<Page>
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, 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)
<Table>
DELAWARE 76-0423828
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1900 SAINT JAMES PLACE, 4TH FLOOR, HOUSTON TX 77056
(Address of principal executive offices) (Zip Code)
</Table>
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 July 31, 2001 was 15,435,229 and 1,254,480 respectively.
1
<Page>
CARRIAGE SERVICES, INC.
INDEX
<Table>
<Caption>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 2000 and June 30, 2001 3
Consolidated Statements of Operations for the
Three Months ended June 30, 2000 and 2001 and
Six Months ended June 30, 2000 and 2001 4
Consolidated Statements of Comprehensive Income (Loss)
Six Months ended June 30, 2000 and 2001 5
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 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 16
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 18
</Table>
2
<Page>
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2000 2001
-------------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,210 $ 2,475
Accounts receivable --
Trade, net of allowance for doubtful accounts of $4,572 in
2000 and $4,247 in 2001 16,167 13,279
Other 3,828 3,296
-------------- -------------
19,995 16,575
Assets held for sale, net 10,018 1,784
Inventories and other current assets 9,152 9,105
-------------- -------------
Total current assets 42,375 29,939
-------------- -------------
Property, plant and equipment, at cost, net of accumulated
depreciation of $19,156 in 2000 and $22,288 in 2001 119,252 118,185
Cemetery property, at cost 61,529 61,485
Names and reputations, net of accumulated amortization of
$17,984 in 2000 and $20,682 in 2001 166,585 164,309
Cemetery installment accounts receivable 20,383 19,431
Deferred charges and other non-current assets 38,123 34,430
Preneed funeral contracts 231,874 232,267
Preneed cemetery trust funds 30,164 35,350
-------------- -------------
Total assets $ 710,285 $ 695,396
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,247 $ 23,247
Current portion of long-term debt and obligations under capital
leases 3,236 3,148
-------------- -------------
Total current liabilities 28,483 26,395
Deferred cemetery revenue and preneed liabilities 99,623 100,861
Deferred preneed funeral contracts revenue 231,874 232,267
Long-term debt and obligations under capital leases 181,968 167,251
-------------- -------------
Total liabilities 541,948 526,774
-------------- -------------
Commitments and contingencies
Redeemable preferred stock 1,172 181
Company-obligated mandatorily redeemable convertible preferred
securities of Carriage Services Capital Trust 89,928 89,996
Minority interest in consolidated subsidiary --- 200
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares
Authorized; 14,302,000 and 15,170,000 issued and outstanding at
December 31, 2000 and June 30, 2001, respectively 143 152
Class B Common Stock; $.01 par value; 10,000,000 shares
Authorized; 1,845,000 and 1,426,000 issued and outstanding at
December 31, 2000 and June 30, 2001, respectively 18 14
Contributed capital 193,234 188,852
Retained deficit (116,158) (110,268)
Unrealized loss on interest rate swaps, net of tax benefit -- (505)
-------------- -------------
Total stockholders' equity 77,237 78,245
-------------- -------------
Total liabilities and stockholders' equity $ 710,285 $ 695,396
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
3
<Page>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues, net
Funeral $ 29,602 $ 31,148 $ 65,137 $ 66,035
Cemetery 8,678 9,873 18,354 18,851
----------- ----------- ----------- -----------
38,280 41,021 83,491 84,886
Costs and expenses
Funeral 24,319 23,811 50,450 48,657
Cemetery 7,331 7,448 15,043 14,326
----------- ----------- ----------- -----------
31,650 31,259 65,493 62,983
----------- ----------- ----------- -----------
Gross profit 6,630 9,762 17,998 21,903
General and administrative expenses 2,381 2,179 4,869 4,229
----------- ----------- ----------- -----------
Operating income 4,249 7,583 13,129 17,674
Interest expense, net 3,433 3,286 7,152 6,989
Financing costs of company-obligated mandatorily
redeemable convertible preferred securities of
Carriage Services Capital Trust 1,641 1,641 3,282 3,282
----------- ----------- ----------- -----------
Total interest and financing costs 5,074 4,927 10,434 10,271
Income (loss) before income taxes and cumulative effect
of the change in accounting principle (825) 2,656 2,695 7,403
Provision (benefit) for income taxes (55) 531 1,707 1,481
----------- ----------- ----------- -----------
Net income (loss) before cumulative effect of the
change in accounting principle (770) 2,125 988 5,922
Cumulative effect on prior years of the change in
accounting principle, net of income tax benefit -- -- (38,993) --
----------- ----------- ----------- -----------
Net income (loss) (770) 2,125 (38,005) 5,922
Preferred stock dividends 20 12 41 32
----------- ----------- ----------- -----------
Net income (loss) available to common stockholders $ (790) $ 2,113 $ (38,046) $ 5,890
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Continuing operations $ (0.05) $ .13 $ .06 $ .36
Cumulative effect of the change in accounting
principle, net -- -- (2.44) --
----------- ----------- ----------- -----------
Net income (loss) $ (0.05) $ .13 $ (2.38) $ .36
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Continuing operations $ (0.05) $ .12 $ .06 $ .34
Cumulative effect of the change in accounting
principle, net -- -- (2.44) --
----------- ----------- ----------- -----------
Net income (loss) $ (0.05) $ .12 $ (2.38) $ .34
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 16,027 16,592 16,002 16,549
=========== =========== =========== ===========
Diluted 16,027 17,651 16,002 17,525
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
4
<Page>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
2000 2001
------------ -----------
Net income (loss) $ (38,005) $ 5,922
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 --- (633)
Related income tax benefit --- 127
------------ -----------
Total other comprehensive income (loss) $ --- $ (505)
------------ -----------
Comprehensive income (loss) $ (38,005) $ 5,417
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
5
<Page>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------------
2000 2001
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (38,005) $ 5,922
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 3,879 3,152
Amortization 6,208 5,448
Provision for losses on accounts receivable 1,958 1,612
Deferred income taxes 4,766 2,495
--------------- ---------------
Net cash provided by operating activities before
changes in assets and liabilities 17,799 18,629
Changes in assets and liabilities, net of effects from acquisitions and
dispositions:
(Increase) decrease in accounts receivable (3,913) 3,007
(Increase) decrease in inventories and other current assets (297) 1,767
(Increase) decrease in deferred charges and other non-current assets 285 (141)
(Increase) in preneed cemetery trust funds (7,800) (4,931)
Increase (decrease) in accounts payable and accrued liabilities 212 (1,609)
Increase in deferred revenue and preneed liabilities 11,216 1,949
--------------- ---------------
Net cash provided by operating activities 17,502 18,671
Cash flows from investing activities:
Preneed funeral and cemetery costs (4,415) (2,155)
Purchase of note receivable (566) ---
Proceeds from sales of businesses --- 7,109
Sale of minority interest in subsidiary --- 200
Acquisitions, net of cash acquired (1,333) (212)
Capital expenditures (6,357) (3,050)
--------------- ---------------
Net cash provided by (used in) investing activities (12,671) 1,892
Cash flows from financing activities:
Proceeds from long-term debt 26,298 ---
Proceeds from issuance of common stock 499 119
Payment of acquisition-related obligations (1,147) (4,935)
Payments on long-term debt and obligations under capital leases (27,233) (16,450)
Payment of preferred stock dividends (41) (32)
Other (65) --
--------------- ---------------
Net cash used in financing activities (1,689) (21,298)
Net increase (decrease) in cash and cash equivalents 3,142 (735)
Cash and cash equivalents at beginning of period 2,517 3,210
--------------- ---------------
Cash and cash equivalents at end of period $ 5,659 $ 2,475
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs $ 10,795 $ 9,392
--------------- ---------------
Cash paid for income taxes $ 344 $ 26
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</Table>
6
<Page>
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 June 30,
2001, the Company owned and operated 154 funeral homes and 32 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 month periods ended June 30, 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. Certain
information and footnote disclosures, normally included in annual financial
statements, have been condensed or omitted pursuant to the rules of the SEC. The
accompanying consolidated financial statements have been prepared consistent
with the accounting policies described in our annual report on Form 10-K for the
year ended December 31, 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.
7
<Page>
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 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 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 six months ended June
30, 2000, before the cumulative effect of the accounting change, was to decrease
net income $2.1 million, or $.13 per diluted share. The revenue not recognized
is included in the accompanying 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 charge of approximately $0.5 million, net
of related income tax benefit, in the consolidated statement of comprehensive
income to record the liability for the interest rate swaps during the six months
ended June 30, 2001.
(c) Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 142 addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. The provisions also apply to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later.
8
<Page>
The provisions of SFAS No. 142 are required to be applied starting with
fiscal years beginning after December 15, 2001. Goodwill and intangible assets
acquired after June 30, 2001, will be subject immediately to the amortization
provisions of this Statement.
The effect of these Statements on the Company will be the elimination of
the amortization of goodwill which is currently being amortized over 40 years,
and the testing for impairments of goodwill and other intangible assets on an
annual basis. The Company estimates that under these accounting principles,
proforma results for the second quarter of 2001 would have been earnings of
$0.17 per diluted share, compared to proforma earnings of $0.03 per diluted
share for the second quarter of last year.
3. 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):
<Table>
<Caption>
FUNERAL CEMETERY CORPORATE CONSOLIDATED
---------- ---------- ----------- --------------
External revenues:
Six months ended June 30, 2001 $ 66,035 $ 18,851 --- $ 84,886
Six months ended June 30, 2000 65,137 18,354 --- 83,491
Profit (loss) before cumulative effect of the change in
accounting principle:
Six months ended June 30, 2001 $ 10,120 $ 2,814 $ (7,012) $ 5,922
Six months ended June 30, 2000 8,930 1,370 (9,312) 988
Total assets:
June 30, 2001 $ 539,298 $ 153,616 $ 2,482 $ 695,396
June 30, 2000 637,979 172,037 13,498 823,514
</Table>
9
<Page>
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 2001 operating results.
Income from operations, which we define as earnings before interest and
income taxes, increased, as a percentage of net revenues, from 11.1% for the
second quarter of 2000 to 18.5% for the second quarter of 2001. This improvement
was largely due to the cost savings that resulted from Fresh Start initiatives
and increased same-store revenues in both the funeral and cemetery segments,
combined with the disposition during the last four quarters of 24 funeral homes
and 10 cemeteries which were only marginally profitable. Despite the property
dispositions, revenues from funeral homes increased 5.2% and cemeteries
increased 13.8% in the second quarter of 2001 compared to the same period in
2000. Gross margins for the funeral homes increased from 17.8% in the second
quarter of 2000 to 23.6% in the second quarter of 2001. As a percentage of
cemetery net revenues, cemetery gross margin was 24.6% in the second quarter of
2001 compared to 15.5% in the second quarter of 2000.
During the first half of 2001 we sold, closed or combined with other
existing locations, 18 funeral homes and 6 cemeteries. Proceeds from the sale of
businesses totaling $7.1 million and cash flow from operations enabled us to
reduce our debt by approximately $16.0 million during the first half of 2001.
The debt reduction was achieved despite the payment of a $4.9 million contingent
purchase price obligation related to an acquisition from a prior year.
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, 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 approximately two-thirds of our revenues and cash flow, a
second "underperforming" group, and a third group consisting of businesses that
10
<Page>
are "targeted for sale". Additionally, funeral homes and cemeteries owned and
operated for the entirety of each period being compared are referred to as
"existing 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, 2000 compared to the
three and six months ended June 30, 2001.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30, CHANGE
--------------------------- --------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ----------- -----------
Net location same-store revenues:
Core $ 17,845 $ 19,455 $ 1,610 9.0 %
Underperforming 8,622 9,426 804 9.3 %
Targeted for sale 954 1,061 107 11.2 %
Sold and discontinued 1,658 220 (1,438) *
----------- ------------ -----------
Total location revenues $ 29,079 $ 30,162 $ 1,083 3.7 %
Preneed insurance commissions revenue 523 986 463 *
----------- ------------ -----------
Total net revenues $ 29,602 $ 31,148 $ 1,546 5.2 %
=========== ============ ===========
Gross profit:
Core $ 3,737 $ 4,409 $ 672 18.0 %
Underperforming 946 1,770 824 87.1 %
Targeted for sale 146 171 25 17.1 %
Sold and discontinued (69) 1 70 *
----------- ------------ -----------
Total location gross profit $ 4,760 $ 6,351 $ 1,591 33.4 %
Preneed insurance commissions revenue 523 986 463 *
----------- ------------ -----------
Total gross profit $ 5,283 $ 7,337 $ 2,054 38.9 %
=========== ============ ===========
* Not meaningful.
</Table>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, CHANGE
--------------------------- --------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ----------- -----------
Net location same-store revenues:
Core $ 39,152 $ 40,678 $ 1,526 3.9 %
Underperforming 19,146 19,675 529 2.8 %
Targeted for sale 2,051 2,352 301 14.7 %
Sold and discontinued 3,742 1,042 (2,700) *
----------- ------------ -----------
Total location revenues $ 64,091 $ 63,747 $ (344) (0.5)%
Preneed insurance commissions revenue 1,046 2,288 1,242 *
----------- ------------ -----------
Total net revenues $ 65,137 $ 66,035 $ 898 1.4 %
=========== ============ ===========
Gross profit:
Core $ 10,127 $ 10,505 $ 378 3.7 %
Underperforming 3,193 4,075 882 27.6 %
Targeted for sale 224 451 227 101.3 %
Sold and discontinued 97 59 (38) *
----------- ------------ -----------
Total location gross profit $ 13,641 $ 15,090 $ 1,449 10.6 %
Preneed insurance commissions revenue 1,046 2,288 1,242 *
----------- ------------ -----------
Total gross profit $ 14,687 $ 17,378 $ 2,691 18.3 %
=========== ============ ===========
* Not meaningful.
</Table>
11
<Page>
Funeral location revenues for the three months ended June 30, 2001
increased $1.1 million or 3.7% over the three months ended June 30, 2000. The
higher net revenues were primarily a result of an increase of 4.7% in the number
of services and an increase of 4.5% in the average revenue per service for the
existing operations. The number of funeral services increased 4.1% for the core
group in comparing the second quarter of 2001 to the second quarter of 2000,
while the average revenue per service for those existing locations increased
4.8% in comparing those same periods. The number of funeral services for the
underperforming group increased 5.8% while the average revenue per service
increased 3.5% in comparing the second quarter 2001 to the second quarter of
2000. In addition to the net revenues from funeral location operations above,
insurance commission revenues from preneed funeral contract sales totaled $1.0
million for the three months of 2001 as compared to $0.5 million for the three
months ended June 30, 2000. The increase in commission revenues is due primarily
to nonrecurring commissions on the conversion of trust funded contracts to
insurance funded contracts.
Total funeral location gross profit for the three months ended June 30,
2001 increased $1.6 million or 33.4% from the comparable three months of 2000.
The higher gross profit is due primarily to the higher net revenues,
depreciation and amortization that was $0.9 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.
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, 2000 compared to the three and six
months ended June 30, 2001.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30, CHANGE
--------------------------- --------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ----------- -----------
Net same-store revenues:
Core $ 7,377 $ 8,482 $ 1,105 15.0 %
Targeted for sale 799 1,113 314 39.3 %
Acquired or sold 502 278 (224) *
----------- ------------ -----------
Total net revenues $ 8,678 $ 9,873 $ 1,195 13.8 %
=========== ============ ===========
Gross profit:
Core $ 1,319 $ 1,999 $ 680 51.6 %
Targeted for sale 94 359 265 281.9 %
Acquired or sold (66) 67 133 *
----------- ------------ -----------
Total gross profit $ 1,347 $ 2,425 $ 1,078 80.0 %
=========== ============ ===========
* Not meaningful.
</Table>
12
<Page>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, CHANGE
--------------------------- --------------------------
2000 2001 AMOUNT PERCENT
----------- ------------ ----------- -----------
Net same-store revenues:
Core $ 15,634 $ 16,122 $ 488 3.1 %
Targeted for sale 1,672 1,876 204 12.2 %
Acquired or sold 1,048 853 (195) *
----------- ------------ -----------
Total net revenues $ 18,354 $ 18,851 $ 497 2.7 %
=========== ============ ===========
Gross profit:
Core $ 3,135 $ 3,813 $ 678 21.6 %
Targeted for sale 214 495 281 131.3 %
Acquired or sold (38) 217 255 *
----------- ------------ -----------
Total gross profit $ 3,311 $ 4,525 $ 1,214 36.7 %
=========== ============ ===========
* Not meaningful.
</Table>
Total cemetery net revenues for the three months ended June 30, 2001
increased $1.2 million over the three months ended June 30, 2000, and total
cemetery gross profit increased $1.1 million over the comparable three months of
2000. The higher net revenues resulted primarily from an increase of $1.1
million from core operations. The higher gross profit reflected an increase of
$0.7 million from core operations and $0.4 million from cemeteries that have
been sold or are targeted for sale. Total gross margin increased from 15.5% for
the three months ended June 30, 2000 to 24.6% for the three months ended June
30, 2001, primarily due to a higher level of atneed deliveries of previously
contracted preneed merchandise and services, increased property sales and
improved business practices.
OTHER. General and administrative expenses for the quarter ended June 30, 2001
decreased $0.2 million as compared to the second quarter of 2000. These
expenses, as a percentage of net revenues, decreased from 6.2% to 5.3% 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 June
30, 2001 declined slightly, compared to the second quarter of 2000. While the
average debt outstanding during the first six months of 2001 was less than the
outstanding debt in the same period for 2000, 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.
Preferred stock dividends of $12,000 were subtracted from the $2.1 million
of net income in computing the net income available to common stockholders for
the three months ended June 30, 2001.
For the quarter ended June 30, 2001, the Company provided for income taxes
on income before income taxes at a combined state and federal rate of 20%
compared with 6.7% on the loss for the same period in 2000. The rate for the
second quarter of 2000 was negatively impacted by the effects of non-deductible
amortization, while the rate for the second quarter of 2001 benefited by $0.7
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
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<Page>
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 $2.5 million at June 30, 2001,
representing a decrease of $0.7 million from December 31, 2000. For the six
months ended June 30, 2001, cash provided by operations was $18.7 million as
compared to $17.5 million for the six months ended June 30, 2000. The increase
in cash provided by operations was primarily due to the higher level of earnings
as adjusted for non-cash charges and benefits period to period. Cash provided by
investing activities was $1.9 million for the six months ended June 30, 2001
compared to cash used in the amount of $12.7 million for the first six months of
2000, the change being primarily due to the proceeds from the sale of businesses
in the first and second quarters of 2001 in the amount of $7.1 million, combined
with a decline in capital expenditures and lower preneed costs. In the first six
months of 2001, cash flow used in financing activities amounted to approximately
$21.3 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 $103.6 million in
senior debt notes, a $100 million revolving line of credit, $24.1 million in
acquisition indebtedness and capital lease obligations, and approximately $90
million in mandatorily redeemable convertible preferred securities.
The $103.6 million in senior debt notes are unsecured, mature in tranches
of $23.7 million in 2004, $56.5 million in 2006 and $23.4 million in 2008 and
bear interest at the fixed rates of $7.73%, 7.96% and 8.06%, respectively.
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 June 30, 2001, $43 million was outstanding under the
credit facility and the Company's debt to total capitalization was 50 percent.
The approximately $90 million in mandatorily redeemable convertible
preferred securities mature in 2029 and pay a fixed rate of 7%.
As of June 30, 2001, the Company had 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 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
total 2000
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<Page>
amount of $10.5 million. Because future cash flows and the availability of
financing are subject to a number of variables, such as the Company's operating
performance, timing of debt maturities and the number and size of acquisitions
made by the Company, there can be no assurance that the Company'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. 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 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 June 30, 2001.
In June 2001 the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 142 addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. The provisions also apply to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later.
The provisions of SFAS No. 142 are required to be applied starting with
fiscal years beginning after December 15, 2001. Goodwill and intangible assets
acquired after June 30, 2001, will be subject immediately to the amortization
provisions of this Statement.
The effect of these Statements on the Company will be the elimination of
the amortization of goodwill which is currently being amortized over 40 years,
and the testing for impairments of goodwill and other intangible assets on an
annual basis. The Company estimates that under these accounting principles,
proforma results for the second quarter of 2001 would have been earnings of
$0.17 per diluted share, compared to proforma earnings of $0.03 per diluted
share for the second quarter of last year.
15
<Page>
SEASONALITY
The Company's business can be affected by seasonal fluctuations in the
death rate. Generally, death rates are higher during the winter months.
INFLATION
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 4. SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2001 annual meeting of shareholders was held on May 22, 2001.
All director nominees were elected. The voting tabulation was as follows:
<Table>
<Caption>
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
------------------ --------------------- --------------------------
Greg M. Brudnicki 25,643,945 386,178
Vincent D. Foster 24,732,835 1,297,288
</Table>
The terms of the following other directors continue after the meeting:
Melvin C. Payne, Stuart W. Stedman, Ronald A. Erickson and Mark F. Wilson.
Other matters voted upon at the meeting were as follows:
<Table>
<Caption>
NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
------------ --------------- ------------------
Reclassification of Mark F. Wilson
from a Class III to a Class I director 20,044,210 330,940 16,221
Selection of Arthur Andersen LLP as
auditors for 2001 25,044,849 970,889 14,385
</Table>
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
16
<Page>
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, collecting accounts receivable and reducing preneed sales
origination 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 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.
17
<Page>
(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 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
11.1 -- Statement regarding computation of per share earnings
12 -- Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
None
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, 2001 /s/ Thomas C. Livengood
- ----------------------------- ----------------------------------------
Date Thomas C. Livengood, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
18