SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________ COMMISSION FILE NUMBER: 1-11961 ------------------------- CARRIAGE SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0423828 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1300 POST OAK BLVD., SUITE 1500, HOUSTON, TX77056 (Address of principal executive offices)(Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 556-7400 ------------------------ 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 [ ] No [X] The number of shares of the Registrant's Class A Common Stock, $.01 par value per share, and Class B Common Stock, $.01 par value per share, outstanding as of October 29, 1997 was 5,541,780 and 5,050,485, respectively.
CARRIAGE SERVICES, INC. INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 ....................... 3 Consolidated Statements of Operations for the Three Months Ended September 30, 1996 and 1997 and the Nine Months Ended September 30, 1996 and 1997 .................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1997 .................. 5 Notes to Consolidated Financial Statements ........................ 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 8 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES ....................................... 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 15 Signature ............................................................... 17 FORWARD-LOOKING STATEMENTS Certain matters discussed in this Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the following: the Company's ability to sustain its rapid acquisition rate, to manage the growth and to obtain adequate performance from acquired businesses; the economy and financial market conditions, including stock prices, interest rates and credit availability; and death rates and competition in the Company's markets. 2
CARRIAGE SERVICES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) December September 31, 30, 1996 1997 --------- --------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents ...................... $ 1,712 $ 883 Accounts receivable -- Trade, net of allowance for doubtful accounts of $530 in 1996 and $1,041 in 1997 5,665 8,218 Other ..................................... 673 1,042 --------- --------- 6,338 9,260 Inventories and other current assets ........... 3,350 5,109 --------- --------- Total current assets ................. 11,400 15,252 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation of $4,095 in 1996 and $6,335 in 1997 ................................. 46,112 71,942 CEMETERY PROPERTY, at cost .......................... 4,061 23,686 NAMES AND REPUTATIONS, net of accumulated amortization of $2,007 in 1996 and $3,731 in 1997 62,568 94,440 DEFERRED CHARGES AND OTHER NONCURRENT ASSETS ........ 7,167 13,916 --------- --------- $ 131,308 $ 219,237 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other current liabilities .. $ 5,225 $ 7,089 Current portion of long-term debt and obligations under capital leases ................ 1,086 1,328 --------- --------- Total current liabilities ............. 6,311 8,417 PRENEED LIABILITIES, net ............................. 3,664 7,692 LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, net of current portion .................. 43,290 85,642 DEFERRED INCOME TAXES ................................ 3,749 11,915 --------- --------- Total liabilities ..................... 57,014 113,668 --------- --------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK ........................... 17,251 16,285 STOCKHOLDERS' EQUITY: Class A Common Stock, $.01 par value; 40,000,000 shares Authorized; 3,942,000 and 5,542,000 issued and outstanding at December 31, 1996 and September 30, 1997, respectively .................................... 40 55 Class B Common Stock; $.01 par value; 10,000,000 shares Authorized; 4,502,000 and 5,050,000 issued and outstanding at December 31, 1996 and September 30, 1997, respectively ......................................... 45 50 Contributed capital ............................. 63,966 93,439 Retained deficit ................................ (7,008) (4,260) --------- --------- Total stockholders' equity ............ 57,043 89,284 --------- --------- $ 131,308 $ 219,237 ========= ========= The accompanying notes are an integral part of these financial statements. 3
CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1996 1997 1996 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> REVENUES, net Funeral ......................... $ 9,303 $ 15,365 $ 24,951 $ 46,283 Cemetery ........................ 842 2,880 2,119 9,012 -------- -------- -------- -------- 10,145 18,245 27,070 55,295 COSTS AND EXPENSES Funeral ......................... 8,434 12,271 20,888 34,405 Cemetery ........................ 717 2,417 1,799 7,187 -------- -------- -------- -------- 9,151 14,688 22,687 41,592 -------- -------- -------- -------- Gross profit .................... 994 3,557 4,383 13,703 GENERAL AND ADMINISTRATIVE EXPENSES .. 611 1,471 1,766 3,657 -------- -------- -------- -------- Operating income ................ 383 2,086 2,617 10,046 INTEREST EXPENSE, net ................ 1,069 1,457 3,713 4,028 -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item .......... (686) 629 (1,096) 6,018 PROVISION (BENEFIT) FOR INCOME TAXES . (272) 282 (21) 2,357 -------- -------- -------- -------- Income (loss) before extraordinary item .............. (414) 347 (1,075) 3,661 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of income tax benefit of $332 and $159, respectively .. (498) (195) (498) (195) -------- -------- -------- -------- NET INCOME (LOSS) .................... (912) 152 (1,573) 3,466 Preferred stock dividend requirements 250 29 351 239 -------- -------- -------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ............. $ (1,162) $ 123 $ (1,924) $ 3,227 ======== ======== ======== ======== INCOME (LOSS) PER SHARE: Net income (loss) per common and common equivalent share before extraordinary item attributable to common shareholders ........ $ (.11) $ .03 $ (.39) $ .31 Extraordinary item per share .... $ (.09) $ (.02) $ (.14) $ (.02) -------- -------- -------- -------- Net income (loss) per common and common equivalent share attributable to common shareholders .................. $ (.20) $ .01 $ (.53) $ .29 ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding ..................... 5,920 11,754 3,662 11,325 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements. 4
CARRIAGE SEAVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) For the nine months ended September 30, -------------------- 1996 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................... $ (1,573) $ 3,466 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation and amortization ....... 2,410 5,644 Provision for losses on accounts receivable ....... 396 284 Loss on early extinguishment of debt, net of income taxes ...................................... 498 195 Deferred income taxes ............................. (209) 1,574 Changes in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable .............. (1,463) (1,768) Increase in inventories and other current assets ....................................... (823) (942) Increase in accounts payable and other current liabilities .......................... 315 1,062 Other, net ........................................ (147) (475) -------- -------- Net cash provided by (used in) operating activities .................... (596) 9,040 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired ................... (40,865) (43,568) Purchase of property, plant and equipment ............ (2,945) (5,209) Other, including disposition of assets ............... 1,297 (957) -------- -------- Net cash provided by (used in) investing activities ................................... (42,513) (49,734) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt ......................... 56,388 41,884 Payments on long-term debt and obligations under capital leases .................................... (65,724) (1,112) Proceeds from issuance of common stock ............... 47,771 -- Payment of preferred stock dividends ................. (351) (712) Exercise of stock options ............................ 44 113 Purchase of treasury stock ........................... (341) -- Payment of deferred debt charges .................... (446) (308) -------- -------- Net cash provided by (used in) financing activities ............... 37,341 39,865 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................................... (5,768) (829) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 7,573 1,712 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 1,805 $ 883 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid through issuance of new debt ........... $ 825 $ -- ======== ======== Cash paid for interest ............................... $ 4,037 $ 4,030 ======== ======== Cash paid for income taxes ........................... $ -- $ 812 ======== ======== Non-cash consideration for acquisitions .............. $ 18,773 $ 28,328 ======== ======== Retirement of debt through disposition of business ... $ 2,642 $ -- ======== ======== The accompanying notes are an integral part of these financial statements. 5
CARRIAGE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include Carriage Services, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. The information for the three and nine months ended September 30, 1996 and 1997 is unaudited, but in the opinion of management, reflects all adjustments which are of a normal, recurring nature necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in the Company's report on Form 10-K for the year ended December 31, 1996, and should be read in conjunction therewith. 2. ACQUISITIONS During the nine months ended September 30, 1997, the Company purchased 31 funeral homes and four cemeteries. 35 funeral homes and five cemeteries were acquired during the nine months ended September 30, 1996. These acquisitions have been accounted for by the purchase method, and their results of operations are included in the accompanying consolidated financial statements from the dates of acquisition. The effect of the above acquisitions on the Consolidated Balance Sheets was as follows: September 30, ----------------------- 1996 1997 -------- -------- (in thousands) Current Assets, net of cash acquired ............... $ 3,196 $ 7,671 Cemetery Property .................................. 2,088 19,645 Property, Plant and Equipment ...................... 20,719 22,902 Deferred Charges and Other Noncurrent Assets ....... 1,865 813 Names and Reputations .............................. 36,171 33,594 Current Liabilities ................................ (1,490) (801) Other Liabilities .................................. (2,911) (11,928) -------- -------- Total Acquisitions ............................ 59,638 71,896 Redeemable Preferred Stock issued .................. 17,776 20,000 Preferred Stock issued ............................. 555 -- Common Stock issued ................................ 442 8,328 -------- -------- Cash used for acquisitions .................... $ 40,865 $ 43,568 ======== ======== The following table represents, on an unaudited pro forma basis, the combined operations of the Company and the above noted acquisitions, as if such acquisitions had occurred as of January 1, 1996. 6
Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions; however, these unaudited pro forma results are based on the acquired businesses' historical financial results and do not assume any additional profitability resulting from the application of the Company's revenue enhancement measures or cost reduction programs to the historical results of the acquired businesses. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have resulted had the combinations been in effect on the dates indicated, that have resulted since the dates of acquisition or that may result in the future. Nine months ended September 30, ----------------------------- 1996 1997 ------------ ------------ (Unaudited and in thousands) Revenues, net ................................ $ 57,185 $ 59,347 Net income (loss) before income taxes ........ (1,671) 6,048 Net income (loss) attributable to common stockholders ............................... (1,852) 3,286 Income (loss) per common and common equivalent share ........................... (.51) .29 3. DEBT In August 1996, the Company entered into a credit facility (the "Former Credit Facility") for a $75 million revolving line of credit. The Former Credit Facility provided for both LIBOR and base rate interest options. That facility was unsecured and was for a term of three years. During September, 1997, the Company entered into a new credit facility (the "New Credit Facility") for a $150 million revolving line of credit. The New Credit Facility has a five year term, is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires the Company to maintain certain financial ratios. Interest under the New Credit Facility is provided at both LIBOR and prime rate options. As of September 30, 1997, $72.7 million was outstanding under the line of credit. 4. RECENT ACCOUNTING STANDARD In February 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per Share was issued. FAS 128 is effective for earnings per share calculations for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The Company expects the new accounting standard to have no significant effect on earnings per share. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was formed in 1991 in order to take advantage of the attractive fundamentals of and significant opportunities to consolidate the death care industry. From 1992 through 1995, the Company acquired 42 funeral homes and four cemeteries, for consideration ranging from approximately $9 million to $14 million in each of the four years. The Company intentionally took a disciplined, deliberate approach to acquisitions that allowed management the time to integrate early acquisitions, to develop and implement systems, including operational procedures, administrative policies, financial systems and related controls, and to promote a decentralized service culture. Management believes that the Company's focus on controlled growth while implementing operational and administrative systems and related controls to effectively manage a highly decentralized management structure positioned it to pursue an accelerated growth strategy beginning in late 1995. The Company significantly expanded its corporate development and acquisition activities in 1996 and 1997, thus requiring additions to the corporate infrastructure. During 1996, the Company acquired 38 funeral homes and seven cemeteries for an aggregate consideration of approximately $68 million. During the first nine months of 1997, the Company acquired 31 funeral homes and four cemeteries for an aggregate consideration of approximately $72 million. Upon acquisition, the operations team focuses on increasing historic operating income by improving the merchandising approach, pricing structure and marketing strategy of acquired businesses. These enhancements, complemented by discounts from consolidated purchasing, generally result in improved margins of the acquired businesses within the first 12 months following acquisition. RESULTS OF OPERATIONS The following is a discussion of the Company's results of operations for the three and nine month periods ended September 30, 1996 and 1997. For purposes of this discussion, funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "existing operations." Operations acquired or opened during either period being compared are referred to as "acquired operations." FUNERAL HOME SEGMENT. The following table sets forth certain information regarding the net revenues and gross profit of the Company from its funeral home operations for the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1997. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Three months ended September 30, Change ----------------- ----------------- 1996 1997 Amount Percent ------- ------- ------- ------- (dollars in thousands) Net revenues: Existing operations .......... $ 8,447 $ 8,468 $ 21 .3% Acquired operations .......... 856 6,897 6,041 * ======= ======= ======= Total net revenues ...... $ 9,303 $15,365 $ 6,062 65.2% ======= ======= ======= 8
Three months ended September 30, Change ---------------- ------------------ 1996 1997 Amount Percent ---- ------ ------ ----- (dollars in thousands) Gross profit: Existing operations .......... $751 $1,420 $ 669 89.1% Acquired operations .......... 118 1,674 1,556 * ==== ====== ====== Total gross profit ..... $869 $3,094 $2,225 256.0% ==== ====== ====== NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Nine months ended September 30, Change ------------------ -------------------- 1996 1997 Amount Percent ------- ------- --------- -------- (dollars in thousands) Net revenues: Existing operations ........... $18,515 $18,254 $ (261) (1.4)% Acquired operations ........... 6,436 28,029 21,593 * ======= ======= ======== Total net revenues ....... $24,951 $46,283 $ 21,332 85.5% ======= ======= ======== Nine months ended September 30, Change ------------------- ------------------ 1996 1997 Amount Percent ------ ------- ------ ----- (dollars in thousands) Gross profit: Existing operations ....... $2,981 $ 4,098 $1,117 37.5% Acquired operations ....... 1,082 7,780 6,698 * ====== ======= ====== Total gross profit .... $4,063 $11,878 $7,815 192.4% ====== ======= ====== - --------------- * Not meaningful. Due to the rapid growth of the Company, "existing operations" represented only 55% of the total funeral revenues and only 46% of the total funeral gross profit for the three months ended September 30, 1997 and only 39% of the total funeral revenues and only 35% of the total funeral gross profit for the nine months ended September 30, 1997. Total funeral net revenues for the three months ended September 30, 1997 increased $6.1 million or 65.2% over the three months ended September 30, 1996. The higher net revenues reflect an increase of $6.0 million in net revenues from acquired operations and an increase in net revenues of $21,000 or .3% from existing operations. Total funeral net revenues for the nine months ended September 30, 1997 increased $21.3 million or 85.5% over the nine months ended September 30, 1996. The higher net revenues reflect an increase of $21.6 million in net revenues from acquired operations and a decrease in net revenues of $261,000 or 1.4% from existing operations. Fewer services were performed year to date in 1997 primarily due to lower than usual seasonal death rates in certain of the Company's markets, especially in the East North Central region of the country where the Company has a large number of "existing operations." Total funeral gross profit for the three months ended September 30, 1997 increased $2.2 million or 256.0% over the comparable three months of 1996. The higher total gross profit reflected an increase of 9
$1.6 million from acquired operations and an increase of $669,000 or 89.1% from existing operations. Total funeral gross profit for the nine months ended September 30, 1997 increased $7.8 million or 192.4% over the comparable nine months of 1996. The higher total gross profit reflected an increase of $6.7 million from acquired operations and an increase of $1.1 million or 37.5% from existing operations. Gross profit for existing operations increased for both periods due to the efficiencies gained by consolidation, cost savings, improved collections experience and the increasing effectiveness of the Company's merchandising strategy, which were partially offset by lower revenues. Total gross margin increased from 9% for the third quarter of 1996 to 20% for the third quarter of 1997 and from 16% for the first nine months of 1996 to 26% for the first nine months of 1997 due to these factors. CEMETERY SEGMENT. The following table sets forth certain information regarding the net revenues and gross profit of the Company from its cemetery operations for the three and nine months ended September 30, 1996 compared to the three and nine months ended September 30, 1997. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Three months ended September 30, Change -------------------- -------------------- 1996 1997 Amount Percent --------- --------- --------- --------- (dollars in thousands) Total net revenues ............ $ 842 $ 2,880 $ 2,038 242.0% ========= ========= ========= Total gross profit ............ $ 125 $ 588 $ 463 370.4% ========= ========= ========= NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Nine months ended September 30, Change -------------------- -------------------- 1996 1997 Amount Percent --------- --------- --------- --------- (dollars in thousands) Total net revenues ............ $ 1,799 $ 7,187 $ 5,388 299.5% ========= ========= ========= Total gross profit ............ $ 320 $ 1,825 $ 1,505 470.3% ========= ========= ========= Due to the rapid growth of the Company, "existing operations" represented approximately 31% of cemetery revenues and approximately 16% of cemetery gross profit for the three months ended September 30, 1997 and approximately 14% of cemetery revenues and less than 7% of cemetery gross profit for the nine months ended September 30, 1997. As a result, the Company does not believe it is meaningful to present the results for "existing" and "acquired" operations separately. Total cemetery net revenues for the three months ended September 30, 1997 increased $2.0 million or 242.0% over the three months ended September 30, 1996 and total cemetery gross profit increased $463,000 or 370.4% over the comparable three months of 1996. Total cemetery net revenues for the nine months ended September 30, 1997 increased $5.4 million or 299.5% over the nine months ended September 30, 1996 and total cemetery gross profit increased $1.5 million or 470.3% over the comparable nine months of 1996. Total gross margin increased from 14.8% for the three months ended 10
September 30, 1996 to 20.4% for the three months ended September 30, 1997 and from 17.8% for the first nine months of 1996 to 25.4% for the first nine months of 1997. These increases were due primarily to the Company's acquisition of the Rolling Hills cemetery as part of the CNM Group acquisition in January 1997 and increased preneed marketing efforts. OTHER General and administrative expenses for the nine months ended September 30, 1997 increased $1.9 million over the first nine months of 1996 due primarily to the increased personnel expense necessary to support a higher rate of growth and increased acquisition activity. General and administrative expenses as a percentage of net revenues increased from 6.5% for the first nine months of 1996 to 6.6% for the comparable period of 1997, reflecting increased corporate development activity and the continuing development of the infrastructure in expectation of closing a large number of transactions during the fourth quarter of 1997. Interest expense for the nine months ended September 30, 1996 increased $315,000 over the first nine months of 1996. However, as a percentage of net revenues, interest expense decreased from 13.7% for the first nine months of 1996 to 7.3% primarily as a result of the Company's utilization of the net proceeds from its initial public offering of common stock (the "IPO") and borrowings under the Former Credit Facility to repay its outstanding indebtedness in August 1996. During 1996, the Company issued approximately $18 million of Series D Redeemable Preferred Stock to fund a portion of its acquisition program. Dividends on the majority of this preferred stock range from 6% - 7% per annum. The majority of this preferred stock converted into common stock during the first quarter of 1997. During the first three months of 1997, the Company issued approximately $20 million of Series F Redeemable Preferred Stock. Dividends on this preferred stock are currently 4% per annum. The Series F Redeemable Preferred Stock is considered a common stock equivalent for purposes of computing primary earnings per share. Therefore, only the dividends on the Series D preferred stock of $239,000 are deducted from net income in determining net income attributable to common stockholders for the nine months ended September 30, 1997 ($29,000 for the three months ended September 30, 1997). For the first six months of 1997, the Company provided for income taxes using the federal and state rates of approximately 38.5%. This rate includes a 4.5% net benefit for utilization of prior year net operating losses net of other tax reserves. Excluding the 4.5% net benefit, the Company is providing for state and federal income taxes at a rate of 43%. For the three months ended September 30, 1997, the Company provided for income taxes at the combined rates of approximately 45%, which reflects the effect that stock acquisitions have on the tax rate and operating in states that have high tax rates. For the nine months ended September 30, 1997, the effective tax rate is 39.2%. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $.9 million at September 30, 1997, representing a decrease of $.8 million from December 31, 1996. For the nine months ended September 30, 1997, cash provided by operations was $9.0 million as compared to cash used in operations of $596,000 for the nine months ended September 30, 1996. The increase in net cash provided by operating activities was principally due to the net income in 1997 compared to the net loss for 1996. Cash used in investing activities was $49.7 million for the nine months ended September 30, 1997 compared to $42.5 million for the first nine months of 1996, due primarily to the increases in acquisition costs and construction of funeral facilities. In the first nine months of 1997, cash flow provided by financing activities amounted to approximately $39.9 million, primarily due to proceeds from long term debt which were used to fund acquisitions. 11
Historically, the Company has financed its acquisitions with proceeds from debt and the issuance of common and preferred stock. The following table shows the activity in the Series D and Series F Redeemable Preferred Stock for the nine months ended September 30, 1997: Number Number of Shares of Shares Outstanding Outstanding at 12/31/96 Issuances Conversions at 9/30/97 ---------- ---------- ----------- ---------- SERIES D PREFERRED STOCK Convertible into Class A Common Stock ........ 1,200,000 (1,200,000) 0 Convertible into Class B Common Stock ........ 16,053,116 (14,370,616) 1,682,500 SERIES F PREFERRED STOCK Convertible into Class A Common Stock ........ 0 19,999,992 (5,388,315) 14,611,677 ---------- ---------- ----------- ---------- Totals ................... 17,253,116 19,999,992 (20,958,931) 16,294,177 ========== ========== =========== ========== The following table shows the effect on common shares outstanding from the Redeemable Preferred Stock conversions during the nine months ended September 30, 1997: Increase in Common Conversion Shares Conversions Price Outstanding ---------- ------------- ----------- SERIES D PREFERRED STOCK Convertible into Class A Common Stock ............... 1,200,000 $ 13.50 88,888 Convertible into Class B Common Stock ............... 14,370,616 $ 13.50 1,064,481 SERIES F PREFERRED STOCK Convertible into Class A Common Stock ............... 5,388,315 $ 15.00 359,221 ---------- --------- Totals .......................... 20,958,931 1,512,590 ========== ========= The holders of Series D Preferred Stock are entitled to receive annual cash dividends of $.06 - $.07 per share depending upon when such shares were issued. The current conversion rate is $14.50 per share. Commencing on the second anniversary of the completion of the Company's IPO, the Company 12
may, at its option, redeem all or any portion of the shares of Series D Preferred Stock then outstanding at a redemption price of $1.00 per share, together with all accrued and unpaid dividends. Such redemption is subject to the right of each holder of Series D Preferred Stock to convert such holder's shares into shares of Class B Common Stock. On December 31, 2001, the Company must redeem all shares of Series D Preferred Stock then outstanding at a redemption price of $1.00 per share, together with all accrued and unpaid dividends. The holders of the Series F Preferred Stock are entitled to receive cash dividends at the annual rate initially of $.04 per share, with the annual rate increasing by 5% per year commencing January 1, 1998 until January 1, 2001, at which time the annual rate becomes fixed at $0.0486 per share. The current conversion rate is $16.00 per share. On December 31, 2007, the Company must redeem all shares of Series F Preferred Stock then outstanding at a redemption price of $1.00 per share, together with all accrued and unpaid dividends. The Company does not have the option to redeem any Series F Preferred Stock. In conjunction with the closing of the IPO, the Company entered into a new credit facility (the "Former Credit Facility") which provided for a $75 million revolving line of credit with both LIBOR and base rate interest options. The Former Credit Facility was unsecured and was for a term of three years. During September, 1997, the Company entered into a new credit facility (the "New Credit Facility") for a $150 million revolving line of credit. The New Credit Facility has a five year term, is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires the Company to maintain certain financial ratios. Interest under the New Credit Facility is provided at both LIBOR and prime rate options. As of September 30, 1997, $72.7 million was outstanding under the line of credit. The Company issued 573,979 shares of Class A Common Stock and approximately 20,000,000 shares of Series F Preferred Stock and paid $44 million in cash to fund acquisitions during the nine months ended September 30, 1997. The Company intends to fund future acquisitions through borrowings under its New Credit Facility and additional issuances of Class A Common Stock or additional preferred stock. In March 1997, the Company filed a shelf registration statement relating to 2,000,000 shares of Class A Common Stock to be used to fund acquisitions. The Company has budgeted $125 million for its acquisition program in 1997 of which $72 million had been utilized as of October 29, 1997. As of October 29, 1997, the Company had letters of intent for acquisitions involving an aggregate purchase price of approximately $55 million. The Company expects to continue to aggressively pursue additional acquisitions of funeral homes and cemeteries to take advantage of the trend toward consolidation occurring in the industry which will require significant levels of funding from various sources. In addition, the Company currently expects to incur less than $8 million of capital expenditures during 1997, primarily for upgrading funeral home facilities. The Company believes that cash flow from operations, borrowings under the New Credit Facility and its ability to issue additional debt and equity securities should be sufficient to fund acquisitions and its anticipated capital expenditures and other operating requirements for the remainder of 1997. However, because future cash flows and the availability of financing are subject to a number of variables, such as the number and size of acquisitions made by the Company, there can be no assurance that the Company's capital resources will be sufficient to fund its capital needs. Additional debt and equity financings may be required to continue the Company's acquisition program. The availability and terms of these capital sources will depend on prevailing market conditions and interest rates and the then-existing financial condition of the Company. 13
SEASONALITY Although the death care business is relatively stable and fairly predictable, the Company's business can be affected by seasonal fluctuations in the death rate. Generally, death rates are higher during the winter months. In addition the quarterly results of the Company may fluctuate depending on the magnitude and timing of acquisitions. INFLATION Inflation has not had a significant impact on the results of operations of the Company. 14
PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES From January 1, 1997 through May 31, 1997, the Company issued an aggregate of 462,994 shares of Class A Common Stock, valued at market prices, to the former owners of acquired funeral homes and cemeteries. Consideration for such shares consisted of ownership interests in funeral home and cemetery businesses. The Company relied on an exemption under Section 4(2) of the Securities Act in effecting these transactions. Beginning in June 1997, the Company began to issue registered shares of Class A Common Stock to former owners of acquired properties under its shelf registration statement on Form S-4. On January 7, 1997, the Company issued 19,999,992 shares of Series F Preferred Stock, valued at $1.00 per share, to the former owners of acquired funeral homes and cemeteries. Consideration for such shares consisted of ownership interests in funeral home and cemetery businesses. The Company relied on an exemption under Section 4(2) of the Securities Act in effecting these transactions. On May 9, 1997, the Company filed a Certificate of Amendment, increasing the authorized Class A Common Stock to 40,000,000 shares, reducing the authorized Class B Common Stock to 10,000,000 shares, and increasing the authorized Preferred Stock to 70,000,000 shares. The Company additionally filed, on May 9, 1997, a Certificate of Decrease, reducing the authorized Series D Preferred Stock to 2,000,000 shares, and a Certificate of Decrease, reducing the authorized Series F Preferred Stock to 15,000,000 shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 -- Loan Agreement by and among the Company and NationsBank of Texas, N.A., dated September 9, 1997 10.2 -- Certificate of Amendment, increasing the authorized Class A Common Stock, reducing the Class B Common Stock, and increasing the authorized Preferred Stock dated May 9, 1997 10.3 -- Certificate of Decrease, reducing the authorized Series D Preferred Stock 10.4 -- Certificate of Decrease, reducing the authorized Series F Preferred Stock 11.1 -- Statement regarding computation of per share earnings 27.1 -- Financial Data Schedule (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on August 18, 1997 with respect to its acquisition of substantially all of the operating assets of McNary - Moore Funeral Service on August 1, 1997. The 15
Company also filed a Current Report on Form 8-K/A on October 14, 1997 to include in the Form 8-K filed on August 18, 1997 the financial statements and pro forma financial information required by item 7. The Company filed a Current Report on Form 8-K on October 10, 1997 with respect to its merger with Cemetery Enterprises, Inc. on September 25, 1997. 16
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARRIAGE SERVICES, INC. NOVEMBER 14, 1997 /s/ THOMAS C. LIVENGOOD Date Thomas C. Livengood, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)