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 JUNE 30, 1999
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, TX 77056
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 556-7400
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
The number of shares of the Registrant's Class A Common Stock, $.01 par value
per share, and Class B Common Stock, $.01 par value per share, outstanding as of
July 30, 1999 was 12,358,327 and 3,549,741 respectively.
CARRIAGE SERVICES, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1999 ............................. 3
Consolidated Statements of Operations for the
Three Months Ended June 30, 1998 and 1999 and the
Six Months Ended June 30, 1998 and 1999 ......................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1999 ......................... 5
Notes to Consolidated Financial Statements ......................... 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................ 9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK ...... 15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 16
ITEM 5. OTHER INFORMATION ............................................ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................. 18
Signature ................................................................ 19
2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 2,892 $ 3,949
Accounts receivable --
Trade, net of allowance for doubtful accounts
of $3,435 in 1998 and $ 4,848 in 1999 ......... 17,835 20,506
Other ............................................ 3,696 4,695
------------ ------------
21,531 25,201
Inventories and other current assets ............. 7,457 10,134
------------ ------------
Total current assets ................. 31,880 39,284
Property, plant and equipment, at cost, net of
accumulated depreciation of $11,363 in 1998
and $14,147 in 1999 .............................. 131,144 148,157
Cemetery property, at cost .......................... 63,409 66,773
Names and reputations, net of accumulated
amortization of $8,428 in 1998 and $11,226
in 1999 .......................................... 211,183 221,507
Deferred charges and other noncurrent assets ........ 28,528 37,974
------------ ------------
$ 466,144 $ 513,695
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 4,754 $ 4,644
Accrued liabilities ............................... 9,168 11,524
Current portion of long-term debt and
obligations under capital leases ................ 6,394 5,191
------------ ------------
Total current liabilities ............. 20,316 21,359
Preneed liabilities, net ............................. 11,106 10,647
Long-term debt, net of current portion ............... 212,972 160,586
Obligations under capital leases, net of current
portion .............................................. 3,209 3,902
Deferred income taxes ................................ 16,474 16,962
------------ ------------
Total liabilities ..................... 264,077 213,456
------------ ------------
Commitments and contingencies
Redeemable preferred stock ........................... 1,673 1,172
Company-obligated mandatorily redeemable
convertible preferred securities of Carriage
Services Capital Trust .......................... -- 90,300
Stockholders' equity:
Class A Common Stock, $.01 par value;
40,000,000 shares authorized; 12,028,000
and 12,337,000 issued and outstanding
at December 31, 1998 and June 30, 1999,
respectively .................................... 120 123
Class B Common Stock, $.01 par value;
10,000,000 shares authorized; 3,779,000
and 3,547,000 issued and outstanding
at December 31, 1998 and June 30, 1999,
respectively .................................... 38 35
Contributed capital ............................... 194,911 197,982
Retained earnings ................................. 5,325 10,627
------------ ------------
Total stockholders' equity ............ 200,394 208,767
------------ ------------
$ 466,144 $ 513,695
============ ============
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 MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1998 1999 1998 1999
------- -------- ------- --------
Revenues, net
Funeral ............................................................... $20,370 $ 30,816 $43,613 $ 64,328
Cemetery .............................................................. 4,844 11,655 9,719 20,013
------- -------- ------- --------
25,214 42,471 53,332 84,341
Costs and expenses
Funeral ............................................................... 14,493 22,212 30,326 44,170
Cemetery .............................................................. 3,723 8,549 7,221 14,878
------- -------- ------- --------
18,216 30,761 37,547 59,048
------- -------- ------- --------
Gross profit .......................................................... 6,998 11,710 15,785 25,293
General and administrative expenses ....................................... 1,751 2,275 3,620 4,712
------- -------- ------- --------
Operating income ...................................................... 5,247 9,435 12,165 20,581
Interest expense, net ..................................................... 2,044 3,494 4,151 6,960
Financing cost of company-obligated securities of Carriage
Services Capital Trust .................................................... -- 510 -- 510
------- -------- ------- --------
Total interest and financing expense ................................ 2,044 4,004 4,151 7,470
Income before income taxes and
extraordinary item .................................................... 3,203 5,431 8,014 13,111
Provision for income taxes ................................................ 1,400 2,335 3,565 5,637
------- -------- ------- --------
Income before extraordinary item ...................................... 1,803 3,096 4,449 7,474
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $151 ............................................ -- (200) -- (200)
------- -------- ------- --------
Net income ................................................................ 1,803 2,896 4,449 7,274
Preferred stock dividend requirements ..................................... 151 28 301 56
------- -------- ------- --------
Net income available to common stockholders ........................... $ 1,652 $ 2,868 $ 4,148 $ 7,218
======= ======== ======= ========
Basic earnings per share:
Net income before extraordinary item .................................. $ .13 $ 0.19 $ .35 $ 0.47
Extraordinary item .................................................... $ - $ (0.01) $ -- $ (0.01)
------- -------- ------- --------
Net income ............................................................ $ .13 $ 0.18 $ .35 $ 0.46
======= ======== ======= ========
Diluted earnings per share:
Net income before extraordinary item .................................. $ .13 $ 0.19 $ .34 $ 0.45
Extraordinary item .................................................... $ -- $ (0.01) $ -- $ (0.01)
------- -------- ------- --------
Net income ............................................................ $ .13 $ 0.18 $ .34 $ 0.44
======= ======== ======= ========
Weighted average number of common and common equivalent shares outstanding:
Basic ................................................................. 12,393 15,877 11,775 15,843
======= ======== ======= ========
Diluted ............................................................... 12,881 16,335 12,874 16,981
======= ======== ======= ========
The accompanying notes are an integral part of these financial statements.
4
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1998 1999
-------- --------
Cash flows from operating activities:
Net income ......................................... $ 4,449 $ 7,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 4,844 7,789
Loss on early extinguishment of debt, net of
income taxes .................................... -- 200
Provision for losses on accounts receivable ....... 868 2,821
Deferred income taxes ............................. 1,118 424
Other, net ........................................ (38) --
-------- --------
Net cash provided by operating activities
before changes in assets and liabilities ........ 11,241 18,508
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) in accounts receivables .................. (4,075) (6,818)
(Increase) in inventories and other current assets .. (378) (2,358)
(Increase) in deferred charges and other ............ (2,458) (3,025)
(Decrease) in accounts payable ...................... (569) (1,022)
Increase in accrued liabilities ..................... 1,061 1,984
(Decrease) in preneed liabilities ................... (553) (412)
-------- --------
Net cash provided by operating activities .. 4,269 6,857
Cash flows from investing activities:
Acquisitions, net of cash acquired .................. (24,401) (31,908)
Capital expenditures ................................ (8,555) (9,351)
-------- --------
Net cash used in investing activities ...... (32,956) (41,259)
Cash flows from financing activities:
Proceeds from long-term debt ....................... 8,200 21,970
Payments on long-term debt and obligations under
capital leases .................................... (51,938) (77,411)
Proceeds from issuance of common stock ............. 68,495 656
Proceeds from issuance of company-obligated
mandatorily redeemable convertible preferred
securities ........................................ -- 90,300
Payment of preferred stock dividends ............... (301) (56)
Other, net ......................................... 131 --
-------- --------
Net cash provided by financing activities .. 24,587 35,459
Net increase (decrease) in cash and cash equivalents . (4,100) 1,057
Cash and cash equivalents at beginning of period ..... 6,126 2,892
-------- --------
Cash and cash equivalents at end of period ........... $ 2,026 $ 3,949
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ 4,548 $ 9,042
======== ========
Cash paid for income taxes .......................... $ 3,195 $ 7,132
======== ========
Non-cash consideration for acquisitions ............. $ 3,144 $ 1,648
======== ========
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
(a) The Company
Carriage Services, Inc., (the "Company") is the fourth largest
publicly-traded provider of products and services in the death care industry in
the United States. As of June 30, 1999, the Company owned and operated 179
funeral homes and 38 cemeteries in 31 states.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information for the three and six months ended June 30, 1998 and 1999 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, 1998, and should be read in conjunction therewith. Certain
prior period amounts in the consolidated financial statements have been
reclassified to conform with current period presentation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITIONS
During the six months ended June 30, 1999, the Company purchased 13 funeral
homes and 11 cemeteries. Eleven funeral homes and one cemetery were acquired
during the six months ended June 30, 1998. 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.
6
The effect of the above acquisitions on the Consolidated Balance Sheets was
as follows:
JUNE 30,
-----------------------
1998 1999
-------- --------
(IN THOUSANDS)
Current assets, net of cash acquired ............. $ 888 $ 6,645
Cemetery property ................................ 2,305 3,740
Property, plant and equipment .................... 6,017 11,455
Deferred charges and other noncurrent assets ..... 352 757
Names and reputations ............................ 18,478 13,246
Current liabilities .............................. (255) (1,438)
Other liabilities ................................ (240) (849)
-------- --------
Total acquisitions .......................... 27,545 33,556
Consideration:
Debt ............................................. 3,144 1,648
Common stock issued .............................. -- --
-------- --------
Cash used for acquisitions .................. $ 24,401 $ 31,908
======== ========
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, 1998. 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.
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues, net ...................................... $80,218 $88,545
Net income before income taxes ..................... 6,557 13,465
Net income available to common stockholders ........ 3,305 7,390
Earnings per common share:
Basic ......................................... 0.28 0.47
Diluted ....................................... 0.26 0.44
7
3. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States.
(IN THOUSANDS) FUNERAL CEMETERY CORPORATE CONSOLIDATED
-------- -------- --------- ------------
External revenues:
Six months ended June 30, 1999 $ 64,328 $ 20,013 -- $ 84,341
Six months ended June 30, 1998 43,613 9,719 -- 53,332
Profit and Loss:
Six months ended June 30, 1999 $ 19,812 $ 6,092 $(18,630) $ 7,274
Six months ended June 30, 1998 12,709 3,494 (11,754) 4,449
Total Assets:
June 30, 1999 ................ $378,344 $123,074 $ 13,500 $ 514,918
June 30, 1998 ................ 241,713 61,726 7,689 311,128
4. LONG TERM DEBT
During June 1999, the Company replaced and increased its existing credit
facility with a new $250 million line of credit. The new credit facility is
unsecured, is for a term of five years 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.
5. SUBSEQUENT EVENT
Subsequent to June 30, 1999, the Company issued $110 million in senior debt
notes and used the proceeds to reduce the amount outstanding under the
Company's revolving line of credit. The notes are unsecured, mature in
tranches of five, seven and nine years and bear interest at the fixed rates
of 7.73%, 7.96% and 8.06%, respectively.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of death care services and products in the
United States. The Company's focus is on growth through acquisitions and
enhancements at facilities currently owned to increase revenues and gross
profit. That focus has resulted in a successful track record of internal growth
from attractive acquisition opportunities; high standards of service,
operational and financial performance; and an infrastructure containing
measurement and management systems. The operating focus for 1999 includes
institutionalized internal training, internal growth, and making quality
initiatives introduced in 1998 an integral part of the culture.
Income from operations, which the Company defines as earnings before interest
and income taxes, increased, as a percentage of net revenues, from 20.8% for the
second quarter of 1998 to 22.8% for the second quarter of 1999. This improvement
was due largely to the increased gross profits at the individual cemetery
locations. Gross margins for the funeral homes decreased from 28.9% in the
second quarter of 1998 to 27.9% in the second quarter of 1999, on an increase in
revenue of 51%. As a percentage of cemetery net revenues, cemetery gross profit
was 26.6% in the second quarter of 1999 compared to 23.1% in the second quarter
in 1998. Revenues and gross profits from cemeteries increased 141% and 177%,
respectively, in the second quarter of 1999 compared to the same period in 1998.
A one cent per share extraordinary item included in the current year quarter
resulted from the early extinguishment of the Company's bank credit facility,
which was replaced and expanded during the quarter.
The Company has experienced significant growth through acquisitions.
Forty-four funeral homes and ten cemeteries were acquired during 1997 for
approximately $118 million. During 1998, the Company acquired 48 funeral homes
and seven cemeteries for an aggregate consideration of approximately $159
million. These acquisitions were funded through cash flow from operations,
additional borrowings under the Company's credit facilities and issuance of
preferred and common stock. In addition, as of July 30, 1999, the Company has
either acquired or has letters of intent to acquire 18 funeral homes and 14
cemeteries for an aggregate consideration of approximately $46 million. The
Company believes its increased recognition in the death care industry as an
established operator and purchaser of funeral homes and cemeteries, as well as
favorable conditions in the acquisition marketplace, has improved its ability to
attract potential acquisitions that are larger, strategic and accretive.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the
three and six month periods ended June 30, 1998 and 1999. 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 six months ended June 30, 1998 compared to the
three and six months ended June 30, 1999.
9
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
THREE MONTHS ENDED
JUNE 30, CHANGE
------------------ ------------------
1998 1999 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ...... $19,332 $21,003 $ 1,671 8.6%
Acquired operations ...... 1,038 9,813 8,775 *
------- ------- -------
Total net revenues .. $20,370 $30,816 $10,446 51.3%
======= ======= =======
Gross profit:
Existing operations ...... $ 5,326 $ 5,850 $ 524 9.8%
Acquired operations ...... 551 2,754 2,203 *
------- ------- -------
Total gross profit .. $ 5,877 $ 8,604 $ 2,727 46.4%
======= ======= =======
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
SIX MONTHS ENDED
JUNE 30, CHANGE
------------------ ------------------
1998 1999 AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ...... $41,098 $43,820 $ 2,722 6.6%
Acquired operations ...... 2,515 20,508 17,993 *
------- ------- -------
Total net revenues .. $43,613 $64,328 $20,715 47.5%
======= ======= =======
Gross profit:
Existing operations ...... $12,085 $13,632 $ 1,547 12.8%
Acquired operations ...... 1,202 6,526 5,324 *
------- ------- -------
Total gross profit .. $13,287 $20,158 $ 6,871 51.7%
======= ======= =======
- ---------
* Not meaningful.
Due to the rapid growth of the Company, existing operations represented 68%
of the total funeral revenues and the total funeral gross profit for the three
months ended June 30, 1999, as well as 68% of the total funeral revenues and the
total funeral gross profit for the six months ended June 30, 1999. Total funeral
net revenues for the three months ended June 30, 1999 increased $10.4 million or
51.3% over the three months ended June 30, 1998. The higher net revenues reflect
an increase of $8.8 million in net revenues from acquired operations and an
increase in net revenues of $1.7 million from existing operations. Total funeral
net revenues for the six months ended June 30, 1999 increased $20.7 million or
47.5% over the six months ended June 30, 1998. The higher net revenues reflect
an increase of $18 million in net revenues from acquired operations and an
increase in net revenues of $2.7 million from existing operations.
Total funeral gross profit for the three months ended June 30, 1999 increased
$2.7 million or 46.4% over the comparable three months of 1998. The higher total
gross profit reflected an increase of $2.2 million from acquired operations and
an increase of $ 0.5 million from existing operations. Total funeral gross
profit for the six months ended June 30, 1999 increased $6.9 million or 51.7%
over the comparable six months of 1998. The higher total gross profit reflected
an increase of $5.3 million from acquired
10
operations and an increase of $1.5 million from existing operations. Gross
profit for existing operations increased for both periods due to the
efficiencies gained by consolidation, cost savings, improved collections
experience and the increasing effectiveness of the Company's training
initiatives. Total gross margin decreased from 28.9% for the second quarter of
1998 to 27.9% for the second quarter of 1999 and increased from 30.5% for the
first six months of 1998 to 31.3% for the first six months of 1999.
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 six months ended June 30, 1998 compared to the
three and six months ended June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
THREE MONTHS ENDED
JUNE 30, CHANGE
----------------- ----------------------
1998 1999 AMOUNT PERCENT
------ ------- -------- ----------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ....... $4,844 $ 5,608 $ 764 15.8%
Acquired operations ....... -- 6,047 6,047 *
------ ------- --------
Total net revenues ... $4,844 $11,655 $ 6,811 140.6%
====== ======= ========
Gross profit:
Existing operations ....... $1,121 $ 1,327 $ 206 18.4%
Acquired operations ....... -- 1,779 1,779 *
------ ------- --------
Total gross profit .. $1,121 $ 3,106 $ 1,985 177.1%
====== ======= ========
- ---------
* Not meaningful.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
SIX MONTHS ENDED
JUNE 30, CHANGE
----------------- ----------------------
1998 1999 AMOUNT PERCENT
------ ------- -------- ----------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ....... $9,425 $10,298 $ 873 9.3%
Acquired operations ....... 294 9,715 9,421 *
------ ------- --------
Total net revenues .. $9,719 $20,013 $ 10,294 105.9%
====== ======= ========
Gross profit:
Existing operations ....... $2,421 $ 2,413 $ (8) (0.3)%
Acquired operations ....... 77 2,722 2,645 *
------ ------- --------
Total gross profit .. $2,498 $ 5,135 $ 2,637 105.6%
====== ======= ========
- ---------
* Not meaningful.
Due to the acquisition of relatively significant cemetery properties during
the third quarter of 1998 and at the end of the first quarter of 1999, existing
operations represented only 48% of cemetery revenues and only 43% of cemetery
gross profit for the three months ended June 30, 1999 and only 51% of cemetery
revenues and 47% of cemetery gross profit for the six months ended June 30,
1999.
11
Total cemetery net revenues for the three months ended June 30, 1999
increased $6.8 million over the three months ended June 30, 1998 and total
cemetery gross profit increased $2.0 million over the comparable three months of
1998. The higher net revenues reflect an increase of $6.0 million in net
revenues from acquired operations and an increase of $0.8 million in revenues
from existing operations. Total cemetery net revenues for the six months ended
June 30, 1999 increased $10.3 million over the six months ended June 30, 1998,
and total cemetery gross profit increased $2.6 million over the comparable six
months of 1998. Total gross margin increased from 23.1% for the three months
ended June 30, 1998 to 26.6% for the three months ended June 30, 1999. These
increases were due primarily to the Company's recently acquired cemeteries, as
well as increased preneed marketing efforts. Total gross margin remained
constant at 25.7% for the six months ended June 30, 1999 and for the six months
ended June 30, 1998.
OTHER.
General and administrative expenses for the six months ended June 30, 1999
increased $1.1 million or 30.2% over the first six months of 1998 due primarily
to the increased personnel expense necessary to support the Company's growth and
acquisition activity. However, as a percentage of net revenues, these expenses
decreased from 6.8% for the six months ended June 30, 1998, to 5.6% for the six
months ended June 30, 1999, as the expenses were spread over a larger volume of
revenue.
Interest expense and other financing costs for the six months ended June 30,
1999, increased $3.3 million over the first six months of 1998, principally due
to increased borrowings for acquisitions.
Preferred stock dividends of $56,000 were subtracted from the $7.3 million of
net income in computing the net income available to common stockholders of $7.2
million for the six months ended June 30, 1999. The reduction in preferred stock
dividends from 1998 to 1999 was due to conversions of the preferred stock to
common stock.
For the six months ended June 30, 1999, the Company provided for income taxes
on income before income taxes at a combined state and federal rate of 43%
compared with 44.5% for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3.9 million at June 30, 1999, representing
an increase of $1.1 million from December 31, 1998. For the six months ended
June 30, 1999, cash provided by operations was $6.9 million as compared to cash
provided by operations of $4.3 million for the six months ended June 30, 1998.
The increase in net cash provided by operating activities was principally due to
the increases in net income as adjusted for non-cash charges, which was
partially offset by a net increase in the working capital accounts. The net
increase in the working capital accounts was primarily related to working
capital requirements of recent acquisitions. Cash used in investing activities
was $41.3 million for the six months ended June 30, 1999 compared to $33.0
million for the first six months of 1998, due primarily to an increase in
amounts paid in connection with acquisitions.
In the first six months of 1999, cash flow provided by financing activities
amounted to approximately $35.5 million, primarily due to the net proceeds
generated from the Company's sale of mandatorily redeemable convertible
preferred securities and repayments of long-term debt, during the second quarter
of 1999. On June 3, 1999, the Company's subsidiary, Carriage Services Capital
Trust, completed the sale of 1,875,000 units of 7% convertible preferred
securities, resulting in approximately $90 million in net proceeds to the
Company, of which $77.4 million was used to repay outstanding indebtedness under
the
12
Company's credit facility, with the remaining $12.6 million used general
corporate purposes. The convertible preferred securities have a liquidation
amount of $50 per unit, are convertible into the Company's Class A Common Stock
at the equivalent conversion price of $20.4375 per share of Class A Common
Stock, mature in 2029, and are guaranteed, on a subordinated basis, by the
Company. Distributions are payable quarterly, but may be deferred at the
Company's option.
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. As of June 30, 1998, the
Company had 1,682,500 shares of Series D Preferred Stock issued and outstanding.
The Series D Preferred Stock is convertible into Class B Common Stock. The
holders of Series D Preferred Stock are entitled to receive cash dividends at an
annual rate of $.06-$.07 per share depending upon the date such shares were
issued. The Company may, at its option, redeem all or any portion of the shares
of Series D Preferred Stock 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. During the six months ended June 30, 1999, holders of Series D
Preferred Stock converted a total of 500,000 shares into 35,238 shares of Class
B Common Stock, and then converted those Class B shares into 35,238 shares of
Class A Common Stock
As of June 30, 1998, the Company had 12,278,285 shares of Series F Preferred
Stock issued and outstanding. The Series F Preferred Stock paid cash dividends
as the annual rate of $.042 per share. On December 31, 1998, all of the Series F
Preferred Stock was converted into an aggregate of 722,250 shares of Class A
Common Stock at the exercise price of $17 per share.
As of June 30, 1998, the Company had a credit facility with a group of banks
for a $150 million revolving line of credit. During September 1998, the Company
increased the bank credit facility to $225 million. During June 1999, the
Company entered into a new credit facility for a $250 million revolving line of
credit. The 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 credit facility is provided at both LIBOR
and prime rate options. The Company has the ability under the credit facility to
increase its total debt outstanding to as much as 60 percent of its total
capitalization. As of June 30, 1999, $140.5 million was outstanding under the
credit facility and the Company's debt to total capitalization was 36 percent.
The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. During the six months ended June 30,
1999, the Company incurred approximately $9.4 million in capital expenditures,
primarily related to funeral home improvements. In addition, the Company
currently expects to incur capitalizable costs in the range of $5 million to $7
million during the second half of 1999 related to upgrading funeral home
facilities. The Company believes that cash flow from operations, borrowings
under the new credit facility and its ability to issue additional debt and
equity securities should be sufficient to fund acquisitions and its anticipated
capital expenditures and other operating requirements. In March 1997, the
Company filed a shelf registration statement relating to 2,000,000 shares of
Class A Common Stock to be used to fund acquisitions of which approximately
1,057,000 shares remain available at June 30, 1999. The Company has recently
revised its estimate for acquisition spending for 1999 from $155 million to $115
million. As of July 30, 1999, the Company has spent $33 million and has signed
non-binding letters of intent for acquisitions totaling $13 million. 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
13
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.
SEASONALITY
The Company's business can be affected by seasonal fluctuations in the death
rate. Generally, death rates are higher during the winter months. In addition
the quarterly results of the Company may fluctuate depending on the magnitude
and timing of acquisitions.
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company.
YEAR 2000
Our information systems management group is continually reviewing the
management and accounting software packages for internal accounting and
information requirements to keep pace with our continued growth and to achieve
Year 2000 compliance. To address the Year 2000 issue, our program which
encompasses performing an inventory of our information technology and
non-information technology systems, assessing the potential problem areas,
testing the systems for year 2000 readiness, and modifying systems that are not
Year 2000 ready.
To date, inventory and assessment have been completed for all of our core
systems that are essential for business operations. All of these core systems
are believed to be Year 2000 compliant except for a portion of the
record-keeping system for certain cemetery operations, for which the
modifications have been completed, tested and certified as Year 2000 compliant.
As of June 30, 1999, management estimated that we had completed more than ninety
percent of the work involved in modifying, replacing and testing the
non-compliant hardware and software. The inventory and assessment phases for
newly acquired businesses is performed during the acquisition process as part of
our due diligence analysis.
We are also communicating with vendors, trustees and other third parties with
which we conduct business to determine the extent to which those companies are
addressing their Year 2000 compliance. To date, no significant third parties
have informed us that any Year 2000 issue exists which will have a material
effect on us.
Although we expect to be ready to continue our business activities without
interruption by a Year 2000 problem, we recognize the general uncertainty
inherent in the Year 2000 issue, in part because of the uncertainty about the
Year 2000 readiness of third parties. Under a "most likely worst case Year 2000
scenario," it may be necessary for us to replace some suppliers, rearrange some
work plans or even temporarily interrupt some normal business activities or
operations. We believe that such circumstances would be isolated and would not
result in a material adverse impact to our operations or pose a material
financial risk to us. We have begun, but not yet completed, developing a
contingency plan to deal with the "most likely worst case Year 2000 scenario."
The contingency plan is expected to be completed during the third quarter of
1999.
Based on the current assessment, our total costs of becoming Year 2000
compliant are not expected to be significant to our financial position, results
of operations or cash flows. As of June 30, 1999, we have
14
spent approximately $70,000 related to Year 2000 compliance. The total remaining
costs for addressing the Year 2000 issue are presently estimated to be less than
$80,000.
The estimated costs of the projects are forward-looking statements based
on our best estimates, which were derived utilizing numerous assumptions of
future events. While we believe all necessary work will be completed in a timely
fashion, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Some of the
factors that might cause such material differences include failure by third
parties to adequately solve Year 2000 problems, the cooperation of third parties
and the ability to identify and correct potential problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There has been no material change in the Company's position regarding
quantitative and qualitative disclosures of market risk from that disclosed in
the Company's 1998 Form 10-K.
15
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 annual meeting of shareholders was held on May 11, 1999.
All director nominees were elected. The voting tabulation was as follows:
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
- -------------------------- --------------------- --------------------------
Stuart W. Stedman 43,398,361 103,498
Ronald A. Erickson 43,391,124 110,735
Mark F. Wilson 43,398,361 103,498
The terms of the following other directors continue after the meeting: Mark
W. Duffey, Barry K. Fingerhut, Greg M. Brudnicki, Melvin C. Payne, Robert D.
Larrabee, and C. Byron Snyder.
Other matters voted upon at the meeting were as follows:
NUMBER OF NUMBER OF NUMBER OF
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
---------- --------- -------------
Amendment to 1995 Stock Incentive Plan ... 38,549,176 2,525,104 185,937
Amendment to 1996 Stock Option Plan ...... 39,840,394 1,217,240 202,683
Amendments to 1996 Directors'
Stock Option Plan ..................... 39,943,685 906,847 409,685
Selection of Arthur Andersen LLP
as auditors for 1999 .................. 43,460,705 2,636 38,518
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on assumptions that
the Company believes are reasonable; however, many important factors could cause
the Company's actual results in the future to differ materially from the
forward-looking statements made herein and in any other documents or oral
presentations made by, or on behalf of, the Company.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed herein and in any other forward-looking statements made
by or on behalf of the Company.
(1) Achieving revenue growth depends in part upon sustaining the level of
acquisition activity experienced by the Company in the last three fiscal years.
Higher levels of acquisition activity will
16
increase anticipated revenues, and lower levels will decrease anticipated
revenues. The level of acquisition activity depends not only on the number of
properties acquired, but also on the size of the acquisitions; for example, one
large acquisition could increase substantially the level of acquisition activity
and, consequently, revenues. Several important factors, among others, affect the
Company's ability to consummate acquisitions:
(a) The Company may be unable to find a sufficient number of
businesses for sale at prices that are favorable to the Company
and the Company is willing to pay.
(b) In most of its existing markets and in certain new markets that
the Company desires to enter, the Company competes for
acquisitions with other publicly-traded and privately
owned death care firms. These competitors, and others, may
be willing to pay higher prices for businesses than the
Company or may cause the Company to pay more to acquire a
business than the Company would otherwise have pay in the
absence of such competition. Thus, the aggressiveness of
the Company's competitors in pricing acquisitions affects
the Company's ability to complete acquisitions at prices
it finds attractive.
(2) Achieving the Company's revenue goals also is affected by the volume and
prices of the properties, products and services sold. The annual sales targets
set by the Company are aggressive, and the inability of the Company to achieve
planned increases in volume or prices could cause the Company not to meet
anticipated levels of revenue. The ability of the Company to achieve volume or
price increases at any location depends on numerous factors, including the local
economy, the local death rate and competition.
(3) Future revenue also is affected by the level of prearranged sales in
prior periods. The level of prearranged sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individual to have less discretionary income.
(4) In addition to the factors discussed above, earnings per share may be
affected by other important factors, including the following:
(a) The ability of the Company to successfully integrate acquisitions
into the Company's business and to realize expected revenue
projections and cost savings in connection with the acquisitions.
(b) Whether acquired businesses perform at pro forma levels used by
management in the valuation process and whether, and the
rate at which management is able to increase the
profitability of acquired businesses.
(c) The ability of the Company to manage its growth in terms of
implementing internal controls and information gathering
systems, and retaining or attracting key personnel, among
other things.
(d) The amount and rate of growth in the Company's general and
administrative expenses.
(e) Changes in interest rates, which can increase or decrease the
amount the Company pays on borrowings with variable rates of
interest.
(f) The Company's debt-to-equity ratio, the number of shares of
common stock outstanding and the portion of the Company's debt
that has fixed or variable interest rates.
(g) The impact on the Company's financial statements of nonrecurring
accounting charges that may result from the Company's ongoing
evaluation of its business strategies, asset valuations and
organizational structures.
(h) Changes in government regulation, including tax rates and their
effects on corporate structure.
(i) Changes in inflation and other general economic conditions
domestically, affecting financial markets (e.g. marketable
security values).
17
(j) Unanticipated legal proceedings and unanticipated outcomes of
legal proceedings.
(k) Changes in accounting policies and practices adopted voluntarily
or required to be adopted by generally accepted accounting
principles, such as amortization periods for long-lived
intangible assets.
(l) The ability of the Company and its significant vendors, financial
institutions and insurers to achieve Year 2000 compliance on a
timely basis.
The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or any
other forward-looking statements made by, or on behalf of, the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*4.1 - Certificate of Elimination of Series F Preferred Stock
+4.2 - Certificate of Trust of Carriage Services Capital Trust. (4.6)
+4.3 - Amended and Restated Declaration of Trust of Carriage Services
Capital Trust, dated as of June 3, 1999, among Carriage Services,
Inc. as Sponsor, Wilmington Trust Company as Property Trustee,
Wilmington Trust Company as Delaware Trustee, and Mark W. Duffey,
Thomas C. Livengood and Terry E. Sanford as Administrative
Trustees. (4.7)
+4.4 - Indenture for the Convertible Junior Subordinated Debentures due
2029, dated as of June 3, 1999, amount Carriage Services, Inc. as
Issuer, and Wilmington Trust Company as Indenture Trustee. (4.8)
+4.5 - Form of Carriage Services Capital Trust 7% Convertible Preferred
Securities. (4.10)
+4.6 - Form of Carriage Services, Inc., Convertible Junior Subordinated
Debentures due 2029. (4.11)
+4.7 - Preferred Securities Guarantee, dated as of June 3, 1999, between
Carriage Services Inc., As Guarantor, and Wilmington Trust Company
as Guarantee Trustee. (4.12)
+4.8 - Common Securities Guarantee, dated as of June 3, 1999, by Carriage
Services, Inc. as Guarantor. (4.13)
+4.9 - Amendment No.1 to Amended and Restated Declaration of Trust of
Carriage Services Capital Trust. (4.l4)
*10.1 - Credit Agreement by and among the Company and Bank of America
dated June 14, 1999
+10.2 - Registration Rights Agreement, dated June 3, 1999, by and among
Carriage Services Capital Trust, Carriage Services, Inc., and
Credit Suisse First Boston Corporation. (10.1)
*11.1 - Statement regarding computation of per share earnings.
*12 - Calculation of Ratio of Earnings to Fixed Charges
*27.1 - Financial Data Schedule.
- --------------
(*) Filed herewith.
(+) Incorporated by reference to the Exhibit number shown in parentheses to
the registrant's Form S-3 Registration Statement No. 333-84141.
(b) Reports on Form 8-K
1) The Company filed a Form 8-K on June 1, 1999, reporting, under "Item 5.
Other Events," the news release dated June 1, 1999 announcing the sale
of convertible preferred securities.
2) The Company filed a Form 8-K/A on June 11, 1999 with respect to its
acquisition of all the operating assets of nine cemeteries and five
funeral homes from Service Corporation International, Inc. on
March 30, 1999.
18
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.
[AUGUST 13, 1999] /s/ Thomas C. Livengood
- ------------------ -------------------------
Date Thomas C. Livengood,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
19