SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
(Mark One) |
|
|
ý QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
|
|
|
For the quarterly period ended September 30, 2003 |
|
|
|
OR |
|
|
|
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
|
|
|
For the transition period from to |
|
|
|
Commission file number: 1-11961 |
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
|
76-0423828 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
||
1900 Saint James Place, 4th Floor, Houston, TX |
|
77056 |
(Address of principal executive offices) |
|
(Zip Code) |
|
||
Registrants telephone number, including area code: (713) 332-8400 |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: |
||||
|
Common Stock, $.01 Par Value |
|
New York Stock Exchange |
|
|
Series G Preferred Stock Purchase Rights |
|
New York Stock Exchange |
|
|
(Title Of Class) |
|
(Name of Exchange on which registered) |
|
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: |
None |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act) Yes o No ý
The number of shares of the Registrants Common Stock, $.01 par value per share, outstanding as of November 4, 2003 was 17,551,241.
CARRIAGE SERVICES, INC.
INDEX
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARRIAGE SERVICES, INC.
(in thousands, except share data)
|
|
December 31, |
|
September 30, |
|
||
|
|
2002 |
|
2003 |
|
||
|
|
|
|
(unaudited) |
|
||
ASSETS |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
2,702 |
|
$ |
2,191 |
|
Accounts receivable |
|
|
|
|
|
||
Trade, net of allowance for doubtful accounts of $2,844 in 2002 and $2,013 in 2003 in 2002 |
|
14,640 |
|
12,734 |
|
||
Other |
|
746 |
|
512 |
|
||
|
|
15,386 |
|
13,246 |
|
||
Inventories and other current assets |
|
8,777 |
|
9,054 |
|
||
Total current assets |
|
26,865 |
|
24,491 |
|
||
|
|
|
|
|
|
||
Property, plant and equipment, at cost, net of accumulated depreciation of $30,449 in 2002 and $34,444 in 2003 |
|
113,967 |
|
112,377 |
|
||
Cemetery property, at cost |
|
64,570 |
|
64,287 |
|
||
Goodwill |
|
158,696 |
|
159,668 |
|
||
Deferred charges and other non-current assets |
|
60,344 |
|
55,561 |
|
||
Preneed funeral contracts |
|
235,347 |
|
233,603 |
|
||
Preneed cemetery merchandise and service trust funds |
|
43,965 |
|
45,946 |
|
||
Total assets |
|
$ |
703,754 |
|
$ |
695,933 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable and accrued liabilities |
|
$ |
26,097 |
|
$ |
20,294 |
|
Current portion of long-term debt and capital leases obligations |
|
2,348 |
|
24,403 |
|
||
Total current liabilities |
|
28,445 |
|
44,697 |
|
||
|
|
|
|
|
|
||
Deferred cemetery revenue and preneed liabilities |
|
96,812 |
|
97,815 |
|
||
Deferred preneed funeral contracts revenue |
|
243,067 |
|
241,265 |
|
||
Long-term debt, net of current portion |
|
141,207 |
|
109,827 |
|
||
Obligations under capital leases, net of current portion |
|
5,539 |
|
5,512 |
|
||
Distributions payable on convertible preferred securities |
|
|
|
2,197 |
|
||
Total liabilities |
|
515,070 |
|
501,313 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
Minority interest in consolidated subsidiary |
|
400 |
|
|
|
||
Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust |
|
90,193 |
|
90,294 |
|
||
Stockholders equity: |
|
|
|
|
|
||
Common Stock, $.01 par value; 80,000,000 shares authorized; 17,075,000 and 17,522,000 shares issued and outstanding at December 31, 2002 and September 30, 2003, respectively |
|
171 |
|
175 |
|
||
Contributed capital |
|
185,100 |
|
186,625 |
|
||
Accumulated deficit |
|
(86,915 |
) |
(81,717 |
) |
||
Deferred compensation |
|
|
|
(757 |
) |
||
Unrealized loss on interest rate swaps, net of tax benefit |
|
(265 |
) |
|
|
||
Total stockholders equity |
|
98,091 |
|
104,326 |
|
||
Total liabilities and stockholders equity |
|
$ |
703,754 |
|
$ |
695,933 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
3
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
Revenues, net |
|
|
|
|
|
|
|
|
|
||||
Funeral |
|
$ |
27,521 |
|
$ |
26,883 |
|
$ |
89,060 |
|
$ |
85,939 |
|
Cemetery |
|
8,601 |
|
8,818 |
|
25,834 |
|
26,335 |
|
||||
|
|
36,122 |
|
35,701 |
|
114,894 |
|
112,274 |
|
||||
Costs and expenses |
|
|
|
|
|
|
|
|
|
||||
Funeral |
|
20,351 |
|
20,877 |
|
62,919 |
|
64,189 |
|
||||
Cemetery |
|
6,531 |
|
6,724 |
|
19,663 |
|
19,217 |
|
||||
|
|
26,882 |
|
27,601 |
|
82,582 |
|
83,406 |
|
||||
Gross profit |
|
9,240 |
|
8,100 |
|
32,312 |
|
28,868 |
|
||||
General and administrative expenses |
|
3,619 |
|
2,620 |
|
8,475 |
|
7,708 |
|
||||
Special charges and other items |
|
|
|
(226 |
) |
|
|
(534 |
) |
||||
Operating income |
|
5,621 |
|
5,706 |
|
23,837 |
|
21,694 |
|
||||
Interest expense, net |
|
3,101 |
|
2,669 |
|
9,450 |
|
8,346 |
|
||||
Financing costs of company-obligated mandatory redeemable convertible preferred securities of Carriage Services Capital Trust |
|
1,675 |
|
1,684 |
|
5,023 |
|
5,032 |
|
||||
Total interest and financing costs |
|
4,776 |
|
4,353 |
|
14,473 |
|
13,378 |
|
||||
Income before income taxes |
|
845 |
|
1,353 |
|
9,364 |
|
8,316 |
|
||||
Provision (benefit) for income taxes |
|
325 |
|
507 |
|
(9,193 |
) |
3,118 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income available to common stockholders |
|
$ |
520 |
|
$ |
846 |
|
$ |
18,557 |
|
$ |
5,198 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per common share |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
1.10 |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per common share |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
1.06 |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common and common equivalent shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
16,978 |
|
17,496 |
|
16,940 |
|
17,409 |
|
||||
Diluted |
|
17,367 |
|
17,832 |
|
17,439 |
|
17,752 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
4
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
|
|
For the
nine months |
|
||||
|
|
2002 |
|
2003 |
|
||
|
|
|
|
|
|
||
Net income |
|
$ |
18,557 |
|
$ |
5,198 |
|
|
|
|
|
|
|
||
Other comprehensive income: |
|
|
|
|
|
||
Unrealized gain on interest rate swaps |
|
247 |
|
|
|
||
Amortization of accumulated unrealized loss on interest rate swap |
|
249 |
|
|
|
||
Related income tax provision |
|
(99 |
) |
|
|
||
Total other comprehensive income |
|
$ |
397 |
|
$ |
|
|
|
|
|
|
|
|
||
Comprehensive income |
|
$ |
18,954 |
|
$ |
5,198 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
5
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
|
For the
nine months |
|
||||
|
|
2002 |
|
2003 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income |
|
$ |
18,557 |
|
$ |
5,198 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation |
|
4,851 |
|
5,162 |
|
||
Amortization |
|
3,002 |
|
3,203 |
|
||
Provision for losses on accounts receivable |
|
1,696 |
|
1,056 |
|
||
Net gain on sale of business assets |
|
|
|
(1,113 |
) |
||
Stock-related compensation |
|
|
|
245 |
|
||
Deferred income taxes (benefit) |
|
(8,079 |
) |
3,118 |
|
||
Loss on early extinguishment of debt |
|
|
|
147 |
|
||
Other |
|
168 |
|
(145 |
) |
||
Changes in assets and liabilities, net of effects from acquisitions and dispositions: |
|
|
|
|
|
||
Decrease in accounts receivable |
|
3,113 |
|
1,046 |
|
||
Decrease (increase) in inventories and other current assets |
|
(39 |
) |
100 |
|
||
(Increase) in deferred charges and other |
|
(33 |
) |
(515 |
) |
||
(Increase) in preneed funeral and cemetery costs |
|
(2,773 |
) |
(2,994 |
) |
||
(Increase) in preneed cemetery trust funds |
|
(1,958 |
) |
(3,402 |
) |
||
(Decrease) in accounts payable and accrued liabilities |
|
(6,042 |
) |
(3,881 |
) |
||
Increase in deferred revenue and preneed liabilities |
|
1,848 |
|
1,382 |
|
||
Increase in distributions payable on convertible preferred securities |
|
|
|
1,650 |
|
||
Net cash provided by operating activities |
|
14,311 |
|
10,257 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Net proceeds from sales of businesses and other assets |
|
81 |
|
2,197 |
|
||
Sale of minority interest in subsidiary |
|
200 |
|
|
|
||
Acquisitions and cost adjustments related to acquisitions |
|
(2,160 |
) |
1,500 |
|
||
Capital expenditures |
|
(4,886 |
) |
(5,081 |
) |
||
Net cash used in investing activities |
|
(6,765 |
) |
(1,384 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Proceeds (payments) under bank line of credit |
|
3,000 |
|
(2,500 |
) |
||
Payments on long-term debt and obligations under capital leases |
|
(4,735 |
) |
(6,727 |
) |
||
Proceeds from issuance of common stock |
|
438 |
|
461 |
|
||
Payment of contingent stock price guarantees |
|
(5,289 |
) |
|
|
||
Payment of deferred debt charges and other |
|
|
|
(618 |
) |
||
Net cash used in financing activities |
|
(6,586 |
) |
(9,384 |
) |
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
960 |
|
(511 |
) |
||
Cash and cash equivalents at beginning of period |
|
2,744 |
|
2,702 |
|
||
Cash and cash equivalents at end of period |
|
$ |
3,704 |
|
2,191 |
|
|
|
|
|
|
|
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
||
Cash paid for interest and financing costs |
|
$ |
16,284 |
|
$ |
13,628 |
|
Cash paid for income taxes |
|
$ |
229 |
|
$ |
54 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
6
CARRIAGE SERVICES, INC.
CONDENSED 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 September 30, 2003, the Company owned and operated 139 funeral homes and 30 cemeteries in 29 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 Condensed Disclosures
The information for the three and nine month periods ended September 30, 2002 and 2003 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, 2002, and should be read in conjunction therewith. Certain amounts in the consolidated financial statements for the period ended in 2002 in this report have been reclassified to conform with current year 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) Costs Associated with Disposal Activities
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring), required an exit cost liability to be recognized at the date of an entitys commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. The adoption of SFAS No. 146 did
7
not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
(b) Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for financial statements for fiscal years ending after December 15, 2002. The Company accounts for stock options and shares issued pursuant to its employee stock purchase plan under APB Opinion No. 25, under which no compensation expense is recognized in the Consolidated Statement of Operations. Had the Company accounted for stock options and shares pursuant to its employee stock benefit plans under SFAS No. 123 for the three and nine months ended September 30, 2002 and 2003, the results would have been as follows (in thousands, except per share amounts):
|
|
Three
months ended |
|
Nine
months ended |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income, as reported |
|
$ |
520 |
|
$ |
846 |
|
$ |
18,557 |
|
$ |
5,198 |
|
|
|
|
|
|
|
|
|
|
|
||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
184 |
|
111 |
|
552 |
|
333 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Pro forma net income |
|
$ |
336 |
|
$ |
735 |
|
$ |
18,005 |
|
$ |
4,865 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
||||
Basic as reported |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
1.10 |
|
$ |
0.30 |
|
Basic pro forma |
|
$ |
0.02 |
|
$ |
0.04 |
|
$ |
1.06 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted as reported |
|
$ |
0.03 |
|
$ |
0.05 |
|
$ |
1.06 |
|
$ |
0.29 |
|
Diluted pro forma |
|
$ |
0.02 |
|
$ |
0.04 |
|
$ |
1.03 |
|
$ |
0.27 |
|
(c) Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to require consolidation of business entities under certain circumstances, particularly with respect to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entitys expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other primary interests in an entity. The provisions of this statement will be effective beginning with Carriages fourth quarter
8
of 2003. The Company is currently evaluating FIN No. 46 and its preliminary understanding is that the preneed trusts may be consolidated at fair value in the Companys balance sheet. Management has not determined the impact to earnings and the presentation within the statement of cash flows, if any, of the new accounting standard.
3. SALES OF BUSINESSES
The Company sold certain of its businesses during the first nine months of 2003. These businesses generated $1,575,000 in revenue and $243,000 in gross profit for the nine months ended September 30, 2002 and $836,000 in revenue and $24,000 in gross profit for the period of time that the Company owned them in 2003. The Company recognized gains on the sale of these businesses totaling $856,000 during the nine months ended September 30, 2003.
4. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue, net income and total assets by segment (in thousands):
|
|
Funeral |
|
Cemetery |
|
Corporate(1) |
|
Consolidated |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
External revenues: |
|
|
|
|
|
|
|
|
|
||||
Nine months ended September 30, 2003 |
|
$ |
85,939 |
|
$ |
26,335 |
|
$ |
|
|
$ |
112,274 |
|
Nine months ended September 30, 2002 |
|
89,060 |
|
25,834 |
|
|
|
114,894 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss): |
|
|
|
|
|
|
|
|
|
||||
Nine months ended September 30, 2003 |
|
13,011 |
|
4,338 |
|
(12,151 |
) |
5,198 |
|
||||
Nine months ended September 30, 2002 |
|
15,809 |
|
3,760 |
|
(1,012 |
) |
18,557 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total assets: |
|
|
|
|
|
|
|
|
|
||||
September 30, 2003 |
|
520,485 |
|
164,058 |
|
11,390 |
|
695,933 |
|
||||
December 31, 2002 |
|
525,645 |
|
163,750 |
|
14,359 |
|
703,754 |
|
||||
(1) Net income (loss) as reported for the nine months ended September 30, 2002 is primarily attributable to the reduction in the deferred tax valuation allowance discussed in Note 5, which is included in Corporate.
5. INCOME TAXES
The Company estimates that its effective tax rate will be 37.5 percent for financial statement purposes in 2003. Carriage records a valuation allowance to reflect the estimated amount of deferred tax for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized. When the Company incurred the Fresh Start restructuring costs and write-downs in late 2000 and proceeded to dispose of low performing businesses, it could not be assured that it would generate enough future taxable income to utilize the tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty, the Company recorded a valuation allowance to offset these tax benefits until such time that is could be determined it would be more likely than not the Company would be able to realize the tax benefits. Based on positive operating results subsequent to 2000 and managements forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Company recorded a tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which eliminated a substantial portion of the valuation allowance. Excluding the $12.8 million tax benefit, income taxes were recorded at the effective rate of 38.5 percent during the first nine months of 2002.
9
6. DEFERRED COMPENSATION AND STOCK-RELATED COMPENSATION
In January 2003, the Company issued 227,000 shares of restricted stock to certain officers of the Company. Twenty-five percent of the shares vest annually on each of the next four anniversary dates of the grant. The value of the stock was $3.97 per share, for a total of $902,000, which is amortized into expense over the four-year vesting period.
The Company also has a compensation plan for its outside directors under which directors may choose to accept fully vested shares of the Companys common stock for all or a portion of their annual retainer and meeting fees, and under which new directors receive an award of 20,000 shares of common stock at the time of their initial election to the Board, 50% of which are vested at the grant date and 25% of which vests on the first and second anniversary of the grant. The value of the shares at the grant date is charged to expense as the shares vest.
7. DEBT
In August 2003, Carriage replaced its $75 million revolving bank credit facility with a new $40 million unsecured revolving credit facility that matures in March 2006. Interest is payable at both prime rate and LIBOR options. Initially, the LIBOR option is set at LIBOR plus 300 basis points and the basis points above LIBOR can decline in the future with reductions in Carriages debt to EBITDA ratio, if any, as defined in the credit agreement. The new credit facility reduces by $7.5 million in March 2005 and by an additional $7.5 million in September 2005. In addition, the commitment reduces by up to $5 million for the banks pro-rata share of proceeds from dispositions of assets. In order to comply with the conditions of the new credit facility, the Company began deferring interest payments on the subordinated debentures held by its affiliated trust. As a result, cash distributions on the Company-obligated mandatorily redeemable convertible preferred securities (TIDES) of Carriage Services Trust are deferred and recorded as a liability for at least the term of the new credit facility beginning with the September 1, 2003 payment.
The TIDES contain a provision for the deferral of distributions for up to 20 consecutive quarters. During the period in which distribution payments are deferred, distributions will continue to accumulate at the 7 percent annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7 percent and are recorded as a liability. During the period in which distributions are deferred, Carriage is prohibited from paying dividends on its common stock or repurchasing its common stock, with limited exceptions.
Carriage recorded a pretax charge in the third quarter of 2003 in connection with the extinguishment of the previous existing credit facility in the approximate amount of $147,000, which represents the unamortized loan origination costs related to the that credit facility.
10
MANAGEMENTS DISCUSSION AND ANALYSIS OF |
|
|
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our business strategy is to continue to focus on increasing operating cash flow and improving profitability at each business location through activities to execute our culture of service and leadership excellence. We do not expect the execution of our business strategy will require significant investments of new capital over the next two years. However, the Company will likely access the debt and capital markets over the next three years to refinance or repay maturing debt. We plan to continue reducing our senior debt and improve our leverage ratios. Our focus is on continuing to improve our organizational leadership, quality of personnel and financial flexibility.
Net income totaled $0.8 million for the third quarter of 2003, equal to $0.05 per diluted share, of which special items, as more described in the following Results of Operations section, contributed $0.2 million or $0.01 per diluted share. Comparatively, net income for the third quarter of 2002 totaled $0.5 million or $0.03 per diluted share, which included charges in general and administrative expenses totaling $1.2 million, the equivalent of $0.04 per diluted share, which were not present in the current year period. Decreased operating profitability in the funeral segment of $1.2 million negatively impacted gross profit in comparing the third quarter of 2003 to the third quarter of 2002. Lower outstanding debt and lower interest rates provided a benefit of $0.4 million in interest expense in the current year quarter compared to the prior year quarter.
Net income totaled $5.2 million for the first nine months of 2003, or $0.29 per diluted share as compared to net income of $18.6 million for the first nine months of 2002, or $1.06 per diluted share. Certain items significantly impacted the results and comparability of the two periods. The first quarter of 2002 included an income tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, related to the reversal of a valuation allowance on deferred tax assets established in 2000. Excluding the impact of this tax benefit, diluted earnings per share for the first nine months of 2002 would have been $0.33. Net income for the first nine months of 2003, equal to $0.29 per diluted share, was negatively impacted by the operating results of the funeral segment, which accounts for approximately 77 percent of the Companys revenues, which, when compared to the first nine months of 2002, reported a revenue decline of 3.5 percent and an increase in segment costs and expenses of 2.0 percent. A large portion of the decline in the funeral segment revenues occurred in the first quarter of 2003 when same-store sales declined 8.6 percent. These variances combined, caused by the funeral segment, to reduce the gross profit of the Company by $4.4 million, equal to $0.15 per diluted share, compared to the first nine months of 2002. In contrast, the operations of the cemetery segment provided an increase in gross profit to the Company by $0.9 million, equal to $0.03 per diluted share. Additionally, and as more fully described in RESULTS OF OPERATIONS, lower interest expense, special items and lower general and administrative expense in 2003 provided $2.4 million in pretax earnings, equal to $0.08 per diluted share, compared to 2002.
Managements discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with generally accepted accounting principles in the United States of America. Our significant accounting policies are more fully described in Note 1 to the consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
11
Funeral and Cemetery Operations
We record the sales of funeral merchandise and services when the funeral service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No 66, Accounting for Sales of Real Estate. This method provides for the recognition of revenue in the period in which the customers cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.
Allowances for customer cancellations, refunds and bad debts are provided at the date of sale based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Preneed Funeral Contracts & Deferred Preneed Funeral Contracts Revenue
Cash proceeds from preneed funeral sales are deposited to a trust or used to purchase a third-party insurance product. Unperformed guaranteed preneed funeral contracts are included in the consolidated balance sheets as preneed funeral contracts. The balance in this asset account represents amounts due from customer receivables and third-party insurance companies, and the amounts deposited with the trustee and the accumulated earnings on these deposits. A corresponding credit is recorded to deferred preneed funeral contracts revenue. The funeral revenue is not recorded until the service is performed. The trust income earned and the increases in insurance benefits on the insurance products are also deferred until the service is performed, in order to offset inflation in cost to provide the service in the future.
Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses over the expected timing of the performance of the services or delivery of the merchandise covered by the preneed contracts. The pattern of the periods over which the costs are recognized is based on actuarial statistics, provided by a third party administrator, based on the actual contracts we hold.
Goodwill and Other Intangible Assets
The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in transactions accounted for as purchases, is recorded as goodwill. Many of the acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SFAS No. 142, we review the carrying value of goodwill at least annually on a regional basis to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by reference to certain valuation models, which include discounting the estimated future cash flows of the businesses in each region at the Companys weighted average cost of capital, less debt allocable to the region. The calculation of fair value
12
can vary dramatically with changes in estimates of the number of future services performed, inflation in costs, market conditions and the Companys cost of capital. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value. No impairments were recorded during the nine month periods ended September 30, 2002 and 2003.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, Accounting for Income Taxes.
Stock Compensation Plans
The Company has four stock option plans currently in effect under which stock options may be issued. Additionally, the Company sponsors an Employee Stock Purchase Plan (ESPP) under which employees can purchase common stock at a discount. The stock options are granted with an exercise price equal to or greater than the fair market value of the Companys Common Stock. Substantially all of the options granted under the four stock option plans have ten-year terms. The options generally vest over a period of two to four years. The Company accounts for stock options and shares issued under the ESPP under APB Opinion No. 25, under which no compensation cost is recognized in the Consolidated Statement of Operations. Had the Company accounted for stock options and shares pursuant to its employee stock benefit plans under SFAS No. 123 for the nine months ended September 30, 2002 and 2003, net income for those periods would have been lower by $0.6 and $0.3 million, respectively.
The Financial Accounting Standards Board (FASB) recently announced its opinion that stock options should be expensed and that they will undertake work to develop accounting and valuation guidance regarding such.
In January 2003, the Company issued 227,000 shares of restricted stock to certain officers of the Company. Twenty-five percent of the shares vest annually on each of the next four anniversary dates of the grant. The value of the stock was $3.97 per share, for a total of $902,000, which is being amortized into expense over the four-year vesting period.
The Company also has a compensation plan for its outside directors under which directors may choose to accept fully vested shares of the Companys common stock for all or a portion of their annual retainer and meeting fees, and under which new directors receive an award of 20,000 shares of common stock at the time of their initial election to the Board, 50% of which are vested at the grant date and 25% of which vests on the first and second anniversary of the grant. During the first nine months of 2003, the Company issued 7,585 shares of common stock to directors in lieu of payment in cash for their fees, the value of which was charged to operations. A new director was elected on May 13, 2003 at which time he received an award of 20,000 shares of common stock, the value of which at the grant date is charged to operations as the shares vest.
RESULTS OF OPERATIONS
The following is a discussion of the Companys results of operations for the three and nine month periods ended September 30, 2002 and 2003. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as same-store or 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, 2002 compared to the three and nine months ended September 30, 2003.
13
Three months ended September 30, 2002 compared to three months ended September 30, 2003
(dollars in thousands)
|
|
Three months ended |
|
Change |
|
|||||||
|
|
2002 |
|
2003 |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total same-store revenue |
|
$ |
26,343 |
|
$ |
26,464 |
|
$ |
121 |
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Acquired, sold or discontinued |
|
777 |
|
88 |
|
(689 |
) |
(88.7 |
)% |
|||
Preneed insurance commissions revenue |
|
401 |
|
331 |
|
(70 |
) |
(17.5 |
)% |
|||
Total net revenues |
|
$ |
27,521 |
|
$ |
26,883 |
|
$ |
(638 |
) |
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit: |
|
|
|
|
|
|
|
|
|
|||
Same-store |
|
$ |
6,572 |
|
$ |
5,706 |
|
$ |
(866 |
) |
(13.2 |
)% |
Acquired, sold or discontinued |
|
197 |
|
(31 |
) |
(228 |
) |
(115.7 |
)% |
|||
Preneed insurance commissions revenue |
|
401 |
|
331 |
|
(70 |
) |
(17.5 |
)% |
|||
Total gross profit |
|
$ |
7,170 |
|
$ |
6,006 |
|
$ |
(1,164 |
) |
(16.2 |
)% |
Nine months ended September 30, 2002 compared to nine months ended September 30, 2003
(dollars in thousands)
|
|
Nine months ended |
|
Change |
|
|||||||
|
|
2002 |
|
2003 |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total same-store revenue |
|
$ |
85,298 |
|
$ |
83,355 |
|
$ |
(1,943 |
) |
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Acquired, sold or discontinued |
|
2,516 |
|
1,326 |
|
(1,190 |
) |
(47.3 |
)% |
|||
Preneed insurance commissions revenue |
|
1,246 |
|
1,258 |
|
12 |
|
1.0 |
% |
|||
Total net revenues |
|
$ |
89,060 |
|
$ |
85,939 |
|
$ |
(3,121 |
) |
(3.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit: |
|
|
|
|
|
|
|
|
|
|||
Same-store |
|
$ |
24,438 |
|
$ |
20,340 |
|
$ |
(4,098 |
) |
(16.8 |
)% |
Acquired, sold or discontinued |
|
457 |
|
152 |
|
(305 |
) |
(66.7 |
)% |
|||
Preneed insurance commissions revenue |
|
1,246 |
|
1,258 |
|
12 |
|
1.0 |
% |
|||
Total gross profit |
|
$ |
26,141 |
|
$ |
21,750 |
|
$ |
(4,391 |
) |
(16.8 |
)% |
Funeral same-store revenues for the three months ended September 30, 2003 increased 0.5% when compared to the three months ended September 30, 2002, as we experienced a decrease of 0.6% in the number of contracts and an increase of 1.1% to $4,736 in the average revenue per contract for those existing operations. Historically, we have disclosed same-store comparisons using calls, which are contracts with a value of $1,500 and greater. We are now presenting same-store comparisons using all contracts as it provides a complete representation of our revenues. Approximately 30.2 percent of the funeral services were cremation services compared to 28.2 percent in the third quarter of 2002. The average price of Carriages cremation services decreased 0.9 percent compared to the third quarter of 2002. Of the funeral services performed during the third quarters of 2002 and 2003, approximately 20 percent were previously prearranged.
14
Total funeral same-store gross profit for the three months ended September 30, 2003 decreased $0.9 million from the comparable three months of 2002, and as a percentage of funeral same-store revenue, declined from 24.9% to 21.6%.
Funeral same-store revenues for the nine months ended September 30, 2003 decreased $1.9 million, or 2.3%, when compared to the nine months ended September 30, 2002, as we experienced a decrease of 3.9% in the number of contracts and an increase of 1.6% in the average revenue per service for those existing operations. In addition to lower mortality rates during the first nine months of the current year in certain markets, we identified certain of our businesses that have lost market share. We have recently realigned management responsibilities in our funeral operations and are reviewing our funeral organization and operations with the goal of making changes to generate market share and improve financial performance in the future.
Total funeral same-store gross profit for the nine months ended September 30, 2003 decreased $4.1 million or 16.8% from the comparable nine months of 2002, partly the result of the decrease in same store revenues given the predominantly fixed cost structure of our businesses and partly the result of a 2.0% increase in funeral costs and expenses compared to the first nine months of 2002.
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 month periods ended September 30, 2002 compared to the three and nine month periods ended September 30, 2003.
Three months ended September 30, 2002 compared to three months ended September 30, 2003
(dollars in thousands)
|
|
Three months ended |
|
Change |
|
|||||||
|
|
2002 |
|
2003 |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total same-store revenue and total net revenues |
|
$ |
8,601 |
|
$ |
8,818 |
|
$ |
217 |
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Total same-store gross profit and total gross profit |
|
$ |
2,070 |
|
$ |
2,094 |
|
$ |
24 |
|
1.2 |
% |
Nine months ended September 30, 2002 compared to nine months ended September 30, 2003
(dollars in thousands)
|
|
Nine months ended |
|
Change |
|
|||||||
|
|
2002 |
|
2003 |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Total same-store revenue and total net revenues |
|
$ |
25,834 |
|
$ |
26,335 |
|
$ |
501 |
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Total same-store gross profit and total gross profit |
|
$ |
6,171 |
|
$ |
7,118 |
|
$ |
947 |
|
15.3 |
% |
No cemetery businesses were acquired or sold during the comparable periods.
Cemetery net revenues for the three months ended September 30, 2003 increased $0.2 million, or 2.5%, over the three months ended September 30, 2002, and cemetery gross profit increased slightly over the comparable three months of 2002. Cemetery revenues were positively impacted by a $0.5 million from the completion of mausoleums for which sales had previously been deferred. Financial revenues (trust earnings and finance charges on installment contracts) and deliveries of preneed merchandise and services declined $0.1 million and $0.3 million, respectively, compared to the third quarter of the prior year.
15
Cemetery net revenues for the nine months ended September 30, 2003 increased $0.5 million, or 1.9%, over the nine months ended September 30, 2002, and cemetery gross profit increased $0.9 million over the comparable nine months of 2002. Total gross margin increased from 23.9% for the nine months ended September 30, 2002 to 27.0% for the nine months ended September 30, 2003 primarily from improvement in bad debt expense.
Other. General and administrative expenses for the three months and nine months ended September 30, 2003 decreased $1.0 million and $0.8 million, respectively, as compared to the third quarter and the nine months of 2002 primarily because the third quarter 2002 included a $0.7 million charge related to the termination of an employment agreement with a former corporate officer and $0.5 million in professional fees incurred in connection with changes in tax accounting methods.
The following table describes the components of special charges and other items of the Company for the three and nine months ended September 30, 2003:
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
Amount |
|
Diluted |
|
Amount |
|
Diluted |
|
||||
|
|
(000s) |
|
|
|
(000s) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net gains from the dispositions of business assets |
|
$ |
373 |
|
$ |
0.01 |
|
$ |
1,113 |
|
$ |
0.04 |
|
Early termination of lease obligation and bank credit facility |
|
(147 |
) |
|
|
(579 |
) |
(0.02 |
) |
||||
Total special charges and other items |
|
$ |
226 |
|
$ |
0.01 |
|
$ |
534 |
|
$ |
0.02 |
|
Interest expense and other financing costs for the three and nine month periods ended September 30, 2003 declined $0.4 million and $1.1 million respectively, compared to the three and nine month periods ended September 30, 2002. Cash flow from operations and proceeds from the sales of business assets have provided the source of funds to reduce the debt outstanding during 2002 and 2003. Since September 30, 2002, total outstanding debt has been reduced by $15.8 million. Reductions in interest rates over the last two years have also contributed (to a lesser degree) in reducing interest expense.
Income Taxes. The Company recorded income taxes at the effective rate of 38.5% (excluding the affect of the change in the valuation allowance) and 37.5% for the nine months ended September 30, 2002 and 2003, respectively.
The Company has net operating loss carryforwards totaling approximately $10 million for Federal income tax purposes, as well as significant operating loss carryforwards in certain states. Because of the ability to use the net operating loss to offset taxable income and the timing of when revenue and expenses are recognized for tax purposes, we do not expect to pay Federal income taxes in 2003 and 2004. The slightly lower tax rate in 2003, compared to 2002, is based on our expectations of utilizing certain state loss carryforwards, the benefits of which have not yet been recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2.2 million at September 30, 2003, representing a decrease of $0.5 million from December 31, 2002. It is Carriages practice to apply available cash against its revolving line of credit, described below, to minimize interest expense. If the Company needs cash for working capital or investment purposes, it may draw on the line of credit so long as the Company is in compliance with the loan covenants and committed funds are available. For the nine months ended September 30, 2003, cash provided
16
by operating activities was $10.3 million as compared to $14.3 million for the nine months ended September 30, 2002. Cash used in investing activities was $1.4 million for the nine months ended September 30, 2003 compared to cash used in the amount of $6.8 million for the first nine months of 2002, the change being primarily due to the combination of acquisition costs totaling $2.2 million in the 2002 period versus proceeds totaling $3.7 million from the sales of businesses and the settlement of a prior acquisition contingency in the 2003 period.
The Companys debt at September 30, 2003 totaled $139.7 million and consisted of $96.3 million in senior debt notes, a $40 million revolving line of credit ($25 million outstanding at September 30, 2003) and $18.4 million in acquisition indebtedness and capital lease obligations.
The $96.3 million in senior debt notes are unsecured, mature in tranches of $22.3 million in 2004, $52.4 million in 2006 and $21.6 million in 2008 (based on current balances) and bear interest at the fixed rates of 7.73%, 7.96% and 8.06%, respectively.
The Company had a $75 million unsecured revolving credit facility at June 30, 2003 that would have matured in June 2004. On August 4, 2003, Carriage replaced the facility with a new $40 million unsecured revolving credit facility that matures in March 2006 which should be sufficient for the Company to meet its working capital needs and retire the Series A maturities of the Senior Notes in July 2004. Interest is payable at both prime rate and LIBOR options. Initially, the LIBOR option is set at LIBOR plus 300 basis points and the basis points above LIBOR can decline in the future with reductions, if any, in Carriages debt to EBITDA ratio, as defined by the credit agreement. The new credit facility reduces by $7.5 million in March 2005 and by $7.5 million in September 2005. In addition, the commitment reduces by up to $5 million for the banks pro-rata share of proceeds from disposition of assets. As of September 30, 2003, the Companys debt to total capitalization, as defined by the credit facility, was 41.8 percent as compared to 44.2 percent at December 31, 2002. As of September 30, 2003, the Companys debt to EBITDA ratio , as defined by the loan agreement, was 3.40.
The Company, in complying with the conditions of the new credit facility, began deferring interest payments on the subordinated debentures held by the Companys affiliated trust. As a result, cash distributions on the Company-obligated mandatorily redeemable convertible trust preferred securities of Carriage Services Capital Trust (TIDES) are deferred and recorded as a liability for at least the term of the new credit facility beginning with the September 1, 2003 payment. The condition was imposed by the lenders to ensure that the Company had sufficient available borrowings under the unsecured credit facility to retire the Series A maturities of the Senior Notes that have a current balance of $22.3 million and to accommodate the two $7.5 million commitment reductions in 2005. The Company intends to use the cash savings from the deferral of the TIDES distributions to repay borrowings under the unsecured credit facility.
The TIDES contain a provision for the deferral of distributions for up to 20 consecutive quarters. During the period in which distribution payments are deferred, distributions will continue to accumulate at the 7 percent annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7 percent and are recorded as a liability. During the deferral period, Carriage is prohibited from paying dividends on the common stock or repurchasing its common stock, subject to limited exceptions.
We believe that cash flow from operations, cash savings from the deferral of the TIDES distributions and borrowings under the credit facility should be sufficient to fund anticipated capital expenditures, retire the Series A maturities of the Senior Notes in July 2004 and other operating requirements. Because future cash flows and the availability of financing are subject to certain variables, such as the Companys operating performance and conditions of the credit and equity markets, there can be no assurance that the Companys capital resources will be sufficient to fund its capital needs in future years. Additional debt and equity financing will likely 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.
17
(a) Costs Associated with Disposal Activities
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring), required an exit cost liability to be recognized at the date of an entitys commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
(b) Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to require consolidation of business entities under certain circumstances, particularly with respect to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entitys expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other primary interests in an entity. The provisions of this statement would be effective beginning with Carriages fourth quarter of 2003. The Company is currently evaluating FIN No. 46 and its preliminary understanding is that the preneed trusts may be consolidated at fair value in the Companys balance sheet. Management has not determined the impact to earnings and the presentation of the statement of cash flows, if any, of the new accounting standard.
SEASONALITY
The Companys 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.
Carriage is currently exposed to market risk from changes in interest rates. Interest on the Companys revolving credit facility will change with changes in the prime lending rate and LIBOR. Previously, the Company was party to interest rate swaps to minimize the affect of increasing interest rates. Those swaps matured in May 2003 and, consequently, a change of, for example, one percent in the interest rate would cause
18
a change in interest expense on these borrowings of approximately $250,000, based on the balance outstanding at September 30, 2003,or $0.01 per diluted share, on an annualized basis.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2003. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures are effective. During the period covered by this report, there were no changes in our internal control over financial reporting, as such term is defined under Rule 13a-15(f) of the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect.
We carry insurance with coverages and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operation; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words may, will, estimate, intend, believe, expect, project, forecast, plan, anticipate and other similar words.
19
The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Companys actual consolidated results and could cause the Companys 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.
Risks related to our business
(1) Earnings from and principal of trust funds and insurance contracts could be reduced by changes in stock and bond prices and interest and dividend rates.
(2) Increased costs may have a negative impact on earnings and cash flows.
(3) Our ability to achieve our debt reduction targets and to service our debt in the future depends upon our ability to generate sufficient cash, which depends on many factors, some of which are beyond our control.
(4) We may experience declines in preneed sales due to numerous factors including changes made to contract terms and sales force compensation, or a weakening economy. Declines in preneed sales would reduce our backlog and revenue and could reduce our future market share.
(5) Increased preneed sales may have a negative impact on cash flow.
(6) Price competition could reduce market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.
(7) Increased advertising or better marketing by competitors, or increased activity by competitors offering products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs in order to retain or recapture our market share.
(8) Increases in interest rates would increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.
(9) Covenant restrictions under our revolving credit facility and senior notes limit our flexibility in operating our business.
(10) Our projections for 2003 and later years include adjustments to earnings and cash flow for estimated disposition activity. Several important factors, among others, may affect our ability to consummate dispositions, including our ability to identify buyers for the businesses and assets we expect to sell at acceptable prices.
Risks related to the death care industry
(1) Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.
(2) The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, basic cremations produce no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser profit margins than traditional funerals.
20
(3) If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.
(4) Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.
(5) Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Credit Agreement dated August 4, 2003 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, as Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.1 to the Companys Form 8-K Current Report filed August 6, 2003.
11.1 Computation of Per Share Earnings
31.1 Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Periodic Financial Reports by Joseph Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report on Form 8-K Current Report was filed with the SEC on August 6, 2003 to disclose the terms of the Companys new bank credit facility and to report the Companys press release dated August 5, 2003 reporting the Companys second quarter results.
A report on Form 8-K Current report was filed with the SEC on September 8, 2003 in connection with the press release dated September 5, 2003 reporting an update to the Company and Investment Profile dated September 2003.
21
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 13, 2003 |
|
/s/ Joseph Saporito |
|
Date |
Joseph Saporito, |
||
|
Senior
Vice President and Chief Financial |
||
22
EXHIBIT 11.1
CARRIAGE SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
(unaudited and in thousands, except per share data)
Earnings per share for the three and nine month periods ended September 30, 2002 and 2003 is calculated based on the weighted average number of common and common equivalent shares outstanding during the period as prescribed by SFAS 128. The following table sets forth the computation of the basic and diluted earnings per share for the three and nine month periods ended September 30, 2002 and 2003:
|
|
Three
months |
|
Nine
months |
|
||||||||
|
|
2002 |
|
2003 |
|
2002 |
|
2003 |
|
||||
Net income available to common stockholders for basic EPS computation |
|
$ |
520 |
|
$ |
846 |
|
$ |
18,557 |
|
$ |
5,198 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
||||
Net income available to common stockholders for diluted EPS computation |
|
$ |
520 |
|
$ |
846 |
|
$ |
18,557 |
|
$ |
5,198 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding for basic EPS computation |
|
16,978 |
|
17,496 |
|
16,940 |
|
17,409 |
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
389 |
|
336 |
|
499 |
|
343 |
|
||||
Weighted average number of common and common equivalent shares outstanding for diluted EPS computation |
|
17,367 |
|
17,832 |
|
17,439 |
|
17,752 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per common share |
|
$ |
.03 |
|
$ |
0.05 |
|
$ |
1.10 |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per common share |
|
$ |
.03 |
|
$ |
0.05 |
|
$ |
1.06 |
|
$ |
0.29 |
|
EXHIBIT 31.1
I, Melvin C. Payne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carriage Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is prepared;
b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting.
Dated: November 13, 2003 |
|
/s/ Melvin C. Payne |
|
|
|
|
|
Melvin C. Payne |
|
|
|
|
Chairman of
the Board, President |
EXHIBIT 31.2
I, Joseph Saporito, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carriage Services Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is prepared;
b. evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting.
Dated: November 13, 2003 |
|
/s/ Joseph Saporito |
|
|
Joseph Saporito |
||
|
Senior Vice
President and Chief |
EXHIBIT 32.1
I, Melvin C. Payne, certify, to the best of my knowledge, that: the attached Quarterly Report on Form 10-Q of Carriage Services, Inc. for the period September 30, 2003 (Form 10-Q) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Carriage Services, Inc.
November 13, 2003
|
/s/ Melvin C. Payne |
|
Melvin C. Payne |
|
Chairman of the Board, |
|
President and |
|
Chief Executive Officer |
EXHIBIT 32.2
I, Joseph Saporito, certify, to the best of my knowledge, that: the attached Quarterly Report on Form 10-Q of Carriage Services, Inc. for the period ended September 30, 2003 (Form 10-Q) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Carriage Services, Inc.
November 13, 2003
|
/s/ Joseph Saporito |
|
Joseph Saporito |
|
Senior Vice President and |
|
Chief Financial Officer |