e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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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)
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DELAWARE
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76-0423828 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3040 Post Oak Boulevard, Suite 300, Houston, TX
(Address of principal executive offices)
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77056
(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filer o Accelerated filer þ Non-Accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrants Common Stock, $.01 par value per share, outstanding
as of November 1, 2007 was 19,208,265.
CARRIAGE SERVICES, INC.
INDEX
- 2 -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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December 31, |
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September 30, |
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2006 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets: |
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|
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|
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Cash and cash equivalents |
|
$ |
22,820 |
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$ |
7,241 |
|
Short term investments |
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|
10,303 |
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|
|
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|
Accounts
receivable, net of allowance for doubtful accounts of $925 in 2006
and $1,236 in 2007 |
|
|
13,822 |
|
|
|
13,532 |
|
Assets held for sale |
|
|
2,634 |
|
|
|
568 |
|
Inventories and other current assets |
|
|
11,883 |
|
|
|
11,461 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
61,462 |
|
|
|
32,802 |
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
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|
2,888 |
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|
|
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|
Federal agency bond |
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5,000 |
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|
|
5,000 |
|
Preneed cemetery trust investments |
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|
55,483 |
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|
|
63,394 |
|
Preneed funeral trust investments |
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|
44,851 |
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|
66,853 |
|
Preneed receivables, net of allowance for doubtful accounts of $492 in 2006 and
$523 in 2007 |
|
|
15,127 |
|
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|
19,430 |
|
Receivables from preneed funeral trusts |
|
|
15,649 |
|
|
|
15,272 |
|
Property, plant and equipment, at cost, net of accumulated
depreciation of $47,250 in 2006 and $51,744 in 2007 |
|
|
99,894 |
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|
116,525 |
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Cemetery property |
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|
57,798 |
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|
|
68,123 |
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Goodwill |
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|
148,845 |
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|
|
157,468 |
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Deferred charges and other non-current assets |
|
|
25,459 |
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|
|
23,235 |
|
Cemetery perpetual care trust investments |
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|
32,540 |
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|
|
38,374 |
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|
|
|
|
|
|
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Total assets |
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$ |
564,996 |
|
|
$ |
606,476 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of senior long-term debt and capital leases obligations |
|
$ |
1,610 |
|
|
$ |
1,627 |
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Accounts payable |
|
|
7,148 |
|
|
|
6,907 |
|
Accrued liabilities |
|
|
15,888 |
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|
|
11,572 |
|
Liabilities associated with assets held for sale |
|
|
1,061 |
|
|
|
483 |
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Total current liabilities |
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25,707 |
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|
20,589 |
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Senior long-term debt, net of current portion |
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|
133,841 |
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|
132,913 |
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Convertible junior subordinated debenture due in 2029 to an affiliated trust |
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|
93,750 |
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|
93,750 |
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Obligations under capital leases, net of current portion |
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|
4,728 |
|
|
|
4,687 |
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Deferred preneed cemetery revenue |
|
|
50,785 |
|
|
|
51,609 |
|
Deferred preneed funeral revenue |
|
|
28,289 |
|
|
|
31,085 |
|
Non-controlling interests in cemetery trust investments |
|
|
55,483 |
|
|
|
63,394 |
|
Non-controlling interests in funeral trust investments |
|
|
44,851 |
|
|
|
66,853 |
|
|
|
|
|
|
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Total liabilities |
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|
437,434 |
|
|
|
464,880 |
|
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|
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Commitments and contingencies |
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|
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Non-controlling interests in perpetual care trust investments |
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|
31,189 |
|
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|
37,317 |
|
Stockholders equity: |
|
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Common Stock, $.01 par value; 80,000,000 shares authorized;18,608,000 and
19,186,000 shares issued and outstanding at December 31, 2006 and
September 30, 2007, respectively |
|
|
186 |
|
|
|
192 |
|
Additional paid-in capital |
|
|
190,524 |
|
|
|
192,597 |
|
Accumulated deficit |
|
|
(94,337 |
) |
|
|
(88,510 |
) |
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|
|
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Total stockholders equity |
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|
96,373 |
|
|
|
104,279 |
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|
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|
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Total liabilities and stockholders equity |
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$ |
564,996 |
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$ |
606,476 |
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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)
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For the three months |
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For the nine months |
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ended September 30, |
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ended September 30, |
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2006 |
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|
2007 |
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|
2006 |
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|
2007 |
|
Revenues: |
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|
|
|
|
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|
|
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Funeral |
|
$ |
26,779 |
|
|
$ |
29,690 |
|
|
$ |
85,468 |
|
|
$ |
92,337 |
|
Cemetery |
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|
8,215 |
|
|
|
10,924 |
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|
27,451 |
|
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|
32,252 |
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|
|
|
|
|
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|
|
|
|
|
|
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34,994 |
|
|
|
40,614 |
|
|
|
112,919 |
|
|
|
124,589 |
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|
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|
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|
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|
|
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|
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Field costs and expenses: |
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|
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|
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|
|
|
|
|
|
|
|
|
Funeral |
|
|
17,958 |
|
|
|
19,350 |
|
|
|
55,197 |
|
|
|
57,878 |
|
Cemetery |
|
|
7,056 |
|
|
|
7,553 |
|
|
|
20,684 |
|
|
|
21,316 |
|
Depreciation and amortization |
|
|
2,000 |
|
|
|
2,070 |
|
|
|
6,306 |
|
|
|
6,134 |
|
Regional and unallocated funeral and cemetery costs |
|
|
2,139 |
|
|
|
1,848 |
|
|
|
5,843 |
|
|
|
5,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,153 |
|
|
|
30,821 |
|
|
|
88,030 |
|
|
|
90,791 |
|
Gross profit |
|
|
5,841 |
|
|
|
9,793 |
|
|
|
24,889 |
|
|
|
33,798 |
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|
|
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Corporate costs and expenses: |
|
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General, administrative and other |
|
|
2,610 |
|
|
|
3,728 |
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|
|
7,695 |
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|
|
10,712 |
|
Home office depreciation and amortization |
|
|
337 |
|
|
|
337 |
|
|
|
1,068 |
|
|
|
1,048 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,947 |
|
|
|
4,065 |
|
|
|
8,763 |
|
|
|
11,760 |
|
Operating income |
|
|
2,894 |
|
|
|
5,728 |
|
|
|
16,126 |
|
|
|
22,038 |
|
Interest expense |
|
|
(4,609 |
) |
|
|
(4,579 |
) |
|
|
(13,871 |
) |
|
|
(13,785 |
) |
Interest income and other, net |
|
|
911 |
|
|
|
191 |
|
|
|
1,474 |
|
|
|
1,066 |
|
|
|
|
|
|
|
|
|
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Total interest and other |
|
|
(3,698 |
) |
|
|
(4,388 |
) |
|
|
(12,397 |
) |
|
|
(12,719 |
) |
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing operations before
income taxes |
|
|
(804 |
) |
|
|
1,340 |
|
|
|
3,729 |
|
|
|
9,319 |
|
(Provision) benefit for income taxes |
|
|
302 |
|
|
|
(608 |
) |
|
|
(1,398 |
) |
|
|
(3,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) from continuing operations |
|
|
(502 |
) |
|
|
732 |
|
|
|
2,331 |
|
|
|
5,638 |
|
Income (loss) from discontinued operations, net of tax |
|
|
(63 |
) |
|
|
(38 |
) |
|
|
(3,928 |
) |
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(565 |
) |
|
$ |
694 |
|
|
$ |
(1,597 |
) |
|
$ |
6,068 |
|
|
|
|
|
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Basic earnings (loss) per common share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations |
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
0.13 |
|
|
$ |
0.30 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
(0.08 |
) |
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
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Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations |
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
0.12 |
|
|
$ |
0.29 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
(0.09 |
) |
|
$ |
0.31 |
|
|
|
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|
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|
|
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Weighted average number of common and common
equivalent shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
|
18,563 |
|
|
|
19,117 |
|
|
|
18,531 |
|
|
|
18,949 |
|
|
|
|
|
|
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|
|
|
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Diluted |
|
|
18,563 |
|
|
|
19,586 |
|
|
|
18,896 |
|
|
|
19,439 |
|
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|
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The accompanying condensed notes are an integral part of these consolidated financial statements.
- 4 -
CARRIAGE SERVICES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
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|
|
|
|
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|
|
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
|
2006 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,597 |
) |
|
$ |
6,068 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations |
|
|
3,928 |
|
|
|
(430 |
) |
Depreciation and amortization |
|
|
6,518 |
|
|
|
7,179 |
|
Deferred financing costs |
|
|
536 |
|
|
|
536 |
|
Provision for losses on accounts receivable |
|
|
3,141 |
|
|
|
2,051 |
|
Net loss on sale or disposition of business assets |
|
|
(341 |
) |
|
|
|
|
Stock-based compensation expense |
|
|
650 |
|
|
|
868 |
|
Deferred income taxes |
|
|
1,396 |
|
|
|
3,369 |
|
Other |
|
|
|
|
|
|
23 |
|
Changes in operating assets and liabilities that provided (required) cash, net of
effects from acquisitions and dispositions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
878 |
|
|
|
(483 |
) |
Inventories and other current assets |
|
|
(147 |
) |
|
|
441 |
|
Deferred charges and other |
|
|
12 |
|
|
|
(1,161 |
) |
Preneed funeral and cemetery trust investments |
|
|
(10,529 |
) |
|
|
(6,786 |
) |
Accounts payable and accrued liabilities |
|
|
(3,482 |
) |
|
|
(5,487 |
) |
Deferred preneed funeral and cemetery revenue |
|
|
9,206 |
|
|
|
(4,385 |
) |
Non-controlling interests in preneed funeral and cemetery trusts |
|
|
(1,163 |
) |
|
|
7,700 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
9,006 |
|
|
|
9,503 |
|
Net cash provided by operating activities of discontinued operations |
|
|
749 |
|
|
|
31 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
9,755 |
|
|
|
9,534 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions |
|
|
(1,071 |
) |
|
|
(32,531 |
) |
Net proceeds from sales of assets |
|
|
680 |
|
|
|
|
|
Purchase of corporate investments |
|
|
(45,927 |
) |
|
|
|
|
Maturities of corporate investments |
|
|
38,643 |
|
|
|
10,303 |
|
Capital expenditures |
|
|
(4,853 |
) |
|
|
(8,375 |
) |
Sales proceeds deposited into restricted accounts |
|
|
(5,455 |
) |
|
|
2,888 |
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations |
|
|
(17,983 |
) |
|
|
(27,715 |
) |
Net cash provided by investing activities of discontinued operations |
|
|
6,307 |
|
|
|
2,523 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(11,676 |
) |
|
|
(25,192 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on senior long-term debt and obligations under capital leases |
|
|
(1,747 |
) |
|
|
(1,007 |
) |
Proceeds from the issuance of debt |
|
|
922 |
|
|
|
|
|
Proceeds from the exercise of stock options and employee stock purchase plan |
|
|
429 |
|
|
|
845 |
|
Tax benefit from stock-based compensation |
|
|
61 |
|
|
|
365 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations |
|
|
(335 |
) |
|
|
203 |
|
Net cash used in financing activities of discontinued operations |
|
|
(976 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(1,311 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,232 |
) |
|
|
(15,579 |
) |
Cash and cash equivalents at beginning of period |
|
|
7,949 |
|
|
|
22,820 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,717 |
|
|
$ |
7,241 |
|
|
|
|
|
|
|
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
- 5 -
CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Carriage Services, Inc. (Carriage or the Company) is a leading provider of products and
services in the death care industry in the United States. As of September 30, 2007, the Company
owned and operated 135 funeral homes in 27 states and 32 cemeteries in 11 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, 2006 and 2007 is
unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring
and 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. 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, 2006, and should be read in conjunction
therewith.
(d) Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
(e) Use of Estimates
The preparation of the consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an
on-going basis, we evaluate estimates and judgments, including those related to revenue
recognition, realization of accounts receivable, intangible assets, property and equipment and
deferred tax assets. We base our estimates on historical experience, third party data and
assumptions that we believe to be reasonable under the circumstances. The results of these
considerations form the basis for making judgments about the amount and timing of revenues and
expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may
differ from these estimates and such estimates may change if the underlying conditions or
assumptions change. Historical performance should not be viewed as indicative of future
performance, as there can be no assurance the margins, operating income and net earnings as a
percentage of revenues will be consistent from year to year.
(f) Business Combinations
We apply the principles provided in Statement of Financial Accounting Standard (SFAS) 141 when
we acquire businesses. Tangible and intangible assets acquired and liabilities assumed are
recorded at fair value and goodwill is recognized for any difference between the price of the
acquisition and our fair value determination. We customarily estimate our purchase costs and other
related transactions known at closing of the acquisition. To the extent that information not
available to us at the closing date subsequently becomes available during the allocation period, as
defined in SFAS 141, we may adjust goodwill, assets, or liabilities associated with the
acquisition.
(g) Discontinued Operations
In accordance with the Companys strategic portfolio optimization model, non-strategic
businesses are reviewed to determine whether the business should be sold and proceeds redeployed
elsewhere. A marketing plan is then developed for those locations which are identified as held for
sale. When the Company receives a letter of intent and financing commitment from the buyer and the
sale is expected to occur within one year, the location is no longer reported within the Companys
continuing operations. The assets and liabilities associated with the location are reclassified as
held for sale on the balance sheet and the operating results, as well as impairments, are presented
on a comparative basis in the discontinued operations section of the consolidated statements of
operations, along with the income tax effect.
- 6 -
(h) Stock Plans and Stock-Based Compensation
The Company has stock-based employee compensation plans in the form of restricted stock, stock
option and employee stock purchase plans, which are described in more detail in Note 16 to the
consolidated financial statements in our Form 10-K for the year ended December 31, 2006. The
Company accounts for stock-based compensation under SFAS No. 123R, Share-Based Payment (FAS No.
123R). FAS No. 123R requires companies to recognize compensation expense in an amount equal to
the fair value of the share-based awards issued to employees over the period of vesting and applies
to all transactions involving issuance of equity by a company in exchange for goods and services,
including employee services. The fair value of options or awards containing options is determined
using the Black-Scholes valuation model. The Company adopted FAS No. 123R in the first quarter of
2006, using the modified prospective application method.
(i) Accounting Changes and Error Corrections
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting No.
154, Accounting Changes and Error Corrections (FAS No. 154). This statement is a replacement
of Accounting Principles Board Opinion No. 20 and FAS No. 3. FAS No. 154 changes the requirements
for the accounting for and reporting of a change in accounting principle and error corrections. It
establishes, unless impracticable and in the absence of explicit transition requirements,
retrospective application as the required method of a change in accounting principle to the newly
adopted accounting principle. Also, it establishes guidance for reporting corrections of errors as
reporting errors involves adjustments to previously issued financial statements similar to those
generally applicable to reporting accounting changes retrospectively. FAS No. 154 also provides
guidance for determining and reporting a change when retrospective application is impracticable.
FAS No. 154 is effective for accounting changes and corrections of errors made in the fiscal years
beginning after December 15, 2005. The Company adopted the requirements beginning January 1, 2006,
which had no affect on the Companys presentation and disclosure.
(j) Consideration of Misstatements
In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using both a balance
sheet and an income statement approach and evaluate whether either approach results in quantifying
a misstatement that, when all relevant quantitative and qualitative factors are considered, is
material. The provisions of SAB 108 is effective for financial statements as of the beginning of
the first fiscal year ending after November 15, 2006. The Company adopted the requirements at the
beginning of the first quarter of 2007, which had no effect on the financial statements.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS No. 157),
which establishes a framework for measuring fair value in accordance with Generally Accepted
Accounting Principles (GAAP) and expands disclosures about fair value measurements. This
statement is effective as of the beginning of the entitys first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of FAS No.
157 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (FAS No. 159). This
statement permits entities to choose to measure many financial assets and liabilities and certain
other items at fair value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. This
statement is effective as of the beginning of the entitys first fiscal year beginning after
November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of FAS
No. 159 will have on its consolidated financial statements.
3. CHANGE IN ACCOUNTING FOR INCOME TAX UNCERTAINTIES
In June 2006, FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes how tax benefits for uncertain tax positions are to be
recognized, measured, and derecognized in financial statements; requires certain disclosures of
uncertain tax matters; specifies how reserves for uncertain tax position should be classified on
the balance sheet; and provides transition and interim period guidance, among other provisions.
FIN 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the
Company at the beginning of the first quarter of 2007. The Company has reviewed its income tax
positions and identified certain tax deductions, primarily related to business acquisitions that
are not certain. The cumulative effect of adopting FIN 48 has been recorded as a reduction to the
2007 opening balance of Retained Earnings and an increase in noncurrent liabilities in the amount
of $241,000, which includes accrued interest and penalties totaling $86,000. The Companys policy
with respect to potential penalties and interest is to record them as other expense and interest
expense, respectively.
- 7 -
The Company has unrecognized tax benefits for Federal and state income tax purposes totaling
$5.1 million at January 1, 2007, resulting from deductions totaling $13.8 million on Federal
returns and $7.9 million on various state returns. The effect of applying FIN 48 for the nine
months ended September 30, 2007 was not material to operations. The Company has net operating loss
carryforwards exceeding these deductions, and has accounted for these unrecognized tax benefits by
reducing the net operating loss carryforwards by the amount of these unrecognized deductions. In
certain states, the Company has previously reduced its taxes payable by deductions that are not
considered more likely than not. The cumulative effect of adopting FIN 48 specifically relates to
those state income tax returns.
The Companys Federal income tax returns for 2001 through 2006 are open tax years that may be
examined by the Internal Revenue Service. The Companys unrecognized state tax benefits are
related to state returns open from 2001 through 2006. The Company believes it will recognize the
unrecognized tax benefits upon the expiration of statutes of limitations of previously deducted
expenses.
4. ACQUISITIONS
Effective August 3, 2007, the Company acquired six funeral home businesses in Massachusetts
for cash in the amount of $3.6 million. Management currently plans to sell one of the locations
for use other than a funeral home. The Company acquired substantially all the assets and assumed
certain operating liabilities including obligations associated with existing preneed contracts.
The assets and liabilities were recorded at fair value and included goodwill in the amount of $0.2
million. The results of the acquired business are included in the Companys results from the date
of acquisition. The proforma impact of the acquisition on the prior period is not presented as the
impact is not material to reported results.
The effect of the acquisitions on the consolidated balance sheet at September 30, 2007 was as
follows (in thousands):
|
|
|
|
|
Current Assets |
|
$ |
117 |
|
Property, plant & equipment |
|
|
3,322 |
|
Goodwill |
|
|
232 |
|
Preneed Assets |
|
|
1,672 |
|
Deferred preneed revenues |
|
|
(109 |
) |
Non-controlling interest in trusts |
|
|
(1,606 |
) |
|
|
|
|
Cash used for acquisition |
|
$ |
3,628 |
|
|
|
|
|
5. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company continually reviews locations to optimize the sustainable earning power and return
on invested capital of the Company. The Companys strategy, the Strategic Portfolio Optimization
Model, uses strategic ranking criteria to identify disposition candidates. The execution of this
strategy entails selling non-strategic businesses.
At December 31, 2006, three funeral home businesses were held for sale. In the first quarter
of 2007, the Company sold two funeral home businesses for approximately $2.4 million and recognized
a gain of $0.7 million. In the second quarter of 2007, the Company sold a funeral home business
for approximately $0.8 million and recognized a gain of $0.1 million.
At September 30, 2007, one funeral home business was held for sale and subsequently sold in
October 2007 (Note 17). Assets and liabilities associated with the respective funeral home
businesses held for sale in the accompanying balance sheet consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
124 |
|
|
$ |
11 |
|
Property, plant and equipment, net |
|
|
1,406 |
|
|
|
66 |
|
Preneed receivables and trust investments |
|
|
634 |
|
|
|
365 |
|
Goodwill |
|
|
324 |
|
|
|
114 |
|
Deferred charges and other assets |
|
|
146 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,634 |
|
|
$ |
568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
229 |
|
|
$ |
58 |
|
Deferred preneed funeral contracts revenue |
|
|
78 |
|
|
|
|
|
Senior long-term debt, net of current portion |
|
|
54 |
|
|
|
64 |
|
Non-controlling interests in funeral and
cemetery trust investments |
|
|
700 |
|
|
|
361 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,061 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
- 8 -
The operating results of businesses discontinued during the periods presented, as well as
impairments and gains or losses on the disposal, are presented on a comparative basis in the
discontinued operations section of the consolidated statements of operations, along with the income
tax effect. Likewise, the operating results, impairment charges and gains or losses from businesses
sold in the prior year have been similarly reported for comparability. Revenues and operating
income for the businesses presented in the discontinued operations section are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, 2007 |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Revenues |
|
$ |
696 |
|
|
$ |
85 |
|
|
$ |
3,815 |
|
|
$ |
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
11 |
|
|
$ |
(41 |
) |
|
$ |
676 |
|
|
$ |
(5 |
) |
Gain (loss) on sale and (impairment) |
|
|
(111 |
) |
|
|
(31 |
) |
|
|
(6,443 |
) |
|
|
697 |
|
(Provision) benefit for income taxes |
|
|
37 |
|
|
|
34 |
|
|
|
1,839 |
|
|
|
(262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations |
|
$ |
(63 |
) |
|
$ |
(38 |
) |
|
$ |
(3,928 |
) |
|
$ |
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. GOODWILL
Many of the acquired funeral homes, former owners and staff have provided high quality service
to families for generations. The resulting loyalty often represents a substantial portion of the
value of a funeral business. The excess of the purchase price over the fair value of net
identifiable assets acquired, as determined by management in business acquisition transactions
accounted for as purchases, is recorded as goodwill.
The following table presents the changes in goodwill in the accompanying consolidated balance sheet
(in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2007 |
|
Goodwill at beginning of year |
|
$ |
148,845 |
|
Acquisitions |
|
|
8,737 |
|
Assets held for sale |
|
|
(114 |
) |
|
|
|
|
Goodwill at end of period |
|
$ |
157,468 |
|
|
|
|
|
7. PRENEED TRUST INVESTMENTS
Cemetery preneed trust investments
Cemetery preneed trust investments represent trust fund assets that the Company will withdraw
when the merchandise or services are provided. The cost and market values associated with
cemetery preneed trust investments at September 30, 2007 are detailed below (in thousands). The
Company believes the unrealized losses related to trust investments are temporary in nature and not
material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
Cash and money market accounts |
|
$ |
5,037 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,037 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency obligations |
|
|
20,198 |
|
|
|
161 |
|
|
|
(6 |
) |
|
|
20,353 |
|
State and municipal obligations |
|
|
350 |
|
|
|
9 |
|
|
|
|
|
|
|
359 |
|
Corporate |
|
|
2,000 |
|
|
|
20 |
|
|
|
(13 |
) |
|
|
2,007 |
|
Other |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Common stock |
|
|
13,047 |
|
|
|
1,644 |
|
|
|
(247 |
) |
|
|
14,444 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
12,218 |
|
|
|
2,719 |
|
|
|
(58 |
) |
|
|
14,879 |
|
Fixed income |
|
|
5,995 |
|
|
|
116 |
|
|
|
(87 |
) |
|
|
6,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,850 |
|
|
$ |
4,669 |
|
|
$ |
(411 |
) |
|
$ |
63,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
$ |
286 |
|
|
|
|
|
|
|
|
|
|
$ |
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 9 -
The estimated maturities of the fixed income securities included above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain/(Loss) |
|
|
Market |
|
Due in one year or less |
|
$ |
2,519 |
|
|
$ |
(7 |
) |
|
$ |
2,512 |
|
Due in one to five years |
|
|
14,772 |
|
|
|
134 |
|
|
|
14,906 |
|
Due in five to ten years |
|
|
5,104 |
|
|
|
40 |
|
|
|
5,144 |
|
Thereafter |
|
|
158 |
|
|
|
4 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,553 |
|
|
$ |
171 |
|
|
$ |
22,724 |
|
|
|
|
|
|
|
|
|
|
|
Preneed funeral trust investments
Preneed funeral trust investments represent trust fund assets that the Company expects to
withdraw when the services and merchandise are provided. Such contracts are secured by funds paid
by the customer to the Company. Preneed funeral receivables and trust investments are reduced by
the trust investment earnings the Company has been allowed to withdraw prior to performance by the
Company and amounts received from customers that are not required to be deposited into trust,
pursuant to various state laws.
The cost and market values associated with preneed funeral trust investments at September 30,
2007 are detailed below (in thousands). The Company believes the unrealized losses related to trust
investments are temporary in nature and not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
Cash and money market accounts |
|
$ |
32,507 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
32,507 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
8,617 |
|
|
|
102 |
|
|
|
(2 |
) |
|
|
8,717 |
|
State and municipal obligations |
|
|
1,531 |
|
|
|
38 |
|
|
|
|
|
|
|
1,569 |
|
Corporate |
|
|
1,682 |
|
|
|
17 |
|
|
|
(23 |
) |
|
|
1,676 |
|
Mortgage Backed Securities |
|
|
2,019 |
|
|
|
19 |
|
|
|
(4 |
) |
|
|
2,034 |
|
Common stock |
|
|
3,954 |
|
|
|
899 |
|
|
|
(66 |
) |
|
|
4,787 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
11,169 |
|
|
|
2,094 |
|
|
|
(42 |
) |
|
|
13,221 |
|
Fixed income |
|
|
2,343 |
|
|
|
22 |
|
|
|
(23 |
) |
|
|
2,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,822 |
|
|
$ |
3,191 |
|
|
$ |
(160 |
) |
|
$ |
66,853 |
|
|
|
|
|
|
Trust investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities of the fixed income securities included above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain/(Loss) |
|
|
Market |
|
Due in one year or less |
|
$ |
3,576 |
|
|
$ |
(84 |
) |
|
$ |
3,492 |
|
Due in one to five years |
|
|
9,730 |
|
|
|
219 |
|
|
|
9,949 |
|
Due in five to ten years |
|
|
543 |
|
|
|
12 |
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,849 |
|
|
$ |
147 |
|
|
$ |
13,996 |
|
|
|
|
|
|
|
|
|
|
|
Upon cancellation of a preneed funeral or cemetery contract, a customer is generally entitled
to receive a refund of the corpus and some or all of the earnings held in trust. In certain
jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the
customer exceeds the funds in trust including some or all investment income. As a result, when
realized or unrealized losses of a trust result in the trust being under-funded, the Company
assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss
provision would be recorded. No loss amounts have been required to be recognized for the periods
presented in the Consolidated Financial Statements.
- 10 -
Trust Investment Security Transactions
Cemetery and funeral trust investment security transactions recorded in Other income in the
Consolidated Statement of Operations for the three and nine months ended September 30, 2006 and
2007 are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Investment income (loss) |
|
$ |
666 |
|
|
$ |
975 |
|
|
$ |
1,139 |
|
|
$ |
2,799 |
|
Realized gains |
|
|
289 |
|
|
|
1,065 |
|
|
|
2,303 |
|
|
|
2,545 |
|
Realized losses |
|
|
(237 |
) |
|
|
(188 |
) |
|
|
(1,077 |
) |
|
|
(482 |
) |
Expenses |
|
|
(162 |
) |
|
|
(300 |
) |
|
|
(799 |
) |
|
|
(850 |
) |
Increase in non-controlling
interests in trust
investments |
|
|
(556 |
) |
|
|
(1,552 |
) |
|
|
(1,566 |
) |
|
|
(4,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. RECEIVABLES FROM PRENEED FUNERAL TRUSTS
The receivables from preneed funeral trusts represent assets in trusts which are controlled
and operated by third parties in which the Company does not have a controlling financial interest
(less than 50%) in the trust assets. The Company accounts for these investments at cost.
9. CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the
proceeds of the life insurance policies have been assigned to the Company and will be paid upon the
death of the insured. The proceeds will be used to satisfy the beneficiarys obligations under the
preneed contract for services and merchandise. The preneed funeral contracts secured by insurance
totaled $184 million at September 30, 2007, and are not included in the Companys consolidated
balance sheet.
10. CEMETERY PERPETUAL CARE TRUST INVESTMENTS
The Company is required by state law to pay a portion of the proceeds from the sale of
cemetery property interment rights into perpetual care trust funds. The cost and market values
associated with the trust investments held in perpetual care trust funds at September 30, 2007 are
detailed below (in thousands). The Company believes the unrealized losses related to the trust
investments are temporary in nature and not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
Cash and money market accounts |
|
$ |
3,209 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,209 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
6,640 |
|
|
|
41 |
|
|
|
(7 |
) |
|
|
6,674 |
|
State and municipal obligations |
|
|
489 |
|
|
|
12 |
|
|
|
|
|
|
|
501 |
|
Corporate |
|
|
901 |
|
|
|
26 |
|
|
|
(1 |
) |
|
|
926 |
|
Other |
|
|
314 |
|
|
|
|
|
|
|
(8 |
) |
|
|
306 |
|
Common stock |
|
|
11,224 |
|
|
|
1,349 |
|
|
|
(294 |
) |
|
|
12,279 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
6,888 |
|
|
|
1,834 |
|
|
|
(53 |
) |
|
|
8,669 |
|
Fixed income |
|
|
5,713 |
|
|
|
118 |
|
|
|
(98 |
) |
|
|
5,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,378 |
|
|
$ |
3,380 |
|
|
$ |
(461 |
) |
|
$ |
38,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued net investment income |
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities of the fixed income securities included above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain/(Loss) |
|
|
Market |
|
Due in one year or less |
|
$ |
1,249 |
|
|
$ |
(3 |
) |
|
$ |
1,246 |
|
Due in one to five years |
|
|
5,343 |
|
|
|
42 |
|
|
|
5,385 |
|
Due in five to ten years |
|
|
1,505 |
|
|
|
18 |
|
|
|
1,523 |
|
Thereafter |
|
|
247 |
|
|
|
6 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,344 |
|
|
$ |
63 |
|
|
$ |
8,407 |
|
|
|
|
|
|
|
|
|
|
|
- 11 -
Non-controlling interests in cemetery perpetual care trusts represent the corpus of those
trusts plus undistributed income. The components of non-controlling interests in cemetery
perpetual care trusts as of December 31, 2006 and September 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2006 |
|
|
2007 |
|
Trust assets, at market value |
|
$ |
32,540 |
|
|
$ |
38,374 |
|
Pending withdrawals of income |
|
|
(1,351 |
) |
|
|
(1,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests |
|
$ |
31,189 |
|
|
$ |
37,317 |
|
|
|
|
|
|
|
|
Trust Investment Security Transactions
Perpetual care trust investment security transactions recorded in Other income in the
Consolidated Statement of Operations for the three and nine months ended September 30, 2006 and
2007 are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Realized gains |
|
$ |
123 |
|
|
$ |
295 |
|
|
$ |
807 |
|
|
$ |
947 |
|
Realized losses |
|
|
(34 |
) |
|
|
(38 |
) |
|
|
(362 |
) |
|
|
(61 |
) |
Expenses |
|
|
(105 |
) |
|
|
(73 |
) |
|
|
(280 |
) |
|
|
(631 |
) |
Decrease
(increase) in non-controlling
interests in trust
investments |
|
|
16 |
|
|
|
(184 |
) |
|
|
(165 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The following
table presents revenue, pre-tax income from continuing operations and total assets by segment (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
Cemetery |
|
Corporate |
|
Consolidated |
Revenues from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
$ |
92,336 |
|
|
$ |
32,253 |
|
|
$ |
|
|
|
$ |
124,589 |
|
Nine months ended September 30, 2006 |
|
$ |
85,468 |
|
|
$ |
27,451 |
|
|
$ |
|
|
|
$ |
112,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
$ |
26,558 |
|
|
$ |
6,762 |
|
|
$ |
(24,001 |
) |
|
$ |
9,319 |
|
Nine months ended September 30, 2006 |
|
$ |
21,949 |
|
|
$ |
2,403 |
|
|
$ |
(20,623 |
) |
|
$ |
3,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
360,099 |
|
|
$ |
204,217 |
|
|
$ |
42,160 |
|
|
$ |
606,476 |
|
December 31, 2006 |
|
$ |
309,140 |
|
|
$ |
181,225 |
|
|
$ |
74,631 |
|
|
$ |
564,996 |
|
- 12 -
12. SUPPLEMENTAL DISCLOSURE OF STATEMENT OF OPERATIONS INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
11,543 |
|
|
$ |
12,224 |
|
|
$ |
36,746 |
|
|
$ |
38,583 |
|
Cemetery |
|
|
5,617 |
|
|
|
7,240 |
|
|
|
19,029 |
|
|
|
22,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goods |
|
$ |
17,160 |
|
|
$ |
19,464 |
|
|
$ |
55,775 |
|
|
$ |
60,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
15,236 |
|
|
$ |
17,466 |
|
|
$ |
48,722 |
|
|
$ |
53,754 |
|
Cemetery |
|
|
2,598 |
|
|
|
3,684 |
|
|
|
8,422 |
|
|
|
9,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services |
|
$ |
17,834 |
|
|
$ |
21,150 |
|
|
$ |
57,144 |
|
|
$ |
63,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
34,994 |
|
|
$ |
40,614 |
|
|
$ |
112,919 |
|
|
$ |
124,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
10,010 |
|
|
$ |
10,403 |
|
|
$ |
31,103 |
|
|
$ |
31,997 |
|
Cemetery |
|
|
5,123 |
|
|
|
5,325 |
|
|
|
15,247 |
|
|
|
15,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goods |
|
$ |
15,133 |
|
|
$ |
15,728 |
|
|
$ |
46,350 |
|
|
$ |
47,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
7,948 |
|
|
$ |
8,947 |
|
|
$ |
24,094 |
|
|
$ |
25,882 |
|
Cemetery |
|
|
1,933 |
|
|
|
2,228 |
|
|
|
5,437 |
|
|
|
5,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services |
|
$ |
9,881 |
|
|
$ |
11,175 |
|
|
$ |
29,531 |
|
|
$ |
31,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
25,014 |
|
|
$ |
26,903 |
|
|
$ |
75,881 |
|
|
$ |
79,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 13 -
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information is supplemental disclosure for the Consolidated Statement of Cash
Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
September 30, |
|
|
2006 |
|
2007 |
Cash paid for interest and financing costs |
|
$ |
16,163 |
|
|
$ |
16,039 |
|
Cash paid for income taxes (state) |
|
|
249 |
|
|
|
407 |
|
Restricted common stock issued to officers and directors |
|
|
|
|
|
|
2,271 |
|
Net deposits in preneed funeral trusts |
|
|
(3,386 |
) |
|
|
(376 |
) |
Net deposits in preneed cemetery trusts |
|
|
(5,209 |
) |
|
|
(4,766 |
) |
Net deposits into perpetual care trusts |
|
|
(3,413 |
) |
|
|
(2,206 |
) |
Net decrease in preneed funeral receivables |
|
|
1,121 |
|
|
|
918 |
|
Net increase in preneed cemetery receivables |
|
|
(118 |
) |
|
|
(729 |
) |
Net withdrawals of receivables from preneed funeral trusts |
|
|
476 |
|
|
|
373 |
|
Net change in preneed funeral receivables increasing
(decreasing) deferred revenue |
|
|
5,136 |
|
|
|
(1,734 |
) |
Net change in preneed cemetery receivables increasing
(decreasing) deferred revenue |
|
|
4,070 |
|
|
|
(2,651 |
) |
Net deposits (withdrawals) in preneed funeral trust
accounts increasing (decreasing) noncontrolling interests |
|
|
(2,464 |
) |
|
|
377 |
|
Net deposits (withdrawals) in cemetery trust accounts
increasing (decreasing) noncontrolling interests |
|
|
(899 |
) |
|
|
4,766 |
|
Deposits in perpetual care trust accounts increasing
noncontrolling interests |
|
|
2,200 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
Restricted cash investing and financing activities: |
|
|
|
|
|
|
|
|
Proceeds from the sale of available for sale
securities of the funeral and cemetery trusts |
|
|
45,671 |
|
|
|
29,653 |
|
Purchase of available for sale securities of the
funeral and cemetery trusts |
|
|
38,028 |
|
|
|
56,601 |
|
Net deposits (withdrawals) in trust accounts
increasing (decreasing) noncontrolling interests |
|
|
1,622 |
|
|
|
1,467 |
|
14. DEBT
The Company has outstanding $130 million of 7.875 % Senior Notes, due in 2015, and $93.75
million of 7.00% subordinated debt payable to an unconsolidated affiliate, Carriage Services
Capital Trust, due in 2029. The Company also has a $35 million senior secured revolving credit
facility for which borrowings bear interest at prime or LIBOR options with the current LIBOR option
set at LIBOR plus 275 basis points and is collateralized by all personal property and by funeral
home real property in certain states. The facility is currently undrawn except for $0.4 million in
letters of credit that were issued and outstanding under the credit facility at September 30, 2007.
Carriage, the parent entity, has no material assets or operations independent of its
subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which
(except for Carriage Services Capital Trust which is a single purpose entity that holds the
debentures issued in connection with our TIDES) have fully and unconditionally guaranteed our
obligations under the Senior Notes. Additionally, the Company does not currently have any
significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor
under the Senior Notes.
15. STOCK-BASED COMPENSATION
Stock options and employee stock purchase plan
No stock options were awarded during the first nine months of 2007. During the third quarter
of 2007, employees purchased a total of 21,067 shares of common stock through the employee stock
purchase plan (ESPP) at a weighted average price of $4.97 per share. The Company recorded
pre-tax stock-based compensation expense for the stock options and the ESPP totaling $45,000 and
$33,000 for the three months ended September 30, 2006 and 2007 and $198,000 and $104,000 for the
nine months ended September 30, 2006 and 2007. As of September 30, 2007, there was $8,000 of total
unrecognized compensation costs,
- 14 -
net of estimated forfeitures, related to nonvested stock options that are expected to be
recognized over a weighted-average period of approximately one year.
The fair value of the right (option) to purchase shares under the ESPP during 2006 and 2007,
respectively, is estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
Employee Stock Purchase Plan |
|
September 30, 2006 |
|
September 30, 2007 |
Dividend yield |
|
None |
|
None |
Expected volatility |
|
|
58.0 |
% |
|
|
23.7 |
% |
Risk-free interest rate |
|
|
4.25 |
% |
|
|
4.96 |
% |
Expected life (in years) |
|
|
0.25 |
|
|
|
0.25 |
|
Expected volatilities are based on the historical volatility for the last twelve months of our
stock. The risk-free rate for periods within the contractual life of the option is based on the
U.S. Treasury yields in effect at the time of grant.
Common stock grants
The Company granted 180,500 shares of restricted stock to certain officers and employees
during the first quarter of 2007, with a four-year vesting period. During the second quarter of
2007, the Company granted 20,000 shares of restricted stock to a new director in which 10,000
shares vest immediately and 10,000 shares vest over two years. The other outside directors each
received an annual grant of 3,000 shares of stock (total of 9,000) with immediate vesting as of the
date of the annual shareholders meeting. The Company granted 120,000 shares of restricted stock
to two officers during the third quarter of 2007, with a four-year vesting period. The Company
recorded $441,000 and $501,000 in pre-tax compensation expense for the nine months ended September
30, 2006 and 2007, respectively, related to the vesting of restricted stock awards. As of
September 30, 2007, there was $2,306,000 of total unrecognized compensation costs related to
unvested restricted stock awards, which is expected to be recognized over a weighted average period
of approximately two and a half years.
Directors may elect to receive all or a portion of their fees in stock. During the three
months ended September 30, 2006 and 2007, the Company issued unrestricted common stock to directors
totaling 2,795 and 2,658 shares respectively, in lieu of payment in cash for their fees, the value
of which totaled $26,000 and $31,000, respectively. During the nine months ended September 30,
2006 and 2007, the Company issued unrestricted stock to directors totaling 12,707 and 13,022 shares
respectively, in lieu of payment in cash for their fees, the value of which totaled $89,000 and
$107,000, respectively.
16. RELATED PARTY TRANSACTIONS
The Company uses a law firm in which one of its partners is the spouse of the Companys
General Counsel. The firm is used for various legal matters. During the three and nine months
ended September 30, 2007, the Company paid the law firm $300,000 and $368,000, respectively.
17. SUBSEQUENT EVENTS
On October 1, 2007, the Company sold a funeral home business that was held for sale as of
September 30, 2007 for $0.7 million and recognized a gain of approximately $0.6 million.
The Company acquired substantially all the assets and liabilities of four funeral homes in
Riverside County, California on November 8, 2007 in exchange for a cash payment at closing in the
amount of $10.0 million.
- 15 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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, acquisitions,
cash balances and cash flow, debt levels or other financial items; any statements of the plans,
strategies and objectives of management for future operations; 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.
Cautionary Statements
We caution readers that the following important factors, among others, in some cases have
affected, and in the future could affect, our actual consolidated results and could cause our
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 us. For
further information regarding risks associated with our business and the death care industry, see
Item 1A Risk Factors in our annual report filed on Form 10-K for the year ended December 31,
2006.
Risks related to our business
(1) Marketing and sales activities by existing and new competitors could cause us to lose
market share and lead to lower revenues and margins.
(2) Our ability to generate preneed sales depends on a number of factors, including sales
incentives and local and general economic conditions.
(3) Price competition could also reduce our market share or cause us to reduce prices to
retain or recapture market share, either of which could reduce revenues and margins.
(4) Our ability to execute our growth strategy is highly dependent upon our ability to
successfully identify suitable acquisition candidates and negotiate transactions on favorable
terms.
(5) Increased or unanticipated costs, such as insurance, taxes and new computer systems
implementations, may have a negative impact on our earnings and cash flows.
(6) Improved performance in our funeral and cemetery segments is highly dependent upon
successful execution of our standards-based Being the Best operating model.
(7) Our smaller businesses are typically dependent upon one or a few key employees for
success.
(8) Earnings from and principal of trust funds and insurance contracts could be reduced by
changes in financial markets and the mix of securities owned.
(9) Covenant restrictions under our debt instruments may limit our flexibility in operating
our business.
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, direct
cremations produce minimal revenues for cemetery operations and lower funeral revenues.
(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, changes in
revenues 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.
- 16 -
OVERVIEW
General
We operate two types of businesses: funeral homes, which account for approximately 75% of our
revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are
principally a service business that provide funeral services (burial and cremation) and sell
related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells
interment rights (grave sites and mausoleums) and related merchandise such as markers and outer
burial containers. As of September 30, 2007, we operated 135 funeral homes in 27 states and 32
cemeteries in 11 states within the United States. Substantially all administrative activities are
conducted or coordinated through our home office in Houston, Texas.
We have implemented long-term operating models in our operations which are designed to improve
operating and financial results. We introduced a more decentralized, entrepreneurial and local
operating model that we refer to as our Standard Operating Model. This model includes operating
and financial standards developed from our best operations, along with an incentive compensation
plan to reward business managers for successfully meeting or exceeding the standards. The model
essentially eliminates the use of financial budgets and focuses on key drivers of a successful
operation market share, people and operating and financial metrics. The model requires strong
leadership to grow an entrepreneurial, high value, personal service and sales business at
sustainable profit margins. We believe a primary driver of higher margins in the future will be
the execution of our Strategic Portfolio Optimization Model that helps us to assess acquisition
and divestiture candidates. Using this model, we believe we will acquire larger, higher margin
strategic businesses and sell smaller, lower margin non-strategic businesses. We believe we can do
so without incremental investment in our consolidation platform infrastructure or additional fixed
regional and corporate overhead.
Funeral Operations
Factors affecting our funeral operating results include: demographic trends in terms of
population growth and average age, which impact death rates and number of deaths; establishing and
maintaining leading market share positions supported by strong local heritage and relationships;
effectively responding to increasing cremation trends by packaging complementary services and
merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to
our at-need business to increase average revenues per contract. In simple terms, volume and price
are the two variables that affect funeral revenues. The average revenue per contract is influenced
by the mix of traditional and cremation services because our average cremation service revenue is
approximately 38% of the average revenue earned from a traditional burial service. Funeral homes
have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause
significant changes to our profitability.
Our same store volumes have declined gradually each year from 22,395 in 2003 to 21,467 in 2006
(compound annual decline of 1.4%) consistent with a period of weak death rates nationally and the
loss of market share primarily in our Central Region funeral operations. We have continued to
experience lower volumes in 2007, primarily in our Eastern and Western Regions, while the Central
Region has reversed its previous trend by reporting slightly higher volumes. Our same store
funeral operations have increased revenue steadily from $107.1 million in 2003 to $113.0 million in
2006 (compound annual increase of 1.9%). We expect same store portfolio volumes to stabilize and
our average revenue per funeral to increase over time as we seek to provide increased services to
our client families in order to offset potential weak death rates and higher cremation rates.
Cemetery Operations
The cemetery operating results are affected by the size and success of our sales organization.
Approximately 55% of our cemetery revenues relate to preneed sales of interment rights and
mausoleums and related merchandise and services. We believe that changes in the level of consumer
confidence (a measure of whether consumers will spend for discretionary items) also affect the
amount of cemetery revenues. Approximately 10% of our cemetery revenues are attributable to
investment earnings on trust funds and finance charges on installment contracts. Changes in the
capital markets and interest rates affect this component of our cemetery revenues.
Our same store cemetery financial performance from 2003 through 2006 was characterized by
increasing revenues but slightly declining field level profit margins. We have experienced
improved performance in 2007. Our goal is to build broader and deeper teams of sales leaders and
counselors in our larger and more strategically located cemeteries that can sustain consistent,
modest growth in preneed property sales over time and to diversify and substantially increase our
cemetery operating and financial results.
Acquisitions
Our growth strategy includes the execution of the Strategic Portfolio Optimization Model. The
goal of that model is to build concentrated groups of businesses in ten to fifteen strategic
markets. We assess acquisition candidates using six strategic ranking criteria and to
differentiate the pricing we are willing to pay. Those criteria are:
- 17 -
|
|
|
Size of business |
|
|
|
|
Size of market |
|
|
|
|
Competitive standing |
|
|
|
|
Demographics |
|
|
|
|
Strength of brand |
|
|
|
|
Barriers to entry |
In general terms, our price expectations range from four to five times pre-tax earnings before
depreciation for tuck-ins to six to seven times pre-tax earnings before depreciation for
businesses that rank very high in the ranking criteria. Our expectation at the beginning of the
year was to acquire two to three large businesses a year. During the first nine months of 2007 we
have completed five acquisitions and we completed an additional acquisition in November. All
acquisitions were all cash transactions. We have not incurred any debt to buy these businesses.
While the number of completed acquisitions was greater than expected, we continue to plan for two
to three in future years. Selected information on the acquisitions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Annual |
Acquisition Date |
|
Type of Business |
|
Market |
|
Revenue (millions) |
January 2007
|
|
Combination and Funeral
Home
|
|
Corpus Christi, TX
|
|
$ |
6.6 |
|
April 2007
|
|
Combination
|
|
Los Angeles, CA
|
|
$ |
3.5 |
|
June 2007
|
|
Combination and Cemetery
|
|
Boise, ID
|
|
$ |
2.8 |
|
June 2007
|
|
Funeral Home
|
|
Sante Fe, NM
|
|
$ |
0.8 |
|
August 2007
|
|
Five Funeral Homes
|
|
Springfield, MA
|
|
$ |
2.2 |
|
November 2007
|
|
Four Funeral Homes
|
|
Los Angeles, CA
|
|
$ |
4.0 |
|
Financial Highlights
Net income from continuing operations for the three months ended September 30, 2007 totaled
$0.7 million, equal to $0.04 per diluted share as compared to net loss from continuing operations
of $0.5 million for the third quarter of 2006, or $(0.03) per diluted share. Net income from
continuing operations for the nine months ended September 30, 2007 totaled $5.6 million, equal to
$0.29 per diluted share as compared to net income from continuing operations of $2.3 million for
the first nine months of 2006, or $0.12 per diluted share.
The year to date improvement in earnings is due in large part to the success of three
initiatives in which we have focused our attention to improve operating results for 2007: (1)
improvement of our existing Central Region funeral homes, (2) new leadership and sales growth at
Rolling Hills Memorial Park, our largest business, and (3) operating results from 2007
acquisitions. The existing Central Region funeral homes generated 7.4% higher revenues and $2.5
million in additional net income, equal to $0.08 per diluted share in the first nine months of 2007
when compared to the same period in 2006. A new Managing Partner was hired at the beginning of
2007 at Rolling Hills Memorial Park, and with the influence of that new leadership and other
improvements, revenues at Rolling Hills Memorial Park increased 41.6% which helped generate $2.2
million in additional net income, equal to $0.07 per diluted share. During the three months ended
September 30, 2007, we acquired six funeral homes in Massachusetts. These acquired businesses,
along with the businesses acquired in the first six months of 2007, generated revenues totaling
$8.9 million and net income of $2.6 million, equal to $0.08 per diluted share. We expect a
continued positive trend in net income during the balance of 2007 and into 2008 from these three
areas.
Income from discontinued operations for the nine months ended September 30, 2007 totaled $0.4
million, equal to $0.02 per diluted share. During the nine months ended September 30, 2007, the
Company completed the sale of three funeral home businesses, resulting in a pre-tax gain of $0.7
million. Loss from discontinued operations for the nine months ended September 30, 2006 totaled
$3.9 million, equal to $(0.21) per diluted share. During the 2006 period we recorded pre-tax
impairment charges of approximately $6.3 million to write down the book value of non-strategic
businesses in Indiana to the estimated net sales proceeds.
- 18 -
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an
on-going basis, we evaluate estimates and judgments, including those related to revenue
recognition, realization of accounts receivable, intangible assets, property and equipment and
deferred tax assets. We base our estimates on historical experience, third party data and
assumptions that we believe to be reasonable under the circumstances. The results of these
considerations form the basis for making judgments about the amount and timing of revenues and
expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may
differ from these estimates and such estimates may change if the underlying conditions or
assumptions change. Historical performance should not be viewed as indicative of future
performance, as there can be no assurance the margins, operating income and net earnings as a
percentage of revenues will be consistent from year to year.
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 accounting principles generally accepted in the United States excluding certain
year end adjustments because of the interim nature of the consolidated financial statements. 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, 2006. We
believe the following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Funeral and Cemetery Operations
We record the sales of funeral and cemetery merchandise and services when the merchandise is
delivered or 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
(FAS) No. 66, Accounting for Sales of Real Estate. This method generally 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. Multiple element cemetery contract arrangements are
allocated based on objective evidence of fair value, and revenue is recorded when the criteria for
revenue recognition has been met for each element. 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. 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.
Allowances for bad debts and customer cancellations are provided at the date that the sale is
recognized as revenue. 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 earned by the
Company are recognized as revenues when the commission is no longer subject to refund, which is
usually one year after the policy is issued. Preneed selling costs consist of sales commissions
that we pay our sales counselors and other direct related costs of originating preneed sales
contracts and are expensed as incurred.
Goodwill
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 reporting units
(aggregated geographically) 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
discounting the estimated future cash flows of the businesses in each reporting unit at the
Companys weighted average cost of capital less debt allocable to the reporting unit and by
reference to recent sales transactions of similar businesses. The calculation of fair value can
vary dramatically with changes in estimates of the number of future services performed, inflation
in costs, and the Companys cost of capital, which is impacted by long-term interest rates. If
impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill
to fair value.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. Federal income tax return and
separate income tax returns in the states in which we operate. 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 and account for uncertain
tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes. The Company records a valuation allowance to reflect the estimated amount of deferred tax
assets 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.
- 19 -
Stock Compensation Plans
The Company has stock-based employee compensation plans in the form of restricted stock, stock
option and employee stock purchase plans. The Company accounts for stock-based compensation under
Statement of Financial Accounting Standards No. 123R, Share-Based Payment (FAS No. 123R). FAS
No. 123R requires companies to recognize compensation expense in an amount equal to the fair value
of the share-based payment issued to employees over the period of vesting. The fair value of share
based payment is determined using the Black-Scholes valuation model. FAS No. 123R applies to all
transactions involving issuance of equity by a company in exchange for goods and services,
including employee services. The Company adopted FAS No. 123R in the first quarter of 2006, using
the modified prospective application method.
We have granted restricted stock to certain officers and key employees of the Company, which
vest over a period of four years. These shares are valued at the dates granted and the value is
charged to operations as the shares vest.
Discontinued Operations
In accordance with the Companys strategic portfolio policy, non-strategic businesses are
reviewed to determine whether the businesses should be sold and the proceeds redeployed elsewhere.
A marketing plan is then developed for those locations which are identified as held for sale. When
the Company receives a letter of intent and financing commitment from the buyer and the sale is
expected to occur within one year, the location is no longer reported within the Companys
continuing operations. The assets and liabilities associated with the held for sale location are
reclassified on the balance sheet and the operating results, as well as impairments, are presented
on a comparative basis in the discontinued operations section of the Consolidated Statements of
Operations, along with the income tax effect.
RESULTS OF OPERATIONS
The following is a discussion of the Companys results of operations for the three and nine
month periods ended September 30, 2006 and 2007. 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 homes and cemeteries purchased after January 2005 (date of refinancing our
Senior Debt) are referred to as acquired.
Funeral Home Segment. The following table sets forth certain information regarding
the revenues and gross profit of the Company from the funeral home operations for the three and
nine months ended September 30, 2006 compared to the three and nine months ended September 30,
2007.
Three months ended September 30, 2006 compared to three months ended September 30, 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2006 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Total same-store revenue |
|
$ |
25,891 |
|
|
$ |
26,087 |
|
|
$ |
196 |
|
|
|
0.8 |
% |
Acquired |
|
|
252 |
|
|
|
3,101 |
|
|
|
2,849 |
|
|
|
* |
|
Preneed insurance commissions revenue |
|
|
636 |
|
|
|
502 |
|
|
|
(134 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
26,779 |
|
|
$ |
29,690 |
|
|
$ |
2,911 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from discontinued operations |
|
$ |
580 |
|
|
$ |
85 |
|
|
$ |
(495 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-store gross profit |
|
$ |
5,417 |
|
|
$ |
5,729 |
|
|
$ |
312 |
|
|
|
5.8 |
% |
Acquired |
|
|
42 |
|
|
|
1,376 |
|
|
|
1,334 |
|
|
|
* |
|
Preneed insurance commissions revenue |
|
|
636 |
|
|
|
502 |
|
|
|
(134 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from continuing operations |
|
$ |
6,095 |
|
|
$ |
7,607 |
|
|
$ |
1,512 |
|
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from discontinued operations |
|
$ |
(50 |
) |
|
$ |
(41 |
) |
|
$ |
9 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 20 -
Nine months ended September 30, 2006 compared to nine months ended September 30, 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2006 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Total same-store revenue |
|
$ |
82,852 |
|
|
$ |
84,371 |
|
|
$ |
1,519 |
|
|
|
1.8 |
% |
Acquired |
|
|
797 |
|
|
|
6,209 |
|
|
|
5,412 |
|
|
|
* |
|
Preneed insurance commissions revenue |
|
|
1,819 |
|
|
|
1,756 |
|
|
|
(63 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
85,468 |
|
|
$ |
92,336 |
|
|
$ |
6,868 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from discontinued operations |
|
$ |
3,037 |
|
|
$ |
628 |
|
|
$ |
(2,409 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-store gross profit |
|
$ |
20,394 |
|
|
$ |
22,680 |
|
|
$ |
2,286 |
|
|
|
11.2 |
% |
Acquired |
|
|
199 |
|
|
|
2,506 |
|
|
|
2,307 |
|
|
|
* |
|
Preneed insurance commissions revenue |
|
|
1,819 |
|
|
|
1,756 |
|
|
|
(63 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from continuing operations |
|
$ |
22,412 |
|
|
$ |
26,942 |
|
|
$ |
4,530 |
|
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from discontinued operations |
|
$ |
556 |
|
|
$ |
(5 |
) |
|
$ |
(561 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral same-store revenues for the three months ended September 30, 2007 increased $0.2
million, or 0.8%, when compared to the three months ended September 30, 2006 as we experienced a
decrease of 3.7% in the number of contracts and an increase of 3.9% to $5,315 in the average
revenue per contract for those existing operations. Total funeral same-store gross profit for the
three months ended September 30, 2007 increased $0.3 million from the comparable three months of
2006, and as a percentage of funeral same-store revenue, increased from 20.9% to 22.0%. The
Central Region generated an increase of $0.5 million in same-store revenues and provided the
increase in same-store profits. The improvement in the Central Region was due to the ability to
realize a 6.5% increase in the average revenue per contract and aggressive expense management.
The West Region suffered a decline of same-store revenues totaling $0.4 million as a result of a
6.9% decline in the number of contracts.
Funeral same-store revenues for the nine months ended September 30, 2007 increased $1.5
million, or 1.8%, when compared to the nine months ended September 30, 2006, as we experienced a
decrease of 1.0% in the number of contracts and an increase of 2.8% to $5,266 in the average
revenue per contract for those existing operations. Cremation services represented 35.5% of the
number of funeral services during the nine months ended September 30, 2007 compared to 34.2% for
the nine months ended September 30, 2006. The average revenue for burial contracts increased 5.2%
to $7,374, while the average revenue for cremation contracts increased 5.1% to $2,758.
Total same-store gross profit for the nine months ended September 30, 2007 increase $2.3
million from the comparable nine months of 2006, and as a percentage of funeral same-store revenue,
increased from 24.6% to 26.9%.
Acquired revenue and gross profit for the three and nine month periods ended September 30,
2007 increased substantially due to the results of the Seaside Funeral Homes in Corpus Christi,
Texas which was acquired in January 2007, Conejo Mountain Funeral Home in Camarillo, California,
which was acquired in April 2007, Cloverdale Funeral Home in Boise, Idaho, which was acquired in
June 2007, and the six funeral homes acquired in Springfield, Massachusetts in August 2007.
Cremation services represented 37.1% of the number of funeral services during the third
quarter of 2007, an increase from 34.9% in the third quarter of 2006. The average revenue for
burial contracts increased 5.5% to $7,483, and the average revenue for cremation contracts
increased 7.1% to $2,749. The Company has addressed the growing demand for cremation by training
the funeral directors to present multiple merchandise and service options to families, resulting in
choices that produce higher revenues. The average revenue for other contracts, which make up
approximately ten percent of the number of contracts, declined $382 to $1,860. Other contracts
consist of charges for merchandise or services for which we do not perform a funeral service for
the deceased during the period.
Cemetery Segment. The following table sets forth certain information regarding the
revenues and gross profit of the Company from the cemetery operations for the three and nine months
ended September 30, 2006 compared to the three and nine months ended September 30, 2007.
- 21 -
Three months ended September 30, 2006 compared to three months ended September 30, 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2006 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Total same-store revenue |
|
$ |
8,215 |
|
|
$ |
9,680 |
|
|
$ |
1,465 |
|
|
|
17.8 |
% |
Acquired |
|
|
|
|
|
|
1,244 |
|
|
|
1,244 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
8,215 |
|
|
$ |
10,924 |
|
|
$ |
2,709 |
|
|
|
33.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from discontinued operations |
|
$ |
116 |
|
|
$ |
|
|
|
$ |
(116 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-store gross profit |
|
$ |
(254 |
) |
|
$ |
2,024 |
|
|
$ |
2,278 |
|
|
|
* |
|
Acquired |
|
|
|
|
|
|
162 |
|
|
|
162 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from continuing operations |
|
$ |
(254 |
) |
|
$ |
2,186 |
|
|
$ |
2,440 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from discontinued operations |
|
$ |
61 |
|
|
$ |
|
|
|
$ |
(61 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 compared to nine months ended September 30, 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2006 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Total same-store revenue |
|
$ |
27,451 |
|
|
$ |
29,517 |
|
|
$ |
2,066 |
|
|
|
7.5 |
% |
Acquired |
|
|
|
|
|
|
2,736 |
|
|
|
2,736 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
27,451 |
|
|
$ |
32,253 |
|
|
$ |
4,802 |
|
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from discontinued operations |
|
$ |
778 |
|
|
$ |
|
|
|
$ |
(778 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total same-store gross profit |
|
$ |
2,477 |
|
|
$ |
6,379 |
|
|
$ |
3,902 |
|
|
|
157.5 |
% |
Acquired |
|
|
|
|
|
|
477 |
|
|
|
477 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from continuing operations |
|
$ |
2,477 |
|
|
$ |
6,856 |
|
|
$ |
4,379 |
|
|
|
176.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from discontinued operations |
|
$ |
121 |
|
|
$ |
|
|
|
$ |
(121 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery same-store revenues for the three months ended September 30, 2007 increased $1.5
million, or 17.8% compared to the three months ended September 30, 2006, the majority ($0.9
million) of which was due to higher revenues at our largest business, Rolling Hills Memorial Park,
and secondarily to broadly higher performance in our Central Region cemeteries. Total atneed
revenues increased from $3.1 million to $3.3 million. Total revenue from preneed property sales
increased $1.1 million while revenues from merchandise and service deliveries declined $0.5
million.
Cemetery same-store revenues for the nine months ended September 30, 2007 increased $2.1
million, or 7.5% compared to the nine months ended September 30, 2006 primarily due to reasons
already discussed. Total atneed revenues increased $0.5 million and total preneed revenues
increased $1.2 million from the same period in 2006.
Cemetery same-store gross profit for the three months ended September 30, 2007 increased $2.3
million. As a percentage of revenues, cemetery same store gross profit increased from (3.1)% to
20.9%, the primary reasons for the improvement were an environmental remediation charge during the
2006 period at Rolling Hills in the amount of $0.7 million and the additional margin on the higher
level of revenues in 2007 and a 380 basis point improvement in margin due to product mix and higher
property sales prices.
Cemetery same-store gross profit for the nine months ended September 30, 2007 increased $3.9
million. As a percentage of revenues, cemetery same-store gross profit increased from 9.0% to
21.6%.
Acquired revenue and gross profit for the three and nine month periods ended September 30,
2007 represents the results of Seaside Memorial Park in Corpus Christi, Texas which was acquired in
January 2007, Conejo Mountain Memorial Park in Camarillo, California, which was acquired in April
2007 and Cloverdale Park, Inc. which was acquired in June 2007.
Earnings from perpetual care trust funds are included in cemetery revenues and totaled $0.8
million and $1.3 million for the three and nine month periods ended September 30, 2007 compared to
$0.3 million and $1.1 million for the three and nine month periods ended September 30, 2006. The
year over year improvements were largely due to realized gains in equity investments which have
appreciated in line with the markets during the last two to three years.
- 22 -
Other. General, administrative and other expenses totaled $4.1 million and $11.8 for
the three and nine months ended September 30, 2007 and $2.9 and $8.8 for the three and nine months
ended September 30, 2006. Included in this category for the 2007 periods are the internal costs to
perform due diligence and integrate the acquired businesses, to upgrade IT systems and to
reorganize and upgrade staff in corporate departments.
Income Taxes
The Company recorded income taxes on earnings from continuing operations at the effective rate
of 39.5% during 2007. For Federal income tax reporting purposes, Carriage has net operating loss
carryforwards totaling $15.4 million net of unrecognized tax benefits available at September 30,
2007 to offset future Federal taxable income, which expire between 2021 and 2025, if not utilized.
Carriage also has approximately $80.0 million of state net operating loss carryforwards that will
expire between 2007 and 2025, if not utilized. Based on managements assessment of the various
state net operating losses, it was determined that it is more likely than not that the Company will
not be able to realize tax benefits on a substantial amount of the state losses. Accordingly, the
Company established a valuation allowance against a substantial portion of the deferred tax asset
related to the state operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and corporate investments at September 30, 2007 totaled $12.2 million and consisted of
$7.2 million in cash, and $5.0 million in a Federal agency bond. Cash and corporate investments
totaled $41.0 million at December 31, 2006. The decrease of $28.8 million since year end 2006 is
primarily attributable to the $32.5 million used for acquisitions in 2007. For the nine months
ended September 30, 2007, cash provided by operating activities of continuing operations was $9.5
million as compared to $9.0 million for the nine months ended September 30, 2006. Additionally,
capital expenditures totaled $8.4 million compared to $4.9 million in the prior year because of
higher growth expenditures in 2007.
The Companys senior debt at September 30, 2007 totaled $139.2 million and consisted of $130.0
million in Senior Notes, described below, and $9.2 million in acquisition indebtedness and capital
lease obligations.
The Company has a $35 million senior secured revolving credit facility that matures in 2010
and is collateralized by all personal property and funeral home real property in certain states.
Borrowings under the revolving credit facility will bear interest at prime or LIBOR options with
the current LIBOR option set at LIBOR plus 275 basis points. The revolving credit facility is
currently undrawn except for $0.4 million in letters of credit that were issued and outstanding
under the credit facility at September 30, 2007.
The outstanding principal amount of the Companys convertible junior subordinated debenture is
$93.75 million, is payable to the Companys unconsolidated affiliate, Carriage Services Capital
Trust, bears interest at 7% and matures in 2029. Substantially all the assets of the Trust consist
of the convertible junior subordinated debenture of the Company. The Trust, in turn, issued 1.875
million shares of convertible preferred term income deferrable equity securities (TIDES) in the
public markets. The rights of the debenture are functionally equivalent to those of the TIDES.
The convertible junior subordinated debenture payable to the affiliated trust and the TIDES
each contain a provision for the deferral of interest payments and distributions for up to 20
consecutive quarters. During any period in which distribution payments are deferred, distributions
continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves
accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is
prohibited from paying dividends on the common stock or repurchasing its common stock, subject to
limited exceptions. The Company currently expects to continue paying the distributions as due.
The Company intends to use its cash, investments, cash flow and proceeds from the sale of
businesses, to acquire funeral home and cemetery businesses. The Company also has the ability to
draw on its revolving credit facility, subject to customary terms and conditions of the credit
agreement, to finance acquisitions.
SEASONALITY
The Companys business can be affected by seasonal fluctuations in the death rate. Generally,
the rate is higher during the winter months because the incidences of deaths from influenza and
pneumonia are higher during this period than other periods of the year.
INFLATION
Inflation has not had a significant impact on the results of operations of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Carriage is currently exposed to market risk primarily related to changes in interest rates
related to the Companys debt, decreases in interest rates related to the Companys short-term
investments and changes in the values of securities associated with the preneed and perpetual care
trusts. For information regarding the Companys exposure to certain market risks, see Item 7A,
Quantitative and Qualitative Market Risk Disclosure in the Companys annual report filed on Form
10-K for the year ended
- 23 -
December 31, 2006. There have been no significant changes in the Companys market risk from
that disclosed in the Form 10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out
an evaluation under the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of September 30, 2007 to provide reasonable assurance that information required
to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
There has been no change in our internal control over financial reporting that occurred during
the nine months ended September 30, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Carriage and our 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 on the
financial statements.
We self-insure against certain risks and carry insurance with coverage and coverage limits
consistent with our assessment of risks in our business and of an acceptable level of financial
exposure. Although there can be no assurance that self-insurance reserves and insurance will be
sufficient to mitigate all damages, claims or contingencies, we believe that our reserves and
insurance provide reasonable coverage for known asserted or unasserted claims. In the event the
Company sustained a loss from a claim and the insurance carrier disputed coverage or coverage
limits, the Company may record a charge in a different period than the recovery, if any, from the
insurance carrier.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity 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
The Company reported on Form 8-K during the quarter covered by this report all information
required to be reported on such form.
Item 6. Exhibits
|
10.3 |
|
Indemnity Agreement with Gary Forbes dated August 7, 2007 |
|
|
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 |
|
Certification of Periodic Financial Reports by Melvin C. Payne and Joseph Saporito in
satisfaction of Section 906 of
the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350 |
- 24 -
SIGNATURES
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 9, 2007
|
|
/s/ Joseph Saporito |
|
|
|
|
|
|
|
Date
|
|
Joseph Saporito, |
|
|
|
|
Executive Vice President, Chief Financial Officer and
Secretary (Authorized Officer and
Principal Financial Officer) |
- 25 -
CARRIAGE SERVICES, INC.
INDEX OF EXHIBITS
10.3 |
|
Indemnity Agreement with Gary Forbes dated August 7, 2007 |
|
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 |
|
Certification of Periodic Financial Reports by Melvin C. Payne and Joseph
Saporito in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C.
Section 1350 |
- 26 -
exv10w3
Exhibit 10.3
INDEMNITY AGREEMENT
This Indemnity Agreement (Agreement) is made effective as of the 7th day of
August, 2007 by and between Carriage Services, Inc., a Delaware corporation (the Company), and
Gary Forbes (Indemnitee).
RECITALS
WHEREAS, highly competent persons have become more reluctant to serve publicly held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis,
at its sole expense, liability insurance to protect persons serving the Company and its
subsidiaries from certain liabilities. Although the furnishing of such insurance has been a
customary and widespread practice among United States based corporations and other business
enterprises, the Company believes that, given current market conditions and trends, such insurance
may be available to it in the future at higher premiums and with more exclusions. At the same
time, directors, officers, and other persons in service to corporations or business enterprises are
being increasingly subjected to expensive and time-consuming litigation relating to, among other
things, matters that traditionally would have been brought only against the corporation or business
enterprise itself. The Amended and Restated Bylaws of the Company (Bylaws) require
indemnification of the officers and directors of the Company. Indemnitee may also be entitled to
indemnification pursuant to the Delaware General Corporation Law (DGCL). The Bylaws and the DGCL
expressly provide that the indemnification provisions set forth therein are not exclusive, and
thereby contemplate that contracts may be entered into between the Company and members of the
Board, officers and other persons with respect to indemnification.
WHEREAS, the uncertainties relating to such insurance and to indemnification have increased
the difficulty of attracting and retaining such persons.
WHEREAS, the Board has determined that the Company should act to assure such persons that
there will be increased certainty of such protection in the future.
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the Company free from
undue concern that they will not be so indemnified.
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws and any
resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to
diminish or abrogate any rights of Indemnitee thereunder.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the
Company and Indemnitee do hereby covenant and agree as follows:
1. Services to the Company. Indemnitee will serve or continue to serve, at the will of the
Company, as an officer, director or key employee of the Company for so long, as Indemnitee is duly
elected or appointed or until Indemnitee tenders his or her resignation.
2. Definitions. As used in this Agreement:
(a) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i) Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the
Beneficial Owner (as defined below), directly or indirectly, of securities of the Company
representing twenty percent (20%) or more of the combined voting power of the Companys then
outstanding securities;
(ii) Change in Board of Directors. During any period of two (2) consecutive years (not
including any period prior to the execution of this Agreement), individuals who at the beginning,
of such period constitute the Board, and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a transaction described in
Sections 2(a)(i), 2(a)(iii) or 2(a)(iv)) whose election by the Board or nomination for election by
the Companys stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to constitute a least a
majority of the members of the Board;
(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company
with any other entity, other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity) more than 51% of the combined voting power of the voting securities of the
surviving entity outstanding immediately after such merger or consolidation and with the power to
elect at least a majority of the board of directors or other governing body of such surviving
entity;
(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation
of the Company or an agreement or series of agreements for the sale or disposition by the Company
of all or substantially all of the Companys assets; or
(v) Other Events. There occurs any other event of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar
schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company
is then subject to such reporting requirement.
(b) Certain Definitions. For purposes of this Agreement, the following terms shall have the
following meanings:
2
(i) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(ii) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, and (iii) any
corporation owned, directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company.
(iii) Beneficial Owner shall have the meaning given to such term in Rule l3d-3 under the
Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming
a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company
with another entity.
(iv) Corporate Status describes the status of a person who is or was a director, officer,
trustee, general partner, managing member, fiduciary, employee or agent of the Company or of any
other Enterprise (as defined below) which such person is or was serving at the request of the
Company.
(v) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding in respect of which indemnification is sought by Indemnitee.
(vi) Enterprise shall mean the Company and any other corporation, limited liability company,
partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is
or was serving at the request of the Company as a director, officer, trustee, general partner,
managing member, fiduciary, employee or agent.
(vii) Expenses shall include all reasonable attorneys fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and
binding costs, telephone charges, postage, delivery service fees, and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, being or preparing to be a witness in, or otherwise
participating in, a Proceeding. Expenses also shall include Expenses incurred in connection with
any appeal resulting from any Proceeding, including without limitation the premium, security for,
and other costs relating to any cost bond, supersede as bond, or other appeal bond or its
equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the
amount of judgments or fines against Indemnitee.
(viii) Reference to other enterprise shall include employee benefit plans; references to
fines shall include any excise tax assessed with respect to any employee benefit plan; references
to serving at the request of the Company shall include any service as a director, officer, which
imposes duties on, or involves services by, such director, employee or agent of the Company which
imposes duties on, or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he or she reasonably believed to be in the best interests of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not
opposed to the best interests of the Company as referred to in this Agreement.
3
(ix) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing
or any other actual, threatened or completed proceeding whether brought in the right of the Company
or otherwise and whether of a civil, criminal, administrative or investigative nature, in which
Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that
Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or
of any action on his part while acting as director or officer of the Company, or by reason of the
fact that he is or was serving, at the request of the Company as a director, officer, trustee,
general partner, managing member, fiduciary, employee or agent of any other Enterprise, in each
case whether or not serving in such capacity at the time any liability or expense is incurred for
which indemnification, reimbursement, or advancement of expenses can be provided under this
Agreement.
(x) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent (i) the Company or Indemnitee in any matter material to either such party (other than
with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees
under similar indemnification agreements), or (ii) any other party to the Proceeding giving, rise
to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent
Counsel shall not include any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing either the Company or Indemnitee
in an action to determine Indemnitees rights under this Agreement. The Company agrees to pay the
reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify
such counsel against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
3. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance
with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or
a participant (as a witness or otherwise) in any Proceeding, other than a Proceeding by or in the
right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee
shall be indemnified against all Expenses, Judgments, fines, penalties and amounts paid in
settlement (including all interest, assessments and other charges paid or payable in connection
with or in respect of such Expenses, Judgments, fines, penalties and amounts paid in settlement)
actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding
or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company and, in the case
of a criminal proceeding had no reasonable cause to believe that his conduct was unlawful.
4. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify
Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened
to be made, a party to or a participant (as a witness or otherwise) in any Proceeding by or in the
right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee
shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf
in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in
good faith and in a manner he reasonably believed to be in or not opposed to the best interests of
the Company. No indemnification for Expenses shall be made under this Section 4 in respect of any
claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be
liable to the Company, unless and only to the extent that any court in which the Proceeding was
brought or
4
the Delaware Court of Chancery shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly
and reasonably entitled to indemnification.
5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful.
Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is a party to
(or a participant in) and is successful, on the merits or otherwise, in any Proceeding, or in
defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith.
If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the
Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or
on his behalf in connection with each successfully resolved claim, issue or matter. If the
Indemnitee is not wholly successful in such Proceeding, the Company also shall indemnify Indemnitee
against all Expenses reasonably incurred in connection with a claim, issue or matter related to any
claim, issue, or matter on which the Indemnitee was successful. For purposes of this Section and
without limitation, the termination of any claim, issue or matter in such a Proceeding, by
dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim,
issue or matter.
6 Indemnification For Expenses of a Witness. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses
actually and reasonably incurred by him or on his behalf in connection therewith.
7. Additional Indemnification.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be
made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure
a judgment in its favor) against all Expenses, judgments, fines, penalties and amounts paid in
settlement (including all interest, assessments and other charges paid or payable in connection
with or in respect of such Expenses, judgments, fines, penalties and amounts paid in settlement)
actually and reasonably incurred by Indemnitee in connection with the Proceeding. No indemnity
shall be made under this Section 7(a) on account of Indemnitees conduct which constitutes a breach
of Indemnitees duty of loyalty to the Company or its stockholders or is an act or omission not in
good faith or which involves intentional misconduct or a knowing violation of the law.
(b) Notwithstanding any limitation in Sections 3, 4, 5 or 7(a), the Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be
made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure
a judgment in its favor) against all Expenses, judgments, fines, penalties and amounts paid in
settlement (including all interest, assessments and other charges paid or payable in connection
with or in respect of such Expenses, judgments, fines, penalties and amounts paid in settlement)
actually and reasonably incurred by Indemnitee in connection with the Proceeding.
(c) For purposes of Sections 7(a) and 7(b), the meaning, of the phrase to the fullest extent
permitted by law shall include, but not be limited to:
5
(i) to the fullest extent permitted by the provision of the DGCL that authorizes or
contemplates additional indemnification by agreement, or the corresponding provision of any
amendment to or replacement of the DGCL; and
(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which on may indemnify
its officers and directors.
8. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any indemnity in connection with any claim made against
Indemnitee:
(a) for which payment has actually been received by or on behalf of Indemnitee under any
insurance policy or other indemnity provision, except with respect to any excess beyond the amount
actually received under any insurance policy or other indemnity provision;
(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by
Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act or
similar provisions of state statutory law or common law; or
(c) except as otherwise provided in Sections 13 (d)-(f) hereof, prior to a Change in Control,
in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee,
including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the
Company or its directors, officers, employees or other indemnitees, unless (i) the Board of
Directors of the Company authorized the Proceeding (or any part of any Proceeding) prior to its
initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to
the powers vested in the Company under applicable law.
9. Advances of Expenses; Defense of Claim.
(a) Notwithstanding any provision of this Agreement to the contrary, the Company shall advance
the expenses incurred by Indemnitee in connection with any Proceeding within ten (10) days after
the receipt by the Company of a statement or statements requesting such advances from time to time,
whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and
interest-free. Advances shall be made without regard to Indemnitees ability to repay the expenses
and without regard to Indemnitees ultimate entitlement to indemnification under the other
provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred
pursuing, an action to enforce this right of advancement, including, Expenses incurred preparing
and forwarding statements to the Company to support the advances claimed. The Indemnitee shall
qualify for advances solely upon the execution and delivery to the Company of an undertaking
providing that the Indemnitee undertakes to repay the advance to the extent that it is ultimately
determined that Indemnitee is not entitled to be indemnified by the Company. This Section 9(a)
shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section
8.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
6
(c) The Company shall not settle any action, claim or Proceeding (in whole or in part) which
would impose any expense, judgment, fine, penalty or limitation on the Indemnitee without the
Indemnitees prior written consent.
10. Procedure for Notification and Application for Indemnification.
(a) Within sixty (60) days after the actual receipt by Indemnitee of notice that he or she is
a party to or a participant (as a witness or otherwise) in any Proceeding, Indemnitee shall submit
to the Company a written notice identifying the Proceeding. The omission by the Indemnitee to
notify the Company will not relieve the Company from any liability which it may have to Indemnitee
(i) otherwise than under this Agreement, and (ii) under this Agreement only to the extent the
Company can establish that such omission to notify resulted in actual prejudice to the Company.
(b) Indemnitee shall thereafter deliver to the Company a written application to indemnify
Indemnitee in accordance with this Agreement. Such application(s) may be delivered from time to
time and at such time(s) as Indemnitee deems appropriate in his or her sole discretion. Following
such a written application for indemnification by Indemnitee, the Indemnitees entitlement to
indemnification shall be determined according to Section 11(a) of this Agreement.
11. Procedure Upon Application for Indemnification.
(a) Upon written request by Indemnitee for indemnification pursuant to Section 10(b), a
determination, if required by applicable law, with respect to Indemnitees entitlement thereto
shall be made in the specific case: (i) by a majority vote of the Disinterested Directors, even
though less than a quorum of the Board; or (ii) if so requested by the Indemnitee in his or her
sole discretion, by Independent Counsel in a written opinion to the Board, a copy of which shall be
delivered to Indemnitee. If it is so determined that Indemnitee is entitled to indemnification,
payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee
shall reasonably cooperate with the person, persons or entity making such determination with
respect to Indemnitees entitlement to indemnification, including providing to such person, persons
or entity upon reasonable advance request any documentation or information which is not privileged
or otherwise protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to such determination. Any costs or expenses (including attorneys fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making
such determination shall be borne by the Company (irrespective of the determination as to
Indemnitees entitlement to indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 11(a) hereof, the Independent Counsel shall be selected as
provided in this Section 11(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board of Directors, and the, Company shall give written notice to
Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless
Indemnitee shall request that such selection be made by the Board of Directors, in which event the
preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising
it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within 10 days after such written notice of selection shall have been
7
received, deliver to the Company or to Indemnitee, as the case may be, a written objection to
such selection; provided, however, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. Absent a proper and timely objection, the
person so selected shall act as Independent Counsel. If such written objection is so made and
substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court of competent jurisdiction has determined that such
objection is without merit. If, within 20 days after submission by Indemnitee of a written request
for indemnification pursuant to Section 10(a) hereof, no Independent Counsel shall have been
selected and not objected to, either the Company or Indemnitee may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or
Indemnitee to the others selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the Court or by such other person as the Court shall
designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement
of any judicial proceeding or arbitration pursuant to Section 13(a) of this Agreement, Independent
Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to
the applicable standards of professional conduct then prevailing).
(c) The Company agrees to pay the reasonable fees of Independent Counsel and to fully
indemnify such Independent Counsel against any and all Expenses, claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.
12. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 10(b) of this Agreement, and the Company shall have the burden of proof to
overcome that presumption in connection with the making by any person, persons or entity of any
determination contrary to that presumption. Neither the failure of the Company (including by its
directors or independent legal counsel) to have made a determination prior to the commencement of
any action pursuant to this Agreement that indemnification is proper in the circumstances because
Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company
(including by its directors or independent legal counsel) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under Section 11 of this Agreement
to determine whether Indemnitee is entitled to indemnification shall not have made a determination
within sixty (60) days after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been made and
Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make Indemnitees statement not
materially misleading, in connection with the request for indemnification, or (ii) a prohibition of
such indemnification under applicable law; provided, however, that such 60-day period may be
extended for a reasonable time, not to exceed an additional thirty (30) days, if the person,
persons or
8
entity making the determination with respect to entitlement to indemnification in good
faith requires such additional time for the obtaining, or evaluating, of documentation and/or
information relating thereto.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall
not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right
of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.
(d) Reliance as Safe Harbor. For purposes of any determination of good faith,
Indemnitee shall be deemed to have acted in good faith if Indemnitees action is based on the
records or books of account of the Enterprise, including financial statements, or on information
supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the
advice of legal counsel for the Enterprise or on information or records given or reports made to
the Enterprise by an independent certified public accountant or by an appraiser or other expert
selected by the Enterprise. The provisions of this Section 12(d) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed or
found to have met the applicable standard of conduct set forth in this Agreement.
(e) Actions of Others. The knowledge and/or actions, or failure to act, of any other
director, trustee, partner, managing member, fiduciary, officer, agent or employee of the
Enterprise shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement.
13. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to Section 11 of this Agreement
that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of
Expenses is not timely made pursuant to Section 9 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 11(a) of this Agreement
within 45 days after receipt by the Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Section 5, 6, 7 or the last sentence of Section 11(a) of
this Agreement within ten (10) days after receipt by the Company of a written request therefor, or
(v) payment of indemnification pursuant to Section 3 or 4 of this Agreement is not made within ten
(10) days after a determination has been made that Indemnitee is entitled to indemnification,
Indemnitee shall be entitled to an adjudication by a court of his entitlement to such
indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an
award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration
Rules of the American Arbitration Association. The Company shall not oppose Indemnitees right to
seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 11(a) of this
Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or
arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de
novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse
9
determination. In any judicial proceeding or arbitration commenced pursuant to this
Section 1.3 the Company shall have the burden of proving Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be, and the Company may not refer to or
introduce into evidence any determination pursuant to Section 11(a) of this Agreement adverse to
Indemnitee for any purpose. If Indemnitee commences a judicial proceeding or arbitration pursuant
to this Section 13, Indemnitee shall not be required to reimburse the Company for any advances
pursuant to Section 9 until a final determination is made with respect to Indemnitees entitlement
to indemnification (as to which all rights of appeal have been exhausted or lapsed).
(c) If a determination shall have been made pursuant to Section 11(a) of this Agreement that
Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any
judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement
by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees
statement not materially misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 13, seeks a judicial adjudication
of or an award in arbitration to enforce his rights under, or to recover damages for breach of,
this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified
by the Company against, any and all Expenses actually and reasonably incurred by him in such
judicial adjudication or arbitration. If it shall be determined in said judicial adjudication or
arbitration that Indemnitee is entitled to receive part but not all of the indemnification or
advancement of Expenses sought, the Indemnitee shall be entitled to recover from the Company, and
shall be indemnified by the Company against, any and all Expenses reasonably incurred by Indemnitee
in connection with such judicial adjudication or arbitration.
(e) The Company shall be precluded from asserting in any judicial proceeding or arbitration
commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are
not valid, binding and enforceable and shall stipulate in any such court or before any such
arbitrator that the Company is bound by all the provisions of this Agreement.
(f) The Company shall indemnify Indemnitee to the fullest extent permitted by law against all
Expenses and, if requested by Indemnitee, shall (within ten (10) days after the Companys receipt
of such written request) advance such Expenses to Indemnitee, which are incurred by Indemnitee in
connection with any judicial proceeding or arbitration brought by Indemnitee for (i)
indemnification or advances of Expenses by the Company under the Agreement or any other agreement
or provision of the Companys Certificate of Incorporation or Bylaws now or hereafter in effect or
(ii) recovery or advances under any insurance policy maintained by any person for the benefit of
Indemnitee, regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance or insurance recovery, as the case may be.
14. Non-exclusivity; Survival of Rights, Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
10
restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in
his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in
Delaware law, whether by statute or judicial decision, permits greater indemnification or
advancement of Expenses than would be afforded currently under the Companys Bylaws and this
Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the
greater benefits so afforded by such change. No right or remedy herein conferred is intended to be
exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors, officers, trustees, partners, managing members, fiduciaries,
employees, or agents of the Company or of any other Enterprise which such person serves at the
request of the Company. Indemnitee shall be covered by such policy or policies in accordance with
its or their terms to the maximum extent of the coverage available for any such director, trustee,
partner, managing member, fiduciary, officer, employee or agent under such policy or policies. If,
at the time the Company receives notice from any source of a Proceeding as to which Indemnitee is a
party or a participant (as a witness or otherwise), the Company has director and officer liability
insurance in effect, the Company shall give prompt notice of such Proceeding to the insurers in
accordance with the procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such Proceeding in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts
otherwise indemnifiable (or for which advancement is provided hereunder) hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any insurance policy,
contract, agreement or otherwise.
(e) The Companys obligation to indemnification, or advance Expenses hereunder to Indemnitee
who is or was serving at the request of the Company as a director, officer, trustee, partner.
managing member. fiduciary, employee or agent of any other Enterprise shall be reduced by any
amount Indemnitee has actually received as indemnification or advancement of expenses from such
Enterprise.
15. Duration of Agreement. This Agreement shall continue until and terminate upon the later
of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director or
officer of the Company or as a director, officer, trustee, partner, managing, member, fiduciary,
employee or agent of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which Indemnitee served at the request of the Company, or (b) one (1) year
after the final termination of any Proceeding (including any rights of appeal thereto) then pending
in
11
respect of which Indemnitee is granted rights of indemnification or advancement of Expenses
hereunder and of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement
relating thereto (including any rights of appeal of any Section 13 Proceeding).
16. Severability. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law,
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto, and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17. Enforcement and Binding Effect.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and
assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director
or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this
Agreement in serving as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof.
(c) The indemnification and advancement of expenses provided by, or granted pursuant to this
Agreement shall continue as to a person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators of such a person.
18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall
be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other provisions of this
Agreement nor shall any waiver constitute a continuing waiver.
19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon
being served with any summons, citation, subpoena, complaint, indictment, information or other
document relating to any Proceeding, or matter which may be subject to indemnification or
advancement of Expenses covered hereunder. The failure of Indemnitee to so notify, the Company
shall not relieve the Company of any obligation which it may have to the Indemnitee under this
Agreement or otherwise.
20. Notices. All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed,
12
or (b) mailed by certified or registered mail with postage prepaid, on the third business day after
the date on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or
such other address as Indemnitee shall provide in writing to the Company.
(b) If to the Company to:
Carriage Services, Inc.
3040 Post Oak Blvd., Suite 300
Houston, Texas 77056
Attn: President
or to any other address as may have been furnished to Indemnitee in writing by the Company.
21. Contribution. To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Indemnitee for any reason
whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount
incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to
be paid in settlement and/or for Expenses, in connection with any claim relating to an
indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in
light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits
received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving
cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors,
officers, employees and agents) and Indemnitee in connection with such event(s) and/or
transaction(s).
22. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among
the parties shall be governed by, and construed and enforced in accordance with, the laws of the
State of Delaware, without regard to its conflict of laws rules. Except with respect to any
arbitration commenced by Indemnitee pursuant to Section 10(a) of this Agreement, the Company and
Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising
out of or in connection with this Agreement shall be brought only in the Chancery Court of the
State of Delaware (the Delaware Court), and not in any other state or federal court in the United
States of America or any court in any other country, (ii) consent to submit to the exclusive
jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in
connection with this Agreement, (iii) irrevocably appoint, to the extent such party is not a
resident of the State of Delaware, The Corporation Trust Company as its agent in the State of
Delaware as such partys agent for acceptance of legal process in connection with any such action
or proceeding, against such party with the same legal force and validity as if served upon such
party personally within the State of Delaware, (iv) waive any objection to the laying of venue of
any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such
action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient
forum.
23. Identical Counterparts. This Agreement may be executed in one or more counterparts, each
of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the
13
party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof
IN WITNESS WHEREOF, the parties have entered into this Agreement on the dates set forth below
their signatures but made effective for all purposes as of the day and year first above written.
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CARRIAGE SERVICES, INC.
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INDEMNITEE |
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By:
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/s/ Melvin C. Payne
Melvin C. Payne,
Chief Executive Officer
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/s/ Gary Forbes
Gary Forbes
Address: 6417 Soter Parkway
Austin, Texas 78735
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Date: 8/7/07
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Date: 8/7/07 |
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14
exv11w1
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 months ended September 30, 2006 and 2007 is
calculated based on the weighted average number of common and common equivalent shares outstanding
during the periods 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, 2006
and 2007, in thousands except for earnings per share:
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Three months |
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Nine months |
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ended September 30, |
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ended September 30, |
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2006 |
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2007 |
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2006 |
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2007 |
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Net income (loss) from continuing operations |
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$ |
(500 |
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$ |
732 |
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$ |
2,333 |
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$ |
5,636 |
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Income (loss) from discontinued operations |
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(65 |
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(38 |
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(3,930 |
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432 |
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Net income (loss) |
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$ |
(565 |
) |
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$ |
694 |
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$ |
(1,597 |
) |
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$ |
6,068 |
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Weighted average number of common shares
outstanding for basic EPS computation |
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18,563 |
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19,117 |
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18,531 |
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18,949 |
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Effect of dilutive securities: |
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Stock options |
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469 |
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365 |
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490 |
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Weighted average number of common and common
equivalent shares outstanding for diluted
EPS computation |
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18,563 |
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19,586 |
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18,896 |
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19,439 |
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Basic earnings (loss) per common share (a): |
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Continuing operations |
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$ |
(0.03 |
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$ |
0.04 |
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$ |
0.13 |
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$ |
0.30 |
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Discontinued operations |
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(0.21 |
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0.02 |
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Net income (loss) |
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$ |
(0.03 |
) |
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$ |
0.04 |
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$ |
(0.08 |
) |
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$ |
0.32 |
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Diluted earnings (loss) per common share (a): |
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Continuing operations |
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$ |
(0.03 |
) |
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$ |
0.04 |
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$ |
0.12 |
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$ |
0.29 |
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Discontinued operations |
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(0.21 |
) |
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0.02 |
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Net income (loss) |
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$ |
(0.03 |
) |
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$ |
0.04 |
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$ |
(0.09 |
) |
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$ |
0.31 |
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Options to purchase 0.9 million shares were not included in the computation of diluted
earnings per share for the three months ended September 30, 2006, because the effect would be
antidilutive and an additional 0.4 million share were also not included because the exercise prices
were greater than the average market price of the common shares during the quarter.
Options to purchase 0.4 million shares were not included in the computation of diluted
earnings per share for the nine month period ending September 30, 2006, because the exercise prices
were greater than the average market prices during the period.
Options to purchase approximately 0.03 million shares and 0.1 million shares were not included
in the computation of diluted earnings per share for the three and nine months ended September 30,
2007, respectively, because the exercise prices were greater than the average market prices during
the periods.
The convertible junior subordinated debenture is convertible into 4.6 million shares of common
stock and is not included in the computation of diluted earnings per share because the effect would
be antidilutive.
(a) Earnings per share are computed independently for each category of earnings presented.
Therefore, the sum of earnings (loss) per share from continuing and discontinued operations may not
equal net income (loss) per share due to rounding.
exv31w1
EXHIBIT 31.1
I, Melvin C. Payne, certify that:
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1. |
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I have reviewed this report on Form 10-Q of Carriage Services, Inc.; |
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2. |
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Based on my knowledge, this 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 report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included
in this 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
report; |
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4. |
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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)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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designed such disclosure controls and procedures, or caused such
disclosure 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 report is being prepared; |
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b. |
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designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles; |
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c. |
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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 |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
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5. |
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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 the registrants board of directors (or persons performing the equivalent
functions): |
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a. |
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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 |
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b. |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
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Dated: November 9, 2007
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/s/ Melvin C. Payne
Melvin C. Payne
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Chairman of the Board, President and |
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Chief Executive
Officer |
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exv31w2
EXHIBIT 31.2
I, Joseph Saporito, certify that:
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I have reviewed this report on Form 10-Q of Carriage Services, Inc.; |
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2. |
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Based on my knowledge, this 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 report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included
in this 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
report; |
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4. |
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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)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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designed such disclosure controls and procedures, or caused such
disclosure 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 report is being prepared; |
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b. |
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designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles; |
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c. |
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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 |
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d. |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
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5. |
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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 the registrants board of directors (or persons performing the equivalent
functions): |
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a. |
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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 |
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b. |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
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Dated: November 9, 2007
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/s/ Joseph Saporito
Joseph Saporito
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Executive Vice President and
Chief Financial Officer |
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exv32
EXHIBIT 32
In connection with the Quarterly Report of Carriage Services, Inc. (the Company) on Form 10-Q for
the period ended September 30, 2007, (Form 10-Q), each of the undersigned officers of the Company
certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that :
(i) the 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 (ii) the information contained in the Form 10-Q fairly
presents, in all material respects, the financial condition and results of operations of the
Company.
November 9, 2007
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/s/ Melvin C. Payne
Melvin C. Payne
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Chairman of the Board,
President and |
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Chief Executive Officer |
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/s/ Joseph Saporito
Joseph Saporito
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Executive Vice President and |
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Chief Financial Officer |
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