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, 1997
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
1300 POST OAK BLVD., SUITE 1500, HOUSTON, TX77056 (Address of
principal executive offices)(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 556-7400
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares of the Registrant's Class A Common Stock, $.01 par value
per share, and Class B Common Stock, $.01 par value per share, outstanding as of
October 29, 1997 was 5,541,780 and 5,050,485, respectively.
CARRIAGE SERVICES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 1996 and September 30, 1997 ....................... 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1996 and 1997 and the
Nine Months Ended September 30, 1996 and 1997 .................. 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1997 .................. 5
Notes to Consolidated Financial Statements ........................ 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 8
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES ....................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 15
Signature ............................................................... 17
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the following: the Company's ability to sustain its rapid
acquisition rate, to manage the growth and to obtain adequate performance from
acquired businesses; the economy and financial market conditions, including
stock prices, interest rates and credit availability; and death rates and
competition in the Company's markets.
2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December September
31, 30,
1996 1997
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 1,712 $ 883
Accounts receivable --
Trade, net of allowance for doubtful
accounts of $530 in 1996 and $1,041 in 1997 5,665 8,218
Other ..................................... 673 1,042
--------- ---------
6,338 9,260
Inventories and other current assets ........... 3,350 5,109
--------- ---------
Total current assets ................. 11,400 15,252
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation of $4,095 in 1996 and
$6,335 in 1997 ................................. 46,112 71,942
CEMETERY PROPERTY, at cost .......................... 4,061 23,686
NAMES AND REPUTATIONS, net of accumulated
amortization of $2,007 in 1996 and $3,731 in
1997 62,568 94,440
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS ........ 7,167 13,916
--------- ---------
$ 131,308 $ 219,237
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other current liabilities .. $ 5,225 $ 7,089
Current portion of long-term debt and
obligations under capital leases ................ 1,086 1,328
--------- ---------
Total current liabilities ............. 6,311 8,417
PRENEED LIABILITIES, net ............................. 3,664 7,692
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, net of current portion .................. 43,290 85,642
DEFERRED INCOME TAXES ................................ 3,749 11,915
--------- ---------
Total liabilities ..................... 57,014 113,668
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ........................... 17,251 16,285
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par value;
40,000,000 shares Authorized; 3,942,000 and
5,542,000 issued and outstanding at
December 31, 1996 and September 30, 1997,
respectively .................................... 40 55
Class B Common Stock; $.01 par value;
10,000,000 shares
Authorized; 4,502,000 and 5,050,000 issued
and outstanding at
December 31, 1996 and September 30, 1997,
respectively ......................................... 45 50
Contributed capital ............................. 63,966 93,439
Retained deficit ................................ (7,008) (4,260)
--------- ---------
Total stockholders' equity ............ 57,043 89,284
--------- ---------
$ 131,308 $ 219,237
========= =========
The accompanying notes are an integral part of these financial statements.
3
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
REVENUES, net
Funeral ......................... $ 9,303 $ 15,365 $ 24,951 $ 46,283
Cemetery ........................ 842 2,880 2,119 9,012
-------- -------- -------- --------
10,145 18,245 27,070 55,295
COSTS AND EXPENSES
Funeral ......................... 8,434 12,271 20,888 34,405
Cemetery ........................ 717 2,417 1,799 7,187
-------- -------- -------- --------
9,151 14,688 22,687 41,592
-------- -------- -------- --------
Gross profit .................... 994 3,557 4,383 13,703
GENERAL AND ADMINISTRATIVE EXPENSES .. 611 1,471 1,766 3,657
-------- -------- -------- --------
Operating income ................ 383 2,086 2,617 10,046
INTEREST EXPENSE, net ................ 1,069 1,457 3,713 4,028
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item .......... (686) 629 (1,096) 6,018
PROVISION (BENEFIT) FOR INCOME TAXES . (272) 282 (21) 2,357
-------- -------- -------- --------
Income (loss) before
extraordinary item .............. (414) 347 (1,075) 3,661
EXTRAORDINARY ITEM:
Loss on early extinguishment of
debt, net of income tax benefit
of $332 and $159, respectively .. (498) (195) (498) (195)
-------- -------- -------- --------
NET INCOME (LOSS) .................... (912) 152 (1,573) 3,466
Preferred stock dividend requirements 250 29 351 239
-------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS ............. $ (1,162) $ 123 $ (1,924) $ 3,227
======== ======== ======== ========
INCOME (LOSS) PER SHARE:
Net income (loss) per common and
common equivalent share before
extraordinary item attributable
to common shareholders ........ $ (.11) $ .03 $ (.39) $ .31
Extraordinary item per share .... $ (.09) $ (.02) $ (.14) $ (.02)
-------- -------- -------- --------
Net income (loss) per common and
common equivalent share
attributable to common
shareholders .................. $ (.20) $ .01 $ (.53) $ .29
======== ======== ======== ========
Weighted average number of common and
common equivalent shares
outstanding ..................... 5,920 11,754 3,662 11,325
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
CARRIAGE SEAVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
For the nine months
ended September 30,
--------------------
1996 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (1,573) $ 3,466
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities -- Depreciation and amortization ....... 2,410 5,644
Provision for losses on accounts receivable ....... 396 284
Loss on early extinguishment of debt, net of
income taxes ...................................... 498 195
Deferred income taxes ............................. (209) 1,574
Changes in assets and liabilities, net of
effects from acquisitions:
Increase in accounts receivable .............. (1,463) (1,768)
Increase in inventories and other current
assets ....................................... (823) (942)
Increase in accounts payable and other
current liabilities .......................... 315 1,062
Other, net ........................................ (147) (475)
-------- --------
Net cash provided by (used in)
operating activities .................... (596) 9,040
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ................... (40,865) (43,568)
Purchase of property, plant and equipment ............ (2,945) (5,209)
Other, including disposition of assets ............... 1,297 (957)
-------- --------
Net cash provided by (used in)
investing activities ................................... (42,513) (49,734)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ......................... 56,388 41,884
Payments on long-term debt and obligations under
capital leases .................................... (65,724) (1,112)
Proceeds from issuance of common stock ............... 47,771 --
Payment of preferred stock dividends ................. (351) (712)
Exercise of stock options ............................ 44 113
Purchase of treasury stock ........................... (341) --
Payment of deferred debt charges .................... (446) (308)
-------- --------
Net cash provided by (used in)
financing activities ............... 37,341 39,865
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................... (5,768) (829)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 7,573 1,712
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 1,805 $ 883
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid through issuance of new debt ........... $ 825 $ --
======== ========
Cash paid for interest ............................... $ 4,037 $ 4,030
======== ========
Cash paid for income taxes ........................... $ -- $ 812
======== ========
Non-cash consideration for acquisitions .............. $ 18,773 $ 28,328
======== ========
Retirement of debt through disposition of business ... $ 2,642 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
5
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include Carriage Services,
Inc. and its subsidiaries (the "Company"). All significant intercompany balances
and transactions have been eliminated.
The information for the three and nine months ended September 30, 1996 and
1997 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, 1996, and should be read in conjunction therewith.
2. ACQUISITIONS
During the nine months ended September 30, 1997, the Company purchased 31
funeral homes and four cemeteries. 35 funeral homes and five cemeteries were
acquired during the nine months ended September 30, 1996. These acquisitions
have been accounted for by the purchase method, and their results of operations
are included in the accompanying consolidated financial statements from the
dates of acquisition.
The effect of the above acquisitions on the Consolidated Balance Sheets was
as follows:
September 30,
-----------------------
1996 1997
-------- --------
(in thousands)
Current Assets, net of cash acquired ............... $ 3,196 $ 7,671
Cemetery Property .................................. 2,088 19,645
Property, Plant and Equipment ...................... 20,719 22,902
Deferred Charges and Other Noncurrent Assets ....... 1,865 813
Names and Reputations .............................. 36,171 33,594
Current Liabilities ................................ (1,490) (801)
Other Liabilities .................................. (2,911) (11,928)
-------- --------
Total Acquisitions ............................ 59,638 71,896
Redeemable Preferred Stock issued .................. 17,776 20,000
Preferred Stock issued ............................. 555 --
Common Stock issued ................................ 442 8,328
-------- --------
Cash used for acquisitions .................... $ 40,865 $ 43,568
======== ========
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, 1996.
6
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,
-----------------------------
1996 1997
------------ ------------
(Unaudited and in thousands)
Revenues, net ................................ $ 57,185 $ 59,347
Net income (loss) before income taxes ........ (1,671) 6,048
Net income (loss) attributable to common
stockholders ............................... (1,852) 3,286
Income (loss) per common and common
equivalent share ........................... (.51) .29
3. DEBT
In August 1996, the Company entered into a credit facility (the "Former
Credit Facility") for a $75 million revolving line of credit. The Former Credit
Facility provided for both LIBOR and base rate interest options. That facility
was unsecured and was for a term of three years. During September, 1997, the
Company entered into a new credit facility (the "New Credit Facility") for a
$150 million revolving line of credit. The New Credit Facility has a five year
term, is unsecured and contains customary restrictive covenants, including a
restriction on the payment of dividends on common stock, and requires the
Company to maintain certain financial ratios. Interest under the New Credit
Facility is provided at both LIBOR and prime rate options. As of September 30,
1997, $72.7 million was outstanding under the line of credit.
4. RECENT ACCOUNTING STANDARD
In February 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings
Per Share was issued. FAS 128 is effective for earnings per share calculations
for periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. The Company expects the new accounting standard to
have no significant effect on earnings per share.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1991 in order to take advantage of the attractive
fundamentals of and significant opportunities to consolidate the death care
industry. From 1992 through 1995, the Company acquired 42 funeral homes and four
cemeteries, for consideration ranging from approximately $9 million to $14
million in each of the four years. The Company intentionally took a disciplined,
deliberate approach to acquisitions that allowed management the time to
integrate early acquisitions, to develop and implement systems, including
operational procedures, administrative policies, financial systems and related
controls, and to promote a decentralized service culture.
Management believes that the Company's focus on controlled growth while
implementing operational and administrative systems and related controls to
effectively manage a highly decentralized management structure positioned it to
pursue an accelerated growth strategy beginning in late 1995. The Company
significantly expanded its corporate development and acquisition activities in
1996 and 1997, thus requiring additions to the corporate infrastructure. During
1996, the Company acquired 38 funeral homes and seven cemeteries for an
aggregate consideration of approximately $68 million. During the first nine
months of 1997, the Company acquired 31 funeral homes and four cemeteries for an
aggregate consideration of approximately $72 million.
Upon acquisition, the operations team focuses on increasing historic
operating income by improving the merchandising approach, pricing structure and
marketing strategy of acquired businesses. These enhancements, complemented by
discounts from consolidated purchasing, generally result in improved margins of
the acquired businesses within the first 12 months following acquisition.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the
three and nine month periods ended September 30, 1996 and 1997. 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, 1996 compared to
the three and nine months ended September 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Three months ended
September 30, Change
----------------- -----------------
1996 1997 Amount Percent
------- ------- ------- -------
(dollars in thousands)
Net revenues:
Existing operations .......... $ 8,447 $ 8,468 $ 21 .3%
Acquired operations .......... 856 6,897 6,041 *
======= ======= =======
Total net revenues ...... $ 9,303 $15,365 $ 6,062 65.2%
======= ======= =======
8
Three months ended
September 30, Change
---------------- ------------------
1996 1997 Amount Percent
---- ------ ------ -----
(dollars in thousands)
Gross profit:
Existing operations .......... $751 $1,420 $ 669 89.1%
Acquired operations .......... 118 1,674 1,556 *
==== ====== ======
Total gross profit ..... $869 $3,094 $2,225 256.0%
==== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Nine months ended
September 30, Change
------------------ --------------------
1996 1997 Amount Percent
------- ------- --------- --------
(dollars in thousands)
Net revenues:
Existing operations ........... $18,515 $18,254 $ (261) (1.4)%
Acquired operations ........... 6,436 28,029 21,593 *
======= ======= ========
Total net revenues ....... $24,951 $46,283 $ 21,332 85.5%
======= ======= ========
Nine months ended
September 30, Change
------------------- ------------------
1996 1997 Amount Percent
------ ------- ------ -----
(dollars in thousands)
Gross profit:
Existing operations ....... $2,981 $ 4,098 $1,117 37.5%
Acquired operations ....... 1,082 7,780 6,698 *
====== ======= ======
Total gross profit .... $4,063 $11,878 $7,815 192.4%
====== ======= ======
- ---------------
* Not meaningful.
Due to the rapid growth of the Company, "existing operations" represented
only 55% of the total funeral revenues and only 46% of the total funeral gross
profit for the three months ended September 30, 1997 and only 39% of the total
funeral revenues and only 35% of the total funeral gross profit for the nine
months ended September 30, 1997. Total funeral net revenues for the three months
ended September 30, 1997 increased $6.1 million or 65.2% over the three months
ended September 30, 1996. The higher net revenues reflect an increase of $6.0
million in net revenues from acquired operations and an increase in net revenues
of $21,000 or .3% from existing operations. Total funeral net revenues for the
nine months ended September 30, 1997 increased $21.3 million or 85.5% over the
nine months ended September 30, 1996. The higher net revenues reflect an
increase of $21.6 million in net revenues from acquired operations and a
decrease in net revenues of $261,000 or 1.4% from existing operations. Fewer
services were performed year to date in 1997 primarily due to lower than usual
seasonal death rates in certain of the Company's markets, especially in the East
North Central region of the country where the Company has a large number of
"existing operations."
Total funeral gross profit for the three months ended September 30, 1997
increased $2.2 million or 256.0% over the comparable three months of 1996. The
higher total gross profit reflected an increase of
9
$1.6 million from acquired operations and an increase of $669,000 or 89.1% from
existing operations. Total funeral gross profit for the nine months ended
September 30, 1997 increased $7.8 million or 192.4% over the comparable nine
months of 1996. The higher total gross profit reflected an increase of $6.7
million from acquired operations and an increase of $1.1 million or 37.5% from
existing operations. Gross profit for existing operations increased for both
periods due to the efficiencies gained by consolidation, cost savings, improved
collections experience and the increasing effectiveness of the Company's
merchandising strategy, which were partially offset by lower revenues. Total
gross margin increased from 9% for the third quarter of 1996 to 20% for the
third quarter of 1997 and from 16% for the first nine months of 1996 to 26% for
the first nine months of 1997 due to these factors.
CEMETERY SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations for the three and nine months ended September 30, 1996 compared to
the three and nine months ended September 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Three months ended
September 30, Change
-------------------- --------------------
1996 1997 Amount Percent
--------- --------- --------- ---------
(dollars in thousands)
Total net revenues ............ $ 842 $ 2,880 $ 2,038 242.0%
========= ========= =========
Total gross profit ............ $ 125 $ 588 $ 463 370.4%
========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Nine months ended
September 30, Change
-------------------- --------------------
1996 1997 Amount Percent
--------- --------- --------- ---------
(dollars in thousands)
Total net revenues ............ $ 1,799 $ 7,187 $ 5,388 299.5%
========= ========= =========
Total gross profit ............ $ 320 $ 1,825 $ 1,505 470.3%
========= ========= =========
Due to the rapid growth of the Company, "existing operations" represented
approximately 31% of cemetery revenues and approximately 16% of cemetery gross
profit for the three months ended September 30, 1997 and approximately 14% of
cemetery revenues and less than 7% of cemetery gross profit for the nine months
ended September 30, 1997. As a result, the Company does not believe it is
meaningful to present the results for "existing" and "acquired" operations
separately.
Total cemetery net revenues for the three months ended September 30, 1997
increased $2.0 million or 242.0% over the three months ended September 30, 1996
and total cemetery gross profit increased $463,000 or 370.4% over the comparable
three months of 1996. Total cemetery net revenues for the nine months ended
September 30, 1997 increased $5.4 million or 299.5% over the nine months ended
September 30, 1996 and total cemetery gross profit increased $1.5 million or
470.3% over the comparable nine months of 1996. Total gross margin increased
from 14.8% for the three months ended
10
September 30, 1996 to 20.4% for the three months ended September 30, 1997 and
from 17.8% for the first nine months of 1996 to 25.4% for the first nine months
of 1997. These increases were due primarily to the Company's acquisition of the
Rolling Hills cemetery as part of the CNM Group acquisition in January 1997 and
increased preneed marketing efforts.
OTHER
General and administrative expenses for the nine months ended September 30,
1997 increased $1.9 million over the first nine months of 1996 due primarily to
the increased personnel expense necessary to support a higher rate of growth and
increased acquisition activity. General and administrative expenses as a
percentage of net revenues increased from 6.5% for the first nine months of 1996
to 6.6% for the comparable period of 1997, reflecting increased corporate
development activity and the continuing development of the infrastructure in
expectation of closing a large number of transactions during the fourth quarter
of 1997.
Interest expense for the nine months ended September 30, 1996 increased
$315,000 over the first nine months of 1996. However, as a percentage of net
revenues, interest expense decreased from 13.7% for the first nine months of
1996 to 7.3% primarily as a result of the Company's utilization of the net
proceeds from its initial public offering of common stock (the "IPO") and
borrowings under the Former Credit Facility to repay its outstanding
indebtedness in August 1996.
During 1996, the Company issued approximately $18 million of Series D
Redeemable Preferred Stock to fund a portion of its acquisition program.
Dividends on the majority of this preferred stock range from 6% - 7% per annum.
The majority of this preferred stock converted into common stock during the
first quarter of 1997. During the first three months of 1997, the Company issued
approximately $20 million of Series F Redeemable Preferred Stock. Dividends on
this preferred stock are currently 4% per annum. The Series F Redeemable
Preferred Stock is considered a common stock equivalent for purposes of
computing primary earnings per share. Therefore, only the dividends on the
Series D preferred stock of $239,000 are deducted from net income in determining
net income attributable to common stockholders for the nine months ended
September 30, 1997 ($29,000 for the three months ended September 30, 1997).
For the first six months of 1997, the Company provided for income taxes using
the federal and state rates of approximately 38.5%. This rate includes a 4.5%
net benefit for utilization of prior year net operating losses net of other tax
reserves. Excluding the 4.5% net benefit, the Company is providing for state and
federal income taxes at a rate of 43%. For the three months ended September 30,
1997, the Company provided for income taxes at the combined rates of
approximately 45%, which reflects the effect that stock acquisitions have on the
tax rate and operating in states that have high tax rates. For the nine months
ended September 30, 1997, the effective tax rate is 39.2%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $.9 million at September 30, 1997,
representing a decrease of $.8 million from December 31, 1996. For the nine
months ended September 30, 1997, cash provided by operations was $9.0 million as
compared to cash used in operations of $596,000 for the nine months ended
September 30, 1996. The increase in net cash provided by operating activities
was principally due to the net income in 1997 compared to the net loss for 1996.
Cash used in investing activities was $49.7 million for the nine months ended
September 30, 1997 compared to $42.5 million for the first nine months of 1996,
due primarily to the increases in acquisition costs and construction of funeral
facilities. In the first nine months of 1997, cash flow provided by financing
activities amounted to approximately $39.9 million, primarily due to proceeds
from long term debt which were used to fund acquisitions.
11
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. The following table shows
the activity in the Series D and Series F Redeemable Preferred Stock for the
nine months ended September 30, 1997:
Number Number
of Shares of Shares
Outstanding Outstanding
at 12/31/96 Issuances Conversions at 9/30/97
---------- ---------- ----------- ----------
SERIES D PREFERRED STOCK
Convertible into Class A
Common Stock ........ 1,200,000 (1,200,000) 0
Convertible into Class B
Common Stock ........ 16,053,116 (14,370,616) 1,682,500
SERIES F PREFERRED STOCK
Convertible into Class A
Common Stock ........ 0 19,999,992 (5,388,315) 14,611,677
---------- ---------- ----------- ----------
Totals ................... 17,253,116 19,999,992 (20,958,931) 16,294,177
========== ========== =========== ==========
The following table shows the effect on common shares outstanding from the
Redeemable Preferred Stock conversions during the nine months ended September
30, 1997:
Increase in
Common
Conversion Shares
Conversions Price Outstanding
---------- ------------- -----------
SERIES D PREFERRED STOCK
Convertible into Class A
Common Stock ............... 1,200,000 $ 13.50 88,888
Convertible into Class B
Common Stock ............... 14,370,616 $ 13.50 1,064,481
SERIES F PREFERRED STOCK
Convertible into Class A
Common Stock ............... 5,388,315 $ 15.00 359,221
---------- ---------
Totals .......................... 20,958,931 1,512,590
========== =========
The holders of Series D Preferred Stock are entitled to receive annual cash
dividends of $.06 - $.07 per share depending upon when such shares were issued.
The current conversion rate is $14.50 per share. Commencing on the second
anniversary of the completion of the Company's IPO, the Company
12
may, at its option, redeem all or any portion of the shares of Series D
Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends. Such redemption is subject to
the right of each holder of Series D Preferred Stock to convert such holder's
shares into shares of Class B Common Stock. On December 31, 2001, the Company
must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends.
The holders of the Series F Preferred Stock are entitled to receive cash
dividends at the annual rate initially of $.04 per share, with the annual rate
increasing by 5% per year commencing January 1, 1998 until January 1, 2001, at
which time the annual rate becomes fixed at $0.0486 per share. The current
conversion rate is $16.00 per share. On December 31, 2007, the Company must
redeem all shares of Series F Preferred Stock then outstanding at a redemption
price of $1.00 per share, together with all accrued and unpaid dividends. The
Company does not have the option to redeem any Series F Preferred Stock.
In conjunction with the closing of the IPO, the Company entered into a new
credit facility (the "Former Credit Facility") which provided for a $75 million
revolving line of credit with both LIBOR and base rate interest options. The
Former Credit Facility was unsecured and was for a term of three years. During
September, 1997, the Company entered into a new credit facility (the "New Credit
Facility") for a $150 million revolving line of credit. The New Credit Facility
has a five year term, is unsecured and contains customary restrictive covenants,
including a restriction on the payment of dividends on common stock, and
requires the Company to maintain certain financial ratios. Interest under the
New Credit Facility is provided at both LIBOR and prime rate options. As of
September 30, 1997, $72.7 million was outstanding under the line of credit.
The Company issued 573,979 shares of Class A Common Stock and approximately
20,000,000 shares of Series F Preferred Stock and paid $44 million in cash to
fund acquisitions during the nine months ended September 30, 1997. The Company
intends to fund future acquisitions through borrowings under its New Credit
Facility and additional issuances of Class A Common Stock or additional
preferred stock. In March 1997, the Company filed a shelf registration statement
relating to 2,000,000 shares of Class A Common Stock to be used to fund
acquisitions. The Company has budgeted $125 million for its acquisition program
in 1997 of which $72 million had been utilized as of October 29, 1997. As of
October 29, 1997, the Company had letters of intent for acquisitions involving
an aggregate purchase price of approximately $55 million.
The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. In addition, the Company currently
expects to incur less than $8 million of capital expenditures during 1997,
primarily for upgrading funeral home facilities. The Company believes that cash
flow from operations, borrowings under the New Credit Facility and its ability
to issue additional debt and equity securities should be sufficient to fund
acquisitions and its anticipated capital expenditures and other operating
requirements for the remainder of 1997. However, because future cash flows and
the availability of financing are subject to a number of variables, such as the
number and size of acquisitions made by the Company, there can be no assurance
that the Company's capital resources will be sufficient to fund its capital
needs. Additional debt and equity financings may be required to continue the
Company's acquisition program. 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.
13
SEASONALITY
Although the death care business is relatively stable and fairly predictable,
the Company's business can be affected by seasonal fluctuations in the death
rate. Generally, death rates are higher during the winter months. In addition
the quarterly results of the Company may fluctuate depending on the magnitude
and timing of acquisitions.
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
From January 1, 1997 through May 31, 1997, the Company issued an aggregate of
462,994 shares of Class A Common Stock, valued at market prices, to the former
owners of acquired funeral homes and cemeteries. Consideration for such shares
consisted of ownership interests in funeral home and cemetery businesses. The
Company relied on an exemption under Section 4(2) of the Securities Act in
effecting these transactions. Beginning in June 1997, the Company began to issue
registered shares of Class A Common Stock to former owners of acquired
properties under its shelf registration statement on Form S-4.
On January 7, 1997, the Company issued 19,999,992 shares of Series F
Preferred Stock, valued at $1.00 per share, to the former owners of acquired
funeral homes and cemeteries. Consideration for such shares consisted of
ownership interests in funeral home and cemetery businesses. The Company relied
on an exemption under Section 4(2) of the Securities Act in effecting these
transactions.
On May 9, 1997, the Company filed a Certificate of Amendment, increasing the
authorized Class A Common Stock to 40,000,000 shares, reducing the authorized
Class B Common Stock to 10,000,000 shares, and increasing the authorized
Preferred Stock to 70,000,000 shares. The Company additionally filed, on May 9,
1997, a Certificate of Decrease, reducing the authorized Series D Preferred
Stock to 2,000,000 shares, and a Certificate of Decrease, reducing the
authorized Series F Preferred Stock to 15,000,000 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Loan Agreement by and among the Company and NationsBank of Texas,
N.A., dated September 9, 1997
10.2 -- Certificate of Amendment, increasing the authorized Class A Common
Stock, reducing the Class B Common Stock, and increasing the
authorized Preferred Stock dated May 9, 1997
10.3 -- Certificate of Decrease, reducing the authorized Series D
Preferred Stock
10.4 -- Certificate of Decrease, reducing the authorized Series F
Preferred Stock
11.1 -- Statement regarding computation of per share earnings
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 18, 1997 with
respect to its acquisition of substantially all of the operating assets of
McNary - Moore Funeral Service on August 1, 1997. The
15
Company also filed a Current Report on Form 8-K/A on October 14, 1997 to include
in the Form 8-K filed on August 18, 1997 the financial statements and pro forma
financial information required by item 7.
The Company filed a Current Report on Form 8-K on October 10, 1997 with respect
to its merger with Cemetery Enterprises, Inc. on September 25, 1997.
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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, 1997 /s/ THOMAS C. LIVENGOOD
Date Thomas C. Livengood,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)