SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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: 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.)
1300 Post Oak Blvd., Suite 1500, Houston, TX77056
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (281) 556-7400
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 [ ]
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
October 29, 1998 was 11,059,770 and 3,870,598, respectively.
<PAGE>
CARRIAGE SERVICES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1998 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1997 and 1998 and the
Nine Months Ended September 30, 1997 and 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signature 16
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the following: the Company's ability to sustain its rapid
acquisition rate, to manage the growth and to obtain adequate performance from
acquired businesses; the economy and financial market conditions, including
stock prices, interest rates and credit availability; and death rates and
competition in the Company's markets.
2
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 6,126 $ 4,100
Accounts receivable, net of allowances ............... 12,912 18,662
Inventories and other current assets ................. 5,691 7,640
------------ ------------
Total current assets ....................... 24,729 30,402
Property, plant and equipment, at cost, net of accumulated
depreciation of $7,123 in 1997 and $10,111 in 1998 ..... 85,865 118,407
Cemetery property, at cost ................................ 32,154 57,862
Names and reputations, net of accumulated amortization of
$4,480 in 1997 and $7,064 in 1998 .................... 118,099 177,502
Deferred charges and other noncurrent assets .............. 17,093 24,070
------------ ------------
$ 277,940 $ 408,243
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 9,022 $ 3,308
Other current liabilities ............................. 9,884 14,649
------------ ------------
Total current liabilities ................... 18,906 17,957
Long-term debt, net of current portion ..................... 121,553 175,414
Other liabilities .......................................... 24,965 24,406
------------ ------------
Total liabilities ........................... 165,424 217,777
Redeemable preferred stock ................................. 13,951 13,951
Stockholders' equity:
Common stock .......................................... 111 148
Contributed capital ................................... 102,056 174,332
Retained earnings (deficit) ........................... (3,602) 2,035
------------ ------------
Total stockholders' equity .................. 98,565 176,515
------------ ------------
$ 277,940 $ 408,243
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1998 1997 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues, net
Funeral .................................... $ 15,365 $22,344 $ 46,283 $65,956
Cemetery ................................... 2,880 6,276 9,012 15,995
-------- ------- -------- -------
18,245 28,620 55,295 81,951
Costs and expenses
Funeral .................................... 12,271 16,608 34,405 46,934
Cemetery ................................... 2,417 4,699 7,187 11,920
-------- ------- -------- -------
14,688 21,307 41,592 58,854
-------- ------- -------- -------
Gross profit ............................... 3,557 7,313 13,703 23,097
General and administrative expenses ............. 1,471 2,041 3,657 5,661
-------- ------- -------- -------
Operating income ........................... 2,086 5,272 10,046 17,436
Interest expense, net ........................... 1,457 2,360 4,028 6,511
-------- ------- -------- -------
Income before income taxes and
extraordinary item ...................... 629 2,912 6,018 10,925
Provision for income taxes ...................... 282 1,269 2,357 4,833
-------- ------- -------- -------
Income before extraordinary item ........... 347 1,643 3,661 6,092
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $159 ................. (195) -- (195) --
-------- ------- -------- -------
Net income ...................................... 152 1,643 3,466 6,092
Preferred stock dividend requirements ........... 176 153 713 454
-------- ------- -------- -------
Net income (loss) attributable to common
stockholders ............................... $ (24) $ 1,490 $ 2,753 $ 5,638
======== ======= ======== =======
Basic earnings per share:
Net income before extraordinary item ....... $ .02 $ .10 $ .29 $ .44
Extraordinary item ......................... (.02) -- (.02) --
-------- ------- -------- -------
Net income ................................. $ -- $ .10 $ .27 $ .44
======== ======= ======== =======
Diluted earnings per share:
Net income before extraordinary item ....... $ .02 $ .10 $ .29 $ .43
Extraordinary item ......................... (.02) -- (.02) --
-------- ------- -------- -------
Net income ................................. $ -- $ .10 $ .27 $ .43
======== ======= ======== =======
Weighted average number of common and
common equivalent shares outstanding:
Basic ...................................... 10,546 14,733 10,040 12,772
======== ======= ======== =======
Diluted .................................... 10,841 15,224 10,323 13,198
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 3,466 $ 6,092
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 5,644 7,646
Provision for deferred income taxes .......................................... 1,574 1,347
Other, net ................................................................... (125) 938
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) in accounts receivables ........................................ (1,768) (5,688)
(Increase) in other assets ................................................ (2,176) (5,313)
Increase in payables and other liabilities ................................ 1,821 194
-------- ---------
Net cash provided by operating activities ........................... 8,436 5,216
Cash flows from investing activities:
Acquisitions, net of cash acquired ............................................... (43,568) (105,191)
Capital expenditures ............................................................. (6,162) (12,060)
Other, including disposition of assets ........................................... 600 (267)
-------- ---------
Net cash used in investing activities ............................... (49,130) (117,518)
Cash flows from financing activities:
Proceeds from long-term debt ..................................................... 41,884 94,455
Payments on long-term debt and obligations under capital leases .................. (1,112) (52,491)
Proceeds from issuance of common stock ........................................... -- 68,696
Payment of preferred stock dividends ............................................. (713) (454)
Other, net ....................................................................... (194) 70
-------- ---------
Net cash provided by financing activities ........................... 39,865 110,276
Net (decrease) in cash and cash equivalents ........................................ (829) (2,026)
Cash and cash equivalents at beginning of period ................................... 1,712 6,126
-------- ---------
Cash and cash equivalents at end of period ......................................... $ 883 $ 4,100
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................... $ 4,030 $ 7,079
======== =========
Cash paid for income taxes ....................................................... $ 812 $ 4,537
======== =========
Non-cash consideration for acquisitions .......................................... $ 28,328 $ 10,166
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include Carriage Services,
Inc. and its subsidiaries (the "Company"). All significant intercompany balances
and transactions have been eliminated.
The information for the three and nine months ended September 30, 1997 and
1998 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's report on Form 10-K for
the year ended December 31, 1997, 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.
2. ACQUISITIONS
During the nine months ended September 30, 1998, the Company purchased 34
funeral homes and five cemetery compared to 31 funeral homes and four cemeteries
purchased during the nine months ended September 30, 1997. These acquisitions
have been accounted for by the purchase method, and their results of operations
are included in the accompanying consolidated financial statements from the
dates of acquisition. The purchase price allocations for certain of these
acquisitions are based on preliminary information.
The effect of the above acquisitions on the Consolidated Balance Sheets was
as follows:
SEPTEMBER 30,
-------------------------
1997 1998
---------- ----------
(IN THOUSANDS)
Current assets, net of cash acquired ............. $ 7,671 $ 6,148
Cemetery property ................................ 19,645 25,159
Property, plant and equipment .................... 22,902 23,919
Deferred charges and other non-current assets .... 813 819
Names and reputations ............................ 33,594 61,292
Current liabilities .............................. (801) (466)
Other liabilities ................................ (11,928) (1,514)
--------- ---------
Total acquisitions .......................... 71,896 115,357
Consideration:
Debt ............................................. -- 6,556
Redeemable preferred stock issued ................ 20,000 --
Common stock issued .............................. 8,328 3,610
--------- ---------
Cash used for acquisitions .................. $ 43,568 $ 105,191
========= =========
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, 1997. 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,
-----------------------------
1997 1998
----------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
------------ ------------
Revenues, net .................................. $ 92,861 $ 96,745
Net income before income taxes ................. 6,804 9,375
Net income available to common stockholders .... 3,276 4,702
Earnings per common share:
Basic ..................................... 0.33 0.37
Diluted ................................... 0.32 0.36
3. RECENT ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and No. 131, "Disclosure about Segments of an Enterprise
and Related Information" are required to be implemented during 1998. The effect
of these pronouncements on the Company's consolidated financial condition and
results of operations is not expected to be material.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of death care services and products in
the United States. The Company's focus is on growth through acquisitions and
enhancements at facilities currently owned to increase revenues and gross
profit. The Company entered 1998 with the goals, along with an aggressive
acquisition budget to continue growing the Company, of implementing company-wide
training; increasing employee incentive and ownership programs; substantially
increasing the preneed sales and marketing activities; and strenthening the
management team. The objective of these goals was to expand the infrastructure
and stability of the Company as it continued to pursue consolidation
opportunities in the death care industry. The Company has successfully met these
goals which have resulted in a positive impact to profitability. The operating
focus for 1999 will leverage off of the 1998 goals to increase revenues,
margins, quality of service and market share.
Income from operations, which the Company defines as earnings before interest
and income taxes, increased 152.7% and 73.6% for the three and nine months ended
September 30, 1998, respectively, compared to the same periods in 1997. As a
percentage of net revenues, income from operations increased from 18.2% for the
first nine months of 1997 to 21.3% for the first nine months of 1998 and from
11.4% for the third quarter of 1997 to 18.4% for the third quarter of 1998. The
improvements were largely due to the increased gross profits at the individual
locations. Gross margins for the funeral homes increased from 25.1% (before
including a gain on the sale of property) in the first nine months of 1997 to
28.8% in the first nine months of 1998 and from 20.1% for the third quarter of
1997 to 25.7% for the third quarter of 1998, on increases in revenue of 42.5%
and 45.4%, respectively. Improvements in cemetery gross profit margins were
fueled by a doubling of the number of cemeteries during 1997 and the continued
expansion of the preneed sales function. As a percentage of cemetery net
revenues, cemetery gross profit was 25.5% in first nine months of 1998 compared
to 20.3% in the first nine months in 1997 on an increase in revenue of 77.5%.
Increased preneed sales and marketing efforts have had a significant impact
beginning in the fourth quarter of 1997 and continuing in 1998, as revenues and
gross profits from cemeteries owned at least one year increased 79.7% and
664.1%, respectively, in the first nine months of 1998 compared to the same
period in 1997.
The Company has experienced significant growth since 1995, when it owned 44
facilities. During 1996, the Company acquired 38 funeral homes and seven
cemeteries for an aggregate consideration of approximately $68 million.
Forty-four funeral homes and ten cemeteries were acquired during 1997 for
approximately $118 million. In addition, as of October 22, 1998, the Company has
acquired 41 funeral homes and five cemeteries for an aggregate consideration of
approximately $132 million. These acquisitions were funded through cash flow
from operations, additional borrowings under the Company's credit facilities and
issuance of preferred and common stock. The Company believes its increased
recognition in the death care industry as an established operator and purchaser
of funeral homes and cemeteries has improved its ability to attract potential
acquisitions that are larger, strategic and accretive and its ability to finance
its acquisitions with debt and equity. The Company has also achieved one of its
goals for 1998 by acquiring more combination funeral home and cemetery
acquisitions.
8
<PAGE>
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, 1997 and 1998. For purposes of
this discussion, funeral homes and cemeteries owned and operated 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."
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, 1997 compared to
the three and nine months ended September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------- -----------------
1997 1998 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations .......... $15,148 $15,316 $ 168 1.1%
Acquired operations .......... 217 7,028 6,811 *
------- ------- -------
Total net revenues ..... $15,365 $22,344 $ 6,979 45.4%
======= ======= =======
Gross profit:
Existing operations .......... $ 3,067 $ 3,806 $ 739 24.1%
Acquired operations .......... 27 1,930 1,903 *
------- ------- -------
Total gross ........ $ 3,094 $ 5,736 $ 2,642 85.4%
======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
-------------------- --------------------
1997 1998 AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ....... $35,086 $36,361 $ 1,275 3.6%
Acquired operations ....... 11,197 29,595 18,398 *
------- ------- -------
Total net revenues .... $46,283 $65,956 $19,673 42.5%
======= ======= =======
Gross profit:
Existing operations ....... $ 8,135 $ 9,884 $ 1,749 21.5%
Acquired operations ....... 3,743 9,138 5,395 *
------- ------- -------
Total gross profit ..... $11,878 $19,022 $ 7,144 60.1%
======= ======= =======
- -------------
* Not meaningful.
9
<PAGE>
Due to the rapid growth of the Company, existing operations represented only
68.5% of the total funeral revenues and only 66.4% of the total funeral gross
profit for the three months ended September 30, 1998 and only 55.1% of the total
funeral revenues and 52.0% of the total funeral gross profit for the nine months
ended September 30, 1998. Total funeral net revenues for the three months ended
September 30, 1998 increased $7.0 million or 45.4% over the three months ended
September 30, 1997. The higher net revenues reflect an increase of $6.8 million
in net revenues from acquired operations and an increase of $.2 million in net
revenues from existing operations. Total funeral net revenues for the nine
months ended September 30, 1998 increased $19.7 million or 42.5% over the nine
months ended September 30, 1997. The higher net revenues reflect an increase of
$1.3 million in net revenues from existing operations and an increase in net
revenues of $18.4 million from acquired operations.
Total funeral gross profit for the three months ended September 30, 1998
increased $2.6 million or 85.4% over the comparable three months of 1997. The
higher total gross profit reflected an increase of $1.9 million from acquired
operations and an increase of $.7 million from existing operations. Total
funeral gross profit for the nine months ended September 30, 1998 increased $7.1
million or 60.1% over the comparable nine months of 1997. The higher total gross
profit reflected an increase of $5.4 million from acquired operations and an
increase of $1.7 million from existing operations. Gross profit for existing
operations increased for both periods due to the efficiencies gained by
consolidation, cost savings, improved collections experience and the increasing
effectiveness of the Company's merchandising strategy. Total gross margin
increased from 20.1% for the third quarter of 1997 to 25.7% for the third
quarter of 1998 and from 25.7% for the first nine months of 1997 to 28.8% for
the first nine months of 1998 due to these factors.
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 June 30, 1997 compared to the
three and nine months ended September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1997 1998 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ........ $ 2,877 $ 3,843 $ 966 33.6%
Acquired operations ........ 3 2,433 2,430 *
------- ------- -------
Total net revenues ..... $ 2,880 $ 6,276 $ 3,396 117.9%
======= ======= =======
Gross profit:
Existing operations ........ $ 467 $ 1,022 $ 555 118.8%
Acquired operations ........ (4) 555 559 *
------- ------- -------
Total gross profit ..... $ 463 $ 1,577 $ 1,114 240.6%
======= ======= =======
- ---------
* Not meaningful.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
-------------------- --------------------
1997 1998 AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Total net revenues ................ $ 9,012 $15,995 $ 6,983 77.5%
======= ======= =======
Total gross profit ................ $ 1,825 $ 4,075 $ 2,250 123.3%
======= ======= =======
Due to the acquisition of relatively significant cemetery properties during
the first quarter of 1997, existing operations represented 61.2% of cemetery
revenues and 64.8% of cemetery gross profit for the three months ended September
30, 1998 and yet only 32.9% of cemetery revenues and 26.3% of cemetery gross
profit for the nine months ended September 30, 1998. As a result, the Company
does not believe it is meaningful to present the results for existing and
acquired operations separately for the nine months ended September 30, 1997 and
1998.
Total cemetery net revenues for the three months ended September 30, 1998
increased $3.4 million over the three months ended September 30, 1997 and total
cemetery gross profit increased $1.1 million over the comparable three months of
1997. The higher net revenues reflect an increase of $2.4 million in net
revenues from acquired operations and an increase of $1.0 million in revenues
from existing operations. Total cemetery net revenues for the nine months ended
September 30, 1998 increased $7.0 million over the nine months ended September
30, 1997, and total cemetery gross profit increased $2.3 million over the
comparable nine months of 1997. Total gross margin increased from 16.1% for the
third quarter of 1997 to 25.1% for the third quarter of 1998 and from 20.3% for
the nine months ended September 30, 1997 to 25.5% for the nine months ended
September 30, 1998. These increases were due primarily to particular cemeteries
acquired during 1997 and 1998 that are relatively more profitable, and increased
preneed marketing efforts.
OTHER.
General and administrative expenses for the nine months ended September 30,
1998 increased $2.0 million or 54.8% over the first nine months of 1997 due
primarily to the increased personnel expense necessary to support the Company's
growth and acquisition activity. However, the increase in general and
administrative expenses as a percentage of net revenues was less than one-half
of one percentage point as the expenses were spread over a larger volume of
revenue.
Interest expense for the nine months ended September 30, 1998 increased $2.5
million over the first nine months of 1997 principally due to increased
borrowings for acquisitions subsequent to September 30, 1997. Partially
offsetting the increased borrowings for acquisitions are the effects of a new
credit facility, which reflects substantially improved terms and reduced
interest rates compared to the previous arrangements and proceeds from the
Company's sale of common stock during May 1998, which were used to reduce
outstanding debt.
Preferred stock dividends of $454,000 were subtracted from the $6.1 million
of net income in computing the net income available to common stockholders of
$5.6 million for the nine months ended
11
<PAGE>
September 30, 1998. The reduction in preferred stock dividends from 1997 to 1998
is due to conversions of the preferred stock to common stock.
For the nine months ended September 30, 1998, the Company provided for income
taxes on income before income taxes at a combined state and federal rate of
44.2% compared with 39.2% for the same period in 1997. The effective tax rate
for the first nine months in 1997 included a 4.5% tax benefit for the
utilization of prior year net operating losses, net of other tax reserves.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $ 4.1 million at September 30, 1998,
representing a decrease of $2.0 million from December 31, 1997. For the nine
months ended September 30, 1998, cash provided by operations was $5.2 million as
compared to cash provided by operations of $8.4 million for the nine months
ended September 30, 1997. The decrease in net cash provided by operating
activities was principally due to the increases in accounts receivable and other
assets, which was partially offset by an increase in income from operations.
Cash used in investing activities was $117.5 million for the nine months ended
September 30, 1998 compared to $49.1 million for the first nine months of 1997,
due primarily to increases in amounts paid in connection with acquisitions and
capital expenditures.
In the first nine months of 1998, cash flow provided by financing activities
amounted to approximately $110.3 million, primarily due to the net proceeds
generated from the Company's equity offering in the second quarter of 1998 and
proceeds from long-term debt which were used to fund acquisitions. On May 28,
1998, the Company completed the sale of 3,000,000 shares of the Company's Class
A Common Stock and on June 10, 1998, the underwriters in that equity offering
exercised their options to sell an additional 450,000 shares of Class A Common
Stock, raising the total number of shares offered to 3,450,000 and resulting in
approximately $69 million in net proceeds, of which $45 million was used to
repay outstanding indebtedness under the Company's credit facility, with the
remaining $24 million used for acquisitions and general corporate purposes.
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. As of September 30, 1998,
the Company has 1,682,500 shares of Series D Preferred Stock and 12,278,285
shares of Series F Preferred Stock issued and outstanding. The Series D
Preferred Stock is convertible into Class B Common Stock and the Series F
Preferred Stock is convertible into Class A 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. Commencing
on the second anniversary of the completion of the Company's IPO (August 8,
1998), the Company may, at its option, redeem all or any portion of the shares
of Series D Preferred Stock then outstanding 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.
The holders of the Series F Preferred Stock are entitled to receive cash
dividends at the annual rate currently of $.042 per share, with the annual rate
increasing by 5% per year commencing January 1, 1999 until January 1, 2001, at
which time the annual rate becomes fixed at $0.0486 per share. On December 31,
2007, the Company must redeem all shares of Series F Preferred Stock then
outstanding at a
12
<PAGE>
redemption price of $1.00 per share, together with all accrued and unpaid
dividends. The Company does not have the option to redeem any Series F Preferred
Stock.
During September 1997, the Company entered into a new credit facility for a
$150 million revolving line of credit. The new credit facility has a five year
term, is unsecured and contains customary restrictive covenants, including a
restriction on the payment of dividends on common stock, and requires the
Company to maintain certain financial ratios. The facility allows for a total
debt capacity of 60% of total capital. Interest under the new credit facility is
provided at both LIBOR and prime rate options. During September 1998, the
Company increased its bank credit facility from $150 million to $225 million,
with three additional banks participating in the agreement. As of September 30,
1998, $156.8 million was outstanding under the line of credit, and the Company's
debt to total capital was 49% which allows for additional debt capacity of
approximately $100 million.
The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. During the nine months ended September
30, 1998, the Company incurred $12.1 million in capital expenditures, primarily
related to funeral home improvements. In addition, the Company currently expects
to incur additional capitalizable costs during the last three months of 1998
related to upgrading funeral home facilities. The Company believes that cash
flow from operations, borrowings under the new credit facility and its ability
to issue additional debt and equity securities should be sufficient to fund
acquisitions and its anticipated capital expenditures and other operating
requirements. In March 1997, the Company filed a shelf registration statement
relating to 2,000,000 shares of Class A Common Stock to be used to fund
acquisitions of which approximately 1,352,000 shares remain available at
September 30, 1998. The Company has increased its 1998 acquisition goal from
$120 million to $140 million. As of October 22, 1998, the Company has spent $132
million for acquisitions. 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 financings may be required to continue the Company's acquisition
program during 1999. 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.
SEASONALITY
The Company's business can be affected by seasonal fluctuations in the death
rate. Generally, death rates are higher during the winter months. In addition
the quarterly results of the Company may fluctuate depending on the magnitude
and timing of acquisitions.
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company.
YEAR 2000
The Company's information systems management group is constantly reviewing
the management and accounting software packages for internal accounting and
information requirements to meet with the continued growth of the Company and to
achieve the Year 2000 compliance. To address the Year 2000 issue, the Company's
information management group has implemented a Y2K program which
13
<PAGE>
encompasses: performing an inventory of the Company's Information Technology
("IT") and non-IT systems; assessing the potential problem areas; testing the
systems for Year 2000 readiness; and modifying systems that are not Year 2000
ready. For essential business operations, the inventory and assessment phases
have been completed and substantially all of its core systems are believed to be
Year 2000 compliant except for the record-keeping system for certain cemetery
operations, on which modification along with various functionality enhancements
are underway. The Y2K program is on target for June 1999 completion and the
Company believes it will be fully compliant by 2000.
The Company's total costs of becoming Year 2000 compliant are not expected to
be significant to the company's financial results. To date, the Company has
expensed approximately $18,000 related to the Year 2000 project, all of which
were expensed as incurred in the first nine months of 1998. The total remaining
costs of the Year 2000 project are presently estimated at less than $100,000
which will also be expensed as incurred.
As the Company operates in a relatively low technology business environment,
business can be conducted manually without significant disruptions to
operations. Therefore, the Company does not believe that any failure to achieve
Year 2000 readiness on a timely basis would result in a material adverse impact
to operations nor would it pose a material financial risk to the Company.
The estimated costs of the project and the dates on which the Company plans
to complete the Year 2000 projects are forward-looking statements based on the
management's best estimates, which were derived utilizing numerous assumptions
of future events. While the Company believes all necessary work will be
completed timely, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Factors that might cause such material differences include, but are not limited
to, non-compliance issues relating to material third party vendors and the
cooperation of the third party vendors. The Company intends to complete
assessment and contingency planning of its major third party vendors by March
1999.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1-- Amendment No. 2, dated September 16, 1998, to the Loan Agreement by
and among the Company and NationsBank of Texas, N. A., dated
September 9, 1997
*11.1-- Statement regarding computation of per share earnings.
*27.1-- Financial Data Schedule.
(*) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
15
<PAGE>
SIGNATURE
Pursuant o 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 12, 1998 /s/ Thomas C. Livengood
- ------------------ ----------------------------
DATE Thomas C. Livengood,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
16
EXHIBIT 10.1
AMENDMENT NO. 2
This Amendment No. 2 dated as of September 16, 1998 ("Agreement"), is
among Carriage Services, Inc., a Delaware corporation (the "Borrower"), the
lenders signatory to the Credit Agreement described below (the "Lenders"), and
NationsBank, N.A., successor in interest by merger to NationsBank of Texas,
N.A., as agent (the "Agent") for the Lenders.
INTRODUCTION
Reference is made to the Credit Agreement dated as of September 9, 1997
(as modified, the "Credit Agreement") among the Borrower, the Lenders, and the
Agent. The Borrower, the Lenders, and the Agent have agreed to increase the
amount of the Commitments under the Credit Agreement to $225,000,000 and make
other amendments to the Credit Agreement as set forth herein in connection
therewith.
THEREFORE, in connection with the foregoing and for other good and
valuable consideration, the Borrower, the Agent and the Lenders hereby agree as
follows:
Section 1. DEFINITIONS; REFERENCES. Unless otherwise defined in this
Agreement, each term used in this Agreement which is defined in the Credit
Agreement has the meaning assigned to such term in the Credit Agreement.
Section 2. AMENDMENT.
(a) The Lenders which are parties to the Credit Agreement prior to the
execution of this Agreement are retaining or increasing their respective
existing Commitments, and each of Chase Bank Texas, N.A., Wells Fargo Bank
(Texas), National Association, and Paribas are committing to respective
Commitments such that upon the effectiveness of this Agreement, the Commitments
of each Lender shall be those set forth for such Lender on the signature pages
of this Agreement, and the aggregate amount of such Commitments shall be
$225,000,000. The effective date for this increase shall be the date of this
Agreement, and following the effectiveness of this Agreement and as of such
date, (a) the Agent shall record the new Commitments in the Register, (b) the
Agent shall reallocate all outstanding Advances and all participation interests
in Letters of Credit, if any, so that the Lenders hold such Advances and
participation interests in Letters of Credit ratably in accordance with their
Commitments, and (c) each of Chase Bank Texas, N.A., Wells Fargo Bank (Texas),
National Association, and Paribas shall be a party to the Credit Agreement for
all purposes and have all of the rights and obligations of a Lender thereunder.
<PAGE>
(b) A new definition of "Amendment No. 2" is added to Section 1.1 of the
Credit Agreement in the appropriate alphabetical order as set forth below:
"AMENDMENT NO. 2" means the Amendment No. 2 dated as of September
16, 1998, among the Borrower, the Agent, and the Lenders amending the
terms of this Agreement.
(c) Section 2.01 of the Credit Agreement is amended by deleting the first
sentence thereof in its entirety and replacing it with the following:
Section 2.01 COMMITMENT TO MAKE ADVANCES. Each Lender severally agrees, on
the terms and conditions set forth in this Agreement, to make Advances to
the Borrower from time-to-time on any Business Day during the period from
the date of this Agreement until the Maturity Date in an aggregate amount
not to exceed at any time outstanding (a) the amount set opposite such
Lender's name on the signature pages of the Amendment No. 2 as its
Commitment, or if such Lender has entered into any Assignment and
Acceptance, the amount set forth for such Lender as its Commitment in the
Register maintained by the Agent pursuant to Section 9.06(c), as such
amount may be reduced pursuant to Section 2.05 (such Lender's
"Commitment") LESS (b) such Lender's Pro Rata Share of the Letter of
Credit Exposure at such time LESS (c) such Lender's Pro Rata Share of the
Swing Line Loan at such time.
(d) Section 2.02(c)(i) of the Credit Agreement is amended by deleting such
section in its entirety and replacing it with the following:
(c) CERTAIN LIMITATIONS. Notwithstanding anything in paragraphs (a)
and (b) above:
(i) at no time shall there be more than ten Interest Periods
applicable to outstanding Eurodollar Rate Advances;
(e) Section 7.01(k) of the Credit Agreement is amended by deleting such
section in its entirety and replacing it with the following:
(k) CERTIFICATES; OPINION. The Borrower shall fail to deliver to the
Agent within 30 days after the date of Amendment No. 2 any of the
-2-
<PAGE>
following items: (i) certificates of good standing, existence and
authority for each Subsidiary formed or acquired by the Borrower after the
date of this Agreement (but on or prior to the date of Amendment No. 2),
or (ii) a supplemental, favorable opinion of Snell & Smith, a Professional
Corporation, counsel to the Borrower and its Subsidiaries, dated as of the
date of Amendment No. 2, regarding the existence, good standing, and
authority of each of the foregoing Subsidiaries of the Borrower, in form
and substance reasonably satisfactory to the Agent.
(f) Article IV of the Credit Agreement is amended by adding thereto, in
appropriate numerical order, the following Section 4.21:
Section 4.21. YEAR 2000.
(a) The Borrower (i) has begun analyzing the operations of the
Borrower and its Subsidiaries and Affiliates that could be adversely
affected by failure to become Year 2000 compliant (that is, that computer
applications, imbedded microchips and other systems will be able to
perform date-sensitive functions prior to and after December 31, 1999);
and (ii) is developing a plan for becoming Year 2000 compliant in a timely
manner. The Borrower reasonably believes that it will become Year 2000
compliant for its operations and those of its Subsidiaries and Affiliates
on a timely basis except to the extent that a failure to do so could not
reasonably be expected to cause a Material Adverse Change.
(b) The Borrower reasonably believes any suppliers and vendors that
are material to the operations of the Borrower or its Subsidiaries and
Affiliates will be Year 2000 compliant for their own computer applications
except to the extent that a failure to do so could not reasonably be
expected to cause a Material Adverse Change.
(c) The Borrower will promptly notify the Agent in the event the
Borrower determines that any computer application which is material to the
operations of the Borrower, its Subsidiaries, or any of its material
vendors or suppliers will not be fully Year 2000 compliant on a timely
basis, except to the extent that such failure could not reasonably be
expected to cause a Material Adverse Change.
(g) The Schedules to the Credit Agreement are amended by replacing
SCHEDULE
-3-
<PAGE>
1 to the Credit Agreement with SCHEDULE 1 attached to this Agreement.
Section 3. EFFECTIVENESS. The effectiveness of the amendments in Section 2
of this Agreement are subject to the satisfaction of the condition precedent
that the Borrower shall have delivered or shall have caused to be delivered the
documents and other items (other than the items indicated as post-closing
documents) listed on the Closing Documents List dated as of even date with this
Agreement, each in form and with substance satisfactory to the Agent and where
applicable executed by the appropriate parties thereto.
Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants that (a) the execution, delivery and performance of this Agreement are
within the corporate power and authority of the Borrower and have been duly
authorized by appropriate proceedings, (b) this Agreement constitutes legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the rights of
creditors generally and general principles of equity, and (c) upon the
effectiveness of this Agreement and the amendment of the Credit Documents as
provided for herein, no Event of Default shall exist under the Credit Documents
and there shall have occurred no event which with notice or lapse of time would
become an Event of Default under the Credit Documents, as amended.
Section 5. EFFECT ON CREDIT DOCUMENTS. Except as amended herein, the
Credit Agreement and all other Credit Documents remain in full force and effect
as originally executed. Nothing herein shall act as a waiver of the Agent's or
any Lender's rights under the Credit Documents as amended, including the waiver
of any default or event of default, however denominated. The Borrower must
continue to comply with the terms of the Credit Documents, as amended. This
Agreement is a Credit Document for the purposes of the provisions of the other
Credit Documents. Without limiting the foregoing, any breach of representations,
warranties, and covenants under this Agreement may be a default or event of
default under the other Credit Documents.
Section 6. EFFECTIVENESS. This Agreement shall become effective and the
Credit Agreement shall be amended as provided in this Agreement effective on the
date first set forth above when the Agent shall have received duly and validly
executed counterparts hereof signed by the Borrower, the Agent, and the Lenders.
-4-
<PAGE>
Section 7. MISCELLANEOUS. The miscellaneous provisions of the Credit
Agreement apply to this Agreement. This Agreement may be signed in any number
of counterparts, each of which shall be an original, and may be executed and
delivered by telecopier.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THIS
AGREEMENT, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
BORROWER:
CARRIAGE SERVICES, INC.
By: _______________________________________
Thomas C. Livengood, Executive Vice
President and Chief Financial Officer
AGENT:
NATIONSBANK, N.A., successor in interest
by merger to NationsBank of Texas, N.A.,
as Agent
By: _______________________________________
Albert L. Welch
Vice President
-5-
<PAGE>
LENDERS:
NATIONSBANK, N.A., successor in interest by
merger to NationsBank of Texas, N.A.
Commitment: $40,000,000 By:__________________________________
Albert L. Welch
Vice President
PROVIDENT SERVICES, INC.
Commitment: $50,000,000 By: __________________________________
Daniel M. Chong
Vice President
BANK ONE, TEXAS, NA
Commitment: $30,000,000 By: __________________________________
Name: ________________________________
Title: _______________________________
CIBC INC.
Commitment: $15,000,000 By:___________________________________
Name: ________________________________
Title: _______________________________
-6-
<PAGE>
FIRST UNION NATIONAL BANK, successor in
interest by merger to Corestates Bank, N.A.
Commitment: $20,000,000 By: __________________________________
Name: ________________________________
Title: _______________________________
TORONTO DOMINION (TEXAS), INC.
Commitment: $20,000,000 By: __________________________________
Name: ________________________________
Title: _______________________________
CHASE BANK TEXAS, N.A.
Commitment: $20,000,000 By: __________________________________
Name: ________________________________
Title: _______________________________
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
Commitment: $15,000,000 By: ___________________________________
Name: ________________________________
Title: _______________________________
-7-
<PAGE>
PARIBAS
Commitment: $15,000,000 By: __________________________________
Name: ________________________________
Title: _______________________________
By: __________________________________
Name: ________________________________
Title: _______________________________
-8-
EXHIBIT 11.1
CARRIAGE SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
Earnings per share for the three and nine month periods ended September
30, 1998 and 1997 is calculated based on the weighted average number of common
and common equivalent shares outstanding during the period as prescribed by SFAS
128. The following table sets forth the computation of the basic and diluted
earnings per share for the three and nine month periods ended September 30, 1997
and 1998:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income before extraordinary item ....... $ 347 $ 1,643 $ 3,661 $ 6,092
Extraordinary item ......................... (195) -- (195) --
-------- -------- -------- --------
Net income ................................. 152 1,643 3,466 6,092
Preferred stock dividends .................. 176 153 713 454
-------- -------- -------- --------
Net income (loss) available to common
stockholders for basic EPS computation .... (24) 1,490 2,753 5,638
Effect of dilutive securities .............. -- -- -- --
-------- -------- -------- --------
Net income (loss) available to common
stockholders for diluted EPS computation .. $ (24) $ 1,490 $ 2,753 $ 5,638
======== ======== ======== ========
Weighted average number of common shares
outstanding for basic EPS computation .... 10,546 14,733 10,040 12,772
Effect of dilutive securities:
Stock options ......................... 295 491 283 426
Assumed conversion of preferred stock . -- -- -- --
-------- -------- -------- --------
Weighted average number of common and common
equivalent shares outstanding for diluted
EPS computation ........................... 10,841 15,224 10,323 13,198
======== ======== ======== ========
Basic earnings per share:
Net income before extraordinary item .. $ .02 $ .10 $ .29 $ .44
Extraordinary item .................... (.02) -- (.02) --
-------- -------- -------- --------
Net income ............................ $ -- $ .10 $ .27 $ .44
======== ======== ======== ========
Diluted earnings per share:
Net income before extraordinary item .. $ .02 $ .10 $ .29 $ .43
Extraordinary item .................... (.02) -- (.02) --
-------- -------- -------- --------
Net income ............................ $ -- $ .10 $ .27 $ .43
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,100
<SECURITIES> 0
<RECEIVABLES> 20,231
<ALLOWANCES> 1,569
<INVENTORY> 4,574
<CURRENT-ASSETS> 30,460
<PP&E> 128,518
<DEPRECIATION> 10,112
<TOTAL-ASSETS> 408,243
<CURRENT-LIABILITIES> 17,958
<BONDS> 178,668
0
13,951
<COMMON> 148
<OTHER-SE> 176,367
<TOTAL-LIABILITY-AND-EQUITY> 408,243
<SALES> 81,951
<TOTAL-REVENUES> 81,951
<CGS> 58,854
<TOTAL-COSTS> 58,854
<OTHER-EXPENSES> 5,661
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,511
<INCOME-PRETAX> 10,925
<INCOME-TAX> 4,833
<INCOME-CONTINUING> 6,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,092
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
