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 MARCH 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ --------
COMMISSION FILE NUMBER: 1-11961
-------------------------
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0423828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 SAINT JAMES PLACE, 4TH FLOOR, HOUSTON, TX 77056
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 332-8400
------------------------
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 May 10, 2001 was 14,804,927 and 1,789,618 respectively.
1
CARRIAGE SERVICES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 2000 and March 31, 2001 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 2001 4
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2000 and 2001 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 2001 6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signature 17
2
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2001
-----------------------------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,210 $ 5,039
Accounts receivable --
Trade, net of allowance for doubtful accounts of $4,572 in
2000 and $4,711 in 2001 16,167 14,503
Other 3,828 3,730
-----------------------------------
19,995 18,233
Assets held for sale, net 10,018 2,503
Inventories and other current assets 9,152 9,343
-----------------------------------
Total current assets 42,375 35,118
-----------------------------------
Property, plant and equipment, at cost, net of accumulated
depreciation of $19,156 in 2000 and $20,594 in 2001 119,252 118,392
Cemetery property, at cost 61,529 61,823
Names and reputations, net of accumulated amortization of
$17,984 in 2000 and $19,156 in 2001 166,585 165,499
Deferred charges and other non-current assets 58,506 55,453
Preneed funeral contracts 231,874 236,444
Preneed cemetery trust funds 30,164 33,054
-----------------------------------
Total assets $ 710,285 $ 705,783
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,240 $ 3,842
Accrued liabilities 21,007 18,395
Current portion of long-term debt and obligations under capital
Leases 3,236 3,723
-----------------------------------
Total current liabilities 28,483 25,960
Deferred cemetery revenue and preneed liabilities 99,623 99,412
Deferred preneed funeral contracts revenue 231,874 236,444
Long-term debt, net of current portion 176,662 166,312
Obligations under capital leases, net of current portion 5,306 5,338
-----------------------------------
Total liabilities 541,948 533,466
-----------------------------------
Commitments and contingencies
Redeemable preferred stock 1,172 1,172
Company-obligated mandatorily redeemable convertible preferred
Securities of Carriage Services Capital Trust 89,928 89,997
Minority interest in consolidated subsidiary --- 200
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares Authorized;
14,302,000 and 14,724,000 issued and outstanding at
December 31, 2000 and March 31, 2001, respectively 143 148
Class B Common Stock; $.01 par value; 10,000,000 shares
Authorized; 1,845,000 and 1,793,000
issued and outstanding at
December 31, 2000 and March 31, 2001, respectively 18 18
Contributed capital 193,234 193,664
Retained earnings (116,158) (112,380)
Unrealized gain (loss) on interest rate swaps, net of tax benefit -- (502)
-----------------------------------
Total stockholders' equity 77,237 80,948
-----------------------------------
Total liabilities and stockholders' equity $ 710,285 $ 705,783
===================================
The accompanying notes are an integral part of these consolidated
financial statements.
3
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------------
2000 2001
----------------- ------------------
Revenues, net
Funeral $ 35,535 $ 34,887
Cemetery 9,676 8,993
----------------- ------------------
45,211 43,880
Costs and expenses
Funeral 26,131 24,873
Cemetery 7,712 6,891
----------------- ------------------
33,843 31,764
----------------- ------------------
Gross profit 11,368 12,116
General and administrative expenses 2,488 2,041
----------------- ------------------
Operating income 8,880 10,075
Interest expense, net 3,719 3,686
Financing costs of company-obligated mandatorily
Redeemable convertible preferred securities of Carriage
Services Capital Trust 1,641 1,641
----------------- ------------------
Total interest and financing costs 5,360 5,327
Income before income taxes and cumulative effect of the change in
accounting principles 3,520 4,748
Provision for income taxes 1,760 950
----------------- ------------------
Net income before cumulative effect of the change in accounting
principle 1,760 3,798
Cumulative effect on prior years of the change in accounting
principle, net of income tax benefit of $20,755 (38,993) --
----------------- ------------------
Net income (loss) (37,233) 3,798
Preferred stock dividend requirements 21 20
----------------- ------------------
Net income (loss) available to common stockholders $ (37,254) $ 3,778
================= ==================
Basic earnings (loss) per common share:
Continuing operations $ .11 $ .23
Cumulative effect of the change in accounting principle, net (2.44) --
----------------- ------------------
Net income (loss) $ (2.33) $ .23
================= ==================
Diluted earnings (loss) per common share:
Continuing operations $ .11 $ .22
Cumulative effect of the change in accounting principle, net (2.44) --
----------------- ------------------
Net income (loss) $ (2.33) $ .22
================= ==================
Weighted average number of common and common equivalent shares
outstanding:
Basic 15,977 16,511
================= ==================
Diluted 16,235 17,368
================= ==================
The accompanying notes are an integral part of these
consolidated financial statements.
4
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------------
2000 2001
----------------- ------------------
Net income (loss) $ (37,233) $ 3,798
Other comprehensive income (loss):
Cumulative effect on prior years of the change in accounting
principle, net of income tax benefit of $1 --- 1
Unrealized gains (losses) on interest rate swaps arising during
period --- (629)
Related income tax benefit --- 126
----------------- ------------------
Total other comprehensive income (loss) $ --- $ (502)
----------------- ------------------
Comprehensive income (loss) $ (37,233) $ 3,296
================= ==================
The accompanying notes are an integral part of these consolidated
financial statements.
5
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------------
2000 2001
----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (37,233) $ 3,798
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of the change in accounting principle, net of tax
benefits 38,993 ---
Depreciation 1,961 1,546
Amortization 3,132 2,699
Provision for losses on accounts receivable 1,078 1,185
Deferred income taxes 2,646 1,430
----------------- ----------------
Net cash provided by operating activities before 10,577 10,658
changes in assets and liabilities
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivable (2,805) 660
(Increase) decrease in inventories and other current assets 1,956 3,705
(Increase) decrease in deferred charges and other 313 (17)
(Increase) decrease in preneed cemetery trust funds 824 (2,890)
Increase (decrease) in accounts payable 824 (398)
(Decrease) in accrued liabilities (1,871) (2,656)
Increase (decrease) in deferred revenue and preneed liabilities 1,860 (213)
----------------- ----------------
Net cash provided by operating activities 10,854 8,849
Cash flows from investing activities:
Preneed funeral and cemetery costs (2,699) (958)
Purchase of note receivable (566) ---
Proceeds from sales of businesses -- 6,224
Sale of minority interest in subsidiary -- 200
Acquisitions, net of cash acquired (1,291) (212)
Capital expenditures (3,007) (1,388)
----------------- ----------------
Net cash provided by (used in) investing activities (7,563) 3,866
Cash flows from financing activities:
Proceeds from long-term debt 12,224 ---
Proceeds from issuance of common stock 342 ---
Payments on long-term debt and obligations under capital leases (16,634) (10,866)
Payment of preferred stock dividends (21) (20)
----------------- ----------------
Net cash used in financing activities (4,089) (10,886)
Net increase (decrease) in cash and cash equivalents (798) 1,829
Cash and cash equivalents at beginning of period 2,517 3,210
----------------- ----------------
Cash and cash equivalents at end of period $ 1,719 $ 5,039
================= ================
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs $ 7,753 $ 6,214
================= ================
Cash paid for income taxes $ 194 $ ---
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
6
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
(a) The Company
Carriage Services, Inc., (the "Company") is a leading provider of products
and services in the death care industry in the United States. As of March 31,
2001, the Company owned and operated 161 funeral homes and 33 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 months ended March 31, 2000 and 2001 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 our annual report on Form 10-K for the year
ended December 31, 2000, 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. ACCOUNTING CHANGES
(a) Preneed Revenues and Costs
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 - "Revenue Recognition in Financial Statements" (SAB
101). This SAB deals with various revenue recognition issues; certain ones of
which are pertinent to the death care industry. As a result, we have changed our
method of recognizing preneed revenues and certain related costs of originating
preneed cemetery contracts. SAB 101 was effective as of the beginning of 2000,
but because of extensions to allow for implementation, we implemented the
changes beginning with the fourth quarter of 2000 and restated quarters 1
through 3 in our annual report on Form 10-K for the year ended December 31,
2000.
Previously, we had recognized sales of cemetery interment rights, together
with associated merchandise and services as revenues at the time contracts were
signed. Costs related to the sales of
7
interment rights were charged to operations using the specific identification
method. The costs for cemetery merchandise and services sold, but not delivered,
was previously accrued as an expense at the time the cemetery revenue was
recognized. Trust income on cemetery merchandise and service trusts was
recognized when earned by the trust.
Under the new accounting principle, we will follow Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate", in
recognizing the revenue from the sales of cemetery interment rights. This method
is generally characterized as the period when the customer's payments equal or
exceed 10% of the contract price related to the interment right. Costs related
to the sales of interment rights are charged to operations using the specific
identification method in the period in which the sale of the interment right is
recognized as revenue. Revenues and costs related to the sales of cemetery
merchandise and services, and earnings from the related trust funds, are
deferred until the period in which the merchandise is delivered or the service
is provided.
The Company recorded a non-cash charge of approximately $39.0 million, after
reduction for income taxes of approximately $21 million, or $2.44 per share, to
reflect the cumulative effect of the change in accounting principle as of the
beginning of 2000. The effect of this change on the three months ended March 31,
2000, before the cumulative effect of the accounting change was to decrease net
income $1.1 million, or $.07 per diluted share. The revenue not recognized is
included in the consolidated balance sheet in the caption "Deferred cemetery
revenue and preneed liabilities".
(b) Derivative Financial Instruments
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", for which the effective date was deferred to years
beginning after June 15, 2000 by SFAS No. 137, and amended by SFAS No. 138 to
establish accounting and financial reporting standards for certain derivative
instruments and certain hedging activities. The key provisions of SFAS No. 133,
as amended, are that certain derivatives will be recognized as an asset or
liability at their fair value and that later changes in fair value are generally
reported in earnings or other comprehensive income. The Company is currently
engaged in interest rate swaps which have a notional amount of $30 million to
hedge against rising interest rates on its variable rate long-term debt.
The Company recorded a non-cash benefit of approximately $1,000, after
reduction for income taxes in the consolidated statement of comprehensive income
to reflect the cumulative effect of the change in accounting principle as of the
beginning of 2001.
3. PROPOSED ACCOUNTING CHANGE
The Financial Accounting Standards Board has issued an exposure draft
which would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be
the elimination of the amortization of Names and Reputations, which would have
an estimated pre-tax impact of approximately $4 million per year, and testing to
determine impairments, if any, for long-lived assets. The final pronouncement
may change from the exposure draft.
8
4. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The
following table presents external revenue, profit and loss and total assets by
segment (in thousands):
Funeral Cemetery Corporate Consolidated
------- -------- --------- ------------
External revenues:
Three months ended March 31, 2001 $ 34,887 $ 8,993 --- $ 43,880
Three months ended March 31, 2000 35,535 9,676 --- 45,211
Profit and Loss before cumulative effect of the
change in accounting principle:
Three months ended March 31, 2001 $ 8,011 $ 1,682 $ (5,895) $ 3,798
Three months ended March 31, 2000 4,702 982 (3,924) 1,760
Total Assets:
March 31, 2001 $ 545,658 $ 158,532 $ 1,593 $705,783
March 31, 2000 632,325 131,909 9,785 774,019
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Carriage is a leading provider of death care services and products in
the United States. Carriage provides a complete range of services relating to
funerals, burials, and cremations, including the use of funeral homes and motor
vehicles, the performance of cemetery interment services and the management and
maintenance of cemetery grounds. We also sell related products and merchandise
including caskets, burial vaults, garments, cemetery interment rights, stone and
bronze memorials, as well as other items. From 1993 to 1999, the Company grew
rapidly as a result of a high level of acquisition activity. During this period,
we made many highly successful acquisitions, but in others we made market share
and revenue growth assumptions that proved overly optimistic. Fiscal 2000 was a
transitional year that included a decline in operating profitability, the
adoption of a substantially changed accounting method for preneed cemetery
sales, and the implementation of a multi-element "Fresh Start" restructuring
program, announced in the latter half of 2000.
The goals of Fresh Start are restoring credibility to our operating and
consolidation model, increasing and better aligning our earnings and cash flow,
restoring market credibility to our balance sheet; reducing our debt; and
re-accessing the capital markets.
The principal elements of Fresh Start include downsizing our corporate
organization; changing our operating leadership; changing our preneed funeral
organizational strategy; stratifying by performance our funeral and cemetery
portfolios; implementing action plans to improve underperforming businesses;
disposing of some underperforming businesses; adjusting the carrying basis of
other underperforming businesses; and modifying financial covenants with lenders
to facilitate execution of Fresh Start. Most of the elements of Fresh Start have
been accomplished and we are beginning to see the benefits of these actions in
our operating results.
Income from operations, which we define as earnings before interest and
income taxes, increased, as a percentage of net revenues, from 19.6% for the
first quarter of 2000 to 23.0% for the first quarter of 2001. This improvement
was largely due to the cost savings that resulted from Fresh Start initiatives
and from the sales of businesses that had previously performed below standard.
Gross margins for the funeral homes increased from 26.5% in the first quarter of
2000 to 28.7% in the first quarter of 2001, on a decrease in revenue of 1.8%. As
a percentage of cemetery net revenues, cemetery gross margin was 23.4% in the
first quarter of 2001 compared to 20.3% in the first quarter in 2000. Revenues
from cemeteries decreased 7.1% in the first quarter of 2001 compared to the same
period in 2000.
During the first quarter of 2001 we sold, closed or combined with other
existing locations, eleven funeral homes and five cemeteries. Proceeds from the
sales totaling $6.2 million and cash flow from operations enabled us to reduce
our debt by $10.9 million during the first quarter of 2001.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for
the three month periods ended March 31, 2000 and 2001. For purposes of this
discussion, the Company's locations are in three groups, as a result of the
stratification of our funeral home and cemetery portfolios in 2000. A "core"
group which represents a large majority of our revenues and cash flow, a second
"underperforming" group, and a third group consisting of businesses that are
"targeted for sale".
10
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 months ended March 31, 2000 compared to the three
months ended March 31, 2001.
THREE MONTHS ENDED
MARCH 31, CHANGE
--------------------------- -----------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Net location revenues:
Core $ 21,307 $ 21,223 $ (84) 0.0 %
Underperforming 10,684 10,250 (434) (4.1)%
Targeted for sale 1,545 1,694 149 9.6 %
Sold and discontinued 1,476 418 (1,058) *
----------- ------------ -------------
Total location revenues $ 35,012 $ 33,585 $ (1,427) (4.1)%
Preneed insurance commissions revenue 523 1,302 779 *
----------- ------------ -------------
Total net revenues $ 35,535 $ 34,887 $ (648) (1.8)%
=========== ============ =============
Gross profit:
Core $ 6,422 $ 6,087 $ (335) (5.2)%
Underperforming 2,320 2,283 (37) (1.6)%
Targeted for sale 107 367 260 *
Sold and discontinued 32 (25) (57) *
----------- ------------ -------------
Total location gross profit $ 8,881 $ 8,712 $ (169) (1.9)%
Preneed insurance commissions revenue 523 1,302 779 *
----------- ------------ -------------
Total gross profit $ 9,404 $ 10,014 $ 610 6.5 %
=========== ============ =============
- ---------------
* Not meaningful.
Funeral location revenues for the three months ended March 31, 2001
decreased $1.4 million or 4.1% over the three months ended March 31, 2000.
The lower net revenues were primarily a result of a decrease of $1.1 million
from businesses that were sold in the first quarter of 2001. The number of
funeral services decreased 1.3% for the core group in comparing the first
quarter of 2001 to the first quarter of 2000, while the average revenue per
service for those existing locations increased 0.8% in comparing those same
periods. The number of funeral services for the underperforming group
decreased 8.0% while the average revenue per service increased 3.5% in
comparing the first quarter 2001 to the first quarter of 2000. In addition to
the net revenues from funeral location operations above, insurance commission
revenues from preneed funeral contract sales totaled $1.3 million for the
three months of 2001 as compared to $.5 million for the three months ended
March 31, 2000. The increase in commission revenues is due primarily to
nonrecurring commissions on rollover transactions.
Total funeral location gross profit for the three months ended March 31,
2001 decreased $.2 million or 1.9% from the comparable three months of 2000.
The lower total gross profit is due primarily to the lower net revenues and
higher utility costs due to the recent increase in energy prices. These
negative factors were mitigated in part by depreciation and amortization that
was $.9 million less than the prior period due to the impairments recorded in
the latter half of 2000 and lower overhead and administrative costs resulting
from Fresh Start initiatives.
11
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 months ended March 31, 2000 compared to the three months ended
March 31, 2001.
THREE MONTHS ENDED
MARCH 31, CHANGE
--------------------------- -----------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Net revenues:
Core $ 8,257 $ 8,007 $ (250) (3.0)%
Targeted for sale 907 900 (.7) (7)%
Sold 512 86 (426) *
------------ ----------- ------------ -------------
Total net revenues $ 9,676 $ 8,993 $ (683) (7.1)%
=========== ============ =============
Gross profit:
Core $ 1,819 $ 1,931 $ 112 6.2%
Targeted for sale 113 202 89 78.8%
Sold 32 (31) (63) *
----------- ------------ ------------- ------------
Total gross profit $ 1,964 $ 2,102 $ 138 7.0%
=========== ============ =============
- ---------------
* Not meaningful.
Total cemetery net revenues for the three months ended March 31, 2001
decreased $.7 million over the three months ended March 31, 2000, and total
cemetery gross profit increased $.1 million over the comparable three months of
2000. The lower net revenues reflect a decrease of $250,000 from core operations
and a decrease of $433,000 from the cemeteries that have been sold or are
targeted for sale. The higher gross profit reflected an increase of $112,000
from core operations and $26,000 from cemeteries that have been sold or are
targeted for sale. Total gross margin increased from 20.3% for the three months
ended March 31, 2000 to 23.4% for the three months ended March 31, 2001, due
primarily to the reduction in personnel costs related to the downsizing in the
Fresh Start program.
OTHER. General and administrative expenses for the quarter ended March 31, 2001
decreased $.3 million as compared to the first quarter of 2000. These expenses,
as a percentage of net revenues, decreased from 5.5% to 4.6% due to the
downsizing of the corporate organization and other cost savings initiatives of
Fresh Start.
Interest expense and other financing costs for the three months ended March
31, 2001 was approximately the same as in the first three months of 2000. While
the average debt outstanding during the 2001 quarter was less than the
outstanding debt in the 2000 quarter, the rate paid on the Company's line of
credit was slightly higher due to the debt modification in late 2000 as was also
the amortization of loan costs due to the payment of debt modification fees.
12
Preferred stock dividends of $20,000 were subtracted from the $3.8 million
of net income in computing the net income available to common stockholders for
the three months ended March 31, 2001.
For the three months ended March 31, 2001, we provided for income taxes on
income before income taxes at a combined state and federal rate of 20% compared
with 50% on income from continuing operations for the same period in 2000. The
rate for the first quarter of 2000 was negatively impacted by the effects of
non-deductible amortization, while the rate for the first quarter of 2001
benefited by $1.2 million from the utilization of tax benefits that were
generated from the losses in the latter part of 2000, such tax benefits are
being recognized when realized through taxable income. We will continue to
evaluate the realizability of the valuation allowance for deferred taxes at each
reporting period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $5.0 million at March 31, 2001,
representing an increase of $1.8 million from December 31, 2000. For the
three months ended March 31, 2001, cash provided by operations was $8.8
million as compared to $10.9 million for the three months ended March 31,
2000. The decrease in cash provided by operations was primarily due to the
changes in the working capital accounts period to period. Cash provided by
investing activities was $3.9 million for the three months ended March 31,
2001 compared to cash used in the amount of $7.6 million for the first three
months of 2000, the change being primarily due to the proceeds from the sale
of businesses in the first quarter of 2001 in the amount of $6.2 million.. In
the first three months of 2001, cash flow used in financing activities
amounted to approximately $10.9 million, due to the reduction of the
Company's debt. We intend to utilize the majority of free cash flow and
proceeds from the sale of assets to reduce the amount of debt outstanding and
thereby improve credit ratios.
The Company's debt and other sources of capital include $108 million in
senior debt notes, approximately $90 million in mandatorily redeemable
convertible preferred securities, a $100 million revolving line of credit,
approximately $1 million of redeemable preferred stock, and approximately $25
million in acquisition indebtedness and capital lease obligations.
The $108 million in senior debt notes are unsecured, mature in traunches of
$24.5 million in 2004, $59 million in 2006 and $24.5 million in 2008 and bear
interest at the fixed rates of $7.73%, 7.96% and 8.06%, respectively.
The approximately $90 million in mandatorily redeemable convertible
preferred securities mature in 2029 and pay a fixed rate of 7%.
Carriage has a credit facility with a group of banks for a $100 million
revolving line of credit. The credit facility, maturing in 2004, is unsecured
and contains customary restrictive covenants, including a restriction on the
payment of dividends on common stock, and requires that we maintain certain
financial ratios. Interest under the credit facility is provided at both LIBOR
and prime rate options. 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 March 31, 2001, $42 million was outstanding under the
credit facility and the Company's debt to total capitalization was 51 percent.
As of March 31, 2001, the Company had 1,182,500 shares outstanding of
Series D Preferred Stock. The Series D Preferred Stock is convertible into Class
B Common Stock. The holders of Series D Preferred Stock are entitled to receive
cash dividends at an annual rate of $.06-$.07 per share depending upon the date
such shares were issued. The Company may, at its option, redeem all or any
portion of the shares of the Series D Preferred Stock at a redemption price of
$1.00 per share, together with all accrued
13
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.
We believe that cash flow from operations and borrowings under the credit
facility should be sufficient to fund anticipated capital expenditures as well
as other operating requirements. Acquisition spending during 2001 is anticipated
to be relatively insignificant and capital expenditures should be less than the
2000 amount. 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 financing may be required in the future. The availability and terms of
these capital sources will depend on prevailing market conditions and interest
rates and the then-existing financial condition of the Company.
ACCOUNTING CHANGES
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", which, as amended, was implemented during the fourth quarter of
2000, and applied retroactively to the first three quarters of 2000, to provide
guidance related to recognizing revenue in circumstances in which no specific
authoritative literature exists. Members of the death care industry, in
consultation with the Commission, agreed to certain changes in the manner in
which cemetery preneed sales and costs are recorded. The change that is most
meaningful to the Company is a change from recording cemetery merchandise and
service revenue and their related costs at the time the contract is executed, to
the period in which they are delivered. These accounting changes do not result
in a material change in net cash flows nor the amount or revenues we ultimately
expect to realize.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and
Hedging Activities", for which the effective date was deferred to years
beginning after June 15, 2000 by SFAS No. 137, and amended by SFAS No. 139, to
establish accounting and financial reporting standards for certain derivative
instruments and certain hedging activities. The key provisions of SFAS No. 133,
as amended, are that every derivative will be recognized as an asset or
liability at its fair value and that later changes in fair value are generally
reported in earnings or other comprehensive income. The Company is currently
engaged in interest rate swaps that have a notional amount of $30 million to
hedge against rising interest rates on its variable rate long-term debt. The
swaps are recorded as a liability in the amount of $.6 million at March 31,
2001.
POTENTIAL ACCOUNTING CHANGE
The Financial Accounting Standards Board has issued an exposure draft which
would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be
the elimination of the amortization of Names and Reputations, which would have
an estimated pre-tax impact of approximately $4 million per year, and testing to
determine impairments, if any, for long-lived assets. The final pronouncement
may change from the exposure draft.
SEASONALITY
The Company's business can be affected by seasonal fluctuations in the
death rate. Generally, death rates are higher during the winter months.
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INFLATION
Inflation has not had a significant impact on the results of operations of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There has been no material change in the Company's position regarding
quantitative and qualitative disclosures of market risk from that disclosed in
the Company's 2000 form 10-K.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements made by the management of Carriage Services, Inc.(the
"Company" or "Carriage"). Such statements are typically identified by terms
expressing future expectations or goals. These forward-looking statements,
although made in good faith, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include
Carriage's inability to sell businesses and properties held for sale for their
carrying value, to maintain or increase free cash flow from operations, or to
achieve internal growth from our businesses; adverse changes in economic and
financial market conditions, including declining stock prices, increasing
interest rates, and restricted credit availability; lower death rates; changing
consumer preferences; competition in our markets; Carriage's inability to
maintain operating ratios within the limits set out within our financing
arrangements; and changes in government regulation of the death care industry.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision of these forward-looking statements. Readers should carefully review
the Cautionary Statements described in this and other documents we file from
time to time with the Securities and Exchange Commission, including Annual
Reports on Form 10-K and Current Reports on Form 8-K filed by Carriage
throughout 2001.
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) Maintaining or achieving growth in free cash flow from operations
depends primarily on achieving anticipated levels of earnings before
depreciation, amortization and other non-cash charges, controlling capital
expenditures to budgeted levels, collecting accounts receivable and reducing
preneed funeral costs.
(2) Achieving the Company's revenue goals also is affected by the volume
and prices of the products and services sold, as well as the mix of products and
services sold. The annual sales targets set by the Company are aggressive, and
the inability of the Company to achieve planned volume or prices could cause the
Company not to meet anticipated levels of revenue. In certain markets the
Company
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expects to increase prices, while in other markets prices will be
lowered. The ability of the Company to achieve volume or price targets at any
location depends on numerous factors, including the capabilities of the local
operating staff, the local economy, the local death rate, competition and
changes in consumer preferences, including cremations.
(3) Revenue also is affected by the level of preneed sales in both current
and prior periods. The level of preneed 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 marketing
approach, commission practices and contractual terms. Future revenue will also
be affected by the Company's recent decision to eliminate its national preneed
sales and marketing organization and to manage future preneed activities at the
local business level.
(4) In addition to the factors discussed above, financial performance may
be affected by other important factors, including the following:
(a) The ability of the Company to retain or attract key personnel.
(b) The amount and rate of growth in the Company's general and
administrative expenses.
(c) Changes in interest rates, which can increase or decrease the
amount the Company pays on borrowings with variable rates of
interest.
(d) The Company's ability to stay within the limits of the credit
ratios set out in the debt covenants, such as the
debt-to-capital ratio, debt-to-EBITDA ratio, and the fixed
charge coverage ratio.
(e) Availability and related terms of debt and equity financing to
fund operating needs.
(f) The impact on the Company's financial statements of accounting
charges that may result from the Company's evaluation of its
business strategies, asset valuations and organizational
structures as part of the Fresh Start restructuring program.
(g) The amount of net proceeds actually realized on assets held
for sale.
(h) Changes in government regulation, including tax rates and
their effects on corporate structure.
(i) Changes in inflation and other general economic conditions
domestically, affecting financial markets (e.g. marketable
security values).
(j) Unanticipated legal proceedings and unanticipated outcomes of
legal proceedings.
(k) Changes in accounting policies and practices required by
generally accepted accounting principles or the Securities and
Exchange Commission, such as amortization periods and asset
carrying values for long-lived intangible assets.
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--Note Termination Agreement with Russell Allen dated March 9, 2001
10.2--Tax Indemnity Agreement with Russell Allen dated March 9, 2001
11.1--Statement regarding computation of per share earnings
12 --Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
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Carriage filed a Current Report on Form 8-K on March 28, 2001, with
respect to the correspondence to the Securities and Exchange Commission
regarding Staff Accounting Bulletin No. 101.
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.
May 15, 2001 /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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