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, 2000
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.)
1900 ST. JAMES PLACE, 4TH FLOOR, HOUSTON, TX 77056
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 332-8400
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Class A Common Stock, $.01 par value
per share, and Class B Common Stock, $.01 par value per share, outstanding as of
November 8, 2000 was 14,229,601 and 1,903,212 respectively.
<PAGE>
CARRIAGE SERVICES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1999 and 2000 and the
Nine Months Ended September 30, 1999 and 2000 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 2000 5
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK 17
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
2
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 2,517 $ 6,426
Accounts receivable --
Trade, net of allowance for doubtful accounts of $6,058 in
1999 and $6,283 in 2000 ...................................................... 23,036 19,256
Other ............................................................................. 4,941 5,053
--------------- ---------------
27,977 24,309
Assets held for sale, net ............................................................ -- 5,504
Inventories and other current assets ................................................. 13,851 14,320
--------------- ---------------
Total current assets ........................................................ 44,345 50,559
Property, plant and equipment, at cost, net of accumulated depreciation of $17,250 in
1999 and $20,861 in 2000 .............................................................. 153,347 148,436
Cemetery property, at cost ................................................................. 65,920 63,809
Names and reputations, net of accumulated amortization of $14,339 in 1999 and $17,967
in 2000 ............................................................................... 231,393 222,699
Deferred charges and other noncurrent assets ............................................... 44,585 45,463
--------------- ---------------
$ 539,590 $ 530,966
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 4,726 $ 5,101
Accrued liabilities ................................................................... 11,938 14,315
Current portion of long-term debt and obligations under capital
leases ............................................................................. 5,496 2,559
--------------- ---------------
Total current liabilities .................................................... 22,160 21,975
Preneed liabilities, net .................................................................... 9,099 6,461
Long-term debt, net of current portion ...................................................... 178,942 182,323
Obligations under capital leases, net of current portion .................................... 3,333 3,222
Deferred income taxes ....................................................................... 23,021 24,762
--------------- ---------------
Total liabilities ............................................................ 236,555 238,743
--------------- ---------------
Commitments and contingencies
Redeemable preferred stock .................................................................. 1,172 1,172
Company-obligated mandatorily redeemable
convertible preferred securities of Carriage Services
Capital Trust holding solely Carriage Services, Inc. 7%
convertible junior subordinated debentures ............................................. 89,854 89,884
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares
authorized; 13,912,000 and 14,179,000 issued and outstanding
at December 31, 1999 and September 30, 2000, respectively ........................... 139 142
Class B Common Stock, $.01 par value; 10,000,000 shares authorized;
2,030,000 and 1,906,000 issued and outstanding
at December 31, 1999 and September 30, 2000, respectively ........................... 20 19
Contributed capital ................................................................... 195,931 193,127
Retained earnings ..................................................................... 15,919 7,879
--------------- ---------------
Total stockholders' equity ................................................... 212,009 201,167
--------------- ---------------
$ 539,590 $ 530,966
=============== ===============
</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,
--------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues, net
Funeral ......................................................... $ 29,083 $ 29,665 $ 93,411 $ 94,932
Cemetery ........................................................ 11,387 10,359 31,400 34,596
------------ ------------ ------------ ------------
40,470 40,024 124,811 129,528
Costs and expenses
Funeral ......................................................... 21,991 24,871 66,161 75,392
Cemetery ........................................................ 8,440 8,527 23,319 26,308
------------ ------------ ------------ ------------
30,431 33,398 89,480 101,700
------------ ------------ ------------ ------------
Gross profit .................................................... 10,039 6,626 35,331 27,828
General and administrative expenses ................................. 2,202 4,237 6,915 9,106
Impairment/losses on assets held for sale or sold ................... -- 12,449 -- 12,449
------------ ------------ ------------ ------------
Operating income (loss) ......................................... 7,837 (10,060) 28,416 6,273
Interest expense, net ............................................... 3,145 3,562 10,105 10,716
Financing cost of company-obligated securities of
Carriage Services Capital Trust ................................ 1,641 1,641 2,151 4,922
------------ ------------ ------------ ------------
Total interest and financing costs ............................ 4,786 5,203 12,256 15,638
Income (loss) before income taxes and
extraordinary item ......................................... 3,051 (15,263) 16,160 (9,365)
Provision (benefit) for income taxes ................................ 1,312 (4,212) 6,949 (1,386)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ......................... 1,739 (11,051) 9,211 (7,979)
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $151 ................................. -- -- (200) --
------------ ------------ ------------ ------------
Net income (loss) ................................................... 1,739 (11,051) 9,011 (7,979)
Preferred stock dividend requirements ............................... 25 20 78 61
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders .............. $ 1,714 $ (11,071) $ 8,933 $ (8,040)
============ ============ ============ ============
Basic earnings per share:
Net income (loss) before extraordinary item ..................... $ 0.11 $ (0.69) $ 0.58 $ (0.50)
Extraordinary item .............................................. $ -- $ -- $ (0.01) $ --
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 0.11 $ (0.69) $ 0.57 $ (0.50)
============ ============ ============ ============
Diluted earnings per share:
Net income (loss) before extraordinary item ..................... $ 0.11 $ (0.69) $ 0.57 $ (0.50)
Extraordinary item .............................................. $ -- $ -- $ (0.01) $ --
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 0.11 $ (0.69) $ 0.56 $ (0.50)
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding:
Basic ........................................................... 15,906 16,084 15,864 16,030
============ ============ ============ ============
Diluted ......................................................... 15,983 16,084 16,049 16,030
============ ============ ============ ============
</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,
-------------------------
1999 2000
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................................. $ 9,011 $ (7,979)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and Amortization .................................................................. 12,044 14,161
Loss on early extinguishment of debt, net of income taxes ...................................... 200 --
Loss on sale of business assets ................................................................ -- 1,349
Impairment on assets held for sale ............................................................. -- 11,100
Provision for losses on accounts receivable .................................................... 3,294 4,004
Deferred income taxes .......................................................................... 2,161 1,675
---------- ----------
Net cash provided by operating activities before
changes in assets and liabilities ......................................................... 26,710 24,310
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) in accounts receivables ............................................................. (7,003) (5,496)
(Increase) in inventories and other current assets ............................................. (1,486) (160)
(Increase) decrease in deferred charges and other .............................................. (1,185) 323
Increase (decrease) in accounts payable ........................................................ (703) 375
Increase in accrued liabilities ................................................................ 3,474 1,303
(Decrease) in preneed liabilities .............................................................. (3,190) (2,160)
---------- ----------
Net cash provided by operating activities ............................................. 16,617 18,495
Cash flows from investing activities:
Prearranged funeral costs ......................................................................... (5,695) (2,830)
Purchase of note receivable ....................................................................... -- (566)
Acquisitions, net of cash acquired ................................................................. (37,551) (1,516)
Proceeds from sale of business assets .............................................................. -- 2,199
Capital expenditures ............................................................................... (13,405) (9,472)
---------- ----------
Net cash used in investing activities ................................................. (56,651) (12,185)
Cash flows from financing activities:
Proceeds from long-term debt ....................................................................... 133,357 34,943
Payments on long-term debt and obligations under capital leases .................................... (180,866) (34,415)
Payment of acquisition-related obligation .......................................................... -- (3,297)
Proceeds from issuance of common stock ............................................................. 659 500
Proceeds from issuance of company-obligated mandatorily
redeemable convertible preferred securities ...................................................... 89,881 --
Payment of preferred stock dividends ............................................................... (78) (61)
Payment of deferred debt charges and other ......................................................... (1,934) (71)
---------- ----------
Net cash provided (used) by financing activities ...................................... 41,019 (2,401)
Net increase in cash and cash equivalents ............................................................ 985 3,909
Cash and cash equivalents at beginning of period ..................................................... 2,892 2,517
---------- ----------
Cash and cash equivalents at end of period ........................................................... $ 3,877 $ 6,426
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs ......................................................... $ 11,578 $ 17,680
========== ==========
Cash paid for income taxes ......................................................................... $ 7,499 $ 530
========== ==========
Non-cash consideration for acquisitions ............................................................ $ 1,914 $ --
========== ==========
</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
(a) The Company
Carriage Services, Inc., ("Carriage" or the "Company") is the fourth largest
publicly-traded provider of products and services in the death care industry in
the United States. As of September 30, 2000, the Company owned and operated 176
funeral homes and 42 cemeteries in 31 states.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information for the three and nine months ended September 30, 1999 and
2000 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, 1999, and should be read in conjunction therewith.
Certain prior period amounts in the consolidated financial statements have been
reclassified to conform with current period presentation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(e) Accounting 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, is to be implemented for the fourth quarter of
2000, and applied retroactively to the first three quarters of this fiscal year,
to provide guidance related to recognizing revenue in circumstances in which no
specific authoritative literature exists. Members of the death care industry, in
consultation with the Commission, have agreed to certain changes in the manner
in which cemetery preneed sales and costs are recorded. The changes that are
meaningful to the Company are a change from recording cemetery merchandise and
service revenue, and their related costs at the time the contract is executed,
to the period in which they are delivered. The industry participants are
continuing to review the application of the Staff Accounting Bulletin with the
Commission as it relates to the manner in which we record preneed trusts and
related trust earnings and costs. All accounting changes are not expected to
result in a material change in net
6
<PAGE>
cash flows nor the amount of revenues we ultimately expect to realize. However,
they may have a material impact on our consolidated financial statements and on
the manner in which we record certain preneed activities. We anticipate
discussions to be finalized and the financial impact calculated during the
fourth quarter of 2000. Implementation, using the new accounting guidance, would
include adjustments to the first three quarters' financial statements as well as
proforma adjustments to the prior year comparative financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, for which the effective date was deferred
to years beginning after June 15, 2000 by SFAS No. 137, and which was amended by
SFAS No. 138, to establish accounting and financial reporting standards for
certain derivative instruments and certain hedging activities. The key
provisions of SFAS 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 which have a notional amount of $50
million to hedge against rising interest rates on its variable rate long-term
debt. The swaps, which have a fair value of $1.4 million and $2.2 million at
September 30, 2000 and December 31, 1999, respectively, are currently carried
off-balance sheet, but will be recorded as an asset when the Company implements
SFAS 133 in its first quarter of 2001.
The Financial Accounting Standards Board has issued an exposure draft which
would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be a
reduction in the period of amortization of Names and Reputations, which Carriage
has been amortizing over 40 years.
2. ACQUISITIONS
Acquisition activities have virtually ceased within the publicly
traded companies in the deathcare industry, including the Company. During the
nine months ended September 30, 2000, the Company's new business acquisition
activities were limited to a long-term agreement to manage a municipal cemetery.
Acquisition adjustments, primarily related to contingent consideration, were
made during the first nine months of 2000 for certain acquisitions completed in
prior years. Fifteen funeral homes and fourteen cemeteries were acquired during
the nine months ended September 30, 1999. These acquisitions have been accounted
for by the purchase method, and their results of operations are included in the
accompanying consolidated financial statements from the dates of acquisition.
7
<PAGE>
The effect of the above acquisitions on the Consolidated Balance Sheets was as
follows:
SEPTEMBER 30,
----------------------
1999 2000
-------- --------
(IN THOUSANDS)
Current assets, net of cash acquired ............... $ 9,682 $ (1,712)
Cemetery property .................................. 4,215 --
Property, plant and equipment ...................... 12,386 14
Deferred charges and other noncurrent assets ....... 907 249
Names and reputations .............................. 17,325 3,474
Current liabilities ................................ (2,200) (140)
Other liabilities .................................. (2,850) (369)
-------- --------
Total acquisitions ............................ 39,465 1,516
Consideration:
Debt ............................................... 1,914 --
Common stock issued ................................ -- --
-------- --------
Cash used for acquisitions .................... $ 37,551 $ 1,516
======== ========
The following table represents, on an unaudited pro forma basis, the combined
operations of the Company and the above noted acquisitions, as if such
acquisitions had occurred as of January 1, 1999. Appropriate adjustments have
been made to reflect the accounting basis used in recording these acquisitions,
however, these unaudited pro forma results are based on the acquired businesses'
historical financial results and do not assume any additional profitability
resulting from the application of the Company's revenue enhancement measures or
cost reduction programs to the historical results of the acquired businesses.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would have
resulted had the combinations been in effect on the dates indicated, that have
resulted since the dates of acquisition or that may result in the future.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues, net ........................................ $ 135,707 $ 129,712
Net income before income taxes and extraordinary item 15,589 (9,522)
Net income available to common stockholders .......... 8,608 (8,174)
Earnings per common share:
Basic ........................................... 0.54 (0.51)
Diluted ......................................... 0.55 (0.51)
8
<PAGE>
3. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States
(table in thousands).
<TABLE>
<CAPTION>
FUNERAL CEMETERY CORPORATE CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
External revenues:
Nine months ended September 30, 2000 ....................... $ 93,516 $ 36,012 -- $ 129,528
Nine months ended September 30, 1999 ....................... 91,707 33,104 -- 124,811
Profit and Loss before extraordinary item:
Nine months ended September 30, 2000 ....................... $ 3,392 $ 3,723 $ (15,094) $ (7,979)
Nine months ended September 30, 1999 ....................... 15,189 5,345 (11,323) 9,211
Total Assets:
September 30, 2000 ......................................... $ 384,510 $ 130,317 $ 16,139 $ 530,966
September 30, 1999 ......................................... 384,940 128,057 14,228 527,225
</TABLE>
4. ASSETS HELD FOR SALE
During the third quarter of 2000, management identified certain
underperforming funeral home and cemetery businesses for possible sale. Two
funeral home businesses with a carrying value of $3.5 million were sold for
cash during the third quarter resulting in a loss of $1.3 million.
Additionally, eight funeral home businesses and three cemetery businesses
with a carrying value of approximately $16.6 million were segregated and
classified as assets held for sale, net of impairment charges of $11.1
million and liabilities to reduce the carrying value to net realizable value.
The impairment charges were based on management's best estimate of net
proceeds, and the ultimate proceeds received may differ.
5. LONG-TERM DEBT
During September 2000, the Company restructured its existing credit facility,
decreasing the line of credit from $260 million to $100 million, changing
certain financial covenants and ratio calculations, and narrowing the pricing
grid which determines the applicable borrowing margin for LIBOR and prime
rate borrowings. The credit facility is unsecured and has a remaining term of
approximately four years.
In November 2000, the Company amended the Note Purchase Agreement under which
it previously issued $110 million of senior notes. The amendments changed
certain financial covenants and ratio calculations, and included terms
requiring proceeds from asset dispositions to be applied pro rata with other
senior debt to reduce outstanding principal on the senior notes.
9
<PAGE>
The most significant changes to the debt covenants relate to the following:
o Flexibility in the minimum net worth requirement to allow for
restructuring charges to reduce the minimum net worth requirement;
o The addition of a ratio of debt to earnings before interest, taxes,
depreciation and amortization, which becomes more restrictive over time;
and
o The addition of a provision limiting acquisitions above a certain size
without prior approval.
6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST
Carriage Services Capital Trust, a wholly-owned subsidiary of the Company,
has issued and has outstanding 1,875,000 units of 7% convertible preferred
securities. These convertible preferred securities have a liquidation amount
of $50 per unit and mature in 2029. The sole assets of the Trust are 7%
Convertible Junior Subordinated Debentures of Carriage Services, Inc.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Carriage is a leading provider of death care services and products in the
United States. Historically, our focus has been on operational enhancements at
facilities currently owned to increase revenues and gross profit, as well as
growth through acquisitions. That focus resulted in a track record of growth
from acquisition opportunities; high standards of service, operational and
financial performance; and an infrastructure containing measurement and
management systems. This focus included institutionalizing internal training,
internal growth, and making quality initiatives an integral part of the culture.
As previously announced for 2000, the operating focus was revised to emphasize
increasing operating cash flow and growth through strategies that do not require
investment of new capital.
During the third quarter of 2000, we initiated a major restructuring program
termed "Fresh Start" in response to the current industry environment and
deterioration of the Company's operating results this year. The program began
with a review of the funeral home and cemetery portfolios, operating strategies,
organizational structure, and financial covenants under the Company debt
agreements. The principal elements of Fresh Start include downsizing the
corporate organization, changing the operating leadership, changing the preneed
funeral marketing strategy, stratifying by performance the funeral home and
cemetery portfolios, implementing action plans to improve underperforming
businesses, disposing of some underperforming businesses, reviewing the carrying
basis of other underperforming businesses, and modifying financial covenants
with lenders to facilitate the execution of Fresh Start.
Many of the elements of Fresh Start are well underway. During the month of
September, there was a considerable downsizing of the Houston corporate support
staff, and the corporate headquarters were moved to more modest facilities. The
preneed funeral strategy was changed from a national, centralized strategy to a
local decentralized strategy, whereby each business will have a program
customized to its local needs which will be managed by the local funeral home
manager. As a result, the national preneed funeral sales organization was
eliminated and funeral preneed trust investments are in the process of being
consolidated with one trustee. Changes in personnel were also made at the senior
management level in the funeral home and cemetery operating segments.
As a result of the initial review of the funeral home and cemetery
portfolios, the businesses were divided into two groups: core and
underperforming. At the conclusion of the initial review, we made the decision
to sell ten funeral home businesses and three cemetery businesses. The Company
recorded impairment charges and related losses for the sale of two of the
businesses totaling $12.4 million. Our continued assessment of the
underperforming properties may result in additional impairment losses in the
fourth quarter, which may be material.
Working directly with the Company's banks and senior note holders, we were
able to modify the financial covenants on the debt to allow for all elements of
Fresh Start to be executed and any adjustments resulting from the adoption of
SAB 101 to be made.
11
<PAGE>
RESULTS OF OPERATIONS
Income from operations, which the Company defines as earnings before interest
and income taxes, decreased, as a percentage of net revenues, from 19.4% for the
third quarter of 1999 to (25.1)% for the third quarter of 2000. This decrease
was due largely to asset impairment charges and losses on sale totaling
approximately $12.4 million and other nonrecurring charges totaling
approximately $1.8 million. Excluding the impairment charges and other
nonrecurring charges, income from operations for the third quarter 2000 was
10.5% of net revenue. Gross margins for the funeral homes decreased from 24.4%
in the third quarter of 1999 to 16.2% in the third quarter of 2000, while
revenues increased 2%. As a percentage of cemetery net revenues, cemetery gross
profit was 17.7% in the third quarter of 2000 compared to 25.9% in the third
quarter in 1999. Revenues and gross profits from cemeteries decreased 9% and
38%, respectively, in the third quarter of 2000 compared to the same period in
1999.
The following is a discussion of the Company's results of operations for the
three and nine month periods ended September 30, 1999 and 2000. 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, 1999 compared to
the three and nine months ended September 30, 2000.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ ------------------
1999 2000 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ........ $28,834 $28,753 $ (81) (0.3%)
Acquired operations ........ 249 912 663 *
------- ------- ------
Total net revenues $29,083 $29,665 582 2.0%
======= ======= ======
Gross profit:
Existing operations ........ $ 7,070 $ 4,633 $(2,437) (34.5%)
Acquired operations ........ 22 161 139 *
------- ------- ------
Total gross profit $ 7,092 $ 4,794 $(2,298) (32.4%)
======= ======= ======
--------------------
* Not meaningful.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------------- --------------------------
1999 2000 AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Existing operations ....................................... $ 86,438 $ 82,489 $ (3,949) (4.6%)
Acquired operations ....................................... 6,973 12,443 5,470 *
---------- ---------- ----------
Total net revenues .............................. $ 93,411 $ 94,932 $ 1,521 1.6%
========== ========== ==========
Gross profit:
Existing operations ....................................... $ 25,087 $ 16,853 $ (8,234) (32.8%)
Acquired operations ....................................... 2,163 2,687 524 *
---------- ---------- ----------
Total gross profit .............................. $ 27,250 $ 19,540 $ (7,710) (28.3%)
========== ========== ==========
</TABLE>
---------
* Not meaningful.
Total funeral net revenues for the three months ended September 30, 2000
increased $582,000 or 2.0% over the three months ended September 30, 1999. The
higher net revenues reflect an increase of $663,000 in net revenues from
acquired operations and a decrease of $81,000 in net revenues from existing
operations. Total funeral net revenues for the nine months ended September 30,
2000 increased $1.5 million or 1.6% over the nine months ended September 30,
1999. The higher net revenues reflect an increase of $5.5 million in net
revenues from acquired operations and a decrease in net revenues of $3.9 million
from existing operations. The number of funeral service calls for existing
operations was relatively unchanged in comparing the three months ended
September 30, 2000 to the three months ended September 30, 1999, and was 4.3%
lower in comparing the nine month periods ended September 30, 2000 to 1999. The
average revenue per call declined 0.3% for each of the three and nine month
periods in 2000 to 1999.
Total funeral gross profit for the three months ended September 30, 2000
decreased $2.3 million or 32.4% over the comparable three months of 1999. The
decrease was largely impacted by higher salary and casket costs in 2000 and
adjustments to previously recorded field incentive compensation in the 1999
quarter. The lower total gross profit reflected an increase of $139,000 from
acquired operations and a decrease in gross profit from existing operations of
$2.4 million. Total funeral gross profit for the nine months ended September 30,
2000 decreased $7.7 million or 28.3% over the comparable nine months of 1999.
The higher total gross profit reflected an increase of $524,000 from acquired
operations and decrease of $8.2 million from existing operations. Total gross
margin decreased from 24.4% for the third quarter of 1999 to 16.2% for the third
quarter of 2000 and decreased from 29.2% for the first nine months of 1999 to
20.6% for the first nine months of 2000.
CEMETERY SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations for the three and nine months ended September 30, 1999 compared to
the three and nine months ended September 30, 2000.
13
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------------- --------------------------
1999 2000 AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Existing operations ....................................... $ 11,340 $ 9,382 $ (1,958) (17.3%)
Acquired operations ....................................... 47 977 930 *
---------- ---------- ----------
Total net revenues .............................. $ 11,387 $ 10,359 $ (1,028) (9.0%)
========== ========== ==========
Gross profit:
Existing operations ....................................... $ 2,914 $ 1,797 $ (1,117) (38.3%)
Acquired operations ....................................... 33 35 2 *
---------- ---------- ----------
Total gross profit .............................. $ 2,947 $ 1,832 ($ 1,115) (37.8%)
========== ========== ==========
</TABLE>
---------
* Not meaningful.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------------- --------------------------
1999 2000 AMOUNT PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Existing operations ....................................... $ 25,844 $ 23,265 $ (2,579) (10.0%)
Acquired operations ....................................... 5,556 11,331 5,775 *
---------- ---------- ----------
Total net revenues .............................. $ 31,400 $ 34,596 $ 3,196 10.2%
========== ========== ==========
Gross profit:
Existing operations ....................................... $ 6,591 $ 5,743 $ (848) (12.9%)
Acquired operations ....................................... 1,490 2,545 1,055 *
---------- ---------- ----------
Total gross profit .............................. $ 8,081 $ 8,288 $ 207 2.6%
========== ========== ==========
</TABLE>
---------
* Not meaningful.
Total cemetery net revenues for the three months ended September 30, 2000
decreased $1.0 million over the three months ended September 30, 1999 and total
cemetery gross profit decreased $1.1 million over the comparable three months of
1999. The lower net revenues reflect an increase of $0.9 million in net revenues
from acquired operations and a decrease of $2.0 million in revenues from
existing operations. Total cemetery net revenues for the nine months ended
September 30, 2000 increased $3.2 million over the nine months ended September
30, 1999, and total cemetery gross profit increased $207,000 over the comparable
nine months of 1999. Total gross margin decreased from 25.8% for the three
months ended September 30, 1999 to 17.7% for the three months ended September
30, 2000. Total gross margin decreased from 25.7% for the nine months ended
September 30, 1999 to 24.0% for the nine months ended September 30, 2000. The
lower gross margins in 2000 are due to lower amounts from preneed sales in the
current year, which generally carry a higher gross margin.
14
<PAGE>
OTHER.
General and administrative expenses for the three and nine month periods
ended September 30, 2000 increased $2.0 million and $2.2 million over the
respective three and nine month periods of 1999. The increase for the periods
consists primarily of severance charges related to the termination of certain
officers and employees in the third quarter of 2000 (including $1.1 million
related to a former executive officer), and other nonrecurring expenses related
to the move of the Company's home office, the Company's e-commerce initiative
and costs related to preparing for adoption of SAB 101.
Interest expense and other financing costs for the nine months ended
September 30, 2000 increased $3.4 million over the first nine months of 1999 due
to borrowings to fund acquisitions during 1999, and the restructuring of the
Company's debt during mid-1999 to reflect longer maturities, carrying higher
rates.
Preferred stock dividends of $61,000 were subtracted from the $8.0 million of
net loss in computing the net loss attributable to common stockholders. The
reduction in preferred stock dividends from 1999 to 2000 was due to conversions
of preferred stock to common stock.
For the nine months ended September 30, 2000, the Company provided for income
tax benefits on the pre-tax loss at a combined state and federal rate of 14.8%
compared with a provision for income taxes on pre-tax income of 43% for the same
period in 1999. The effective rate recorded in the current year is lower due to
the impact of nondeductible costs, primarily nondeductible goodwill
amortization, which reduce the pre-tax loss in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $6.4 million at September 30, 2000,
representing an increase of $3.9 million from December 31, 1999. For the nine
months ended September 30, 2000, cash provided by operations was $18.5 million
as compared to cash provided by operations of $16.6 million for the nine months
ended September 30, 1999. The increase in net cash provided by operating
activities was largely due to a decrease in the growth of receivables, inventory
and preneed funeral costs. Cash used in investing activities was $12.2 million
for the nine months ended September 30, 2000 compared to $56.7 million for the
first nine months of 1999, due to the cessation of acquisitions during the
current year.
In the first nine months of 2000, cash flow used by financing activities
amounted to approximately $2.4 million, primarily due to payments to prior
owners on acquisition related obligations.
Historically, we have financed our acquisitions with proceeds from debt and
the issuance of common and preferred stock. As of September 30, 2000, the
Company had 1,182,500 shares outstanding of Series D Preferred Stock. The Series
D Preferred Stock is convertible into Class B Common Stock. The holders of
Series D Preferred Stock are entitled to receive cash dividends at an annual
rate of $.06-$.07 per share depending upon the date such shares were issued. The
Company may, at its option, redeem all or any portion of the shares of the
Series D Preferred Stock at a redemption price of $1.00 per share, together with
all accrued and unpaid dividends. Such redemption is subject to the right of
each holder of Series D Preferred Stock to convert such holder's shares into
shares of Class B Common Stock. On December 31, 2001, the Company must redeem
all shares of Series D Preferred Stock then outstanding at a redemption price of
$1.00 per share, together with all accrued and unpaid dividends.
Prior to September 15, 2000, the Company had a credit facility with a
group of banks for a $260 million revolving line of credit. During September
2000, we reduced the credit facility to $100 million and amended certain
restrictive covenants and financial ratio calculations, and narrowed the pricing
grid
15
<PAGE>
which determines the applicable borrowing margin for LIBOR and prime rate
borrowings. The credit facility is unsecured and has a remaining term of
approximately four years. We have the ability under the credit facility to
increase total debt outstanding to as much as 60 percent of total
capitalization. As of September 30, 2000, $53.0 million was outstanding under
the credit facility and our debt to total capitalization was 39 percent.
During November 2000, we also amended the Note Purchase Agreement under which
we had previously issued $110 million of senior private notes. The amendments
changed certain financial covenants and ratio calculations, and include terms
requiring proceeds from asset dispositions to be applied pro rata with other
senior debt to reduce outstanding principal on the senior private notes.
The most significant changes to the debt covenants relate to the following:
o Flexibility in the minimum net worth requirement to allow for
restructuring charges to reduce the minimum net worth
requirement;
o The addition of a ratio of debt to earnings before interest,
taxes, depreciation and amortization, which becomes more
restrictive over time; and
o The addition of a provision limiting acquisitions above a certain
size without prior approval.
We believe that cash flow from operations and borrowings under the credit
facility should be sufficient to fund anticipated capital expenditures as well
as other operating requirements. Acquisition spending during the remainder of
2000, if any, is anticipated to be significantly less than the amounts during
either of the two preceding years. Because future cash flows and the
availability of financing are subject to a number of variables, 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 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, is to be implemented for the fourth quarter of
2000, and applied retroactively to the first three quarters of this fiscal year,
to provide guidance related to recognizing revenue in circumstances in which no
specific authoritative literature exists. Members of the death care industry, in
consultation with the Commission, have agreed to certain changes in the manner
in which cemetery preneed sales and costs are recorded. The changes that are
meaningful to the Company are a change from recording cemetery merchandise and
service revenue, and their related costs at the time the contract is executed,
to the period in which they are delivered. The industry participants are
continuing to review the application of the Staff Accounting Bulletin with the
Commission as it relates to the manner in which we record preneed trusts and
related trust earnings and costs. All accounting changes are not expected to
result in a material change in net cash flows nor the amount of revenues we
ultimately expect to realize. However, they may have a material impact on our
consolidated financial statements and on the manner in which we record certain
preneed activities. We anticipate discussions to be finalized and the financial
impact calculated during the fourth quarter of 2000. Implementation, using the
new accounting guidance, would include adjustments to the first three quarters'
financial statements as well as proforma adjustments to the prior year
comparative financial statements.
16
<PAGE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, for which the effective date was deferred
to years beginning after June 15, 2000 by SFAS No. 137, and which was amended by
SFAS No. 138, to establish accounting and financial reporting standards for
certain derivative instruments and certain hedging activities. The key
provisions of SFAS 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 which have a notional amount of $50
million to hedge against rising interest rates on its variable rate long-term
debt. The swaps, which have a fair value of $1.4 million and $2.2 million at
September 30, 2000 and December 31, 1999, respectively, are currently carried
off-balance sheet, but will be recorded as an asset when the Company implements
SFAS 133 in its first quarter of 2001.
The Financial Accounting Standards Board has issued an exposure draft which
would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be a
reduction in the period of amortization of Names and Reputations, which Carriage
has been amortizing over 40 years.
SEASONALITY
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There has been no material change in the Company's position regarding
quantitative and qualitative disclosures of market risk from that disclosed in
the Company's 1999 Form 10-K.
17
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on assumptions that
the Company believes are reasonable; however, many important factors could cause
the Company's actual results in the future to differ materially from the
forward-looking statements made herein and in any other documents or oral
presentations made by, or on behalf of, the Company.
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) Achieving growth in free cash flow from operations depends primarily on
achieving anticipated levels of earnings before depreciation, amortization and
other non-cash charges, controlling capital expenditures to budgeted levels,
collecting accounts receivable and reducing preneed funeral costs.
(2) Achieving the Company's revenue goals also is affected by the volume and
prices of the products and services sold, as well as the mix of products and
services sold. The annual sales targets set by the Company are aggressive, and
the inability of the Company to achieve planned volume or prices could cause the
Company not to meet anticipated levels of revenue. In certain markets the
Company expects to increase prices, while in other markets prices will be
lowered. The ability of the Company to achieve volume or price targets at any
location depends on numerous factors, including the local economy, the local
death rate, competition and changes in consumer preferences, including
cremations.
(3) Revenue also is affected by the level of prearranged sales in both
current and prior periods. The level of prearranged sales may be adversely
affected by numerous factors, including deterioration in the economy, which
causes individuals to have less discretionary income, as well as changes in
commission practices and contractual terms. Future revenue will also be affected
by the Company's recent decision to eliminate its national preneed sales and
marketing organization and to manage future preneed activities at the local
business level.
(4) In addition to the factors discussed above, financial performance may be
affected by other important factors, including the following:
(a) The ability of the Company to retain or attract key personnel.
(b) The amount and rate of growth in the Company's general and
administrative expenses.
(c) Changes in interest rates, which can increase or decrease the amount
the Company pays on borrowings with variable rates of interest.
(d) The Company's debt covenants, such as the debt-to-capital ratio,
debt-to-EBITDA ratio, and the fixed charge coverage ratio.
18
<PAGE>
(e) Availability and related terms of debt and equity financing to fund
operating needs.
(f) The impact on the Company's financial statements of accounting
charges that may result from the Company's evaluation of its business
strategies, asset valuations and organizational structures as part of
the Fresh Start restructuring program.
(g) The amount of net proceeds actually realized on assets held for sale.
(h) Changes in government regulation, including tax rates and their
effects on corporate structure.
(i) Changes in inflation and other general economic conditions
domestically, affecting financial markets (e.g. marketable security
values).
(j) Unanticipated legal proceedings and unanticipated outcomes of legal
proceedings.
(k) Changes in accounting policies and practices required by generally
accepted accounting principles or the Securities and Exchange
Commission, such as amortization periods for long-lived intangible
assets and revenue or cost recognition in the preneed cemetery or
funeral business.
The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or any
other forward-looking statements made by, or on behalf of, the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 -- Amendment No. 3 to Credit Agreement by and among the Company and Bank
of America, N.A. and the lenders identified therein, dated as of
September 15, 2000.
*10.2 -- Amendment No. 1 to Note Purchase Agreement, by and between the Company
and the senior note holders identified therein, dated as of November 6,
2000.
*11.1 -- Statement regarding computation of per share earnings.
*12 -- Calculation of Ratio of Earnings to Fixed Charges
*27.1 -- Financial Data Schedule.
---------
(*) Filed herewith.
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRIAGE SERVICES, INC.
November 14, 2000 /s/ Thomas C. Livengood
------------------ --------------------------------
Date Thomas C. Livengood,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
20
