<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 SEPTEMBER 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)
DELAWARE 76-0423828
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation ororganization)
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 October 31, 2001 was 15,735,215 and 1,066,880 respectively.
1
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CARRIAGE SERVICES, INC.
INDEX
<Table>
<Caption>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 31, 2000 and September 30, 2001 3
Consolidated Statements of Operations for the
Three Months ended September 30, 2000 and 2001 and
Nine Months ended September 30, 2000 and 2001 4
Consolidated Statements of Comprehensive Income (Loss) for the
Nine Months ended September 30, 2000 and 2001 5
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2000 and 2001 6
Notes to Condensed 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 5 - OTHER INFORMATION 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
Signature 18
</Table>
2
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CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,210 $ 3,618
Accounts receivable --
Trade, net of allowance for doubtful accounts of $4,572 in
2000 and $2,702 in 2001 16,167 15,704
Other 3,828 3,272
------------ ------------
19,995 18,976
Assets held for sale, net 10,018 1,538
Inventories and other current assets 9,152 8,516
------------ ------------
Total current assets 42,375 32,648
------------ ------------
Property, plant and equipment, at cost, net of accumulated
depreciation of $19,156 in 2000 and $23,538 in 2001 119,252 117,541
Cemetery property, at cost 61,529 61,456
Names and reputations, net of accumulated amortization of
$17,984 in 2000 and $21,763 in 2001 166,585 162,784
Cemetery installment accounts receivable 20,383 18,157
Deferred charges and other non-current assets 38,123 34,683
Preneed funeral contracts 231,874 232,671
Preneed cemetery trust funds 30,164 33,984
------------ ------------
Total assets $ 710,285 $ 693,924
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,247 $ 25,105
Current portion of long-term debt and obligations under capital
leases 3,236 2,386
------------ ------------
Total current liabilities 28,483 27,491
Deferred revenue and preneed liabilities 99,623 100,964
Deferred preneed funeral contracts revenue 231,874 232,671
Long-term debt and obligations under capital leases 181,968 163,717
------------ ------------
Total liabilities 541,948 524,843
------------ ------------
Commitments and contingencies
Redeemable preferred stock 1,172 181
Company-obligated mandatorily redeemable convertible preferred
securities of Carriage Services Capital Trust 89,928 90,024
Minority interest in consolidated subsidiary -- 200
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares authorized;
14,302,000 and 15,675,000 issued and outstanding at
December 31, 2000 and September 30, 2001, respectively 143 157
Class B Common Stock; $.01 par value; 10,000,000 shares
authorized; 1,845,000 and 1,067,000 issued and outstanding at
December 31, 2000 and September 30, 2001, respectively 18 11
Contributed capital 193,234 189,297
Retained deficit (116,158) (109,727)
Unrealized loss on interest rate swaps, net of tax benefit -- (1,062)
------------ ------------
Total stockholders' equity 77,237 78,676
------------ ------------
Total liabilities and stockholders' equity $ 710,285 $ 693,924
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</Table>
3
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<Table>
<Caption>
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,
------------------------- -------------------------
2000 2001 2000 2001
--------- -------- --------- --------
Revenues, net:
Funeral $ 29,702 $ 28,256 $ 94,839 $ 94,290
Cemetery 8,401 9,413 26,755 28,265
--------- -------- --------- --------
38,103 37,669 121,594 122,555
Costs and expenses:
Funeral 24,886 22,333 75,336 70,990
Cemetery 7,506 7,096 22,549 21,421
--------- -------- --------- --------
32,392 29,429 97,885 92,411
--------- -------- --------- --------
Gross profit 5,711 8,240 23,709 30,144
General and administrative expenses 3,137 2,473 8,006 6,702
Special charges 12,970 -- 12,970 --
--------- -------- --------- --------
Operating income (10,396) 5,767 2,733 23,442
Interest expense, net 3,562 3,447 10,714 10,436
Financing costs of company-obligated mandatorily
redeemable convertible preferred securities of
Carriage Services Capital Trust 1,641 1,641 4,923 4,923
--------- -------- --------- --------
Total interest and financing costs 5,203 5,088 15,637 15,359
Income (loss) before income taxes and cumulative effect
of the change in accounting principle (15,599) 679 (12,904) 8,083
Provision (benefit) for income taxes (3,309) 136 (1,604) 1,617
Net income (loss) before cumulative effect of the --------- -------- --------- --------
change in accounting principle (12,290) 543 (11,300) 6,466
Cumulative effect on prior years of the change in
accounting principle, net of income tax benefit -- -- (38,993) --
--------- -------- --------- --------
Net income (loss) (12,290) 543 (50,293) 6,466
Preferred stock dividends 20 3 61 35
--------- -------- --------- --------
Net income (loss) available for common stockholders $ (12,310) $ 540 $ (50,354) $ 6,431
========= ======== ========= ========
Basic earnings (loss) per common share:
Continuing operations $ (0.77) $ .03 $ (0.70) $ .39
Cumulative effect of the change in accounting
principle, net -- -- (2.44) --
--------- -------- --------- --------
Net income (loss) $ (0.77) $ .03 $ (3.14) $ .39
========= ======== ========= ========
Diluted earnings (loss) per common share:
Continuing operations $ (0.77) $ .03 $ (0.70) $ .37
Cumulative effect of the change in accounting
principle, net -- -- (2.44) --
--------- -------- --------- --------
Net income (loss) $ (0.77) $ .03 $ (3.14) $ .37
========= ======== ========= ========
Weighted average number of common and common equivalent
shares outstanding:
Basic 16,084 16,699 16,030 16,600
========= ======== ========= ========
Diluted 16,084 17,851 16,030 17,648
========= ======== ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</Table>
4
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<Table>
<Caption>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED AND IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2000 2001
---------- ---------
$ (50,293) $ 6,466
Net income (loss)
Other comprehensive (loss):
Cumulative effect on prior years of the change in accounting
principle, net of income tax benefit of $1 -- 1
Unrealized (losses) on interest rate swaps arising during
period -- (1,329)
Related income tax benefit -- 266
---------- ---------
Total other comprehensive (loss) $ -- $ (1,062)
---------- ---------
Comprehensive income (loss) $ (50,293) $ 5,404
========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</Table>
5
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<Table>
<Caption>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
2000 2001
---------- ---------
Cash flows from operating activities:
Net income (loss) $ (50,293) $ 6,466
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of the change in accounting principle, net of income
tax benefit 38,993 --
Depreciation 5,801 4,724
Amortization 9,353 8,097
Loss on sale of business assets 1,349 ---
Impairment of assets 11,100 ---
Provision for losses on accounts receivable 4,004 2,047
Deferred income taxes 1,457 2,557
---------- ---------
Net cash provided by operating activities before
changes in assets and liabilities 21,764 23,891
Changes in assets and liabilities, net of effects from acquisitions
and dispositions:
(Increase) decrease in accounts receivable (5,496) 1,064
(Increase) decrease in inventories and other current assets (160) 2,200
(Increase) decrease in deferred charges and other non-current assets 323 (207)
(Increase) in preneed cemetery trust funds (8,743) (3,564)
Increase in accounts payable and accrued liabilities 1,099 263
Increase in deferred revenue and preneed liabilities 13,012 1,553
---------- ---------
Net cash provided by operating activities 21,799 25,200
Cash flows from investing activities:
Preneed funeral and cemetery costs (6,134) (3,388)
Purchase of note receivable (566) --
Proceeds from sales of businesses 2,199 8,442
Sale of minority interest in subsidiary -- 200
Acquisitions, net of cash acquired (1,516) (212)
Capital expenditures (9,472) (4,588)
---------- ---------
Net cash provided by (used in) investing activities (15,489) 454
Cash flows from financing activities:
Proceeds from long-term debt 3,118 --
Payments on long-term debt and obligations under capital leases (2,590) (20,843)
Proceeds from issuance of common stock 500 567
Payment of acquisition-related obligations (3,297) (4,935)
Payment of preferred stock dividends (61) (35)
Other (71) --
---------- ---------
Net cash used in financing activities (2,401) (25,246)
Net increase in cash and cash equivalents 3,909 408
Cash and cash equivalents at beginning of period 2,517 3,210
---------- ---------
Cash and cash equivalents at end of period $ 6,426 $ 3,618
========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest and financing costs $ 17,680 $ 15,797
========== =========
Cash paid for income taxes $ 530 $ 65
========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</Table>
6
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CARRIAGE SERVICES, INC.
NOTES TO CONDENSED 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 September
30, 2001, the Company owned and operated 154 funeral homes and 32 cemeteries in
30 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 month periods ended September 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
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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 nine months ended September
30, 2000, before the cumulative effect of the accounting change, was to decrease
net income $3.3 million, or $.21 per diluted share. The revenue not recognized
is included in the accompanying consolidated balance sheet in the caption
"Deferred 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 $1.1 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 nine
months ended September 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.
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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 SFAS No. 142 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 on an annual basis. The Company
estimates that the proforma earnings, excluding goodwill amortization, for the
third quarter of 2001 would have been earnings of $0.08 per diluted share,
compared to a proforma loss of $0.69 per diluted share for the third quarter of
2000.
(d) Impairment of Long-Lived Assets
In August 2001 the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
addresses financial accounting and reporting of long-lived assets, other than
goodwill, that are to be disposed by sale or otherwise, and is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company has not determined what effect, if any, the implementation of SFAS
No. 144 will have on the Company's financial position or results of operations.
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:
Nine months ended September 30, 2001 $ 94,290 $ 28,265 --- $ 122,555
Nine months ended September 30, 2000 94,839 26,755 --- 121,594
Profit (loss) before cumulative effect of the change in
accounting principle:
Nine months ended September 30, 2001 $ 14,512 $ 4,444 $(12,490) $ 6,466
Nine months ended September 30, 2000 12,482 2,692 (26,474) (11,300)
Total assets:
September 30, 2001 $532,725 $148,405 $ 12,794 $ 693,924
December 31, 2000 547,430 156,194 6,661 710,285
</Table>
4. SPECIAL CHARGES
During the third quarter of 2000, management identified certain
underperforming funeral home and cemetery businesses for possible sale and
initiated a multi-element restructuring program. Two funeral home businesses
were sold during the third quarter of 2000 at a loss of $1.3 million and
impairment charges totaling $11.1 million were recorded to reduce the carrying
value of other businesses, classified as held for sale, to net realizable value.
The loss on sale and impairment charge, along with restructuring charges, are
classified as special charges in the consolidated statement of operations for
the three and nine months ended September 30, 2000.
9
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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 seeing the benefits of these actions in our 2001
operating results.
Income from operations, which we define as earnings before interest, income
taxes and special charges, increased, as a percentage of net revenues, from
6.8% for the third quarter of 2000 to 15.3% for the third quarter of 2001. This
improvement was largely due to the cost savings that resulted from Fresh Start
initiatives and increased same-store revenues in the cemetery segment, 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 decreased only 4.9% and cemeteries
increased 12.0% in the third quarter of 2001 compared to the same period in
2000. Gross margins for the funeral homes increased from 16.2% in the third
quarter of 2000 to 21.0% in the third quarter of 2001. As a percentage of
cemetery net revenues, cemetery gross margin was 24.6% in the third quarter of
2001 compared to 10.7% in the third quarter of 2000.
During the first three quarters of 2001 we sold, closed or combined with
other existing locations, 20 funeral homes and 6 cemeteries. Proceeds from the
sale of businesses totaling $8.4 million and cash flow from operations enabled
us to reduce our debt by approximately $20.8 million during the first three
quarters 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 nine month periods ended September 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"
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group which represents approximately two-thirds of our revenues and cash
flow, a second "underperforming" group, and a third group consisting of
businesses that 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 nine months ended September 30, 2000 compared to
the three and nine months ended September 30, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
<Table>
<Caption>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------- -----------------------
2000 2001 AMOUNT PERCENT
------- ------- -------- --------
Net location same-store revenues:
Core $17,919 $17,548 $ (371) (2.1)%
Underperforming 8,415 8,749 334 4.0%
Targeted for sale 899 904 5 0.6%
------- ------- --------
Total same-store revenues $27,233 $27,201 $ (32) (0.1)%
Sold and discontinued 1,945 145 (1,800) *
Preneed insurance commissions revenue 524 910 386 73.7%
------- ------- --------
Total net revenues $29,702 $28,256 $(1,446) (4.9)%
======= ======= ========
Gross profit:
Core $ 3,360 $ 3,361 $ 1 0.0%
Underperforming 929 1,440 511 55.0%
Targeted for sale 29 198 169 582.8%
------- ------- --------
Total same-store gross profit $ 4,318 $ 4,999 $ 681 15.8%
Sold and discontinued (26) 14 40 *
Preneed insurance commissions revenue 524 910 386 73.7%
------- ------- --------
Total gross profit $ 4,816 $ 5,923 $ 1,107 23.0%
======= ======= ========
* Not meaningful.
</Table>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
<Table>
<Caption>
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------- -----------------------
2000 2001 AMOUNT PERCENT
------- ------- -------- --------
Net location same-store revenues:
Core $56,909 $58,226 $ 1,317 2.3%
Underperforming 27,129 28,104 975 3.6%
Targeted for sale 2,829 3,039 210 7.4%
------- ------- --------
Total same-store revenues $86,867 $89,369 $ 2,502 (2.9)%
Sold and discontinued 6,402 1,723 (4,679) *
Preneed insurance commissions revenue 1,570 3,198 1,628 103.7%
------- ------- --------
Total net revenues $94,839 $94,290 $ (549) (0.6)%
======= ======= ========
Gross profit:
Core $13,506 $13,861 $ 355 2.6%
Underperforming 3,992 5,438 1,446 36.2%
Targeted for sale 279 607 328 117.6%
------- ------- --------
Total same-store gross profit $17,777 $19,906 $ 2,129 12.0%
Sold and discontinued 156 196 40 *
Preneed insurance commissions revenue 1,570 3,198 1,628 103.7%
------- ------- --------
Total gross profit $19,503 $23,300 $ 3,797 19.5%
======= ======= ========
* Not meaningful.
</Table>
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Funeral same-store revenues for the three months ended September 30, 2001
were essentially flat when compared to the three months ended September 30,
2000, as we experienced a decrease of 3.1% in the number of services and an
increase of 3.1% in the average revenue per service for the existing
operations. The lower total net revenues were primarily a result of the
decline in revenues related to the businesses that we have sold subsequent to
the second quarter 2000. The number of funeral services decreased 4.3% for
the core group in comparing the third quarter of 2001 to the third quarter of
2000, while the average revenue per service for those existing locations
increased 2.2% in comparing those same periods. The number of funeral
services for the underperforming group decreased 1.0% while the average
revenue per service increased 5.0% in comparing the third quarter 2001 to the
third quarter of 2000. In addition to the net revenues from funeral location
operations above, insurance commission revenues from preneed funeral contract
sales totaled $0.9 million and $3.2 million for the three and nine month
periods of 2001 as compared to $0.5 million and $1.6 million for the three
and nine month periods ended September 30, 2000, respectively. The increase
in commission revenues is due primarily to nonrecurring commissions on the
conversion of trust funded contracts to insurance funded contracts.
Total funeral same-store gross profit for the three months ended September
30, 2001 increased $0.7 million or 15.8% from the comparable three months of
2000. The higher gross profit is due primarily to depreciation and
amortization that was $1.0 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 nine months ended September 30, 2000 compared to the three and
nine months ended September 30, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
<Table>
<Caption>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------- -----------------------
2000 2001 AMOUNT PERCENT
------- ------- -------- --------
Net same-store revenues:
Core $7,217 $8,531 $1,314 18.2%
Targeted for sale 731 882 151 20.7%
------- ------- --------
Total same-store revenue $7,948 $9,413 $1,465 18.4%
Acquired or sold 453 -- (453) *
------- ------- --------
Total net revenues $8,401 $9,413 $1,012 12.0%
======= ======= ========
Gross profit:
Core $ 864 $2,106 $1,242 143.8%
Targeted for sale 37 212 175 473.0%
------- ------- --------
Total same-store gross profit $ 901 $2,318 $1,417 157.3%
Acquired or sold (6) (1) 5 *
------- ------- --------
Total gross profit $ 895 $2,317 $1,422 158.9%
======= ======= ========
* Not meaningful.
</Table>
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<Page>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
<Table>
<Caption>
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------- -----------------------
2000 2001 AMOUNT PERCENT
------- ------- -------- --------
Net same-store revenues:
Core $22,910 $25,237 $ 2,327 10.2%
Targeted for sale 2,403 2,759 356 14.8%
------- ------- --------
Total same-store revenue $25,313 $27,996 $ 2,683 10.6%
Acquired or sold 1,442 269 (1,173) *
------- ------- --------
Total net revenues $26,755 $28,265 $ 1,510 5.6%
======= ======= ========
Gross profit:
Core $ 3,982 $ 6,117 $ 2,135 53.6%
Targeted for sale 247 707 460 186.2%
------- ------- --------
Total same-store gross profit $ 4,229 $ 6,824 $ 2,595 61.4%
Acquired or sold (23) 20 43 *
------- ------- --------
Total gross profit $ 4,206 $ 6,844 $ 2,638 62.7%
======= ======= ========
* Not meaningful.
</Table>
Cemetery same-store net revenues for the three months ended September 30,
2001 increased $1.5 million over the three months ended September 30, 2000,
and cemetery same-store gross profit increased $1.4 million over the
comparable three months of 2000. The higher same-store net revenues resulted
primarily from an increase of $1.3 million from core operations. The higher
same-store gross profit reflected an increase of $1.2 million from core
operations and $0.2 million from cemeteries that have been targeted for sale.
Total gross margin increased from 10.7% for the three months ended September
30, 2000 to 24.6% for the three months ended September 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 September 30,
2001 decreased $0.7 million as compared to the third quarter of 2000. These
expenses, as a percentage of net revenues, decreased from 8.2% to 6.6% 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
September 30, 2001 declined slightly, compared to the second quarter of 2000.
While the average debt outstanding during the first nine 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 and higher amortization of loan costs due to the payment of debt
modification fees.
Preferred stock dividends of $3,000 were subtracted from the $0.5 million of
net income in computing the net income available for common stockholders for the
three months ended September 30, 2001.
For the quarter ended September 30, 2001, the Company provided for income
taxes on income before income taxes at a combined state and federal rate of 20%
compared with 21.2% on the loss for the same period in 2000. The rate for the
third quarter of 2000 was negatively impacted by the effects of non-deductible
amortization, while the rate for the third quarter of 2001 benefited by $0.1
million from the utilization of tax benefits that were generated from the losses
in the fourth quarter of 2000, tax benefits that are being recognized when
13
<Page>
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 $3.6 million at September 30, 2001,
representing an increase of $0.4 million from December 31, 2000. For the nine
months ended September 30, 2001, cash provided by operations was $25.2 million
as compared to $21.8 million for the nine months ended September 30, 2000. The
increase in cash provided by operations was primarily due to the higher level of
earnings as adjusted for non-cash charges period to period. Cash provided by
investing activities was $0.5 million for the nine months ended September 30,
2001 compared to cash used in the amount of $15.5 million for the first nine
months of 2000, the change being primarily due to the proceeds from the sale of
businesses during the nine months of 2001 in the amount of $8.4 million,
combined with a decrease in capital expenditures and preneed costs. In the first
nine months of 2001, cash flow used in financing activities amounted to
approximately $25.2 million, most of which was used to reduce 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, $23.5 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 September 30, 2001, $40 million was outstanding under the
credit facility and the Company's debt to total capitalization was 49.7 percent.
The approximately $90 million in mandatorily redeemable convertible preferred
securities mature in 2029 and pay a fixed rate of 7%.
As of September 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 holder of the Series D Preferred Stock is entitled to
receive cash dividends at an annual rate of $.06 per share. 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
approximately $6 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.
14
<Page>
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 $1.1 million at September 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 SFAS No. 142 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 on an annual basis. The Company estimates that proforma
earnings, excluding goodwill amortization, for the third quarter of 2001 would
have been $0.08 per diluted share, compared to a proforma loss of $0.69 per
diluted share for the third quarter of 2000.
In August 2001 the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
addresses financial accounting and reporting of long-lived assets, other than
goodwill, that are to be disposed by sale or otherwise, and is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company has not determined what effect, if any, the implementation of SFAS
No. 144 will have on the Company's financial position or results of operations.
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 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 forth 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 managing preneed sales
origination costs to current or lower levels.
16
<Page>
(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, changes in consumer spending
preferences, 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 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
17
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRIAGE SERVICES, INC.
November 14, 2001 /s/ Thomas C. Livengood
- ------------------------------ -------------------------------
Date Thomas C. Livengood, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
18