SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
of incorporation or organization) (I.R.S. Employer Identification No.)
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
October 29, 1999 was 13,702,134 and 2,239,989 respectively.
CARRIAGE SERVICES, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1999 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1999 and the
Nine Months Ended September 30, 1998 and 1999 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK 16
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
Signature 20
2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 2,892 $ 3,877
Accounts receivable --
Trade, net of allowance for doubtful accounts of $3,435 in
1998 and $ 5,967 in 1999 .............................................. 17,835 22,054
Other ...................................................................... 3,696 5,000
-------- --------
21,531 27,054
Inventories and other current assets ........................................... 7,457 9,878
-------- --------
Total current assets ................................................. 31,880 40,809
Property, plant and equipment, at cost, net of accumulated
depreciation of $11,363 in 1999 .................................................. 131,144 151,688
Cemetery property, at cost .......................................................... 63,409 66,426
Names and reputations, net of accumulated amortization of $8,428
in 1998 and $12,693 in 1999 ...................................................... 211,183 225,427
Deferred charges and other noncurrent assets ........................................ 28,528 42,875
-------- --------
$466,144 $527,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 4,754 $ 5,567
Accrued liabilities ............................................................ 9,168 13,173
Current portion of long-term debt and obligations under capital
leases ...................................................................... 6,394 4,311
-------- --------
Total current liabilities ............................................. 20,316 23,051
Preneed liabilities, net ............................................................. 11,106 9,082
Long-term debt, net of current portion ............................................... 212,972 171,043
Obligations under capital leases, net of current portion ............................. 3,209 3,313
Deferred income taxes ................................................................ 16,474 19,207
-------- --------
Total liabilities ..................................................... 264,077 225,696
-------- --------
Commitments and contingencies
Redeemable preferred stock ........................................................... 1,673 1,172
Company-obligated mandatorily redeemable
convertible preferred securities of Carriage
Services Capital Trust .......................................................... -- 89,881
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares
authorized; 12,028,000 and 12,383,000 issued and outstanding
at December 31, 1998 and September 30, 1999, respectively..................... 120 124
Class B Common Stock, $.01 par value; 10,000,000 shares
authorized; 3,779,000 and 3,525,000 issued and outstanding
at December 31, 1998 and September 30, 1999, respectively..................... 38 35
Contributed capital ............................................................ 194,911 196,097
Retained earnings .............................................................. 5,325 14,220
-------- --------
Total stockholders' equity ............................................ 200,394 210,476
-------- --------
$466,144 $527,225
======== ========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1999 1998 1999
--------- --------- --------- ---------
Revenues, net
Funeral .................................................. $ 22,344 $ 29,083 $ 65,956 $ 93,411
Cemetery ................................................. 6,276 11,387 15,995 31,400
--------- --------- --------- ---------
28,620 40,470 81,951 124,811
Costs and expenses
Funeral .................................................. 16,608 21,991 46,934 66,161
Cemetery ................................................. 4,699 8,440 11,920 23,319
--------- --------- --------- ---------
21,307 30,431 58,854 89,480
--------- --------- --------- ---------
Gross profit ............................................. 7,313 10,039 23,097 35,331
General and administrative expenses .......................... 2,041 2,202 5,661 6,915
--------- --------- --------- ---------
Operating income ......................................... 5,272 7,837 17,436 28,416
Interest expense, net ........................................ 2,360 3,145 6,511 10,105
Financing cost of company-obligated securities of
Carriage Services Capital Trust ........................... -- 1,641 -- 2,151
--------- --------- --------- ---------
Total interest and financing costs ..................... 2,360 4,786 6,511 12,256
Income before income taxes and
extraordinary item .................................... 2,912 3,051 10,925 16,160
Provision for income taxes ................................... 1,269 1,312 4,833 6,949
--------- --------- --------- ---------
Income before extraordinary item ......................... 1,643 1,739 6,092 9,211
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $151 .......................... -- -- -- (200)
--------- --------- --------- ---------
Net income ................................................... 1,643 1,739 6,092 9,011
Preferred stock dividend requirements ........................ 153 25 454 78
--------- --------- --------- ---------
Net income available to common stockholders .............. $ 1,490 $ 1,714 $ 5,638 $ 8,933
========= ========= ========= =========
Basic earnings per share:
Net income before extraordinary item ..................... $ .10 $ 0.11 $ .44 $ 0.58
Extraordinary item ....................................... $ -- $ -- $ -- $ (0.01)
--------- --------- --------- ---------
Net income ............................................... $ .10 $ 0.11 $ .44 $ 0.57
--------- --------- --------- ---------
Diluted earnings per share:
Net income before extraordinary item ..................... $ .10 $ 0.11 $ .43 $ 0.57
Extraordinary item ....................................... $ -- $ -- $ -- $ (0.01)
--------- --------- --------- ---------
Net income ............................................... $ .10 $ 0.11 $ .43 $ 0.56
--------- --------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding:
Basic .................................................... 14,733 15,906 12,772 15,864
========= ========= ========= =========
Diluted .................................................. 15,224 15,983 13,198 16,049
========= ========= ========= =========
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 NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 6,092 $ 9,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 3,099 4,393
Amortization .................................... 4,547 7,651
Loss on early extinguishment of debt, net of
income taxes .................................. -- 200
Provision for losses on accounts receivable ..... 976 3,294
Deferred income taxes ........................... 1,347 2,161
Other, net ...................................... (38) --
--------- ---------
Net cash provided by operating activities
before changes in assets and liabilities .... 16,023 26,710
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) in accounts receivables ............... (5,688) (7,003)
(Increase) in inventories and other current assets (1,087) (1,486)
(Increase) in deferred charges and other ......... (430) (1,185)
(Decrease) in accounts payable ................... (302) (703)
Increase in accrued liabilities .................. 1,700 3,474
(Decrease) in preneed liabilities ................ (1,205) (3,190)
--------- ---------
Net cash provided by operating
activities.......................... 9,011 16,617
Cash flows from investing activities:
Prearranged funeral costs ......................... (3,795) (5,695)
Acquisitions, net of cash acquired ................ (105,191) (37,551)
Capital expenditures .............................. (12,327) (13,405)
--------- ---------
Net cash used in investing activities (121,313) (56,651)
Cash flows from financing activities:
Proceeds from long-term debt ...................... 94,455 133,357
Payments on long-term debt and obligations under
capital leases .................................. (52,491) (180,866)
Proceeds from issuance of common stock ............ 68,696 659
Proceeds from issuance of company-obligated
mandatorily redeemable convertible preferred
securities....................................... -- 89,881
Payment of preferred stock dividends .............. (454) (78)
Payment of deferred debt charges and other ........ 70 (1,934)
--------- ---------
Net cash provided by financing
activities ......................... 110,276 41,019
Net increase (decrease) in cash and cash equivalents (2,026) 985
Cash and cash equivalents at beginning of period .... 6,126 2,892
--------- ---------
Cash and cash equivalents at end of period .......... $ 4,100 $ 3,877
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs ........ $ 7,079 $ 11,578
--------- ---------
Cash paid for income taxes ........................ $ 4,537 $ 7,499
========= =========
Non-cash consideration for acquisitions ........... $ 10,166 $ 1,914
========= =========
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 September 30, 1999, the Company owned and operated 181
funeral homes and 41 cemeteries in 31 states.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information for the three and nine months ended September 30, 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 nine months ended September 30, 1999, the Company purchased 15
funeral homes and 14 cemeteries. Thirty-four funeral homes and five cemeteries
were acquired during the nine months ended September 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:
SEPTEMBER 30,
--------------------------
1998 1999
--------- ---------
(IN THOUSANDS)
Current assets, net of cash acquired ....... $ 6,148 $ 9,682
Cemetery property .......................... 25,159 4,215
Property, plant and equipment .............. 23,919 12,386
Deferred charges and other noncurrent assets 819 907
Names and reputations ...................... 61,292 17,325
Current liabilities ........................ (466) (2,200)
Other liabilities .......................... (1,514) (2,850)
--------- ---------
Total acquisitions .................... 115,357 39,465
Consideration:
Debt ....................................... 6,556 1,914
Common stock issued ........................ 3,610 --
--------- ---------
Cash used for acquisitions ............ $ 105,191 $ 37,551
--------- ---------
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.
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1999
--------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues, net ..................................... $125,310 $133,098
Net income before income taxes and extraordinary
item ............................................ 10,094 16,711
Net income available to common stockholders ....... 5,098 9,218
Earnings per common share:
Basic ........................................ 0.40 0.58
Diluted ...................................... 0.39 0.57
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:
Nine months ended September 30, 1999 $ 91,707 $ 33,104 -- $124,811
Nine months ended September 30, 1998 63,659 18,292 -- 81,951
Profit and Loss before extraordinary item:
Nine months ended September 30, 1999 $ 15,189 $ 5,345 $(11,323) $ 9,211
Nine months ended September 30, 1998 10,199 2,918 (7,025) 6,092
Total Assets:
September 30, 1999 ................. $384,940 $128,057 $ 14,228 $527,225
September 30, 1998 ................. 301,772 98,721 7,750 408,243
4. LONG TERM DEBT
During June 1999, the Company replaced and increased its existing credit
facility with a new $250 million line of credit. On September 20, 1999, the
Company again increased its credit facility to $260 million. 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.
On July 1, 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.
5. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST
During June 1999, the Company, through its wholly-owned 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. The convertible preferred securities have a
liquidation amount of $50 per unit, and 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. The securities 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 for up to twenty consecutive
quarters.
8
6. SUBSEQUENT EVENTS
On November 4, 1999, the Board of Directors authorized five-year contract
extensions to executive officers of the Company. In connection with the
contract extensions, there will be a special compensation charge to the
Company's earnings in the fourth quarter of 1999 of approximately $1.5
million after tax, or $0.09 per share.
9
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 18.4% for the
third quarter of 1998 to 19.4% for the third quarter of 1999. This improvement
was due largely to the increased gross margins at the individual cemetery
locations and reduction of general and administrative expenses as a percentage
of net revenues. Gross margins for the funeral homes decreased from 25.7% in the
third quarter of 1998 to 24.4% in the third quarter of 1999, while revenues
increased 30%. As a percentage of cemetery net revenues, cemetery gross profit
was 25.9% in the third quarter of 1999 compared to 25.1% in the third quarter in
1998. Revenues and gross profits from cemeteries increased 81% and 87%,
respectively, in the third quarter of 1999 compared to the same period in 1998.
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 October 29, 1999, the Company has
acquired 17 funeral homes and 14 cemeteries for an aggregate consideration of
approximately $45 million. During 1999, the Company reduced the price it is
willing to pay for businesses as compared to the two most recent years, which
has resulted in a decline in acquisition spending for 1999.
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, 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 nine months ended September 30, 1998 compared to
the three and nine months ended September 30, 1999.
10
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ........ $ 20,544 $ 20,700 $ 156 .8%
Acquired operations ........ 1,800 8,383 6,583 *
-------- -------- -------- ----
Total net revenues $ 22,344 $ 29,083 $ 6,739 30.2%
======== ======== ======== ====
Gross profit:
Existing operations ........ $ 5,167 $ 4,950 $ (217) (4.2%)
Acquired operations ........ 569 2,142 1,573 *
-------- -------- -------- ----
Total gross profit $ 5,736 $ 7,092 $ 1,356 23.6%
======== ======== ======== ====
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ........ $ 59,979 $ 62,876 $ 2,897 4.8%
Acquired operations ........ 5,977 30,535 24,558 *
-------- -------- -------- ----
Total net revenues $ 65,956 $ 93,411 $ 27,455 41.6%
======== ======== ======== ====
Gross profit:
Existing operations ........ $ 16,910 $ 18,235 $ 1,325 7.8%
Acquired operations ........ 2,112 9,015 6,903 *
-------- -------- -------- ----
Total gross profit $ 19,022 $ 27,250 $ 8,228 43.3%
======== ======== ======== ====
- -----------
* Not meaningful
Due to the rapid growth of the Company, existing operations represented 71%
of the total funeral revenues and 70% of the total funeral gross profit for the
three months ended September 30, 1999, as well as 67% of the total funeral
revenues and the total funeral gross profit for the nine months ended September
30, 1999. Total funeral net revenues for the three months ended September 30,
1999 increased $6.7 million or 30.2% over the three months ended September 30,
1998. The higher net revenues reflect an increase of $6.6 million in net
revenues from acquired operations and a slight increase in net revenues from
existing operations. Total funeral net revenues for the nine months ended
September 30, 1999 increased $27.5 million or 41.6% over the nine months ended
September 30, 1998. The higher net revenues reflect an increase of $24.6 million
in net revenues from acquired operations and an increase in net revenues of $2.9
million from existing operations.
Total funeral gross profit for the three months ended September 30, 1999
increased $1.4 million or 23.6% over the comparable three months of 1998. The
higher total gross profit reflected an increase of $1.6 million from acquired
operations and a slight decrease in gross profit from existing operations. Total
funeral gross profit for the nine months ended September 30, 1999 increased $8.2
million or 43.3%
11
over the comparable nine months of 1998. The higher total gross profit reflected
an increase of $6.9 million from acquired operations and an increase of $1.3
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 25.7% for the
third quarter of 1998 to 24.4% for the third quarter of 1999 and increased from
28.8% for the first nine months of 1998 to 29.2% for the first nine 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 nine months ended September 30, 1998 compared to
the three and nine months ended September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999.
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ... $ 5,014 $ 5,714 $ 700 13.9%
Acquired operations ... 1,262 5,673 4,411 *
------- ------- ------- ----
Total net revenues $ 6,276 $11,387 $ 5,111 81.4%
======= ======= ======= ====
Gross profit:
Existing operations ... $ 1,211 $ 1,351 $ 140 11.6%
Acquired operations ... 366 1,596 1,230 *
------- ------- ------- ----
Total gross profit $ 1,577 $ 2,947 $ 1,370 86.9%
======= ======= ======= ====
- ---------
* Not meaningful.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations ... $14,093 $15,659 $ 1,566 11.1%
Acquired operations ... 1,902 15,741 13,839 *
------- ------- ------- ----
Total net revenues $15,995 $31,400 $15,405 96.3%
======= ======= ======= ====
Gross profit:
Existing operations ... $ 3,501 $ 3,720 $ 219 6.3%
Acquired operations ... 574 4,361 3,787 *
------- ------- ------- ----
Total gross profit $ 4,075 $ 8,081 $ 4,006 98.3%
======= ======= ======= ====
- ---------
* Not meaningful.
12
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 50% of cemetery revenues and only 46% of cemetery
gross profit for each of the three month and nine month periods ended September
30, 1999.
Total cemetery net revenues for the three months ended September 30, 1999
increased $5.1 million over the three months ended September 30, 1998 and total
cemetery gross profit increased $1.4 million over the comparable three months of
1998. The higher net revenues reflect an increase of $4.4 million in net
revenues from acquired operations and an increase of $0.7 million in revenues
from existing operations. Total cemetery net revenues for the nine months ended
September 30, 1999 increased $15.4 million over the nine months ended September
30, 1998, and total cemetery gross profit increased $4.0 million over the
comparable nine months of 1998. Total gross margin increased from 25.1% for the
three months ended September 30, 1998 to 25.9% for the three months ended
September 30, 1999. These increases were due primarily to the Company's recently
acquired cemeteries, as well as increased preneed marketing efforts. Total gross
margin increased slightly from 25.5% for the nine months ended September 30,
1998 to 25.7% for the nine months ended September 30, 1999.
OTHER.
General and administrative expenses for the nine months ended September 30,
1999 increased $1.3 million or 22% over the first nine 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 6.9% for the nine months ended September 30, 1998 to
5.5% for the nine months ended September 30, 1999, as the expenses were spread
over a larger volume of revenue.
Interest expense and other financing costs for the nine months ended
September 30, 1999 increased $5.7 million over the first nine months of 1998,
principally due to increased borrowings for acquisitions.
Preferred stock dividends of $78,000 were subtracted from the $9.0 million of
net income in computing the net income available to common stockholders of $8.9
million for the nine months ended September 30, 1999. The reduction in preferred
stock dividends from 1998 to 1999 was due to conversions of preferred stock to
common stock.
For the nine months ended September 30, 1999, the Company provided for income
taxes on income before income taxes at a combined state and federal rate of 43%
compared with 44.2% for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3.8 million at September 30, 1999,
representing an increase of $1.0 million from December 31, 1998. For the nine
months ended September 30, 1999, cash provided by operations was $16.6 million
as compared to cash provided by operations of $9.0 million for the nine months
ended September 30, 1998. The increase in net cash provided by operating
activities was principally due to the increase 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 $56.7 million for the nine months ended September 30,
1999 compared to $121.3 million for the
13
first nine months of 1998, due primarily to a slowing in the number of
acquisitions during the comparable nine month periods.
In the first nine months of 1999, cash flow provided by financing activities
amounted to approximately $41.0 million, primarily due to the net proceeds
generated from the issuance of $110.0 million of senior notes and from the
Company's sale of mandatorily redeemable convertible preferred securities less
repayments of long-term debt.
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 Company's
credit facility, with the remaining $12.6 million used for general corporate
purposes.
On July 1, 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.
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. As of September 30, 1998,
the Company 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 nine months ended September 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 September 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.
Prior to September 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. On September 20, 1999, the Company amended the credit facility,
increasing the amount available to $260 million. 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 September 30, 1999, $42.5 million
was outstanding under the credit facility and the Company's debt to total
capitalization was 37 percent.
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The Company expects to continue to pursue additional acquisitions of funeral
homes and cemeteries which will require significant levels of funding from
various sources. During the nine months ended September 30, 1999, the Company
incurred approximately $13.4 million in capital expenditures, primarily related
to funeral home improvements. In addition, the Company currently expects to
incur capitalizable costs of approximately $4 million during the remainder of
1999 related primarily to upgrading funeral home facilities and cemetery
construction. 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. The Company has recently
revised its estimate for acquisition spending for 1999 to approximately $50
million. As of October 29, 1999, the Company has spent approximately $46 million
for acquisitions. Acquisition spending during 2000 is anticipated to be
significantly less than the amounts during either of the two preceding years,
excluding the effect of any possible transactions that may occur with other
corporate death care companies. 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.
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. As of September 30, 1999, management
estimated that we had completed substantially all 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.
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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. Management has concluded that our standard operating
procedures are adequate to deal with most foreseeable contingencies resulting
from the "most likely worst case Year 2000 scenario."
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 September 30, 1999, we have 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
$25,000.
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.
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PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on assumptions that
the Company believes are reasonable; however, many important factors could cause
the Company's actual results in the future to differ materially from the
forward-looking statements made herein and in any other documents or oral
presentations made by, or on behalf of, the Company.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed herein and in any other forward-looking statements made
by or on behalf of the Company.
(1) Achieving revenue growth depends in part upon the level of acquisition
activity experienced by the Company. Higher levels of acquisition activity will
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 which 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.
(c) The timing, size and success of the Company's acquisition efforts
depend in large part on the continued availability of financing. The
Company's growth could be negatively impacted if it is unable to
obtain sufficient capital.
(2) Achieving the Company's revenue goals also is affected by the volume and
prices of the properties, products and services sold, as well as the mix of
products and services sold. The annual sales targets set by the Company are
aggressive, and the inability of the Company to achieve planned volume or prices
could cause the Company not to meet anticipated levels of revenue. In certain
markets the Company expects to increase prices, while in other
17
markets prices will be lowered. The ability of the Company to achieve volume or
price targets at any location depends on numerous factors, including the local
economy, the local death rate, competition and changes in consumer preferences,
including cremations.
(3) 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
individuals to have less discretionary income, as well as changes in 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:
(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 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).
(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
* 10.1-- Amendment No. 1 to Credit Agreement by and among the
Company and Bank of America, N.A., dated July 1, 1999.
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* 10.2-- Amendment No. 2 to Credit Agreement by and among the
Company and Bank of America, N.A., dated September 20, 1999.
* 10.3-- Note Purchase Agreement, dated July 1, 1999, for $300
million in Senior Notes Issuable in Series.
+ 10.4-- Amendment No. 2 to 1995 Stock Incentive Plan. (10.1)
+ 10.5-- Amendment No. 2 to 1996 Stock Option Plan. (10.2)
+ 10.6-- Amendment No. 1 to 1996 Directors' Stock Option Plan. (10.3)
+ 10.7-- Amendment No. 2 to 1995 Directors' Stock Option Plan. (10.4)
- 10.8-- 1998 Stock Option Plan for Consultants. (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-8 Registration Statement No. 333-85961.
(-) Incorporated by reference to the Exhibit number shown in parentheses to the
registrant's Form S-8 Registration Statement No. 333-62593.
(b) Reports on Form 8-K
None.
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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 12,1999 /s/ THOMAS C. LIVENGOOD
- ------------------ -------------------------
Date Thomas C. Livengood,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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