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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR |
For the quarterly period ended | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR |
For the transition period fromto |
Commission file number: 1-11961
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
| |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1900 Saint James Place, 4th Floor, Houston, TX | 77056 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (713) 332-8400 |
Registrant's telephone number, including area code: (713) 332-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: | ||
Common Stock, $.01 Par Value | New York Stock Exchange | |
Series G Preferred Stock Purchase Rights | New York Stock Exchange | |
(Title Of Class) | (Name of Exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
The number of shares of the Registrant'sRegistrant’s Common Stock, $.01 par value per share, outstanding as of November 6, 2002May 5, 2003 was 17,070,502.17,395,693.
CARRIAGE SERVICES, INC.
INDEX
PART | ||||||||||
| ||||||||||
| ||||||||||
Three Months ended | ||||||||||
Three Months ended | ||||||||||
| ||||||||||
2
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| December 31, 2001 | September 30, 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | ||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 2,744 | $ | 3,704 | ||||||
Accounts receivable— | ||||||||||
Trade, net of allowance for doubtful accounts of $3,515 in 2001 and $3,376 in 2002 in 2002 | 15,660 | 13,256 | ||||||||
Other | 773 | 2,377 | ||||||||
16,433 | 15,633 | |||||||||
Assets held for sale, net | 2,287 | 3,366 | ||||||||
Inventories and other current assets | 6,983 | 6,667 | ||||||||
Total current assets | 28,447 | 29,370 | ||||||||
Property, plant and equipment, at cost, net of accumulated depreciation of 24,176 in 2001 and $28,668 in 2002 | 114,217 | 111,426 | ||||||||
Cemetery property, at cost | 61,630 | 64,368 | ||||||||
Goodwill | 160,576 | 161,723 | ||||||||
Deferred charges and other non-current assets | 49,159 | 59,041 | ||||||||
Preneed funeral contracts | 219,975 | 221,880 | ||||||||
Preneed cemetery merchandise and service trust funds | 40,078 | 47,551 | ||||||||
Total assets | $ | 674,082 | $ | 695,359 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable and accrued liabilities | $ | 26,965 | $ | 22,710 | ||||||
Current portion of long-term debt and capital lease obligations | 2,488 | 2,443 | ||||||||
Total current liabilities | 29,453 | 25,153 | ||||||||
Deferred cemetery revenue and preneed liabilities | 89,803 | 98,309 | ||||||||
Deferred preneed funeral contracts revenue | 229,380 | 233,215 | ||||||||
Long-term debt, net of current portion | 148,508 | 147,015 | ||||||||
Capital lease obligations, net of current portion | 5,093 | 5,067 | ||||||||
Total liabilities | 502,237 | 508,759 | ||||||||
Commitments and contingencies | ||||||||||
Minority interest in consolidated subsidiary | 209 | 400 | ||||||||
Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust | 90,058 | 90,159 | ||||||||
Stockholders' equity: | ||||||||||
Common Stock, $.01 par value; 80,000,000 shares authorized; 17,033,000 issued and outstanding at September 30, 2002 | — | 170 | ||||||||
Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 16,811,000 issued and outstanding at December 31, 2001 | 168 | — | ||||||||
Contributed capital | 189,449 | 184,956 | ||||||||
Retained deficit | (107,193 | ) | (88,636 | ) | ||||||
Unrealized loss on interest rate swaps, net of tax benefit | (846 | ) | (449 | ) | ||||||
Total stockholders' equity | 81,578 | 96,041 | ||||||||
Total liabilities and stockholders' equity | $ | 674,082 | $ | 695,359 | ||||||
|
| December 31, |
| March 31, |
| ||
|
|
|
| (unaudited) |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,702 |
| $ | 3,926 |
|
Accounts receivable — |
|
|
|
|
| ||
Trade, net of allowance for doubtful accounts of $2,844 in 2002 and $2,393 in 2003 in 2002 |
| 14,640 |
| 13,871 |
| ||
Other |
| 746 |
| 570 |
| ||
|
| 15,386 |
| 14,441 |
| ||
Inventories and other current assets |
| 8,777 |
| 8,504 |
| ||
Total current assets |
| 26,865 |
| 26,871 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, at cost, net of accumulated depreciation of $30,449 in 2002 and $31,965 in 2003 |
| 113,967 |
| 114,047 |
| ||
Cemetery property, at cost |
| 64,570 |
| 64,458 |
| ||
Goodwill |
| 158,696 |
| 158,696 |
| ||
Deferred charges and other non-current assets |
| 60,344 |
| 58,909 |
| ||
Preneed funeral contracts |
| 235,347 |
| 236,582 |
| ||
Preneed cemetery merchandise and service trust funds |
| 43,965 |
| 45,177 |
| ||
Total assets |
| $ | 703,754 |
| $ | 704,740 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable and accrued liabilities |
| $ | 26,115 |
| $ | 23,291 |
|
Current portion of long-term debt and capital lease obligations |
| 2,348 |
| 2,280 |
| ||
Total current liabilities |
| 28,463 |
| 25,571 |
| ||
|
|
|
|
|
| ||
Deferred cemetery revenue and preneed liabilities |
| 96,794 |
| 97,856 |
| ||
Deferred preneed funeral contracts revenue |
| 243,067 |
| 244,298 |
| ||
Long-term debt, net of current portion |
| 141,207 |
| 140,340 |
| ||
Obligations under capital lease, net of current portion |
| 5,539 |
| 5,538 |
| ||
Total liabilities |
| 515,070 |
| 513,603 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
Minority interest in consolidated subsidiary |
| 400 |
| 400 |
| ||
Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust |
| 90,193 |
| 90,226 |
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Common Stock, $.01 par value; 80,000,000 shares authorized; 40,000,000 shares 17,075,000 and 17,355,000 issued and outstanding at December 31, 2002 and March 31, 2003, respectively |
| 171 |
| 174 |
| ||
Contributed capital |
| 185,100 |
| 186,118 |
| ||
Accumulated deficit |
| (86,915 | ) | (84,860 | ) | ||
Deferred compensation |
| — |
| (854 | ) | ||
Unrealized loss on interest rate swaps, net of tax benefit |
| (265 | ) | (67 | ) | ||
Total stockholders’ equity |
| 98,091 |
| 100,511 |
| ||
Total liabilities and stockholders’ equity |
| $ | 703,754 |
| $ | 704,740 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
3
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2001 | 2002 | ||||||||||
Revenues, net | ||||||||||||||
Funeral | $ | 28,256 | $ | 27,521 | $ | 94,290 | $ | 89,060 | ||||||
Cemetery | 9,413 | 8,601 | 28,265 | 25,834 | ||||||||||
37,669 | 36,122 | 122,555 | 114,894 | |||||||||||
Costs and expenses | ||||||||||||||
Funeral | 22,333 | 20,351 | 70,990 | 62,919 | ||||||||||
Cemetery | 7,096 | 6,531 | 21,421 | 19,663 | ||||||||||
29,429 | 26,882 | 92,411 | 82,582 | |||||||||||
Gross profit | 8,240 | 9,240 | 30,144 | 32,312 | ||||||||||
General and administrative expenses | 2,473 | 3,619 | 6,702 | 8,475 | ||||||||||
Operating income | 5,767 | 5,621 | 23,442 | 23,837 | ||||||||||
Interest expense, net | 3,413 | 3,101 | 10,336 | 9,450 | ||||||||||
Financing costs of company-obligated mandatory redeemable convertible preferred securities of Carriage Services Capital Trust | 1,675 | 1,675 | 5,023 | 5,023 | ||||||||||
Total interest and financing costs | 5,088 | 4,776 | 15,359 | 14,473 | ||||||||||
Income before income taxes | 679 | 845 | 8,083 | 9,364 | ||||||||||
Provision (benefit) for income taxes | 136 | 325 | 1,617 | (9,193 | ) | |||||||||
Net income | 543 | 520 | 6,466 | 18,557 | ||||||||||
Preferred stock dividends | 3 | — | 35 | — | ||||||||||
Net income available to common stockholders | $ | 540 | $ | 520 | $ | 6,431 | $ | 18,557 | ||||||
Basic earnings per common share | $ | 0.03 | $ | 0.03 | $ | 0.39 | $ | 1.10 | ||||||
Diluted earnings per common share | $ | 0.03 | $ | 0.03 | $ | 0.37 | $ | 1.06 | ||||||
Weighted average number of common and common equivalent shares outstanding: | ||||||||||||||
Basic | 16,699 | 16,978 | 16,600 | 16,940 | ||||||||||
Diluted | 17,851 | 17,367 | 17,648 | 17,439 | ||||||||||
|
| For the three months |
| ||||
|
| 2002 |
| 2003 |
| ||
Revenues, net |
|
|
|
|
| ||
Funeral |
| $ | 32,707 |
| $ | 30,354 |
|
Cemetery |
| 8,215 |
| 8,352 |
| ||
|
| 40,922 |
| 38,706 |
| ||
Costs and expenses |
|
|
|
|
| ||
Funeral |
| 21,024 |
| 21,722 |
| ||
Cemetery |
| 6,514 |
| 5,884 |
| ||
|
| 27,538 |
| 27,606 |
| ||
Gross profit |
| 13,384 |
| 11,100 |
| ||
General and administrative expenses |
| 2,506 |
| 2,612 |
| ||
Special charges and other |
| — |
| 588 |
| ||
Operating income |
| 10,878 |
| 7,900 |
| ||
Interest expense, net |
| 3,124 |
| 2,936 |
| ||
Financing costs of company-obligated mandatory redeemable convertible preferred securities of Carriage Services Capital Trust |
| 1,674 |
| 1,674 |
| ||
Total interest and financing costs |
| 4,798 |
| 4,610 |
| ||
Income before income taxes |
| 6,080 |
| 3,290 |
| ||
Provision (benefit) for income taxes |
| (10,480 | ) | 1,234 |
| ||
|
|
|
|
|
| ||
Net income available to common stockholders |
| $ | 16,560 |
| $ | 2,056 |
|
|
|
|
|
|
| ||
Basic earnings per common share |
| $ | 0.98 |
| $ | 0.12 |
|
|
|
|
|
|
| ||
Diluted earnings per common share |
| $ | 0.95 |
| $ | 0.12 |
|
|
|
|
|
|
| ||
Weighted average number of common and common equivalent shares outstanding: |
|
|
|
|
| ||
Basic |
| 16,894 |
| 17,320 |
| ||
Diluted |
| 17,429 |
| 17,714 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
| For the nine months ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | ||||||
Net income | $ | 6,466 | $ | 18,557 | ||||
Other comprehensive income (loss): | ||||||||
Cumulative effect on prior years of the change in accounting principle, net of income tax benefit of $1 | 1 | — | ||||||
Unrealized gain (loss) on interest rate swaps arising during period | (1,329 | ) | 247 | |||||
Amortization of accumulated unrealized loss on interest rate swap | — | 249 | ||||||
Related income tax (provision) benefit | 266 | (99 | ) | |||||
Total other comprehensive income (loss) | $ | (1,062 | ) | $ | 397 | |||
Comprehensive income | $ | 5,404 | $ | 18,954 | ||||
|
| For the three months |
| ||||
|
| 2002 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 16,560 |
| $ | 2,056 |
|
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
| ||
Unrealized gain on interest rate swaps |
| 178 |
| 165 |
| ||
Amortization of accumulated unrealized loss on interest rate swap |
| 83 |
| 83 |
| ||
Related income tax provision |
| (52 | ) | (50 | ) | ||
Total other comprehensive income |
| 209 |
| 198 |
| ||
|
|
|
|
|
| ||
Comprehensive income |
| $ | 16,769 |
| $ | 2,254 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
5
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| For the nine months Ended September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | ||||||||
Cash flows from operating activities: | ||||||||||
Net income | $ | 6,466 | $ | 18,557 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation | 4,724 | 4,851 | ||||||||
Amortization | 8,097 | 3,002 | ||||||||
Provision for losses on accounts receivable | 2,047 | 979 | ||||||||
Deferred income tax expense (benefit) | 2,557 | (8,079 | ) | |||||||
Other | — | 168 | ||||||||
Changes in assets and liabilities, net of effects from acquisitions and dispositions: | ||||||||||
Decrease in accounts receivable | 1,064 | 3,830 | ||||||||
(Increase) decrease in inventories and other current assets | 9 | (39 | ) | |||||||
(Increase) in deferred charges and other | (207 | ) | (33 | ) | ||||||
(Increase) in preneed funeral and cemetery costs | (3,388 | ) | (2,773 | ) | ||||||
(Increase) in preneed cemetery trust funds | (3,564 | ) | (1,958 | ) | ||||||
Increase (decrease) in accounts payable and accrued liabilities | 263 | (5,961 | ) | |||||||
Income tax (payments) refunds, net | 2,191 | (81 | ) | |||||||
Increase in deferred revenue and preneed liabilities | 1,553 | 1,848 | ||||||||
Net cash provided by operating activities | 21,812 | 14,311 | ||||||||
Cash flows from investing activities: | ||||||||||
Net proceeds from sales of businesses and other assets | 8,442 | 81 | ||||||||
Sale of minority interest in subsidiary | 200 | 200 | ||||||||
Acquisitions | (212 | ) | (2,160 | ) | ||||||
Capital expenditures | (4,588 | ) | (4,886 | ) | ||||||
Net cash provided by (used in) investing activities | 3,842 | (6,765 | ) | |||||||
Cash flows from financing activities: | ||||||||||
Proceeds (payments) under bank line of credit | (9,000 | ) | 3,000 | |||||||
Payments on long-term debt and capital lease obligations | (11,843 | ) | (4,735 | ) | ||||||
Proceeds from issuance of common stock | 567 | 438 | ||||||||
Payment of contingent stock price guarantees | (4,935 | ) | (5,289 | ) | ||||||
Payment of preferred stock dividends | (35 | ) | — | |||||||
Net cash used in financing activities | (25,246 | ) | (6,586 | ) | ||||||
Net increase in cash and cash equivalents | 408 | 960 | ||||||||
Cash and cash equivalents at beginning of period | 3,210 | 2,744 | ||||||||
Cash and cash equivalents at end of period | $ | 3,618 | $ | 3,704 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||
Cash paid for interest and financing costs | $ | 15,797 | $ | 16,284 | ||||||
Cash paid for income taxes | $ | 65 | $ | 229 | ||||||
|
| For the three months |
| ||||
|
| 2002 |
| 2003 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 16,560 |
| $ | 2,056 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 1,643 |
| 1,629 |
| ||
Amortization |
| 952 |
| 1,056 |
| ||
Provision for losses on accounts receivable |
| 972 |
| 144 |
| ||
Deferred income tax expense (benefit) |
| (11,907 | ) | 1,233 |
| ||
Other |
| (20 | ) | 96 |
| ||
Changes in assets and liabilities, net of effects from acquisitions and dispositions: |
|
|
|
|
| ||
Decrease in accounts receivable |
| 632 |
| 1,234 |
| ||
(Increase) decrease in inventories and other current assets |
| (841 | ) | 277 |
| ||
(Increase) in deferred charges and other |
| (61 | ) | (30 | ) | ||
(Increase) in preneed funeral and cemetery costs |
| (864 | ) | (988 | ) | ||
(Increase) in preneed cemetery trust funds |
| (1,075 | ) | (1,158 | ) | ||
Decrease in accounts payable and accrued liabilities |
| (1,988 | ) | (2,393 | ) | ||
Income tax (payments) refunds, net |
| (49 | ) | 11 |
| ||
Increase in deferred revenue and preneed liabilities |
| 1,504 |
| 626 |
| ||
Net cash provided by operating activities |
| 5,458 |
| 3,793 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Net proceeds (costs) from sales of assets |
| (43 | ) | — |
| ||
Sale of minority interest in subsidiary |
| 200 |
| — |
| ||
Acquisitions |
| (1,040 | ) | — |
| ||
Capital expenditures |
| (1,398 | ) | (1,725 | ) | ||
Net cash used in investing activities |
| (2,281 | ) | (1,725 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds under bank line of credit |
| 6,000 |
| 1,800 |
| ||
Payments on long-term debt and obligations under capital lease |
| (3,628 | ) | (2,736 | ) | ||
Proceeds from issuance of common stock |
| 222 |
| 92 |
| ||
Payment of contingent stock price guarantees |
| (5,289 | ) | — |
| ||
Net cash used in financing activities |
| (2,695 | ) | (844 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 482 |
| 1,224 |
| ||
Cash and cash equivalents at beginning of period |
| 2,744 |
| 2,702 |
| ||
Cash and cash equivalents at end of period |
| $ | 3,226 |
| $ | 3,926 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash paid for interest and financing costs |
| $ | 6,811 |
| $ | 6,564 |
|
Cash paid for income taxes |
| $ | 156 |
| $ | 22 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
(unaudited)
1. BASIS OF PRESENTATION
(a)
Carriage Services, Inc., (the "Company"“Company”) is a leading provider of products and services in the death care industry in the United States. As of September 30, 2002,March 31, 2003, the Company owned and operated 149143 funeral homes and 30 cemeteries in 29 states.
(b)
The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
(c)
The information for the three and nine month periods ended September 30, 2001March 31, 2002 and 20022003 is unaudited, but in the opinion of management, reflects all adjustments which are of a normal, recurring nature necessary for a fair presentation of financial position and results of operations for the interim periods. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to the rules of the SEC. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2001,2002, and should be read in conjunction therewith. Certain amounts in the December 31, 2001 consolidated balance sheet have been classified differently thanfinancial statements for the periods ended in the consolidated balance sheet included2002 in our annualthis report on Form 10-K. Additionally, preneed funeral and cemetery costs have been reclassified from investing activities to operating activities in the September 30, 2001 consolidated statement of cash flows to conform towith current year presentation.
(d)
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. ACCOUNTING CHANGES
(a)
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for
7
which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements.
The provisions of SFAS No. 142 were required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 as of the beginning of the first quarter of 2002. The effect of SFAS No. 142 on the Company, iswhich was adopted as of the beginning of 2002, included the elimination of the amortization of goodwill, which prior to 2002 was amortized over 40 years,the identification of reporting units for the purpose of assessing potential future impairments of goodwill and the testing for impairmentimpairments of goodwill on an annual basis. Had the adoption of SFAS No. 142 occurred at the beginning of the previous year, the results would have been as follows (in thousands, except per share amounts):
| For the three months ended September 30, 2001 | For the nine months ended September 30, 2001 | ||||
---|---|---|---|---|---|---|
Income before taxes | $ | 1,778 | $ | 11,448 | ||
Net income | 1,422 | 9,158 | ||||
Diluted earnings per share | $ | 0.08 | $ | 0.52 |
See Management's Discussion and Analysis of Financial Condition and Results of Operations for proforma disclosure of this accounting change which additionally incorporates the impact of the change in the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill asduring the first quarter of January 1, 2002 by comparing the fair value of the Company'sCompany’s reporting units (funeral home businessbusinesses by region) to the carrying value of the reporting units and no impairment was recorded at the implementation date of the new accounting standard. Goodwill acquired during the ninethree months ended September 30,March 31, 2002, included $1.0 million for performance-based contingent consideration payments on a prior year acquisition and $0.9 million for a funeral home acquisition in the second quarter of 2002.2001 acquisition.
7
(b)
In August 2001 the Financial Accounting Standards Board issued SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets"Assets”. SFAS No. 144 addresses financial accounting and reporting of long-lived assets, other than goodwill, that are to be disposed by sale or otherwise (e.g. discontinued operations), and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of the beginning of the first quarter of 2002. The effects of adopting SFAS No. 144 were that the businesses that Carriage intends to sell no longer met the criteria to be classified as “assets held for sale”.
(c) Costs Associated with Disposal Activities
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring),” required an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002.
(d) Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for financial statements for fiscal years ending after December 15, 2002. The Company accounts for stock options and shares issued pursuant to its employee stock purchase plan under APB Opinion No. 25, under which had no effect oncompensation expense is recognized in the Company's financial position orConsolidated Statement of Operations. Had the Company accounted for stock options and shares pursuant to its employee stock benefit plans under SFAS No. 123 for the three months ended March 31, 2002 and 2003, the results of operations.would have been as follows (in thousands, except per share amounts):
|
| For the three months |
| ||||
|
| 2002 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income, as reported |
| $ | 16,560 |
| $ | 2,056 |
|
|
|
|
|
|
| ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| 184 |
| 111 |
| ||
Pro forma net income |
| $ | 16,376 |
| $ | 1,945 |
|
|
|
|
|
|
| ||
Earnings per share: |
|
|
|
|
| ||
Basic – as reported |
| $ | 0.98 |
| $ | 0.12 |
|
Basic – pro forma |
| $ | 0.97 |
| $ | 0.11 |
|
|
|
|
|
|
| ||
Diluted – as reported |
| $ | 0.95 |
| $ | 0.12 |
|
Diluted – pro forma |
| $ | 0.94 |
| $ | 0.11 |
|
8
(e) Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to require consolidation of business entities under certain circumstances, particularly with respect to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other primary interests in an entity. The Company is currently evaluating FIN No. 46 to determine if its application would change the manner in which it accounts for preneed trusts. The provisions of this statement would be effective beginning with Carriage’s third quarter of 2003.
3. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue, net income and total assets by segment (in thousands):
| Funeral | Cemetery | Corporate(1) | Consolidated | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
External revenues: | |||||||||||||
Nine months ended September 30, 2002 | $ | 89,060 | $ | 25,834 | — | $ | 114,894 | ||||||
Nine months ended September 30, 2001 | 94,290 | 28,265 | — | 122,555 | |||||||||
Net income | |||||||||||||
Nine months ended September 30, 2002 | $ | 15,809 | $ | 3,760 | $ | (1,012 | ) | $ | 18,557 | ||||
Nine months ended September 30, 2001 | 13,534 | 4,257 | (11,325 | ) | 6,466 | ||||||||
Total assets: | |||||||||||||
September 30, 2002 | $ | 514,841 | $ | 163,511 | $ | 17,007 | $ | 695,359 | |||||
December 31, 2001 | 517,889 | 152,639 | 3,554 | 674,082 |
|
| Funeral |
| Cemetery |
| Corporate(1) |
| Consolidated |
| ||||
External revenues: |
|
|
|
|
|
|
|
|
| ||||
Three months ended March 31, 2003 |
| $ | 30,354 |
| $ | 8,352 |
| $ | — |
| $ | 38,706 |
|
Three months ended March 31, 2002 |
| 32,707 |
| 8,215 |
| — |
| 40,922 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
|
|
|
|
|
|
| ||||
Three months ended March 31, 2003 |
| 5,187 |
| 1,503 |
| (4,634 | ) | 2,056 |
| ||||
Three months ended March 31, 2002 |
| 7,125 |
| 1,026 |
| 8,409 |
| 16,560 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total assets: |
|
|
|
|
|
|
|
|
| ||||
March 31, 2003 |
| 525,447 |
| 165,026 |
| 14,267 |
| 704,740 |
| ||||
December 31, 2002 |
| 525,645 |
| 163,750 |
| 14,359 |
| 703,754 |
| ||||
(1)
4. INCOME TAXES
For 2001, the
The Company had anestimates that its effective tax rate will be 37.5 percent for financial statement purposes in 2003. Carriage records a valuation allowance to reflect the estimated amount of deferred tax ratefor which realization is uncertain. Management reviews the valuation allowance at the end of 20 percent, reflectingeach quarter and makes adjustments if it is determined that it is more likely than not that the benefit of previously unrecognized tax losses from prior periods related to the Fresh Start restructuring program.benefits will be realized. When the Company incurred the Fresh Start restructuring costs and write-downs in late 2000 and proceeded to dispose of low performing businesses, it could not be assured that it would generate enough future taxable income to
9
utilize the sizeable tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty, at the time, the Company recorded a "valuation allowance"valuation allowance to offset these tax benefits until such time that itis could be determined thatit would be more likely than not the Company would be able to deduct them.realize the tax benefits. Based on the positive operating results subsequent to 2000 and management'smanagement’s forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not that the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Company recorded a special one-time tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which eliminated substantially alla substantial portion of the valuation allowance. Excluding the $12.8 million tax benefit, income taxes were recorded at the effective rate of 38.2 percent during the first quarter of 2002.
5. DEFERRED COMPENSATION AND RESTRICTED STOCK
In January 2003, the Company issued 227,000 shares of restricted stock to certain officers of the Company for bonuses earned during 2002. Twenty-five percent of the shares vest annually on each of the next four anniversary dates of the grant. The Company estimates that its effective tax ratevalue of the stock was $3.97 per share, for a total of $902,000, which will be 38.5 percent for financial statement purposes in 2002, excludingamortized into expense over the reduction of the deferred tax valuation allowance. Had the Company also used the 38.5 percent tax rate for the nine months ended September 30, 2001, net income for that period, excluding the effect of the change in accounting for goodwill amortization discussed in Note 2, would have been lower by $1,495,000 or $0.09 per diluted share.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
four-year vesting period.
Carriage
MANAGEMENT’S DISCUSSION AND ANALYSIS OF |
Our business strategy is a leading provider of death care services and products in the United States. Our historical focus has been on operational enhancements at facilities currently owned to increase revenues and gross profit, as well as growth through acquisitions (although we have not pursued the acquisition strategy since 1999). That focus has resulted in high standards of service, operational performance, and an infrastructure containing measurement and management systems. In 2000, the operating strategy was dramatically shifted to focus uponemphasize increasing operating cash flow. In November 2000, we launched a multi-faceted, restructuring program, called "Fresh-Start", which was designedflow and improving profitability at each business location through strategies that carry out our culture of service and leadership excellence. We do not expect our strategy will require significant investments of new capital over the next two years. We plan to increase financial and operating performance, improve cash flow, reduce debt, and assist Carriage in fulfilling our mission of being the highest quality funeral and cemetery service organization in the industry. Beginning with the fourth quarter of 2000, we have been focused on executing elements of Fresh Start.
The goals of Fresh Start were and remain restoring credibility to our operating and consolidation model, increasing and better aligning our earnings and cash flow, restoring market credibility to our balance sheet,continue reducing our debt and re-accessing the capital markets.
The principal elements of Fresh Start include downsizingimproving our corporate organization; changing our operating leadership; changing our preneed funeral organizational strategy; stratifying by performance our funeral and cemetery portfolios; implementing action plansleverage ratios. Our focus is on continuing to improve underperforming businesses; disposingour organizational leadership and quality of some underperforming businesses; adjusting the carrying basis of other underperforming businesses;personnel. Successful execution during 2001 and modifying financial covenants with lenders to facilitate execution of Fresh Start. Most of the elements of Fresh Start have been accomplished and we are seeing the benefits of these actions2002 has, in our operating results.view, positioned the Company as a leader in our industry and improved our financial flexibility. We expect to replace our revolving credit facility during 2003 and prior to its maturity in June 2004. We expect to resume selective acquisitions in 2005.
Net income totaled $18.6$2.1 million infor the first ninethree months of 2003, or $0.12 per diluted share as compared to net income of $16.6 million for the first quarter of 2002, or $1.06 per diluted share. Excluding a $12.8 million, or $0.73 per share special tax benefit, net income was $5.8 million, or $0.33$0.95 per diluted share. Two significant accounting events occurred duringitems significantly impacted the nine months ended September 30, 2002:results and comparability of the eliminationtwo periods. The first quarter of goodwill amortization in connection with the implementation of SFAS No.142, which totaled $3.4 million2002 included an income tax benefit in the first nine monthsamount of 2001, and$12.8 million, equal to $0.73 per diluted share, related to the changereversal of a valuation allowance on deferred tax assets established in 2000. Excluding the Company'simpact of this tax rate from 20 percent to 38.5 percent. Had those two events occurred at the beginning of 2001, net income andbenefit, diluted earnings per share would have totaled $7.0 million and $0.40, respectively, for the first nine monthsquarter of 2001.
The full year impact to diluted earnings per share, by quarter, for 2001 of these two events2002 would have been as follows:
| Diluted Earnings per Share | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Full Year | |||||||||||
2001 results as previously reported | $ | 0.22 | $ | 0.12 | $ | 0.03 | $ | 0.14 | $ | 0.51 | ||||||
Adjustment of tax rate from 20% to 38.5% | (0.05 | ) | (0.03 | ) | (0.01 | ) | (0.03 | ) | (0.12 | ) | ||||||
Proforma elimination of goodwill amortization | 0.04 | 0.04 | 0.04 | 0.04 | 0.16 | |||||||||||
Adjusted 2001 | $ | 0.21 | $ | 0.13 | $ | 0.06 | $ | 0.15 | $ | 0.55 | ||||||
Income from operations, which we define as earnings before interest and$0.22. Net income taxes, increased as a percentage of net revenues, from 15.3% for the thirdfirst quarter of 2001 to 15.6%2003 was negatively impacted by the operating results of the funeral segment, which accounts for the third quarter of 2002 and from 19.1% for the nine months ended September 30, 2001 to 20.7% for the nine months ended September 30, 2002. This improvement was primarily due to the elimination of amortization for goodwill beginning January 1, 2002, offset in part by a $0.7 million charge related to
10
the termination of an employment agreement with a former officer, $0.5 million in professional fees incurred in connection with changes in tax accounting methods and higher insurance costs. Revenues from funeral homes decreased 2.6% and revenues from cemeteries decreased 8.6% in the third quarter of 2002 compared to the same period in 2001 primarily as a result of a decline in same-store revenues period to period, lower preneed insurance commission revenue and lower cemetery preneed property sales. Other factors that attributed to a decrease in funeral revenue are a lower national death rate compared to the third quarter of 2001 and competition from independent operators in some local markets. Also, approximately 7280 percent of its funeral revenue was generated from traditional funeral services and 28 percent from cremation services, as compared to 73 percent and 27 percent in the third quarter of last year. The average revenue for cremation services increased by 0.6 percentCompany’s revenues, which, when compared to the third quarter of last year. Cemetery revenues were negatively impacted by a weaker economy that resulted in lower discretionary spending by consumer and lower returns on investment funds. Specifically, we experienced a 2.8% decrease in preneed merchandise and service deliveries, a 6.1% decrease in sales of interment and entombment sites and a 1.9% decrease in income from perpetual care trusts and finance charges. The decline in cemetery revenue was offset partially by a 2.2% increase in at-need sales of property, services and merchandise.
Gross margins for the funeral homes increased from 21.0% in the third quarter of 2001 to 26.1% in the thirdfirst quarter of 2002, primarily becausereported a revenue decline of 7.2 percent and an increase in segment costs and expenses of 3.3 percent. These operating variances combined to reduce the gross profit of the eliminationCompany by $3.1 million compared to the first quarter of goodwill amortization. As a percentage2002. Substantially all of cemetery net revenues, cemetery gross margin was 24.1%the revenue decline in the third quarter of 2002 compared to 24.6%funeral segment revenues was represented by an 8.6 percent decline in same-store funeral services (partially offset by a 1.6 percent increase in the third quarteraverage revenue per service) which was largely due to a decline in the number of 2001.deaths and a loss in market share in an estimated 15 to 20 funeral home businesses.
10
Management'sManagement’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with generally accepted accounting principles.principles in the United States of America. Our significant accounting policies are summarized in Note 1 to the consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2001.2002. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Funeral and Cemetery Operations
We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No 66, "Accounting“Accounting for Sales of Real Estate"Estate”. This method provides for the recognition of revenue in the period in which the customer'scustomer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.
Allowances for customer cancellations, refunds and bad debts are provided at the date of sale based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the
11
policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Preneed Funeral Contracts & Deferred Preneed Funeral Contracts Revenue
Cash proceeds from preneed funeral sales are deposited to a trust or used to purchase of a third-party insurance product. Unperformed guaranteed preneed funeral contracts are included in the consolidated balance sheets as preneed funeral contracts. The balance in this asset account represents amounts due from customer receivables and third-party insurance companies, and the amounts deposited with the trustee and the accumulated earnings on these deposits. A corresponding credit is recorded to deferred preneed funeral contracts revenue. The funeral revenue is not recorded until the service is performed. The trust income earned and the increases in insurance benefits on the insurance products are also deferred until the service is performed, in order to offset inflation in cost to provide the service in the future.
Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses over the expected timing of the performance of the services or delivery of the merchandise covered by the preneed contracts. Effective October 1, 2001, we changed theThe pattern of the periods over which the costs are recognized to more closely trackis based on actuarial statistics, provided by a third party administrator, based on the actual contracts we hold. The effect of this change was to reduce expense in the fourth quarter of 2001 by approximately $0.5 million from that which would have been recorded using the prior methodology.
11
Goodwill and Other Intangible Assets
The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142, we review the carrying value of goodwill at least annually on a regional basis to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each region at the Company'sCompany’s weighted average cost of capital less debt allocable to the region. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs and the Company'sCompany’s cost of capital. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value. No impairments were recorded during the nine monthsthree month periods ended September 30, 2002.March 31, 2002 and 2003.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, "Accounting“Accounting for Income Taxes"Taxes”.
For 2001,
Carriage records a valuation allowance to reflect the Company had an effective financial statementestimated amount of deferred tax ratefor which realization is uncertain. Management reviews the valuation allowance at the end of 20 percent, reflectingeach quarter and makes adjustments if it is determined that it is more likely than not that the benefit of previously unrecognized tax losses from prior periods related to the Fresh Start restructuring program.benefits will be realized. When the Company incurred the Fresh Start restructuring costs and write-downs in late 2000 and proceeded to dispose of low performing businesses, it could not be assured that it would generate enough future taxable income to utilize the sizeable tax benefits created by the tax losses on asset sales.
12
To acknowledge this uncertainty, at the time, the Company recorded a "valuation allowance"valuation allowance to offset these tax benefits until such time that itis could be determined thatit would be more likely than not the Company would be able to deduct them.realize the tax benefits. Based on the positive operating results subsequent to 2000 and management'smanagement’s forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not that the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Company recorded a special one-time tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which eliminated substantially alla substantial portion of the valuation allowance. The Company estimates that its effective tax rate for financial statement purposes is 38.5% in 2002, excluding the affect of the reversal of the deferred tax valuation allowance. Had the Company also used the 38.5 percent tax rate for the nine months ended September 30, 2001, net income for that period, excluding the effect of the change in accounting for goodwill amortization discussed in Note 2, would have been lower by $1,495,000 or $0.09 per diluted share.
Stock Options and Employee Stock Purchase PlanCompensation Plans
The Company has four stock option plans currently in effect under which stock options may be issued. Additionally, the Company sponsors an Employee Stock Purchase Plan (ESPP) under which employees can purchase common stock at a discount. The stock options are granted with an exercise price equal to or greater than the fair market value of the Company'sCompany’s Common Stock. Substantially all of the options granted under the four stock option plans have ten-year terms. The options generally vest over a period of two to four years. The Company accounts for stock options and shares issued under the ESPP under APB Opinion No. 25, under which no compensation cost is recognized in the Consolidated Statement of Operations. Had compensation costthe Company accounted for stock options granted in 2002 and shares issuedpursuant to its employee stock benefit plans under the ESPP in 2002 been determined consistent with SFAS No. 123 "Accounting for Stock Based Compensation",the three months ended March 31, 2002 and 2003, net income for 2002, additional compensationthose periods would have been lower by $0.2 and $0.1 million, respectively.
The Financial Accounting Standards Board (“FASB”) recently announced its opinion that stock options should be expensed and that they will undertake work to develop accounting and valuation guidance regarding such.
In January 2003, the Company issued 227,000 shares of restricted stock to certain officers of the Company for bonuses earned during 2002. Twenty-five percent of the shares vest annually on each of the next four
12
anniversary dates of the grant. The value of the stock was $3.97 per share, for a total of $902,000, which is being amortized into expense totaling $0.5 million, equal to $0.02 per diluted share, would be recorded.over the four-year vesting period.
The following is a discussion of the Company'sCompany’s results of operations for the three and nine month periods ended September 30, 2001March 31, 2002 and 2002. For purposes of the revenue discussion, the Company's funeral home businesses are in three groups, as a result of the stratification of our funeral homes. A "core" group which represents approximately two-thirds of our revenues and cash flow, a second "underperforming" group, and a third group consisting of businesses that are "targeted for sale". Currently none of the cemetery businesses are stratified into these categories and none of the cemeteries are currently held for sale. Additionally, funeral2003. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "same-store"“same-store” or "existing operations"“existing operations”.
Funeral Home Segment.Segment. The following table sets forth certain information regarding the net revenues field EBITDA (earnings before interest, taxes, depreciation and amortization) and gross profit of the Company from its funeral home operations for the three and nine months ended September 30, 2001March 31, 2002 compared to the three and nine months ended September 30, 2002. Field EBITDA differs from gross profitMarch 31, 2003 (dollars in that it excludes preneed insurance commissions revenue, corporate overhead allocations and depreciation and amortization.thousands):
13
|
| Three months ended |
| Change |
| |||||||
|
| 2002 |
| 2003 |
| Amount |
| Percent |
| |||
Total same-store revenue |
| $ | 32,044 |
| $ | 29,790 |
| $ | (2,254 | ) | (7.0 | )% |
|
|
|
|
|
|
|
|
|
| |||
Acquired, sold or discontinued |
| 231 |
| 130 |
| (101 | ) |
| * | |||
Preneed insurance commissions revenue |
| 432 |
| 434 |
| 2 |
| 0.5 | % | |||
Total net revenues |
| $ | 32,707 |
| $ | 30,354 |
| $ | (2,353 | ) | (7.2 | )% |
|
|
|
|
|
|
|
|
|
| |||
Gross profit: |
|
|
|
|
|
|
|
|
| |||
Same-store |
| $ | 11,229 |
| $ | 8,179 |
| $ | (3,050 | ) | (27.2 | )% |
Acquired, sold or discontinued |
| 22 |
| 19 |
| (3 | ) |
| * | |||
Preneed insurance commissions revenue |
| 432 |
| 434 |
| 2 |
| 0.5 | % | |||
Total gross profit |
| $ | 11,683 |
| $ | 8,632 |
| $ | (3,051 | ) | (26.1 | )% |
Three months ended September 30, 2001 compared to three months ended September 30, 2002(dollars in thousands)
| Three months ended September 30, | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | Amount | Percent | ||||||||||
Net location same-store revenues: | ||||||||||||||
Core | $ | 17,342 | $ | 17,678 | $ | 336 | 1.9 | % | ||||||
Underperforming | 8,436 | 8,297 | (139 | ) | (1.6 | )% | ||||||||
Targeted for sale | 913 | 898 | (15 | ) | (1.6 | )% | ||||||||
Total same-store revenue | $ | 26,691 | $ | 26,873 | $ | 182 | 0.7 | % | ||||||
Acquired, sold or discontinued | 655 | 247 | (408 | ) | * | |||||||||
Preneed insurance commissions revenue | 910 | 401 | (509 | ) | (55.9 | )% | ||||||||
Total net revenues | $ | 28,256 | $ | 27,521 | $ | (735 | ) | (2.6 | )% | |||||
Field EBITDA | $ | 9,034 | $ | 9,118 | $ | 84 | 0.9 | % | ||||||
Field EBITDA margin | 33.0 | % | 33.6 | % | 0.6 | % | 1.8 | % | ||||||
Gross profit: | ||||||||||||||
Same-store | $ | 4,945 | $ | 6,694 | $ | 1,749 | 35.4 | % | ||||||
Acquired, sold or discontinued | 68 | 75 | 7 | * | ||||||||||
Preneed insurance commissions revenue | 910 | 401 | (509 | ) | (55.9 | )% | ||||||||
Total gross profit | $ | 5,923 | $ | 7,170 | $ | 1,247 | 21.1 | % | ||||||
14
Nine months ended September 30, 2001 compared to nine months ended September 30, 2002(dollars in thousands)
| Nine months ended September 30, | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | Amount | Percent | ||||||||||
Net location same-store revenues: | ||||||||||||||
Core | $ | 57,534 | $ | 57,741 | $ | 207 | 0.4 | % | ||||||
Underperforming | 26,984 | 26,587 | (397 | ) | (1.5 | )% | ||||||||
Targeted for sale | 3,065 | 2,995 | (70 | ) | (2.3 | )% | ||||||||
Total same-store revenue | $ | 87,583 | $ | 87,323 | $ | (260 | ) | (0.3 | )% | |||||
Acquired, sold or discontinued | 3,509 | 490 | (3,019 | ) | * | |||||||||
Preneed insurance commissions revenue | 3,198 | 1,247 | (1,951 | ) | (61.0 | )% | ||||||||
Total net revenues | $ | 94,290 | $ | 89,060 | $ | (5,230 | ) | (5.6 | )% | |||||
Field EBITDA | $ | 33,086 | $ | 31,731 | $ | (1,355 | ) | (4.1 | )% | |||||
Field EBITDA margin | 36.3 | % | 36.1 | % | (0.2 | )% | (0.6 | )% | ||||||
Gross profit: | ||||||||||||||
Same-store | $ | 19,782 | $ | 24,769 | $ | 4,987 | 25.2 | % | ||||||
Acquired, sold or discontinued | 320 | 125 | (195 | ) | * | |||||||||
Preneed insurance commissions revenue | 3,198 | 1,247 | (1,951 | ) | (61.0 | )% | ||||||||
Total gross profit | $ | 23,300 | $ | 26,141 | $ | 2,841 | 12.2 | % | ||||||
Funeral same-store revenues for the three months ended September 30, 2002 increased 0.7%March 31, 2003 decreased 7.0% when compared to the three months ended September 30, 2001,March 31, 2002, as we experienced a decrease of 0.8%8.6% in the number of services and aan increase of 1.5%1.6% in the average revenue per service for those existing operations. The decrease in the number of services compares favorably with the reported 2.9% decline in the national mortality rates for the three month period. The increase in the average revenue per service of 1.5% was negatively affected by an increase in the cremation rate from 27% to 28%. The average revenue for cremation services increased 0.6%. The number of funeral services increased 0.3% for the core group in comparing the third quarter of 2002 to the third quarter of 2001, and the average revenue per service for those existing locations increased 1.6% in comparing those same periods. The number of funeral services performed by the underperforming group decreased 2.7% while the average revenue per service increased 1.1% in comparing the third quarter 2002 to the third quarter of 2001. In addition to the net revenues from funeral location operations above, insurance commission revenues from preneed funeral contract sales totaled $0.4 million for the three months ended September 30, 2002, as compared to $0.9 million for the three months ended September 30, 2001, primarily due to nonrecurring commissions in the prior year period on the conversion of trust funded contracts to insurance funded contracts.
Total funeral same-store gross profit for the three months ended September 30, 2002 increased $1.7March 31, 2003 decreased $3.1 million or 35.4%27.2% from the comparable three months of 2001. The higher gross profit is primarily due to the elimination of goodwill amortization which totaled $1.1 million during the three months ended September 30, 2001.
2002. Funeral same-store revenues for the nine months ended September 30, 2002 decreased 0.3% when compared to the nine months ended September 30, 2001, as we experienced a decrease of 2.4% in the
15
number of servicescosts and an increase of 2.1% in the average revenue per service for those existing operations. The number of funeral services decreased 1.7% for the core group in comparing the nine months ended September 30, 2002 to the nine months ended September 30, 2001, while the average revenue per service for those existing locationsexpenses increased 2.1% in comparing those same periods. The number of funeral services for the underperforming group decreased 4.1% while the average revenue per service increased 2.8% in comparing the nine months ended September 30, 2002 to the nine months ended September 30, 2001.
Total funeral field EBITDA for the nine months ended September 30, 2002 decreased $1.4 million or 4.1%3.3% from the comparable nine month period in the prior year, the largest factor forfirst quarter of 2002, a significant portion of which was the contribution associated with businesses we sold during 2001. As a percentage of revenue, the field EBITDA margin for the nine months ended September 30, 2002 of 36.1% was relatively consistent with the prior year period.related to higher employee compensation and insurance costs.
Total funeral same-store gross profit for the nine months ended September 30, 2002 increased $5.0 million or 25.2% from the comparable nine months of 2001 primarily due to the elimination of goodwill amortization which totaled $3.3 million during the nine months ended September 30, 2001. The decrease in commission revenues is due primarily to 2001 nonrecurring commissions on the conversion of trust funded contracts to insurance funded contracts.
Cemetery Segment.Segment. The following table sets forth certain information regarding the net revenues field EBITDA and gross profit of the Company from its cemetery operations for the three and nine months ended September 30, 2001March 31, 2002 compared to the three and nine months ended September 30, 2002.
Three months ended September 30, 2001 compared to three months ended September 30, 2002(dollarsMarch 31, 2003 (dollars in thousands):
| Three months ended September 30, | Change |
| Three months ended |
| Change |
| |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | Amount | Percent |
| 2002 |
| 2003 |
| Amount |
| Percent |
| |||||||||||
Total same-store revenue | $ | 9,341 | $ | 8,601 | $ | (740 | ) | (7.9 | )% |
| $ | 8,215 |
| $ | 8,352 |
| $ | 137 |
| 1.7 | % | |||
Acquired or sold | 72 | — | (72 | ) | * |
| — |
| — |
| — |
| — |
| ||||||||||
Total net revenues | $ | 9,413 | $ | 8,601 | $ | (812 | ) | (8.6 | )% |
| $ | 8,215 |
| $ | 8,352 |
| $ | 137 |
| 1.7 | % | |||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Field EBITDA | $ | 3,903 | $ | 3,095 | $ | (808 | ) | (20.7 | )% | |||||||||||||||
Field EBITDA Margin | 41.5 | % | 36.0 | % | (5.5 | )% | (13.3 | )% | ||||||||||||||||
Total same-store gross profit | $ | 2,318 | $ | 2,070 | $ | (248 | ) | (10.7 | )% |
| $ | 1,683 |
| $ | 2,467 |
| $ | 784 |
| 46.6 | % | |||
Acquired or sold | (1 | ) | — | 1 | * |
| 18 |
| — |
| (18 | ) | * |
| ||||||||||
Total gross profit | $ | 2,317 | $ | 2,070 | $ | (247 | ) | (10.7 | )% |
| $ | 1,701 |
| $ | 2,467 |
| $ | 766 |
| 45.0 | % | |||
*
16
Nine months ended September 30, 2001 compared to nine months ended September 30,2002(dollars in thousands)
| Nine months ended September 30, | Change | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | Amount | Percent | ||||||||
Total same-store revenue | $ | 27,774 | $ | 25,834 | $ | (1,940 | ) | (7.0 | )% | |||
Acquired or sold | 491 | — | (491 | ) | * | |||||||
Total net revenues | $ | 28,265 | $ | 25,834 | $ | (2,431 | ) | (8.6 | )% | |||
Field EBITDA | $ | 11,499 | $ | 9,860 | $ | (1,639 | ) | (14.3 | )% | |||
Field EBITDA margins | 40.7 | % | 38.2 | % | (2.5 | )% | (6.1 | )% | ||||
Total same-store gross profit | $ | 6,824 | $ | 6,149 | $ | (675 | ) | (9.9 | )% | |||
Acquired or sold | 20 | 22 | 2 | * | ||||||||
Total gross profit | $ | 6,844 | $ | 6,171 | $ | (673 | ) | (9.8 | )% | |||
13
Cemetery same-store net revenues for the three months ended September 30, 2002 decreased $0.7March 31, 2003 increased $0.1 million, or 7.9%1.7%, over the three months ended September 30,March 31, 2002, and cemetery same-store gross profit decreased $0.2increased $0.8 million , or 10.7%46.6%, over the comparable three months of 2001. Cemetery revenues have been negatively affected by the weak economy and internal challenges in restaffing the preneed sales group. In particular, we experienced a 2.8%2002. A decrease in preneed merchandise and service deliveries, a 6.1% decreasebad debt expense of $889,000 in salescomparing the first quarter of interment and entombment sites and a 1.9% decrease in income from perpetual care trusts and finance charges which have resulted in a decline in field EBITDA. Total gross margin decreased from 24.6%2003 to the first quarter of 2002 was the primary reason for the three months ended September 30, 2001 to 24.1% for the three months ended September 30, 2002. Gross marginincrease in the prior year included an employment termination charge of $120,000 and the current year period benefited by the lower bad debt experience.profitability.
Cemetery same-store net revenues for the nine months ended September 30, 2002 decreased $1.9 million over the nine months ended September 30, 2002, and cemetery same-store gross profit decreased $0.7 million over the comparable nine months of 2001. Total gross margin decreased slightly from 24.2% for the nine months ended September 30, 2001 to 23.9% for the nine months ended September 30, 2002.
Other.Other. General and administrative expenses forcosts increased $0.1 million, approximately 4 percent, in comparing the first quarter ended September 30,of 2002 increased $1.1 million as compared to the thirdfirst quarter of 2001. These expenses, as2003, most of the change attributable to higher salaries and wages and insurance costs.
Special charges and other items totaling $588,000 were recorded during the first quarter, equal to a percentagecharge of net revenues, increased from 6.6% to 10.0% because$0.02 per diluted share, and consisted primarily of a $0.7 million chargecharges related to the early termination of an employment agreement with a former officerlease obligation pursuant to a business dispute between the lessor and $0.5 million in professional fees incurred in connection with changes in tax accounting methods. Excluding these two unusualCarriage. The Company terminated the lease and purchased the underlying equipment because it was economical to do so. The remaining special charges general and administrative expenses totaled 6.7%other items were gains and losses and writedowns of net revenues.assets. No businesses were sold during the first quarter.
Interest expense and other financing costs for the three months ended September 30, 2002March 31, 2003 declined slightly$0.2 million compared to the thirdfirst quarter of 20012002 primarily because average debt outstanding was approximately $11 million less than the average debt outstanding in the same period for 2001.2002.
Income Taxes. The following table sets forth the components of the provision (benefit) of income taxes of the Company for the three and nine months ended September 30, 2001March 31, 2002 compared to the three and nine months ended September 30, 2002.March 31, 2003 (dollars in thousands).
17
Three months ended September 30, 2001 compared to three months ended September 30, 2002
| Three months ended September 30, 2001 | Three months ended September 30, 2002 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Percent of Pretax Income | Amount | Percent of Pretax Income | |||||||
Provision for income taxes before the reduction of the deferred tax asset valuation allowance | $ | 136 | 20 | % | $ | 325 | 38.5 | % |
Nine months ended September 30, 2001 compared to nine months ended September 30,2002
| Nine months ended September 30, 2001 | Nine months ended September 30, 2002 |
| Three months ended |
| Three months ended |
| |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Percent of Pretax Income | Amount | Percent of Pretax Income |
| Amount |
| Percent |
| Amount |
| Percent |
| |||||||||
Provision for income taxes before the reduction of the deferred tax asset valuation allowance | $ | 1,617 | 20 | % | $ | 3,607 | 38.5 | % |
| $ | 2,320 |
| 38.2 | % | $ | 1,234 |
| 37.5 | % | |||
Reduction of deferred tax asset valuation allowance | — | — | (12,800 | ) | (136.7 | )% |
| (12,800 | ) | (210.5 | )% | — |
| — |
| |||||||
Total provision (benefit) for income taxes | $ | 1,617 | 20 | % | $ | (9,193 | ) | (98.2 | )% |
| $ | (10,480 | ) | (172.4 | )% | $ | 1,234 |
| 37.5 | % | ||
The Company has a net operating loss carryforwardcarryforwards totaling approximately $11 million for Federal income tax purposes.purposes, as well as operating loss carryforwards in certain states. Because of the ability to use the net operating loss to offset taxable income and the timing of when revenue and expenses are recognized for tax purposes, we do not expect to pay Federal income taxes in 2003. The slightly lower tax rate in 2003, compared to 2002, and 2003.is based on our expectations of utilizing certain state loss carryforwards, the benefits of which have not yet been recognized.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3.7$3.9 million at September 30, 2002,March 31, 2003, representing an increase of $1.0$1.2 million from December 31, 2001.2002. It is Carriage'sCarriage’s practice to maintain low cash balances and to apply available cash against its revolving line of credit, described below, to minimize interest expense. If the Company needs cash for working capital or investment purposes, it can always draw on the line of credit.credit so long as the Company is in compliance with the related loan agreement. For the ninethree months ended September 30, 2002,March 31, 2003, cash provided by operations was $14.3$3.8 million as compared to $21.8$5.5 million for the ninethree months ended September 30, 2001. The higher level of cash provided by operations in the nine months during 2001 was primarily due to $2.2 million in tax refunds received in 2001 and catch-up trust withdrawals in the 2001 period totaling $3.5 million that normally would have been withdrawn during the 2000 year.March 31, 2002. Cash used in investing activities was $6.8$1.7 million for the ninethree months ended September 30, 2002March 31, 2003, and was entirely used for capital expenditures, compared to cash providedused in the amount of $3.8$2.3 million for the first ninethree months of 2001,2002, the change being primarily due to the combinationcash payment of proceeds from the sale of businesses during the first nine months of 2001 in the amount of $8.4 million and use of cash for an acquisition that closed in the second quarter of 2002 and an earnout related to an acquisition in a prior year totaling $2.2$1.0 million in 2002.
The ability to generate free cash flow from operations is particularly important as this measures the cash produced by the businesses which may be used to repay indebtedness or make acquisitions. We define free cash flow from operations as cash flow provided by operations less all capital expenditures. For the nine months ended September 30, 2002, free cash flow provided by operations
18
was $9.4 million as compared to $17.2 million for the nine months ended September 30, 2001. Our strong free cash flow from operations is a function of consistently high levels of field EBITDA, improved working capital management, and disciplined spending and capital allocation. Free cash flow generated during the fourth quarter of the year will be dedicated to reducing debt to our goal of $150 million. Uses of free cash flow during the nine months ended September 30, 2002, include the payment of $6.3 million of remaining contingent acquisition obligations, $1.1 million on an acquisition and the reduction of our debt by $1.7 million.
The Company'sCompany’s debt at September 30, 2002March 31, 2003 totaled $155.5$148.2 million and consisted of $99.3$97.5 million in senior debt notes, a $100$75 million revolving credit facility ($35.030.8 million outstanding at September 30, 2002)March 31, 2003) and $21.2$19.9 million in acquisition indebtedness and capital lease obligations. The balance sheet category "Assets Held for Sale" is net of debt totaling $1.0 million.
The $99.3$97.5 million in senior debt notes are unsecured, mature in tranches of $22.9$22.5 million in 2004, $54.1$53.1 million in 2006 and $22.3$21.9 million in 2008 and bear interest at the fixed rates of 7.73%, 7.96% and 8.06%, respectively.
The Company has a revolving credit facility with a group of banks. The credit facility, maturing in June 2004, is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires that we maintain certain financial ratios. Interest under the credit facility is provided at both LIBOR and prime rate options. As of September 30, 2002,March 31, 2003, the Company'sCompany’s debt to total capitalization was 45.543.7 percent as compared to 47.844.2 percent at December 31, 2001.2002. During October 2002, management voluntarily reduced the capacity of the revolving line of credit from $100 million to $75 million to reduce bank fees on a portion that is not expected to be used. With the lower capacity, the Company has $39$43 million available to draw under the credit facility.
We believe that cash flow from operations and borrowings under the credit facility should be sufficient to fund anticipated 2003 capital expenditures as well as other operating requirements. Because future cash flows and the availability of financing are subject to a number of variables, such as the Company'sCompany’s operating performance, timing of debt maturities and the number and size of acquisitions made by the Company, there can be no assurance that the Company'sCompany’s capital resources will be sufficient to fund its capital needs.needs in future years. Additional debt and equity financing may be required in the future. The availability and terms of these capital sources will depend on prevailing market conditions and interest rates and the then-existing financial condition of the Company.
(a) Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations"“Business Combinations” and SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”. SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements. The provisions of SFAS No. 142 were required to be applied starting with fiscal years beginning after December
15 2001.
The Company adopted SFAS No. 142 as of the beginning of the first quarter of 2002. The effect of SFAS No. 142 on the Company is the elimination of the amortization of goodwill, which prior to 2002 was amortized over 40 years, and the testing for impairment of goodwill on an annual basis. See Note 2 to the Consolidated Financial Statements for proforma disclosure of this accounting change and the change in
19
the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill as of January 1, 2002 by comparing the fair value of the Company'sCompany’s reporting units (funeral home businesses by region) to the carrying value of the reporting units, and no impairment was required to be reportedrecorded at the implementation date of the new accounting standard. Goodwill acquired during the first quarter of 2002 consisted of a $1.0 million cash payment for performance-based contingent consideration payments on a prior year acquisition.
(b) Impairment of Long-Lived Assets
In August 2001, the Financial Accounting Standards BoardFASB issued SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets"Assets”. SFAS No. 144 addresses financial accounting and reporting of long-lived assets, other than goodwill, that are to be held and used or disposed by sale or otherwise, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of the beginning of the first quarter ofin 2002 which had no effect on the Company's financial position orCompany’s results of operations.
(c) Gains and Losses from Extinguishment of Debt
In April 2002, the FASB issued Statement of Financial Accounting StandardsSFAS No. 145, ("SFAS No. 145"), "Rescission“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."” Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting“Reporting Gains and Losses from Extinguishment of Debt"Debt”. Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains and losses from extinguishment of debt that do not meet the criteria of APB.APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.
(d) Costs Associated with Disposal Activities
In July 2002, the FASB issued Statement of Financial Accounting StandardsSFAS No. 146, ("SFAS No. 146"), "Accounting“Accounting for Costs Associated with Exit or Disposal Activities."” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with andan exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force ("EITF"(“EITF”) No. 94-3, "Liability“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring),"” required an exit cost liability to be recognized at the date of an entity'sentity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002.
(e) Consolidation of Variable Interest EntitiesSEASONALITY
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to require consolidation of business entities under certain circumstances, particularly with respect to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. The Company'sprimary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other primary interests in an entity. The Company is currently evaluating FIN No. 46 to determine if its application would change the manner in which it accounts for preneed trusts. The provisions of this statement would be effective beginning with Carriage’s third quarter of 2003.
16
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 has not had a significant impact on the results of operations of the Company.
There has been no material change in the Company'sCompany’s position regarding quantitative and qualitative disclosures of market risk from that disclosed in the Company's 2001Company’s 2002 Form 10-K.
(a)
20
(b)
21
PART II—II — OTHER INFORMATION
Item 1.1. Legal Proceedings
The Company and its subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect.
We carry insurance with coverages and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
Item 2.2. Changes in Securities and Use of Proceeds
None
None
None
17
Item 4.4. Submission to Matters to A Vote of Security Holders
None.
Item 5.5. Other Information
In addition to historical information, this QuarterlyAnnual Report contains forward-looking statements made bywithin the managementsafe harbor provisions of Carriage Services, Inc. (the "Company" or "Carriage"). Suchthe Private Securities Litigation Reform Act of 1995. These statements are typically identified by terms expressing future expectations or goals. These forward-looking statements, although made in good faith, are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include Carriage's inability to sell businesses and properties held for sale for their carrying value, to maintain or increase freeany projections of earnings, revenues, asset sales, cash flow, from operations,debt levels or to achieve internal growth from our businesses; adverse changes in economic andother financial market conditions, including declining stock prices, increasing interest rates, and restricted credit availability; lower death rates; changing consumer preferences; competition in our markets; Carriage's inability to maintain operating ratios within the limits set forth within our financing arrangements; and changes in government regulationitems; any statements of the death care industry. Readers are cautioned not to place undue reliance on these forward-lookingplans, strategies and objectives of management for future operation; any statements which reflect management's opinions only asregarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the date hereof. We undertake no obligation to revise or publicly releaseforegoing. Forward-looking statements may include the results of any revision of these forward-looking statements. Readers should carefully review the Cautionary Statements described in thiswords “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other documents we file from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K and Current Reports on Form 8-K filed by Carriage throughout 2002.similar words.
The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company'sCompany’s actual consolidated results and could cause the Company'sCompany’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.
22
Risks related to our business
(1) Maintaining or achieving growthEarnings from and principal of trust funds and insurance contracts could be reduced by changes in freestock and bond prices and interest and dividend rates.
(2) Increased costs may have a negative impact on earnings and cash flow from operationsflows.
(3) Our ability to achieve our debt reduction targets and to service our debt in the future depends primarilyupon our ability to generate sufficient cash, which depends on achieving anticipated levelsmany factors, some of earnings before depreciation, amortization and other non-cash charges, maintaining the amount of expected cash income taxes payable, controlling capital expenditures to budgeted levels, collecting accounts receivable and managingwhich are beyond our control.
(4) We may experience declines in preneed sales origination costsdue to current or lower levels.
(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 believed to be achievable, but the inability of the Company to achieve planned volume or prices could cause the Company not to meet anticipated levels of revenue. In certain markets the Company expects to increase prices, but in certain markets prices could be lowered to protect market share. The ability of the Company to achieve volume or price targets at any location depends on numerous factors including the capabilities of the local operating staff, the local economy, the local death rate, competitionchanges made to contract terms and changessales force compensation, or a weakening economy. Declines in consumer preferences, including cremation.
(3) Revenue also is affected by the level of preneed sales in both currentwould reduce our backlog and prior periods. The level ofrevenue and could reduce our future market share.
(5) Increased preneed sales may be adversely affected by numerous factors, including deterioration in the economy, which causes individualshave a negative impact on cash flow.
(6) Price competition could reduce market share or cause us to have less discretionary income, changes in consumer spending preferences, as well as changes in marketing approach, commission practices and contractual terms.
(4) In addition to the factors discussed above, financial performance may be affected by other important factors, including the following:
(7) Increased advertising or better marketing by competitors, or increased activity by competitors offering products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs in the Company's general and administrative expenses.
(8) Increases in interest rates whichwould increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.
(9) Covenant restrictions under our revolving credit facility and senior notes limit our flexibility in operating our business.
18
(10) Our projections for 2003 and later years include adjustments to earnings and cash flow for estimated disposition activity. Several important factors, among others, may affect our ability to consummate dispositions, including our ability to identify buyers for the businesses and assets we expect to sell at acceptable prices.
(11) We expect to refinance the Company’s revolving line of credit prior to its maturity in June 2004. The availability of such refinancing may not be on terms favorable to the Company.
Risks related to the death care industry
(1) Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.
(2) The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, basic cremations produce no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser profit margins than traditional funerals.
(3) If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.
(4) Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.
(5) Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease the amount the Company pays on borrowings with variable rates of interest.
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.cash flows.
23
ITEM 6.6. Exhibits and Reports on Form 8-K
A report on Form 8-K was filed with the SEC on July 24, 2002 in connection with the resignation of Thomas C. Livengood and certain other matters.
A report on Form 8-K was filed with the SEC on August 14, 2002 in connection with furnishing
(a) Exhibits
10.1 — Agreement relating to the SEC the certifications pursuantBoard Position of Mark F. Wilson
11.1 — Statement regarding computation of per share earnings
12 — Computation of Ratio of Earnings to Fixed Charges
99.1 — Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.2002
24
99.2SIGNATURE
— Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None filed during the first quarter of 2003.
19
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. | |||||
May 14, 2003 | /s/ Joseph Saporito | ||||
Date | Joseph Saporito, | ||||
Senior Vice President and Chief Financial | |||||
25
I, Melvin C. Payne, certify that:
1.
2.
3.
4.
a)
20
b)
c)
5.
a)
b)
6.
Dated: | May 14, 2003 | /s/ Melvin C. Payne | |||
Melvin C. Payne | |||||
Chairman of the Board, President and |
26
I, Joseph Saporito, certify that:
1.
2.
3.
4.
a.
b.
c.
5.
a.
21
b.
6.
Dated: | May 14, 2003 | /s/ Joseph Saporito | |||
Joseph Saporito | |||||
Senior Vice President and Chief |
22