma loss of $0.69 per diluted share for the third quarter of 2000. (d)prior year acquisition.
- (b)
- Impairment of Long-Lived Assets
In August 2001 the Financial Accounting Standards Board 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 disposed by sale or otherwise, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company
has not determined what effect, if any, the implementation ofadopted SFAS No. 144will haveas of the beginning of the first quarter of 2002 which had no effect on the Company's financial position or results of operations.3. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue,
profit and lossnet income and total assets by segment (in thousands):
Funeral Cemetery Corporate Consolidated ------- -------- --------- ------------External revenues: Nine months ended September 30, 2001 $ 94,290 $ 28,265 --- $ 122,555 Nine months ended September 30, 2000 94,839 26,755 --- 121,594 Profit (loss) before cumulative effect of the change in accounting principle: Nine months ended September 30, 2001 $ 14,512 $ 4,444 $(12,490) $ 6,466 Nine months ended September 30, 2000 12,482 2,692 (26,474) (11,300) Total assets: September 30, 2001 $532,725 $148,405 $ 12,794 $ 693,924 December 31, 2000 547,430 156,194 6,661 710,2854. SPECIAL CHARGES During the third quarter of 2000, management identified certain underperforming funeral home and cemetery businesses for possible sale and initiated a multi-element restructuring program. Two funeral home businesses were sold during the third quarter of 2000 at a loss of $1.3 million and impairment charges totaling $11.1 million were recorded to reduce the carrying value of other businesses, classified as held for sale, to net realizable value. The loss on sale and impairment charge, along with restructuring charges, are classified as special charges in the consolidated statement of operations
Funeral Cemetery Corporate(1) Consolidated External revenues: Three months ended March 31, 2002 $ 32,707 $ 8,215 — $ 40,922 Three months ended March 31, 2001 34,887 8,978 — 43,865 Net income Three months ended March 31, 2002 $ 7,125 $ 1,026 $ 8,409 $ 16,560 Three months ended March 31, 2001 8,011 1,682 (5,895 ) 3,798 Total assets: March 31, 2002 $ 523,876 $ 164,923 $ 15,623 $ 704,422 December 31, 2001 515,919 152,667 3,526 672,112
- (1)
- Net income for the three
and ninemonths endedSeptember 30, 2000. 9March 31, 2002 and the change in total assets assigned to Corporate is primarily attributable to the reduction in the deferred tax valuation allowance discussed in Note 4. 8
4. INCOME TAXES
For 2001, the Company had an effective book tax rate of 20 percent, reflecting the benefit of previously unrecognized tax losses from prior periods related to the Fresh Start restructuring program. When the Company incurred the Fresh Start 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 sizeable tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty at the time, the Company recorded a "valuation allowance" to offset these tax benefits until such time that it could be determined that the Company would be able to deduct them. Based on the positive operating results subsequent to 2000 and management's forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not that the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Company recorded a special one-time tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which substantially eliminated all of the valuation allowance. The Company estimates that its effective tax rate will be 38.5 percent for book purposes in 2002. Had the Company also used the 38.5 percent tax rate for the first quarter of 2001, net income would have been $878,000, or $0.05 per diluted share, lower for that period.
Item 2. 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.
Carriage provides a complete range of services relatingOur historical focus has been on operational enhancements at facilities currently owned tofunerals, burials,increase revenues andcremations, 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,gross profit, as well asother items. From 1993growth through acquisitions (although this activity was curtailed significantly beginning in 1999). That focus has resulted in high standards of service, operational performance, and an infrastructure containing measurement and management systems. In 2000, the operating strategy was dramatically shifted to1999, the Company grew rapidly asfocus upon increasing operating cash flow. In November 2000, we launched aresult 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 assumptions that proved overly optimistic. Fiscal 2000 was a transitional year that included a decline in operating profitability, the adoption of a substantially changed accounting method for preneed cemetery sales, and the implementation of a multi-element "Fresh Start"two-year multi-faceted, restructuring program,announcedcalled "Fresh-Start", which was designed to increase financial and operating performance, improve cash flow, reduce debt, and assist Carriage in fulfilling our mission of being the highest quality funeral and cemetery service organization in thelatter halfindustry. Beginning with the fourth quarter of2000.2000, we have been focused on executing elements of Fresh Start.The goals of Fresh Start are restoring credibility to our operating and consolidation model, increasing and better aligning our earnings and cash flow, restoring market credibility to our balance sheet; reducing our debt; and re-accessing the capital markets.
The principal elements of Fresh Start include downsizing our corporate organization; changing our operating leadership; changing our preneed funeral organizational strategy; stratifying by performance our funeral and cemetery portfolios; implementing action plans to improve underperforming businesses; disposing of some underperforming businesses; adjusting the carrying basis of other underperforming businesses; and modifying financial covenants with lenders to facilitate execution of Fresh Start. Most of the elements of Fresh Start have been accomplished and we are seeing the benefits of these actions in our
2001operating results.9
Net income totaled $16.6 million in the first quarter of 2002, or $0.95 per diluted share. Excluding a $12.8 million, or $0.73 per share special tax benefit, net income was $3.8 million, or $0.22 per diluted share, which equaled net income in the first quarter of 2001. Two significant accounting events occurred during the first quarter of 2002, the elimination of goodwill amortization in connection with the implementation of SFAS No. 142 which totaled $1,172,000 in the first quarter of 2001, and the change in the Company's tax rate from 20 percent to 38.5 percent. Had those two events occurred at the beginning of 2001, net income and diluted earnings per share would have totaled $3.6 million and $0.21, respectively, for the first quarter of 2001.
The full year impact to diluted earnings per share, by quarter, for 2001 of these two events would have been as follows:
1st
Quarter2nd
Quarter3rd
Quarter4th
QuarterFull Year 2001 results as previously reported $ 0.22 $ 0.12 $ 0.03 $ 0.14 $ 0.51
Proforma adjustment of tax rate from 20% to 38.5%
(0.05
)
(0.03
)
(0.01
)
(0.03
)
(0.12
)Proforma elimination of goodwill amortization 0.04 0.04 0.04 0.04 0.16 Proforma 2001 $ 0.21 $ 0.13 $ 0.06 $ 0.15 $ 0.55 Income from operations, which we define as earnings before interest and income taxes,
and special charges,increased as a percentage of net revenues, from6.8%23.0% for thethirdfirst quarter of20002001 to15.3%26.5% for thethirdfirst quarter of2001.2002. This improvement was largely due to thecost savingselimination of amortization of goodwill for the first quarter of 2002 and the improved operating performance that resulted from Fresh Startinitiatives and increased same-store revenues in the cemetery segment, combined with the disposition during the last four quarters of 24 funeral homes and 10 cemeteries which were only marginally profitable. Despite the property dispositions, revenuesinitiatives. Revenues from funeral homes decreasedonly 4.9%6.2% and revenues from cemeteriesincreased 12.0%decreased 8.5% in thethirdfirst quarter of20012002 compared to the same period in2000.2001 as a result of the sale or closing of 24 funeral homes and eight cemeteries during 2001, lower preneed insurance commission revenue and lower cemetery preneed revenues. Gross margins for the funeral homes increased from16.2%28.8% in thethirdfirst quarter of20002001 to21.0%35.7% in thethirdfirst quarter of2001.2002. As a percentage of cemetery net revenues, cemetery gross margin was24.6%20.7% in thethirdfirst quarter of20012002 compared to10.7%23.4% in thethirdfirst quarter of2000. During the first three quarters of 2001 we sold, closed or combined with other existing locations, 20 funeral homes and 6 cemeteries. Proceeds from the sale of businesses totaling $8.4 million and cash flow from operations enabled us to reduce our debt by approximately $20.8 million during the first three quarters of2001.The debt reduction was achieved despite the payment of a $4.9 million contingent purchase price obligation related to an acquisition from a prior year.RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the three months ended March 31, 2001 and
nine month periods ended September 30, 2000 and 2001.2002. For purposes of this discussion, the Company'slocationsfuneral home businesses are in three groups, as a result of the stratification of our funeralhome and cemetery portfolios in 2000.homes. A "core"10group which represents approximately two-thirds of our revenues and cash flow, a second "underperforming" group, and a third group consisting of businesses that are "targeted for sale". Additionally, funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "same-store" or "existing operations". FUNERAL HOME SEGMENT.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 ninemonths endedSeptember 30, 2000March 31, 2001 compared to the threeand ninemonths endedSeptember 30, 2001. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,March 31, 2002.10
Three months ended March 31, 2001
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, CHANGE ----------------------- ----------------------- 2000 2001 AMOUNT PERCENT ------- ------- -------- --------Net location same-store revenues: Core $17,919 $17,548 $ (371) (2.1)% Underperforming 8,415 8,749 334 4.0% Targeted for sale 899 904 5 0.6% ------- ------- -------- Total same-store revenues $27,233 $27,201 $ (32) (0.1)% Sold and discontinued 1,945 145 (1,800) * Preneed insurance commissions revenue 524 910 386 73.7% ------- ------- -------- Total net revenues $29,702 $28,256 $(1,446) (4.9)% ======= ======= ======== Gross profit: Core $ 3,360 $ 3,361 $ 1 0.0% Underperforming 929 1,440 511 55.0% Targeted for sale 29 198 169 582.8% ------- ------- -------- Total same-store gross profit $ 4,318 $ 4,999 $ 681 15.8% Sold and discontinued (26) 14 40 * Preneed insurance commissions revenue 524 910 386 73.7% ------- ------- -------- Total gross profit $ 4,816 $ 5,923 $ 1,107 23.0% ======= ======= ======== * Not meaningful.NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, CHANGE ----------------------- ----------------------- 2000 2001 AMOUNT PERCENT ------- ------- -------- --------Net location same-store revenues: Core $56,909 $58,226 $ 1,317 2.3% Underperforming 27,129 28,104 975 3.6% Targeted for sale 2,829 3,039 210 7.4% ------- ------- -------- Total same-store revenues $86,867 $89,369 $ 2,502 (2.9)% Sold and discontinued 6,402 1,723 (4,679) * Preneed insurance commissions revenue 1,570 3,198 1,628 103.7% ------- ------- -------- Total net revenues $94,839 $94,290 $ (549) (0.6)% ======= ======= ======== Gross profit: Core $13,506 $13,861 $ 355 2.6% Underperforming 3,992 5,438 1,446 36.2% Targeted for sale 279 607 328 117.6% ------- ------- -------- Total same-store gross profit $17,777 $19,906 $ 2,129 12.0% Sold and discontinued 156 196 40 * Preneed insurance commissions revenue 1,570 3,198 1,628 103.7% ------- ------- -------- Total gross profit $19,503 $23,300 $ 3,797 19.5% ======= ======= ======== * Not meaningful.11compared to three months ended March 31, 2002
(dollars in thousands)
Three months ended
March 31,Change 2001 2002 Amount Percent Net location same-store revenues: Core $ 20,877 $ 21,347 $ 470 2.3 % Underperforming 9,692 9,730 38 0.4 % Targeted for sale 1,167 1,137 (30 ) (2.6 )% Total same-store revenue $ 31,736 $ 32,214 $ 478 1.5 %
Acquired, sold or discontinued
1,849
61
(1788
)
*
Preneed insurance commissions revenue 1,302 432 (870 ) (66.8 )% Total net revenues $ 34,887 $ 32,707 $ (2,180 ) (6.2 )%
Gross profit:
Core $ 6,007 $ 7,987 $ 1980 33.0 % Underperforming 2,325 3,048 723 31.1 % Targeted for sale 182 219 37 20.3 % Total same-store gross profit $ 8,514 $ 11,254 2,740 32.2 %
Acquired, sold or discontinued
224
(3
)
(227
)
*
Preneed insurance commissions revenue 1,302 432 (870 ) (66.8 )% Total gross profit $ 10,040 $ 11,683 $ 1,643 16.4 %
- *
- Not meaningful.
Funeral same-store revenues for the three months ended
September 30, 2001 were essentially flatMarch 31, 2002 increased 1.5% when compared to the three months endedSeptember 30, 2000,March 31, 2001, as we experienced a decrease of3.1%1.5% in the number of services and an increase of3.1%3.0% in the average revenue per service forthethose existing operations.The lower total net revenues wereWe believe that decrease in the number of funeral home services was primarilya result of the decline in revenuesrelated to thebusinessesdecrease in the national mortality rate thatwe have sold subsequentwas reported for the first quarter. We were able to leverage thesecond quarter 2000.higher average revenue per funeral this year into greater profitability because of our focus on reducing costs. The number of funeral services decreased4.3%1.4% for the core group in comparing thethirdfirst quarter of20012002 to thethirdfirst quarter of2000,2001, while the average revenue per service for those existing locations increased2.2%3.7% in comparing those same periods. The number of funeral services for the underperforming group decreased1.0%2.5% while the average revenue per service increased5.0%2.9% in comparing thethirdfirst quarter20012002 to thethirdfirst quarter of2000.2001. In addition to the net revenues from funeral location operations above, insurance commission revenues from preneed funeral contract sales totaled$0.9 million and $3.2$0.4 million for the threeand nine month periodsmonths of20012002, as compared to$0.5 million and $1.6$1.3 million for the threeand nine month periodsmonths endedSeptember 30, 2000, respectively.March 31, 2001. Theincreasedecrease in commission revenues is due primarily to first quarter 2001 nonrecurring commissions on rollover transactions. Additionally and because of a shift in the11
Company's preneed marketing strategy, we expect a decrease of $2.2 million in preneed insurance revenue and funeral gross profit in comparing the
conversion of trust funded contractsfull year 2001 toinsurance funded contracts.the full year 2002 equal to $0.08 per diluted share.Total funeral same-store gross profit for the three months ended
September 30, 2001March 31, 2002 increased$0.7$2.7 million or15.8%32.2% from the comparable three months of2000.2001. The higher gross profit is dueprimarily to depreciation and amortization that was $1.0 million less than the prior period dueto theimpairments recordedcombination of the elimination of goodwill amortization which totaled $1,136,000 during the three months ended March 31, 2001 and to the improvement inthe latter half of 2000 and lower overhead and administrative costs resulting from Fresh Start initiatives. CEMETERY SEGMENT.our funeral EBITDA margins.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 ninemonths endedSeptember 30, 2000March 31, 2001 compared to the threeand ninemonths endedSeptember 30, 2001. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,March 31, 2002.Three months ended March 31, 2001
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, CHANGE ----------------------- ----------------------- 2000 2001 AMOUNT PERCENT ------- ------- -------- --------Net same-store revenues: Core $7,217 $8,531 $1,314 18.2% Targeted for sale 731 882 151 20.7% ------- ------- -------- Total same-store revenue $7,948 $9,413 $1,465 18.4% Acquired or sold 453 -- (453) * ------- ------- -------- Total net revenues $8,401 $9,413 $1,012 12.0% ======= ======= ======== Gross profit: Core $ 864 $2,106 $1,242 143.8% Targeted for sale 37 212 175 473.0% ------- ------- -------- Total same-store gross profit $ 901 $2,318 $1,417 157.3% Acquired or sold (6) (1) 5 * ------- ------- -------- Total gross profit $ 895 $2,317 $1,422 158.9% ======= ======= ======== * Not meaningful.12NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001compared to three months ended March 31, 2002
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, CHANGE ----------------------- ----------------------- 2000 2001 AMOUNT PERCENT ------- ------- -------- --------Net same-store revenues: Core $22,910 $25,237 $ 2,327 10.2% Targeted for sale 2,403 2,759 356 14.8% ------- ------- -------- Total same-store revenue $25,313 $27,996 $ 2,683 10.6% Acquired or sold 1,442 269 (1,173) * ------- ------- -------- Total net revenues $26,755 $28,265 $ 1,510 5.6% ======= ======= ======== Gross profit: Core $ 3,982 $ 6,117 $ 2,135 53.6% Targeted for sale 247 707 460 186.2% ------- ------- -------- Total same-store gross profit $ 4,229 $ 6,824 $ 2,595 61.4% Acquired or sold (23) 20 43 * ------- ------- -------- Total gross profit $ 4,206 $ 6,844 $ 2,638 62.7% ======= ======= ======== * Not meaningful.
(dollars in thousands)
Three months ended
March 31,Change 2001 2002 Amount Percent Total same-store revenue $ 8,693 $ 8,215 $ (478 ) (5.5 )% Acquired or sold 285 — (285 ) * Total net revenues $ 8,978 $ 8,215 $ (763 ) (8.5 )%
Total same-store gross profit
$
2,095
$
1,683
$
(412
)
(19.7
)%Acquired or sold 6 18 12 * Total gross profit $ 2,101 $ 1,701 $ (400 ) (19.0 )%
- *
- Not meaningful.
Cemetery same-store net revenues for the three months ended
September 30, 2001 increased $1.5March 31, 2002 decreased $0.5 million over the three months endedSeptember 30, 2000,March 31, 2002, and cemetery same-store gross profitincreased $1.4decreased $0.4 million over the comparable three months of2000.2001. Thehigherlower same-store net revenues resulted primarily froman increaselower preneed property sales and deliveries of$1.3 million from core operations. The highermerchandise and services. In consequence, this also resulted in a slight decline in same-store grossprofit reflected an increase of $1.2 million from core operations and $0.2 million from cemeteries that have been targeted for sale.profit. Total gross marginincreaseddecreased from10.7%23.4% for the three months endedSeptember 30, 2000March 31, 2001 to24.6%20.7% for the three months endedSeptember 30, 2001, primarily due to a higher level of atneed deliveries of previously contracted preneed merchandise and services, increased property sales and improved business practices. OTHER.March 31, 2002.Other. General and administrative expenses for the quarter ended
September 30, 2001 decreased $0.7March 31, 2002 increased $0.5 million as compared to thethirdfirst quarter of2000.2001. These expenses, as a percentage of net revenues,decreasedincreased from8.2%23.0% to6.6%26.5% due tothe downsizing of the corporate organization and other cost savings initiatives of Fresh Start.additional insurance costs totaling $0.5 million.Interest expense and other financing costs for the three months ended
September 30, 2001 declined slightly,March 31, 2002 decreased by $566,000 compared to thesecondfirst quarter of2000. While2001 primarily because theaverageCompany's total debtoutstanding duringdecreased by approximately $25 million from the firstnine monthsquarter of 2001was less than the outstanding debt in the same period for 2000, the rate paid on the Company's line of credit was slightly higher dueto thedebt modification in late 2000 and higher amortizationfirst quarter ofloan costs due to2002.12
Income Taxes. The following table sets forth the
paymentcomponents ofdebt modification fees. Preferred stock dividendsthe provision (benefit) of$3,000 were subtracted fromincome taxes of the$0.5 million of net income in computing the net income available for common stockholdersCompany for the three months endedSeptember 30, 2001.March 31, 2001 compared to the three months ended March 31, 2002.
Three months ended
March 31, 2001Three months ended
March 31, 2002Amount Percent
of
Pretax
IncomeAmount Percent
of
Pretax
IncomeProvision for income taxes before the reduction of the deferred tax asset valuation allowance $ 950 20 % $ 2,320 38.15 % Reduction of deferred tax asset valuation allowance — — (12,800 ) (210.5 )% Total provision (benefit) for income taxes $ 950 20 % $ (10,480 ) (172.4 )% For 2001, Carriage had an effective book tax rate of 20 percent, reflecting the
quarter ended September 30, 2001,benefit of previously unrecognized tax losses from prior periods related to the Fresh Start restructuring program. When the Companyprovided forincurred the Fresh Start 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 incometaxesto utilize the sizeable tax benefits created by the tax losses onincome before income taxesasset sales. To acknowledge this uncertainty at the time, Carriage recorded acombined state and federal rate of 20% compared with 21.2%"valuation allowance" to offset these tax benefits until such time that it could be determined that the Company would be able to deduct them. Based on thelosspositive operating results subsequent to 2000 and management's forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not that the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 Carriage recorded a special one-time tax benefit in the amount of $12.8 million. The Company estimates that its effective tax rate will be 38.5 percent for book purposes in 2002. Had the Company used the 38.5 percent tax rate also for thesame periodfirst quarter of 2001, net income as reported in2000. The2001 would have been $878,000, or $0.05 per diluted share, lower for that period. Had the Company used the 38.5 percent tax rate for thethird quarter of 2000 was negatively impacted by the effects of non-deductible amortization, while the ratefull year 2001, net income as reported in 2001 would have been $2,081,000, or $0.12 per diluted share, lower for thethird quarter of 2001 benefited by $0.1 million from the utilization of tax benefits that were generated from the losses in the fourth quarter of 2000, tax benefits that are being recognized when 13realized through taxable income. We will continue to evaluate the realizability of the valuation allowance for deferred taxes at each reporting period.year.LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled
$3.6$3.2 million atSeptember 30, 2001,March 31, 2002, representing an increase of$0.4$0.5 million from December 31,2000.2001. For theninethree months endedSeptember 30, 2001,March 31, 2002, cash provided by operations was$25.2$5.5 million as compared to$21.8$7.9 million for theninethree months endedSeptember 30, 2000.March 31, 2001. Theincreasedecrease in cash provided by operations was primarily due tothe$2.2 million in higherlevel of earnings as adjusted for non-cash charges period to period.than normal trust withdrawals received in 2001 and $0.7 million in tax refunds received in 2001. Cashprovided byused in investing activities was$0.5$2.3 million for theninethree months endedSeptember 30, 2001March 31, 2002 compared to cashusedprovided in the amount of$15.5$4.8 million for the firstninethree months of2000,2001, the change being primarily due to the proceeds from the sale of businesses during thenine months offirst quarter 2001 in the amount of$8.4 million, combined with a decrease in capital expenditures and preneed costs. In the first nine months of 2001, cash flow used in financing activities amounted to approximately $25.2 million, most of which was used to reduce the Company's debt. We intend to utilize 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.$6.2 million.13
The Company's debt and other sources of capital include
$103.6$99.3 million in senior debt notes, a $100 million revolving line of credit$23.5and $22.2 million in acquisition indebtedness and capital lease obligationsand approximately $90at March 31, 2002. Our total debt outstanding rose $2 million inmandatorily redeemable convertible preferred securities.the first quarter to $159.5 million primarily due to a $5.3 million payment on our last outstanding contingent stock guarantees arising from prior acquisitions and a $4.1 million semi-annual interest payment on $99 million of senior debt notes.The
$103.6$99.3 million in senior debt notes are unsecured, mature in tranches of$23.7$22.9 million in 2004,$56.5$54.1 million in 2006 and$23.4$22.3 million in 2008 and bear interest at the fixed rates of 7.73%, 7.96% and 8.06%, respectively.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 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 ofSeptember 30, 2001, $40March 31, 2002, $38 million was outstanding under the credit facility and the Company's debt to total capitalization was49.746.5 percent.The approximately $90 million in mandatorily redeemable convertible preferred securities mature in 2029 and pay a fixed rate of 7%. As of September 30, 2001, the Company had 182,500 shares outstanding of Series D Preferred Stock. The Series D Preferred Stock is convertible into Class B Common Stock. The holder of the Series D Preferred Stock is entitled to receive cash dividends at an annual rate of $.06 per share. 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 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.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 2001 is anticipated to be relatively insignificant and capital expenditures should be approximately $6 million.Because future cash flows and the availability of financing are subject to a number of variables, such as the Company's operating performance, timing of debt maturities and 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.14Additional debt and equity financing 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 Recognition in Financial Statements", which, as amended, was implemented during the fourth quarter of 2000, and applied retroactively to the first three quarters of 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, agreed to certain changes in the manner in which cemetery preneed sales and costs are recorded. The change that is most meaningful to the Company is 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. These accounting changes do not result in a material change in net cash flows nor the amount or revenues we ultimately expect to realize. 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 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. The Company is currently engaged in interest rate swaps that have a notional amount of $30 million to hedge against rising interest rates on its variable rate long-term debt. The swaps are recorded as a liability in the amount of $1.1 million at September 30, 2001.In June 2001, the Financial Accounting Standards Board 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 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 provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001.
Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately toThe company adopted SFAS No. 142 as of theamortization provisionsbeginning ofthis Statement.the first quarter of 2002. The effect of SFAS No. 142 on the Companywill beis the elimination of the amortization of goodwill, whichis currently beingprior to 2002 was amortized over 40 years, and the testing forimpairmentsimpairment of goodwill on an annual basis.The Company estimates that proformaHad the adoption of SFAS No. 142 occurred at the beginning of the previous year, net income before taxes, net income and diluted earningsexcluding goodwill amortization, for the third quarter of 2001per share would have been$0.08$$5,920,000, $4,736,000 and $0.27, respectively, from the14
proforma elimination of the amortization of goodwill. The proforma net income and diluted earnings per
dilutedsharecomparedare calculated using the 20 percent tax rate reported in 2001. See Management's Discussion and Analysis of Financial Condition and Results of Operations for proforma disclosure of this accounting change and the change in the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill as of January 1, 2002 by comparing the fair value of the Company's reporting units (funeral home businesses by region) toa proforma lossthe carrying value of$0.69 per diluted share forthethird quarterreporting units, and no impairment was required to be reported at the implementation date of2000.the new accounting standard. Goodwill acquired during the three months ended March 31, 2002, totaled $1,040,000.In August 2001 the Financial Accounting Standards Board 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 disposed by sale or otherwise, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company
has not determined what effect, if any, the implementation ofadopted SFAS No. 144will haveas of the beginning of the first quarter of 2002 which had no effect on the Company's financial position or results of operations.15SEASONALITY
The Company's business can be affected by seasonal fluctuations in the death rate. Generally, death rates are higher during the winter months.
INFLATION
Inflation has not had a significant impact on the results of operations of the Company.
ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKQuantitative and Qualitative Disclosures of Market RiskThere 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
20002001 Form 10-K.PART
II --II—OTHER INFORMATIONITEMItem 5.
OTHER INFORMATION FORWARD-LOOKING STATEMENTSOther InformationForward-Looking Statements
In addition to historical information, this Quarterly Report contains forward-looking statements made by the management of Carriage Services, Inc. (the "Company" or "Carriage"). Such statements are typically identified by terms expressing future expectations or goals. These forward-looking statements, although made in good faith, are subject to certain risks and uncertainties that could cause actual results 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
15
ratios within the limits set forth 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, which 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 other documents we 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 Carriage throughout
2001. CAUTIONARY STATEMENTS2002.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) Maintaining 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, maintaining the amount of expected cash income taxes payable, controlling capital expenditures to budgeted levels, collecting accounts receivable and managing preneed sales origination costs to current or lower levels.
16(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, andbelieved to be achievable, but 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 expects to increase prices,whilebut inothercertain markets priceswillcould belowered.lowered to protect market share. 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 preneed sales in both current and prior periods. The level of preneed sales may be adversely affected by numerous factors, including deterioration in the economy, which causes individuals to have less discretionary income, changes in consumer spending preferences, as well as changes in marketing approach, commission practices and contractual terms. Future revenue will also be affected by the Company's
recentdecision in the latter half of 2000 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.
16
- (d)
- The
Company'sability of the Company 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.- (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)- (g)
- Changes in inflation and other general economic conditions domestically, affecting financial markets (e.g. marketable security values).
(j)- (h)
- Unanticipated legal proceedings and unanticipated outcomes of legal proceedings.
(k)- (i)
- Changes in accounting policies and practices required by generally accepted accounting principles or the Securities and Exchange Commission, such as
amortization andwrite-downs to the asset carrying values for goodwill and other long-livedintangibleassets.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 FORMExhibits and Reports on Form 8-K
- (a)
- Exhibits
11.1
--— Statement regarding computation of per share earnings12
--— Computation of Ratio of Earnings to Fixed Charges
- (b)
- Reports on Form 8-K
None
17
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, 2001 /s/ Thomas C. Livengood - ------------------------------ ------------------------------- Date Thomas C. Livengood, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 18
| CARRIAGE SERVICES, INC. | |||
May 14, 2002 Date | /s/ THOMAS C. LIVENGOOD Thomas C. Livengood, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |