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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 1-11961
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CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0423828
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Saint James Place, 4th Floor, 77056
Houston, TX (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(713) 332-8400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Class A Common Stock, $.01 Par Value
(Title Of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of Carriage's Class A Common Stock) of the Registrant as
of March 19, 2001 was approximately $30,000,000.
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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 March 19, 2001 was 14,718,393 and 1,792,720 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 2001 annual meeting of shareholders,
incorporated in Part III of this Report.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements made by the management of Carriage Services, Inc.
(the "Company" or "Carriage"). Such statements are typically identified by terms
expressing future expectations or goals. These forward-looking statements,
although made in good faith, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include
the following: Carriage's inability to sell businesses and properties held for
sale for their carrying value, to maintain or increase free cash flow from
operations, or to achieve internal growth from our businesses; adverse changes
in economic and financial market conditions, including declining stock prices,
increasing interest rates, and restricted credit availability; lower death
rates; changing consumer preferences; competition in our markets; Carriage's
inability to maintain operating ratios within the limits set out within our
financing arrangements; and changes in government regulation of the death care
industry. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision of these forward-looking statements. Readers should
carefully review the Cautionary Statements described in this and other documents
we file from time to time with the Securities and Exchange Commission, including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed by Carriage
throughout 2001.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed herein and in any other forward-looking statements made
by or on behalf of the Company.
(1) Maintaining or achieving growth in free cash flow from operations depends
primarily on achieving anticipated levels of earnings before depreciation,
amortization and other non-cash charges, controlling capital expenditures to
budgeted levels, collecting accounts receivable and reducing preneed costs.
(2) Achieving the Company's revenue goals is affected by the volume and prices
of the products and services sold, as well as the mix of products and
services sold. The annual sales targets set by the Company are aggressive,
and the inability of the Company to achieve planned volume or prices could
cause the Company not to meet anticipated levels of revenue. In certain
markets the Company expects to increase prices, while in other markets
prices will be lowered. The ability of the Company to achieve volume or
price targets at any location depends on numerous factors, including the
capabilities of the local operating staff, the local economy, the local
death rate, competition and changes in consumer preferences, including
cremations.
(3) Revenue also is affected by the level of preneed sales in both current and
prior periods. The level of preneed sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income, as well as changes in
marketing approach, commission practices and contractual terms. Future
revenue will also be affected by the Company's recent decision to eliminate
the national preneed sales and marketing organization and to manage future
preneed activities at the local business level.
(4) In addition to the factors discussed above, financial performance may be
affected by other important factors, including the following:
(a) The ability of the Company to retain or attract key personnel.
(b) The amount and rate of growth in the Company's general and
administrative expenses.
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(c) Changes in interest rates, which can increase or decrease the amount the
Company pays on borrowings with variable rates of interest.
(d) The ability of the Company to stay within the limits of the credit
ratios set out in the debt covenants, such as the debt-to-capital ratio,
debt-to-EBITDA ratio, and the fixed charge coverage ratio.
(e) Availability and related terms of debt and equity financing to fund
operating needs.
(f) The impact on the Company's financial statements of accounting charges
that may result from the Company's evaluation of its business strategies,
asset valuations and organizational structures as part of the Fresh Start
restructuring program.
(g) The amount of net proceeds actually realized on assets held for sale.
(h) Changes in government regulations, including tax rates and their effects
on corporate structure.
(i) Changes in inflation and other general economic conditions domestically,
affecting financial markets (e.g. marketable security values).
(j) Unanticipated legal proceedings and unanticipated outcomes of legal
proceedings.
(k) Changes in accounting policies and practices required by generally
accepted accounting principles or the Securities and Exchange Commission,
such as amortization periods and asset carrying values for long-lived
intangible assets.
The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or any
other forward-looking statements made by, or on behalf of, the Company.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Carriage is a leading provider of death care services and products in the
United States. As of December 31, 2000, we operated 172 funeral homes and 38
cemeteries in 31 states. Carriage provides a complete range of services relating
to funerals, burials and cremations, including the use of funeral homes and
motor vehicles, the performance of cemetery interment services and the
management and maintenance of cemetery grounds. We also sell related products
and merchandise including caskets, burial vaults, garments, cemetery interment
rights, stone and bronze memorials, as well as other items. From 1993 to 1999,
the Company grew rapidly as a result of a high level of acquisition activity. In
1999, growth slowed and the level of acquisition activity was sharply curtailed
to allow Carriage to focus on the improvement of operating results. From 1996 to
2000, net revenues increased from $40.3 million to $162.6 million. From 1996 to
1999, operating income increased from $4.7 million to $29.8* million, and
diluted earnings per common share from continuing operations increased from a
loss of $.09 to earnings of $.39*. Fiscal 2000 was a transitional year including
a decline in operating profitability, the adoption of a substantially changed
accounting method for preneed cemetery sales, and the implementation of a
multi-element "Fresh Start" restructuring program which is intended to improve
financial and operating performance. As a result of these factors, the 2000
earnings per share fell to $.06* from operations before special charges and
cumulative effect of accounting changes to a loss of $8.23 per share including
these special charges and the accounting change. *Financial results, net of tax
benefit, pro forma restatement for change in accounting principle and exclude
special charges and extraordinary item.
Since Carriage's formation in 1991, we have focused on distinguishing
ourselves from our competitors by developing an employee-driven organization
that emphasizes: (i) providing the highest level of personalized service to
client families, (ii) comprehensive employee training, (iii) a decentralized
management structure, and (iv) location management incentive compensation which
shares the benefits of location profitability above predetermined levels.
Concerns regarding the financial stability and deteriorating fundamentals of the
deathcare industry caused a decline in the number of acquisitions and the prices
that we were willing to pay for acquisition opportunities beginning in 1999. We
acquired 48 funeral homes and 7 cemeteries for consideration of $159 million in
1998, and 17 funeral homes and 14 cemeteries for consideration of $45 million in
1999. In 2000, the Company's new business acquisition activities were limited to
a long-term agreement to manage a municipal cemetery and the purchase of one
additional funeral home.
In response to the changing industry environment, we initiated, in
July 2000, a review of our funeral home and cemetery portfolios, operating
strategies, organizational structure, and financial covenants under Carriage's
credit agreements. As a result, Carriage launched, in September 2000, a
multi-faceted, restructuring program called "Fresh Start". During the last two
quarters of 2000, we eliminated a large portion of our administrative and
general overhead by executing new operating strategies under new leadership.
Organizational changes have been implemented in our funeral home operations and
Carriage has negotiated new supply arrangements with our major preneed funeral
insurance and casket providers. Carriage's preneed funeral strategy has now
changed from a national, centralized strategy to a unique, local, decentralized
strategy whereby each local business will have a program customized to its needs
and managed by the local funeral home manager. The cemetery organization has
been substantially streamlined, and there is now singular responsibility and
accountability for both sales and operations. Our human resources strategy is to
high-grade our personnel, which will include promoting, recruiting, and training
top-quality managers and leaders to replace those who are not able to perform up
to our Fresh Start standards. We conducted a rigorous review of the businesses
we own and stratified the funeral homes and cemeteries into three groups: a
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healthy core group, an underperforming group, and a group that we intend to
sell. Impairment and other special charges totaling $102.3 million were recorded
in connection with Fresh Start. One critical element of Fresh Start was to
modify our financial covenants with our banks and insurance company lenders so
that we could execute all elements of our plan, including any expected
adjustments to Carriage's cemetery revenues, earnings and net worth resulting
from the adoption of the Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements. We believe that implementation of this restructuring
program "Fresh Start" will enhance our ability to effectively compete, since our
infrastructure is now better suited for a non-acquisition environment.
Carriage was incorporated in Delaware on December 29, 1993, and became a
public reporting company in August 1996. Our principal executive office is
located at 1900 Saint James Place, 4th Floor, Houston, Texas 77056, and our
telephone number is (713) 332-8400.
DEATH CARE INDUSTRY
Death care companies provide products and services to families in three
principal areas: (i) ceremony and tribute, generally in the form of a funeral or
memorial service; (ii) disposition of remains, either through burial or
cremation; and, (iii) memorialization, generally through monuments, markers or
inscriptions. The death care industry in the United States is characterized by
the following fundamental attributes:
HIGHLY FRAGMENTED OWNERSHIP. A significant majority of death care operators
consist of small, family-owned businesses that control one or several funeral
homes or cemeteries in a single community. Management estimates that there are
approximately 23,000 funeral homes and 9,600 commercial (as opposed to
religious, family, fraternal, military or municipal) cemeteries in the United
States. Approximately 25% of the 2000 United States death care industry revenues
are represented by Carriage and the three largest publicly traded domestic death
care companies.
BARRIERS TO ENTRY. Death care businesses have traditionally been
transferred to successive generations within a family and in most cases have
developed a local heritage and tradition that act as a barrier for those wishing
to enter an existing market. Heritage and tradition afford an established
funeral home or cemetery a local franchise and provide the opportunity for
repeat business. Other difficulties faced by entities desiring to enter a market
include local zoning restrictions, substantial capital requirements, increasing
regulatory burdens and scarcity of cemetery land in certain urban areas. In
addition, established firms' backlog of preneed, prefunded funerals or presold
cemetery and mausoleum spaces also makes it difficult for new entrants to gain
entry into the marketplace.
STABILITY. The death rates in the United States are relatively stable. The
number of deaths in the United States has increased at a compounded rate of
approximately 1% since 1980. While the number of deaths typically varies from
year to year by 1-2%, industry studies show that the average age of the
population is increasing. Because of the relative stability, individual funeral
home business failures are uncommon. As a result, ownership of independent
funeral home and cemetery businesses generally has not experienced significant
turnover and the aggregate number of funeral homes and cemeteries in the United
States has remained relatively constant.
CONSOLIDATION. Until 1999, the industry experienced a trend toward
consolidation of independent death care operations with a few large, primarily
publicly owned death care providers that sought to benefit from economies of
scale, improved managerial control and more effective strategic planning and
greater financial resources. The trend resulted principally from increased
regulation, a desire on the part of small, family operated funeral businesses to
address family succession and estate planning issues, and a desire for
liquidity. An active acquisition market for funeral homes and cemeteries
provided a source of potential liquidity that was not as readily available to
individual owners in the past. The consolidation trend has decelerated since
1999, and the number of companies actively
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pursuing acquisitions has significantly declined. Some of the consolidators,
including Carriage, are now facing financial pressure and high debt levels as a
result of paying too much for businesses that are not performing as expected.
Each of these consolidators is currently selling selected properties and other
assets in order to reduce their debt levels.
CLUSTERED OR COMBINED OPERATIONS. The death care industry has also
witnessed a trend by companies to cluster their funeral home and cemetery
operations. Clusters refer to funeral homes and/or cemeteries that are grouped
together in a geographical region. Clusters can provide a company with the
ability to generate cost savings through the sharing of personnel, vehicles and
other resources. Firms also are increasingly combining funeral home and cemetery
operations at a single site to allow cross-marketing opportunities and for
further cost reductions through shared resources. The ability to offer the full
range of products and services at one location or to cluster funeral home and
cemetery operations and cross-market the full range of death care services is
believed to be a cost advantage which tends to increase the profitability of
both the funeral home and cemetery.
PRENEED MARKETING. In addition to sales at the time of death or on an "at
need" basis, death care products and services are being sold prior to the time
of death or on a "preneed" basis by some death care providers who have developed
sophisticated marketing organizations to actively promote such products and
services. At the same time, consumers are becoming more aware of the benefits of
advanced planning, such as the financial assurance and peace of mind achieved by
establishing, in advance, a fixed price and type of service, and the elimination
of the emotional strain of making death care plans at the time of need.
Effective marketing of preneed products and services provides a backlog of
future business. We believe sales of preneed products and services, including
cemetery and interment rights and prearranged funeral services, are purchased
primarily by people between the ages of 50 and 80. In 2000, we modified our
preneed funeral sales marketing from a nationwide sales program to a sales
program, which is controlled, on a market-by-market basis, and managed by the
local funeral home manager.
CREMATION. In recent years, there has been steady, gradual growth in the
number of families in the United States that have chosen cremation as an
alternative to traditional methods of burial. According to industry studies,
cremations represented approximately 26% of the United States burial market in
2000 and are projected at 36% for 2010, as compared to approximately 10% in
1980. Many parts of the Southern and Midwestern United States and many
non-metropolitan communities exhibit significantly lower rates of cremation as a
result of religious and cultural traditions. Cremation, historically, has been
marketed as a less costly alternative to interment. However, cremation is
increasingly marketed as part of a complete service package that includes
traditional funeral services and memorialization.
BUSINESS STRATEGY
Our business strategy for the near term is to emphasize increasing operating
cash flow and growth through strategies that do not require investment of new
capital. We plan to systematically reduce our debt, and improve our leverage
ratios over the next two years, with net proceeds from dispositions and
discretionary operating cash flow.
"FRESH START" RESTRUCTURING PROGRAM. During the third quarter of 2000,
Carriage initiated a multi-faceted restructuring program termed "Fresh Start" in
response to the changing industry environment and deterioration of the Company's
operating results during the year. The program began with a review of the
funeral home and cemetery portfolios, operating strategies,
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organizational structure, and financial covenants under the Company's credit
agreements. Key elements of "Fresh Start" are as follows:
GOALS AND PRINCIPAL ELEMENTS. The two-year goals for the restructuring
program, announced in November, 2000, were to (1) restore credibility to our
operating and consolidation model; (2) increase and better align our earnings
and cash flow; (3) restore market value credibility to our balance sheet;
(4) reduce our debt; and (5) re-access the capital markets. The principal
elements of "Fresh Start" included the downsizing of our corporate organization,
changing our operating leadership, changing our preneed funeral marketing
strategy, stratifying by performance the funeral home and cemetery portfolios,
implementing action plans to improve underperforming businesses, disposing of
some underperforming businesses, reviewing and adjusting the carrying basis of
other underperforming businesses, and the modification of financial covenants
with lenders to facilitate the execution of the program.
PROGRAM IMPLEMENTATION. Downsizing of our corporate organization was
completed in the fourth quarter of 2000 and has resulted in the elimination of a
large portion of our operating and administrative overhead. Our infrastructure
is now better suited for a non-acquisition environment, and we are executing our
new operating strategies under new leadership.
The new operating leadership is widely dispersed from major divisions to
individual locations, and we have recruited top-quality managers and leaders to
replace those who were not able to perform up to our "Fresh Start" standards.
Offering incentives to our new local leadership has become an important part of
our Human Resources strategy. We have begun a new Funeral Home Partnership
program designed to foster market share growth by establishing realistic short
and long-term business plans and performance goals that are balanced with
attractive short and long-term rewards.
Our preneed funeral strategy has also changed significantly. We have gone
from a national, centralized strategy to a local, decentralized strategy in
which each business will have a program customized to its local needs.
Accordingly, we have eliminated the national funeral sales organization and
consolidated most existing preneed investments with one trustee. This enabled us
to substantially downsize the Houston administrative support infrastructure and
relocate our smaller corporate staff to more modest facilities.
In reviewing our funeral home and cemetery portfolios, we divided all of our
locations into two main groups: a healthy core group, which represents the
majority of our revenues and cash flow, and a second underperforming group.
There is a smaller third group that consists of businesses that we have targeted
for sale. After completing this stratification, we then established new
performance standards consistent with our mission of "Becoming the Best". No
longer will we allow the success of our best businesses, managers and employees
to be unfairly diluted by the underperformance of our weaker businesses. Where
there are local market share losses or leadership problems, specific action
plans have been designed to deal with underperforming properties. These action
plans included the decision to sell the businesses that cannot meet our new
standards. During the last two quarters of 2000, Carriage sold properties for a
total consideration of $4.8 million. Additional properties are targeted for sale
in 2001. The carrying value of the businesses targeted for sale were written
down to the estimated net realizable value.
As the final element of "Fresh Start" we modified the financial covenants
with our banks and insurance lenders so that we could execute all elements of
the plan. Notwithstanding the difficult industry environment, we received strong
support from our lenders for initiating an aggressive, pro-active plan of
action.
OPERATING STRATEGY. While our strategies have changed, our mission to
become the best funeral and cemetery service organization in the industry has
not. Key elements of our operating strategy that complement the restructuring
program include the following:
7
PERSONALIZED SERVICE. We believe that providing personalized service
results in increased customer satisfaction, increased market share, more
motivated employees and consistently higher levels of profitability. We have
placed a great deal of emphasis upon communicating to our employees the linkage
between personalized service, customer satisfaction, market share increases and
profitability throughout the organization.
EMPLOYEE TRAINING. Beginning in late 1997, we made a significant commitment
of financial and human resources to a company-wide training effort. The training
is designed to improve the management of and communication among employees and
to develop personalized service that will be of value to clients. In training
employees to deliver personalized service, we emphasize employee listening and
communication skills in working towards the goal of uniquely memorializing the
life of an individual. We completed the initial phase of this program in 1999
and have been focusing on integrating the concepts and practices of our training
program into our operations. We believe that this long-term investment in our
employees will, over time, lead to increased market share, resulting in higher
profitability.
ENHANCED INFORMATION SYSTEMS. We utilize an integrated computer system
linked to all of our funeral homes to monitor and access critical operating and
financial data in order to analyze the performance of individual locations on a
timely basis and institute corrective action if necessary. The Internet is used
as a medium to internally disseminate information between locations.
HIGH STANDARDS OF PERFORMANCE. We continually establish targets to
emphasize and enhance customer service and operational and financial
performance. These standards are designed to identify management's expectations
for high achievement in these three key performance areas and are communicated
to employees through our extensive training programs.
QUALITY REVIEW MANAGEMENT SYSTEMS. We have developed quality based
management systems, which operate, within our decentralized management
structure. These systems involve quantifiable customer survey input in addition
to operational and financial measurement of performance. With the assistance of
our training staff, these systems are being implemented at the local level under
the direction of our regional vice presidents and regional managers. These
leaders provide an additional level of operational support and feedback to our
local managers.
INCENTIVE COMPENSATION. We have established a compensation structure that
is designed to create and maintain an ownership mentality to align overall
compensation to our performance objectives. Local management is awarded
meaningful cash bonuses or other rewards for achieving specified service,
operational and financial performance objectives. We have also historically had
stock option programs, which awarded options to full-time employees based upon
the performance of their local businesses. As a result, many management and
full-time employees have the opportunity to increase their personal net worth
through strong local and corporate performance.
COST SAVINGS AND OPERATING EFFICIENCIES. Our larger size, as compared to
local operators, allows favorable pricing and terms to be achieved from vendors
through volume discounts on significant expenditures, such as caskets, vaults,
memorials and vehicles. In addition, while operational functions and management
responsibility are retained at the local level, centralizing certain financial,
accounting, legal, administrative and employee benefit functions allow for more
efficient and cost-effective operations.
RATIONALIZATION OF OUR PRENEED FUNERAL SALES PROGRAM. We have developed a
productive preneed funeral sales program during the last three years that is
expected to provide significant benefits for years into the future. This program
has not been developed, however, without significant costs. Preneed sales
frequently require an immediate cash outlay by the seller to fund commissions
and promotional expenditures. Beginning in 2000, we began selling insurance
funded
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contracts in most markets that allows us to earn commission income and improve
our cash flow. Beginning in 2001, we revised our commission structure and have
redirected our efforts toward only those markets that we truly believe will
benefit from a preneed program, using primarily on-staff funeral directors to
market the program.
ACQUISITION STRATEGY. Since 1999, acquisitions by consolidators of
independent funeral homes and cemeteries have virtually ceased throughout the
deathcare industry, including Carriage Services, as the focus has changed to
improving cash flow and operating results. We believe that consolidation can
work in this industry, but only if acquisition prices are substantially lower
than we experienced during the last few years and we are highly selective in the
locations acquired.
Our acquisition strategy, since inception, is demonstrated in the table
below:
FUNERAL
YEAR CONSIDERATION HOMES(1) CEMETERIES(2)
- ---- ---------------------- -------- -------------
(DOLLARS IN THOUSANDS)
1992................................................ $ 11,832 14 2
1993................................................ 13,843 11 1
1994................................................ 9,153 9 1
1995................................................ 12,191 8 0
1996................................................ 68,181 38 7
1997................................................ 118,260 44 10
1998................................................ 158,661 48 7
1999................................................ 44,434 17 14
2000................................................ 1,983 1 1
-------- --- --
$438,538 190 43
======== === ==
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(1) Eighteen of these funeral homes were subsequently sold or merged with other
Carriage operations prior to December 31, 2000.
(2) Carriage subsequently sold five of these cemeteries prior to December 31,
2000.
IMPAIRMENTS AND ASSET DISPOSITION STRATEGY. In connection with Fresh Start,
as previously stated, a review was performed of the businesses that we own and
those businesses were stratified into three groups: core, underperforming and
targeted for sale. Long-term cash flow forecasts were prepared to determine
whether we would recover our investment through operations on the
underperforming properties. In those instances in which our investment in a
business exceeded the estimated future cash flows, the investment was written
down, through an impairment charge, to the present value of those future cash
flows. Impairment charges totaled $51 million for the underperforming businesses
that we will continue to operate. An estimate of the net realizable value was
determined for those businesses targeted for sale to determine whether we could
expect to recover our investment from the sale of those businesses. Where the
investment exceeded the fair value less costs to sell, an impairment charge was
recorded for the deficiency, which totaled approximately $30 million in the
aggregate, reducing our investment in businesses targeted for sale to
approximately $10 million. Sales of businesses during the latter half of 2000
generated $4.8 million in proceeds.
For the year 2000, the underperforming group generated 31% of funeral home
revenue and 28% of field level cash flow; and the targeted for sale group 8% of
revenues and 4% of cash flow.
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OPERATIONS
Our funeral home operations, cemetery operations and preneed programs are
managed by individuals with extensive death care industry experience. Although
certain financial management and policy matters are centralized, local funeral
home and cemetery managers have substantial autonomy in determining the manner
in which their services and products are marketed and delivered and their
funeral homes are managed. We believe that this strategy permits each local firm
to maintain its unique style of operation and to capitalize on its reputation
and heritage while Carriage maintains centralized supervisory controls and
provides specialized services at the corporate level. We have a commitment to
strong information systems. Systems are linked to all of the funeral homes to
monitor and assess critical operating and financial data in order to analyze the
performance of individual funeral homes on a timely basis. Management is able to
access customer transaction data and other operating information from the
Houston support center to ensure the quality of operating performance and to
implement any necessary corrective actions.
FUNERAL HOME OPERATIONS. As of December 31, 2000, Carriage operated 172
funeral homes in 30 states. Funeral home revenues accounted for approximately
80% and 78% of our net revenues for each of the years ended December 31, 1999
and 2000, respectively. The funeral home operations are managed by a team of
experienced death care industry professionals as well as selected region-level
individuals with related experience in other service industries. See Note 14 to
the consolidated financial statements for segment data related to funeral home
operations.
Our funeral homes offer a complete range of services to meet families'
funeral needs, including consultation, the removal and preparation of cremains,
the sale of caskets and related funeral merchandise, the use of funeral home
facilities for visitation and religious services and transportation services.
Most of our funeral homes have a non-denominational chapel on the premises,
which permits family visitation and religious services to take place at one
location, reducing inconvenience to the family.
CEMETERY OPERATIONS. As of December 31, 2000, we operated 38 cemeteries in
14 states. Cemetery revenues accounted for approximately 20% and 22% of our net
revenues for each of the years ended December 31, 1999 and 2000, respectively.
Carriage's cemetery products and services include interment services, the
rights to interment in cemetery sites (including gravesites, mausoleum crypts
and niches) and related cemetery merchandise such as memorials and vaults.
Cemetery operations generate revenues through sales of interment rights,
memorials and installation, fees for interment and cremation services, finance
charges from installment sales contracts and investment income from preneed
cemetery merchandise and perpetual care trusts.
At the beginning of the fourth quarter of 2000 Carriage Services, along with
others in the industry, implemented the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101--"Revenue Recognition in Financial Statements"
(SAB 101). The most significant impact of adopting SAB 101 is the deferral of
revenue and related expenses for cemetery merchandise and services until they
are delivered instead of recognizing them at the time of sale, as we did
previously. Income earned on merchandise and services funds in trust are also
deferred until delivery occurs. As a result of the new accounting method, the
company now has deferred cemetery revenue of approximately $100 million as of
December 31, 2000, which will be recognized in future periods. Implementation of
SAB 101 had the pro forma effect of reducing revenues by $9.8 million and
pre-tax income by $5.1 million or $0.21 per diluted share for the full year
2000, compared to $13.6 million and $7.4 million or $0.30 per diluted share for
1999. Included in the Statement of Operations for 2000 is a charge in the amount
of $59.7 million, before taxes, relating to the cumulative effect of the change
in accounting principle in connection with the implementation of SAB 101. The
SAB 101 accounting changes have had no effect on cash flow. See Note 14 to the
consolidated financial statements for segment financial data related to cemetery
operations.
10
PRENEED PROGRAMS. In addition to sales of funeral merchandise and services,
cemetery interment rights and cemetery merchandise and services at the time of
need, we also market funeral and cemetery services and products on a preneed
basis. Preneed funeral or cemetery contracts enable families to establish, in
advance, the type of service to be performed, the products to be used and the
cost of such products and services, in accordance with prices prevailing at the
time the contract is signed, rather than when the products and services are
delivered. Preneed contracts permit families to eliminate the emotional strain
of making death care plans at the time of need and enable Carriage to establish
a portion of our future market share. Proceeds from the sale of preneed funeral
contracts are not recognized as revenue until the time the funeral service is
performed.
Preneed funeral contracts are usually paid on an installment basis. The
performance of preneed funeral contracts is usually secured by placing the funds
collected in trust for the benefit of the customer or by the purchase of a life
insurance policy, the proceeds of which will pay for such services at the time
of need. Insurance policies, intended to fund preneed funeral contracts, cover
the original contract price and generally include built-in escalation clauses
designed to offset future inflationary cost increases. During the early part of
2000, we shifted our focus from the sale of trust-funded contracts to the sale
of insurance funded contracts. The shift toward insurance products will improve
the Company's cash flow and reduce the costs associated with the administration
of trust accounts.
In addition to preneed funeral contracts, we also offer "preplanned" funeral
arrangements whereby a client determines in advance substantially all of the
details of a funeral service without any financial commitment or other
obligation on the part of the client until the actual time of need. Preplanned
funeral arrangements permit a family to avoid the emotional strain of making
death care plans at the time of need and enable a funeral home to establish
relationships with a client that may eventually lead to an at-need sale.
In the fourth quarter of 2000, Carriage eliminated our national and regional
preneed funeral marketing organizations and assigned responsibility for preneed
sales to the local funeral home manager. Preneed funeral sales are only
emphasized in those markets that are most competitive. Preneed cemetery sales
are overseen by the regional operating management. As of December 31, 2000, we
employed a staff of 290 advance-planning representatives for the sale of preneed
products and services, which represents an increase of 215% since 1996, but a
reduction from the 405 employed at the end of 1999.
Carriage sold 9,814 and 8,064 preneed funeral contracts in the years ended
December 31, 1999 and 2000, respectively. At December 31, 2000, we had a backlog
of 89,391 preneed funeral contracts to be delivered in the future. Preneed
cemetery sales are usually financed through interest bearing installment sales
contracts, generally with terms of up to five years. Preneed sales of cemetery
interment rights are recorded as revenue when 10% of the contract amount has
been collected. Merchandise and services revenue is recorded when delivery has
occurred. Costs related to the generation of the preneed contracts and delivery
of the products and services are recognized concurrent with the related revenue.
We always receive an initial payment at the time the contract is signed.
Allowances for customer cancellations and refunds are accrued at the date of
sale based upon historical experience.
Cemetery revenues that originated from preneed contracts represented
approximately 51% and 59% of Carriage's net cemetery revenues for the year 1999
on a pro forma basis assuming the retroactive adoption of the change in
accounting method, and the year 2000, respectively.
COMPETITION
The operating and acquisition environment in the death care industry has
been highly competitive. Our publicly traded competitors are Service Corporation
International, The Loewen Group, Inc. and Stewart Enterprises, Inc. In addition,
a number of smaller companies have been active in acquiring
11
funeral homes and cemeteries. However, as previously discussed, acquisition
activity has now virtually ceased as most of the large death care companies,
including Carriage, are currently restructuring as a result of high-priced and
low-performing acquisitions that created financial difficulties.
Our funeral home and cemetery operations generally face competition in the
markets that they serve. Our primary competition in most of our markets is from
local independent operators. Market share for funeral homes and cemeteries is
largely a function of reputation and heritage, although competitive pricing,
professional service and attractive, well-maintained and conveniently located
facilities are also important. The sale of preneed funeral services and cemetery
property has increasingly been used by many companies as a marketing tool to
build market share. Because of the importance of reputation and heritage, market
share increases are usually gained over a long period of time.
We also face competition from companies that market products and related
information over the Internet, as well as non-traditional casket stores in
certain markets. We have felt little impact from these competitors to date.
TRUST FUNDS AND INSURANCE CONTRACTS
GENERAL. We have established a variety of trusts in connection with our
funeral home and cemetery operations as required under applicable state law.
Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery
merchandise and service trusts; and (iii) perpetual care trusts. These trusts
are typically administered by independent financial institutions selected by
Carriage. We also use independent professional managers to advise us on
investment matters.
PRENEED FUNERAL TRUSTS AND INSURANCE CONTRACTS. Preneed funeral sales are
facilitated by deposits to a trust or purchase of a third-party insurance
product. All preneed funeral sales are deferred until the service is performed.
The trust fund income earned and any increase in insurance benefits are also
deferred until the service is performed, in order to offset possible inflation
in cost when providing the service in the future. Although direct marketing
costs and commissions incurred from the sale of preneed funeral contracts are a
current use of cash, such costs are also deferred and amortized over the
expected timing of the performance of the services related to the preneed
funeral sales. The related assets and deferred revenue are reflected on
Carriage's balance sheet. In most states, we are not permitted to withdraw
principal or investment income from such trusts until the funeral service is
performed. Some states, however, allow for the retention of a percentage
(generally 10%) of the receipts to offset any administrative and selling
expenses, which we defer until the service is provided. The aggregate balance of
our preneed funeral contracts held in trust and insurance contracts was
approximately $218.2 million and $229.5 million as of December 31, 1999 and
2000, respectively.
PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. We are generally required
under applicable state laws to deposit a specified amount (which varies from
state to state, generally 50% to 100% of selling price) into a merchandise and
service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income earned is recognized when the related
merchandise and services are delivered. We are permitted to withdraw the trust
principal and the accrued income when the merchandise is purchased, when service
is provided by us or when the contract is cancelled. The merchandise and service
trust fund balances, in the aggregate, were approximately $33.0 million and
$37.5 million as of December 31, 1999 and 2000, respectively.
PERPETUAL CARE TRUSTS. In certain states, regulations require a portion
(generally 10%) of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income earned is recognized in current revenues as trust earnings. While we are
entitled to
12
withdraw the income from our perpetual care trust to provide for the maintenance
of the cemetery property and memorials, we are not entitled to withdraw any of
the principal balance of the trust fund and therefore, none of the principal
balance is reflected in Carriage's balance sheet. The perpetual care trust
balances were approximately $30.1 million and $29.4 million as of December 31,
1999 and 2000, respectively.
For additional information with respect to Carriage's trusts, see Note 1 of
the Consolidated Financial Statements.
REGULATION
Our funeral home operations are subject to substantial regulation by the
Federal Trade Commission (the "FTC"). Certain regulations contain minimum
standards for funeral industry practices, require extensive price and other
affirmative disclosures to the customer at the time of sale and impose mandatory
itemization requirements for the sale of funeral products and services.
We are subject to the requirements of the federal Occupational Safety and
Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication
standard, the United States Environmental Protection Agency community
right-to-know regulations under Title III of the federal Superfund Amendment and
Reauthorization Act and similar state statutes require us to organize
information about hazardous materials used or produced in our operations.
Certain of this information must be provided to employees, state and local
governmental authorities and local citizens. We are also subject to the Federal
Americans with Disabilities Act and similar laws which, among other things, may
require that we modify our facilities to comply with minimum accessibility
requirements for disabled persons.
Our operations, including our preneed sales and trust funds, are also
subject to extensive regulation, supervision and licensing under numerous other
Federal, state and local laws and regulations. See "Trust Funds."
We believe that we are in substantial compliance with all such laws and
regulations. Federal and state legislatures and regulatory agencies frequently
propose new laws, rules and regulations, some of which, if enacted, could have a
material adverse effect on Carriage's results of operations. We cannot predict
the outcome of any proposed legislation or regulations or the effect that any
such legislation or regulations might have on Carriage.
EMPLOYEES
As of December 31, 2000, the Company and its subsidiaries employed 2,186
employees, of whom 1,209 were full-time and 977 part-time. Included in the total
number of employees are 290 advance planning representatives. All of our funeral
directors and embalmers possess licenses required by applicable regulatory
agencies. We believe that our relationship with our employees is good. No
employees of Carriage or its subsidiaries are members of a collective bargaining
unit.
ITEM 2. PROPERTIES
At December 31, 2000, we operated 172 funeral homes and 38 cemeteries in 31
states. Carriage owns the real estate and buildings for 75% of our funeral homes
and leases facilities for the remaining 25%. Carriage owns 33 cemeteries and
operates 5 cemeteries under long-term contracts with municipalities at
December 31, 2000. Ten funeral homes are operated in combination with
cemeteries. The 38 cemeteries operated by Carriage have an inventory of unsold
developed lots totaling approximately 129,000 and 111,000 at December 31, 1999
and 2000, respectively. In addition, approximately 750 acres are available for
future development. We anticipate having a sufficient inventory of lots to
maintain our property sales for the foreseeable future.
13
The following table sets forth certain information as of December 31, 2000,
regarding Carriage's funeral homes and cemeteries by state:
NUMBER OF NUMBER OF
FUNERAL HOMES CEMETERIES
-------------------- -------------------
STATE OWNED LEASED(1) OWNED MANAGED
- ----- -------- --------- -------- --------
Alabama.................................................... 2 0 0 0
California................................................. 16 2 4 0
Connecticut................................................ 6 4 0 0
Florida.................................................... 6 4 6 3
Georgia.................................................... 4 3 0 0
Idaho...................................................... 6 1 3 0
Illinois................................................... 0 6 1 0
Indiana.................................................... 3 3 2 0
Iowa....................................................... 4 0 0 0
Kansas..................................................... 8 0 0 0
Kentucky................................................... 11 4 1 0
Maryland................................................... 0 1 0 0
Massachusetts.............................................. 7 0 0 0
Michigan................................................... 3 2 0 0
Missouri................................................... 0 1 0 0
Montana.................................................... 1 0 0 0
Nevada..................................................... 2 0 2 1
New Jersey................................................. 3 2 0 0
New Mexico................................................. 1 0 0 0
New York................................................... 3 1 0 0
North Carolina............................................. 1 1 1 0
Ohio....................................................... 9 3 0 1
Oklahoma................................................... 1 0 1 0
Oregon..................................................... 0 0 1 0
Rhode Island............................................... 4 0 0 0
South Carolina............................................. 4 0 4 0
Tennessee.................................................. 4 1 0 0
Texas...................................................... 12 1 6 0
Virginia................................................... 4 1 1 0
Washington................................................. 3 1 0 0
West Virginia.............................................. 1 1 0 0
--- -- -- --
Total...................................................... 129 43 33 5
=== == == ==
- ------------------------
(1) The leases, with respect to these funeral homes, have remaining terms
ranging from two to fifteen years, and, generally, we have a right of first
refusal on any proposed sale of the property where these funeral homes are
located.
Carriage's corporate headquarters occupy approximately 32,500 square feet of
leased office space in Houston, Texas.
At December 31, 2000, we operated 704 vehicles, of which 682 are owned and
22 are leased.
The specialized nature of our business requires that our facilities be well
maintained. Management believes that this standard is met.
14
ITEM 3. 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 us.
We carry insurance with coverages and coverage limits that we believe to be
customary in the funeral home and cemetery industries. Although there can be no
assurance that such insurance will be sufficient to protect us against all
contingencies, we believe that our insurance protection is reasonable in view of
the nature and scope of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Carriage's Class A Common Stock is traded on the New York Stock Exchange
under the symbol "CSV". The following table presents the quarterly high and low
sale prices as reported by the New York Stock Exchange:
1999 HIGH LOW
- ---- -------- --------
First Quarter............................................... $ 29.25 $13.125
Second Quarter.............................................. $ 23.00 $15.188
Third Quarter............................................... $ 19.00 $ 7.75
Fourth Quarter.............................................. $ 8.375 $ 4.625
2000
- ------------------------------------------------------------
First Quarter............................................... $6.1875 $ 3.875
Second Quarter.............................................. $ 4.625 $ 2.625
Third Quarter............................................... $ 3.25 $1.5625
Fourth Quarter.............................................. $2.3125 $1.0625
As of March 19, 2001, there were 14,718,393 shares of Carriage's Class A
Common Stock and 1,792,720 shares of the Class B Common Stock outstanding. The
holders of Class A Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of Common stockholders. The holders of Class B
Common Stock are entitled to ten votes for each share held on all matters
submitted to a vote of Common stockholders. The Class A Common Stock shares
outstanding are held by approximately 250 stockholders of record. We believe
there are approximately 4,000 beneficial owners of the Class A Common Stock.
We have never paid a cash dividend on our Class A or Class B Common Stock.
Carriage currently intends to retain earnings to finance the growth and
development of our business and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Any future change in our dividend
policy will be made at the discretion of our Board of Directors in light of the
financial condition, capital requirements, earnings and prospects of Carriage
and any restrictions under credit agreements, as well as other factors the Board
of Directors may deem relevant.
During December 2000, the Company's Board of Directors authorized the
issuance of an aggregate of 365,915 shares of our Class A Common Stock to
executive officers and other key employees of the Company, as bonus grants in
recognition of their performance in 2000, payable in 2001. The Company relied
upon the exemption provided by Section 4(2) of the Securities Act of 1933 in
issuing the stock.
15
ITEM 6. SELECTED FINANCIAL DATA
The income statement data presented hereunder for the years 1996 through
1999 was prepared using the accounting principles employed prior to the
implementation of SAB 101 which was effective January 1, 2000.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
INCOME STATEMENT DATA:
Revenue, net:
Funeral.................................... $37,445 $64,888 $ 92,965 $125,264 $ 127,261
Cemetery................................... 2,903 12,533 23,876 43,203 35,345
------- ------- -------- -------- ---------
Total net revenues......................... 40,348 77,421 116,841 168,467 162,606
------- ------- -------- -------- ---------
Gross profit:
Funeral.................................... 6,804 16,484 28,036 35,539 26,891
Cemetery................................... 362 2,899 6,288 10,945 5,285
------- ------- -------- -------- ---------
Total gross profit......................... 7,166 19,383 34,324 46,484 32,176
General and administrative expense......... 2,474 5,277 7,581 9,265 10,256
Special and other charges.................. -- -- -- 2,500 102,250
------- ------- -------- -------- ---------
Operating income (loss).................... 4,692 14,106 26,743 34,719 (80,330)
Interest expense, net...................... (4,347) (5,889) (9,720) (17,358) (20,705)
Other income............................... -- -- -- 2,000 --
------- ------- -------- -------- ---------
Income (loss) before income taxes.......... 345 8,217 17,023 19,361 (101,035)
Provision (benefit) for income taxes....... 138 3,726 7,490 8,474 (8,032)
------- ------- -------- -------- ---------
Net income (loss) before extraordinary item
and cumulative effect of the change in
accounting principle..................... 207 4,491 9,533 10,887 (93,003)
Extraordinary item, net.................... (498) (195) -- (200) --
Cumulative effect of the change in
accounting, net.......................... -- -- -- -- (38,993)
------- ------- -------- -------- ---------
Net income (loss).......................... (291) 4,296 9.533 10,687 (131,996)
Preferred stock dividends.................. 622 890 606 93 81
------- ------- -------- -------- ---------
Net income (loss) available to common
stockholders............................. $ (913) $ 3,406 $ 8,927 $ 10,594 $(132,077)
======= ======= ======== ======== =========
Earnings (loss) per share
Basic:
Continuing operations...................... $ (.09) $ .35 $ .67 $ .68 $ (5.80)
Extraordinary item......................... (.10) (.02) -- (.01) --
Cumulative effect of the change in
accounting principle..................... -- -- -- -- (2.43)
------- ------- -------- -------- ---------
Basic earnings (loss) per share............ $ (.19) $ .33 $ .67 $ .67 $ (8.23)
======= ======= ======== ======== =========
Diluted:
Continuing operations...................... $ (.09) $ .34 $ .65 $ .67 $ (5.80)
Extraordinary item......................... (.10) (.02) -- (.01) --
Cumulative effect of the change in
accounting principle..................... -- -- -- -- (2.43)
------- ------- -------- -------- ---------
Diluted earnings (loss) per share.......... $ (.19) $ .32 $ .65 $ .66 $ (8.23)
======= ======= ======== ======== =========
16
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
Pro forma amounts assuming the change in
accounting is applied retroactively:
Income (loss) before extraordinary item.... $ 207 $ 2,999 $ 6,673 $ 6,078 $ (93,003)
Basic earnings per share................... $ (.09) $ .21 $ .46 $ .38 $ (5.80)
Diluted earnings per share................. $ (.09) $ .20 $ .44 $ .37 $ (5.80)
Net income (loss).......................... $ (291) $ 2,804 $ 6,673 $ 5,878 $(131,996)
Basic earnings per share................... $ (.19) $ .19 $ .46 $ .36 $ (8.23)
Diluted earnings per share................. $ (.19) $ .18 $ .44 $ .36 $ (8.23)
Weighted average number of common and
common equivalent shares outstanding:
Basic...................................... 4,869 10,226 13,315 15,875 16,056
------- ------- -------- -------- ---------
Diluted.................................... 4,869 10,485 13,808 16,136 16,056
======= ======= ======== ======== =========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period............. 76 120 166 182 172
Cemeteries at end of period................ 10 20 27 41 38
Funeral services performed during period... 7,181 12,131 16,881 22,869 23,150
Preneed funeral contracts sold............. 3,760 4,020 6,481 9,814 8,031
Backlog of preneed funeral contracts....... 22,925 34,797 57,185 83,754 89,391
Depreciation and amortization.............. $ 3,629 $ 7,809 $ 11,444 $ 16,992 $ 21,407
BALANCE SHEET DATA:
Working capital............................ $ 5,089 $ 5,823 $ 11,546 $ 22,185 $ 13,892
Long-term debt, net of current
maturities............................... 42,733 21,553 212,972 178,942 176,662
Redeemable preferred stock................. 17,251 13,951 1,673 91,026 91,100
Shareholders' equity....................... $57,043 $98,565 $200,394 $212,009 $ 77,237
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Carriage is a leading provider of death care services and products in the
United States. Our historical focus has been on operational enhancements at
facilities currently owned to increase revenues and gross profit, as well as
growth through acquisitions (although this activity was curtailed significantly
in 2000). That focus has resulted in high standards of service, operational
performance, and an infrastructure containing measurement and management
systems. The operating focus for 1999 included institutionalizing internal
training, internal growth, and making quality initiatives introduced in 1998 an
integral part of the culture. In 2000, the operating strategy was dramatically
shifted to focus upon increasing operating cash flow. In September 2000, we
launched a multi-faceted, restructuring program, called "Fresh Start", which is
designed to increase financial and operating performance, improve cash flow,
reduce debt, and assist Carriage in fulfilling our mission of being the highest
quality funeral and cemetery service organization in the industry. Many elements
of this program have already been completed.
The implementation of SAB 101 retroactively effective with the beginning of
the year 2000 had a significant impact on our operating results, particularly on
the accounting for cemetery revenues and costs. The accounting changes are
summarized as follows:
(1) Preneed sales of interment rights (burial property)--Revenue and all costs
are now recognized in accordance with the retail land sales provisions of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate". This method provides that revenue is recognized in the period
in which the customer's cumulative payments equal or exceeds 10% of the
contract
17
price related to the interment right. Previously, the revenue and costs were
recognized at the time of contract execution with the customer.
(2) Preneed sales of merchandise--Revenue and all costs are now recognized when
the merchandise is delivered. Previously, the revenue and costs were
recognized at the time of contract execution with the customer.
(3) Preneed sales of cemetery service fees (primarily openings and closings of
burial property and installations of markers)--Revenue and all costs are
deferred until the service is performed. Previously, the revenue and costs
were recognized at the time of contract execution with the customer.
(4) Earnings on cemetery merchandise and services trusts--The trust earnings are
deferred until the underlying merchandise is delivered or the service is
performed. Previously the earnings were recognized as they were earned on
the trust investments.
(5) Preneed cemetery trust funds--Previously, cemetery trust funds were netted
against preneed liabilities on the balance sheet. The amount of these
trusts, beginning January 1, 2000, are included in the non-current asset
section of the balance sheet.
(6) Preneed funeral contracts and deferred preneed funeral contract revenue--The
amount of the preneed funeral contracts receivable, the amount of the funds
deposited in trust and the amount of life insurance contracts are recognized
as an asset on the balance sheet titled "Preneed funeral contracts". The
amount of the preneed funeral contracts is also recognized in the liability
section of the balance sheet titled "Deferred preneed funeral contracts
revenue". Previously, these assets and liabilities were not recorded on the
balance sheet.
The following table presents selected financial data for the years 1996
through 1999 on a pro forma basis assuming the application of the change in
accounting principle at the beginning of the earliest year presented:
PRO FORMA
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
Revenue, net:
Funeral............................................... $37,445 $64,539 $ 92,184 $123,921
Cemetery.............................................. 2,903 9,251 16,908 30,975
------- ------- -------- --------
Total net revenues.................................... 40,348 73,790 109,092 154,896
------- ------- -------- --------
Gross profit:
Funeral............................................... 6,804 16,184 27,623 34,529
Cemetery.............................................. 362 903 2,301 4,556
------- ------- -------- --------
Total gross profit.................................... 7,166 17,087 29,924 39,085
General and administrative expense.................... 2,474 5,277 7,581 9,265
Special and other charges............................. -- -- -- 2,500
------- ------- -------- --------
Operating income...................................... 4,692 11,810 22,343 27,320
Interest expense, net................................. (4,347) (5,889) (9,720) (17,358)
Settlement of Litigation.............................. -- -- -- 2,000
------- ------- -------- --------
Income before income taxes............................ 345 5,921 12,623 11,962
Provision for income taxes............................ 138 2,922 5,950 5,884
------- ------- -------- --------
Net income before extraordinary item.................. 207 2,999 6,673 6,078
Extraordinary item, net............................... (498) (195) -- (200)
------- ------- -------- --------
Income (loss) after extraordinary item................ (291) 2,804 6,673 5,878
Preferred stock dividends............................. 622 890 606 93
------- ------- -------- --------
Net income (loss) available to common stockholders.... $ (913) $ 1,914 $ 6,067 $ 5,785
======= ======= ======== ========
18
All of the following 1996 through 1999 amounts, and comparisons thereto in
the Overview, Results of Operations and Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999 sections, have been adjusted for the pro forma
effect of applying the change in accounting to those periods for comparability.
The principal reason for the change between the revenues and gross profits when
comparing the results for the year ended December 31, 2000, to the historical
results for the year ended December 31, 1999 is the implementation of SAB 101.
Income from operations, which we define as earnings before special and other
charges, interest and income taxes increased, as a percentage of net revenues,
from 11.6% in 1996, to 16.0% in 1997, to 20.5% in 1998, and decreased to 19.3%
in 1999. Income from operations, as a percentage of net revenues, for the year
ended December 31, 2000, decreased to 13.5%. Gross margins for funeral homes
increased from 25.1% in 1997 to 30.0% in 1998 and decreased to 27.9% in 1999 and
to 21.1% in 2000. As a percentage of cemetery net revenues, cemetery gross
profit increased from 9.8% in 1997, to 13.6% in 1998, to 14.7% in 1999, and to
15.0% in 2000.
We have experienced significant growth since the end of 1996 when we owned
86 facilities. We acquired 54 facilities in 1997, 55 facilities in 1998, 31
facilities in 1999 and two additional facilities in 2000. In a deliberate and
managed process, we increased personnel and related infrastructure as a function
of the increase in our revenue run-rate. As a consequence, general and
administrative expenses increased from $2.5 million in 1996; to $5.3 million in
1997; to $7.6 million in 1998; to $9.3 million in 1999, excluding the special
charge of $2.5 million; and to $10.3 million in 2000, excluding the special and
other charges totaling $102.3 million. However, general and administrative
expenses, as a percentage of revenues over these periods, were 6.1% in 1996,
7.1% in 1997, 6.9% in 1998, 6.0% in 1999, exclusive of the special charge, and
6.3% in 2000, exclusive of the special and other charges. The additional
personnel filled critical roles in expanding the geographic coverage of both
operations and preneed sales and marketing activities, as well as the financial,
data processing and administrative functions needed to support the growing
number of locations operating in a decentralized management fashion with timely
financial and management information. During this time we restructured and
expanded the preneed funeral and cemetery sales organization significantly.
A key element of the "Fresh Start" program was the subsequent downsizing of our
corporate organization, which was completed during the fourth quarter of 2000. A
significant percentage of this overhead reduction related to the elimination of
our national preneed funeral sales organization whose costs had been previously
capitalized.
During 1997, we acquired 44 funeral homes and ten cemeteries for an
aggregate consideration of approximately $118 million. We acquired 48 funeral
homes and seven cemeteries during 1998 for approximately $159 million. During
1999, we acquired 17 funeral homes and 14 cemeteries for an aggregate
consideration of approximately $45 million. We funded these acquisitions through
cash flow from operations, additional borrowings under our credit facilities and
issuance of preferred and common stock. During 1999, we reduced the price we
were willing to pay for businesses as compared to the two most recent years,
which resulted in a decline in acquisitions and related spending for 1999. In
2000, acquisition activity was limited to one funeral home and a long-term
agreement to manage a municipal cemetery.
By the middle of 2000 it became clear that we were losing market share in
certain of our markets and costs were not being reduced where we were losing
business. As part of our Fresh Start program, a rigorous review of the funeral
home and cemetery businesses was conducted during the third and fourth quarter
of 2000, and our businesses was stratified into three groups: core,
underperforming and targeted for sale. An estimate of the fair value less costs
to sell was determined for each of the businesses that are categorized as
targeted for sale. Impairment charges aggregating approximately $29.3 million
are included in special and other charges in the 2000 Statement of Operations
for those businesses targeted for sale to reduce the carrying value to the
estimated fair value less costs to sell. Proceeds on sales of businesses during
the second half of 2000 totaled approximately $4.8 million.
19
Long-term cash flow forecasts were prepared to evaluate the carrying value for
those businesses categorized as underperforming. In those instances in which our
investment in the long-lived assets of particular businesses was determined to
exceed estimated future cash flows, the investment was written down, through an
impairment charge, to the present value of those future cash flows. Impairment
charges totaling $51 million are also included in Special and other charges in
the 2000 Statement of Operations for the businesses that are categorized as
underperforming.
For the year 2000 in our funeral segment, the core group represented 61% of
funeral home revenues and 68% of field level cash flow; the underperforming
group 31% of revenues and 28% of cash flow; and the sold and targeted for sale
group 8% of revenues and 4% of cash flows.
In the 2000 Statement of Operations, other items included in Special and
other charges, that totaled $18.4 million, consists of costs related to employee
termination severance costs as a result of downsizing the corporate
organization, accruals for office closures, write-offs of other assets and
adjustments to depreciation and amortization that resulted from restructuring
actions. Special charges totaling $7.5 million are included in accrued
liabilities at December 31, 2000, substantially all of which are expected to be
paid by December 31, 2001.
Because a substantial portion of the impairment charges were recorded
against Names and Reputations at the end of the third quarter and the beginning
of the fourth quarter, the amount on the balance sheet was reduced from
$229.2 million at June 30, 2000 to $166.6 million at December 31, 2000.
Amortization of Names and Reputations for the fourth quarter was $1.0 million,
or $.06 per basic and diluted share, versus $1.5 million or $.09 per basic and
diluted share recorded in each of the first three quarters of 2000.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for Carriage
expressed as a percentage of net revenues for the periods presented:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1999
(PRO FORMA) (PRO FORMA) 2000
----------- ----------- --------
Total revenues, net......................................... 100.0% 100.0% 100.0%
Total gross profit.......................................... 27.4 25.2 19.8
General and administrative expenses......................... 6.9 6.0 6.3
Operating income, excluding special charges................. 20.5 19.2 13.5
Interest expense, net....................................... 8.9 11.2 12.7
Net income before extraordinary item, special charges and
cumulative effect of the change in accounting principle... 6.1 5.5 0.6
20
The following table sets forth the number of funeral homes and cemeteries
owned and operated by Carriage for the periods presented:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- --------- --------
Funeral homes at beginning of period........................ 120 166 182
Acquisitions................................................ 48 17 1
Divestitures and merger of existing funeral homes........... 2 1 11
----- ----- -----
Funeral homes at end of period.............................. 166 182 172
===== ===== =====
Cemeteries at beginning of period........................... 20 27 41
Acquisitions................................................ 7 14 1
Divestitures................................................ -- -- 4
----- ----- -----
Cemeteries at end of period................................. 27 41 38
===== ===== =====
The following is a discussion of Carriage's results of operations for 1998,
1999, and 2000. For purposes of this discussion, funeral homes and cemeteries
owned and operated for the entirety of each year being compared are referred to
as "existing operations". Operations acquired or opened during either year being
compared are referred to as "acquired operations".
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
FUNERAL HOME SEGMENT. The following sets forth certain information
regarding Carriage's net revenues and gross profit from our funeral home
operations during the years ended December 31, 1999 and 2000:
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- -------------------
1999
PRO FORMA 2000 AMOUNT PERCENT
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues............................................ $123,921 $127,261 $ 3,340 2.7%
======== ======== =======
Gross profit............................................ $ 34,529 $ 26,891 $(7,638) (22.1)%
======== ======== =======
Existing operations performed 504 (2.5%) fewer services in 2000, compared to
1999, at an average price that was $12 higher than 1999, resulting in a decrease
in revenue of $2,481,000 from 2000 to 1999. Acquired operations provided an
increase in revenue of $5,869,000, and there was a decrease in revenue in
comparing 2000 to 1999 of $1,245,000 because of businesses that were sold or
discontinued during the period.
The impact on field level revenues by the three groups was as follows:
AVERAGE
NUMBER OF REVENUE PER REVENUES
2000 INCREASE (DECREASE) AS COMPARED TO 1999 SERVICES SERVICE (IN 000'S)
- -------------------------------------------- --------- ----------- -------------------
% % $ %
Core.................................................... 1.8 0.9 1,688 2.7
Underperforming......................................... (9.0) 0.5 (3,208) (8.5)
Targeted for sale....................................... (6.9) (6.0) (961) (12.9)
Gross profit decreased from 1999 to 2000 primarily because of the operating
results of the underperforming and targeted for sale groups and higher operating
costs that were not passed through in way of higher prices to the consumer.
Within our existing businesses, the decline in gross profit was very pronounced
in the underperforming and targeted for sale groups. Higher operating costs
occurred in the form of casket and merchandise price increases, insurance
increases, as well as general inflation
21
in salaries and wages. Additionally, depreciation and amortization were higher
in 2000, compared to 1999.
CEMETERY SEGMENT. The following sets forth certain information regarding
Carriage's net revenues and gross profit from cemetery operations for the years
ended December 31, 1999 and 2000:
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- -------------------
1999
PRO FORMA 2000 AMOUNT PERCENT
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues.............................................. $30,975 $35,345 $4,370 14.1%
======= ======= ======
Gross profit.............................................. $ 4,556 $ 5,285 $ 729 16.0%
======= ======= ======
Cemeteries acquired in 1999 and 2000 contributed additional revenues of
approximately $4 million and attributed to the majority of the increase in gross
profit.
22
OTHER
General and administrative expenses for the year ended December 31, 2000,
increased $1.0 million or 10.7% over 1999. As a percentage of net revenues,
general and administrative expenses increased from 6.0% in 1999 to 6.3% in 2000.
Interest expense for the year ended December 31, 2000, increased
$3.3 million or 19.3% over 1999 resulting from higher financing costs and
interest rates, and higher debt levels resulting from the prior year
acquisitions.
Special and other charges for the year ended December 31, 2000 were
$102.3 million as discussed in the previous Overview section compared to
$2.5 million for the year ended December 31, 1999. The 1999 Special and other
charges related to compensation charges in connection with contract extensions
to certain top executive officers.
Other income in 1999 relates to the reduction of a previously estimated
liability related to a lawsuit which was settled. There was no other income
recorded during 2000.
Preferred dividends of $93,000 for 1999 and $81,000 for 2000 were subtracted
from net income in computing earnings attributable to common stockholders for
purposes of computing basic and diluted earnings per common share.
Carriage provided for income taxes and tax benefits on income before income
taxes and extraordinary item at a combined state and federal tax rate of 43.8%
and 7.9% for the years ended December 31, 1999 and 2000, respectively.
Amortization of names and reputations related to certain acquisitions, which is
nondeductible, is the primary cause of our effective rate exceeding the combined
federal and state statutory income tax rates in 1999. The sale of properties in
2000 generated substantial losses for income tax purposes. The low tax rate for
the year 2000 is due to the limitation on the tax benefit, of those losses, to
the amount that can reasonably be expected to be refunded in the foreseeable
future from carrybacks of the tax loss.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding Carriage's net revenues and gross profit from our funeral home
operations during the years ended December 31, 1998 and 1999:
YEAR ENDED
DECEMBER 31, CHANGE
------------------- -------------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations................................... $79,954 $ 82,993 $ 3,039 3.8%
Acquired operations................................... 13,011 42,271 29,260 *
------- -------- -------
Total net revenues...................................... $92,965 $125,264 $32,299 34.7%
======= ======== =======
Gross profit:
Existing operations................................... $23,767 $ 23,387 $ (380) (1.6)%
Acquired operations................................... 4,269 12,152 7,883 *
------- -------- -------
Total gross profit...................................... $28,036 $ 35,539 $ 7,503 26.8%
======= ======== =======
- ------------------------
* Not meaningful.
As a result of Carriage's rapid growth, existing operations represented only
66% of the total funeral revenues and only 66% of the total funeral gross profit
for the year ended December 31, 1999.
22
Total funeral net revenues for the year ended December 31, 1999, increased
$32.3 million or 34.7% over 1998. The higher net revenues reflect an increase of
$29.3 million in net revenues from acquired operations and an increase in net
revenues of $3.0 million or 3.8% from existing operations. For existing
operations there was a 2.6% increase in the average revenue per funeral service,
and a 1.2% increase in the number of funeral services performed.
Total funeral gross profit for the year ended December 31, 1999, increased
$7.5 million or 26.8% over 1998. The higher total gross profit reflected an
increase of $7.9 million from acquired operations and a slight decrease from
existing operations. Gross profit for existing operations decreased primarily
due to the increase in the percent of funeral services which involved cremations
compared to the prior year, as well as a higher portion of incentive
compensation payable in cash rather than in stock options. Total gross margin
decreased from 30.2% for 1998 to 28.4% for 1999.
CEMETERY SEGMENT. The following table sets forth certain information
regarding Carriage's net revenues and gross profit from cemetery operations for
the years ended December 31, 1998 and 1999:
YEAR ENDED
DECEMBER 31, CHANGE
------------------- -------------------
1998 1999 AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations.................................... $20,518 $20,760 $ 242 1.2%
Acquired operations.................................... 3,358 22,443 19,085 *
------- ------- -------
Total net revenues....................................... $23,876 $43,203 $19,327 80.9%
======= ======= =======
Gross profit:
Existing operations.................................... $ 5,888 $ 5,080 $ (808) (13.7)%
Acquired operations.................................... 400 5,865 5,465 *
------- ------- -------
Total gross profit....................................... $ 6,288 $10,945 $ 4,657 74.1%
======= ======= =======
- ------------------------
* Not meaningful.
As a result of Carriage's rapid growth, existing operations represented
approximately 48.1% of cemetery revenues and approximately 46.4% of cemetery
gross profit for the year ended December 31, 1999.
Total cemetery net revenues for the years ended December 31, 1999 increased
$19.3 million or 80.9% over 1998 and total cemetery gross profit increased
$4.7 million or 74.1% over 1998. The higher net revenues reflect an increase of
$19.1 million in net revenues from acquired operations and a moderate increase
in revenues from existing operations. Total gross margin decreased slightly from
26.3% for the year ended December 31, 1998 to 25.3% for the year ended
December 31, 1999. The decrease in gross margin was due primarily to our
acquisition of 14 cemeteries during 1999, and increased preneed marketing
expenditures.
OTHER
During 1999, the Board of Directors authorized new five-year contracts to
certain top executive officers. A special compensation charge in the amount of
$2.5 million was recorded in general and administration expenses in connection
with the contract extensions.
General and administrative expenses for the year ended December 31, 1999,
increased $4.2 million or 55.2% over 1998. The increase was $1.7 million or
22.2% without the special compensation charge. As a percentage of net revenues,
general and administrative expenses decreased, without including the special
compensation charge, as the expenses were spread over a larger volume of
revenue.
23
Interest expense for the year ended December 31, 1999, increased
$7.6 million or 79% over 1998 due to higher financing costs and interest rates
and increased borrowings for acquisitions.
All of the Series F redeemable preferred stock, or approximately
$20 million, were converted to Class A common stock by December 31, 1998.
Dividends on this preferred stock were 4% per annum. Preferred dividends of
$606,000 for 1998 and $93,000 for 1999 were subtracted from net income in
computing earnings attributable to common stockholders, for purposes of
computing basic and diluted earnings per common share. The reduction in
preferred stock dividends from 1998 to 1999 was due to conversions of preferred
stock to common stock during the year.
Carriage provided for income taxes on income before income taxes and
extraordinary item at a combined state and federal tax rate of 44% and 43.8% for
the years ended December 31, 1998 and 1999, respectively. Amortization of names
and reputations related to certain acquisitions, which is nondeductible, is the
primary cause of our effective rate exceeding the combined federal and state
statutory income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3.2 million at December 31, 2000,
representing an increase of $693,000 from December 31, 1999. For the year ended
December 31, 2000, cash provided by operations was $27.1 million as compared to
$17.0 million for the year ended December 31, 1999. The increase in net cash
provided by operations was principally a result of a decrease in the growth of
receivables, inventory and preneed funeral costs. Cash used in investing
activities was $18.5 million for the year ended December 31, 2000 compared to
$66.7 million in 1999, primarily due to a slowing in the number of acquisitions
in 2000 as compared to the number in 1999. In 2000, cash flow used by financing
activities amounted to approximately $8.0 million, primarily due to the payments
to prior owners on acquisition related obligations incurred in prior years, and
the fees associated with the modification of our financial covenants, a critical
element in our "Fresh Start" restructuring program. At December 31, 2000, the
Company had additional obligations of contingent payments to prior owners
outstanding totaling up to $11.0 million. Approximately half of these
obligations are anticipated to be due in the second quarter of 2001 with the
remainder due in the first quarter of 2002. Aside from these obligations, for
the next two years the Company currently intends to utilize the majority of free
cash flow and proceeds from the sale of assets to reduce the amount of debt
outstanding and thereby improve credit ratios.
On June 3, 1999, the Company's subsidiary, Carriage Services Capital Trust,
completed the sale of 1,875,000 units of 7% convertible preferred securities,
with a maturity in 30 years, resulting in approximately $90 million in net
proceeds to the Company, of which $77.4 million was used to repay outstanding
indebtedness under the Company's credit facility, with the remaining
$12.6 million used for general corporate purposes.
On July 1, 1999, the Company issued $110 million in senior debt notes and
used the proceeds to reduce the amount outstanding under the Company's revolving
line of credit. The notes are unsecured, mature in traunches of $25 million in
five, $60 million in seven and $25 million in nine years and bear interest at
the fixed rates of 7.73%, 7.96% and 8.06%, respectively.
Historically, we have financed our acquisitions with proceeds from debt and
the issuance of common and preferred stock. As of December 31, 1999 and 2000, we
had 1,182,500 shares of Series D Preferred Stock issued and outstanding. The
Series D Preferred Stock is convertible into Class B Common Stock. The holders
of Series D Preferred Stock are entitled to receive cash dividends at an annual
rate of $.06 to $.07 per share depending upon when such shares were issued. The
Company 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
24
shares into shares of Class B Common Stock. On December 31, 2001, we 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. During the
twelve months ended December 31, 2000, holders of Series D Preferred Stock
converted no shares into shares of Class A Common Stock.
At December 31, 1999, the Company had a credit facility with a group of
banks for a $260 million revolving line of credit. On November 6, 2000, we
finalized our modified credit agreement to include a reduction in our bank
revolving credit facility from $260 million to $100 million. The reduction in
the revolving credit capacity reflected our intention to not make any additional
large acquisitions and, therefore we did not wish to continue paying a
commitment fee for availability that was not going to be used. With
$51.5 million available under our revolving credit facility at March 15, 2001,
the Company is currently positioned with adequate financial liquidity. We have
no significant maturities until 2004 and expect to have sufficient free cash
flow to satisfy or refinance our scheduled maturities as they occur. At
December 31, 2000, the Company's debt to total capitalization was 52.7%.
The Company's credit facility and Senior Notes modifications included new
covenants containing the following: (1) flexibility in the minimum net worth
requirement to allow for restructuring charges; (2) the addition of a limit on
the maximum ratio of debt to earnings before interest, taxes, depreciation and
amortization, which becomes more restrictive over time; and (3) the addition of
a provision limiting acquisitions above a certain size without prior approval.
While the Company projects that we will be able to stay within our financial
covenants, there is no assurance that we will be successful in doing so.
Similar modifications to the Senior Notes agreements additionally require
that a significant portion of any proceeds from the sales of assets be offered
to the note holders as prepayment of the amounts outstanding. At December 31,
2000, there was $110 million in principle amount outstanding under these notes.
In the first quarter of 2001 prepayments were made in the amount of
$1.8 million related to the $2.6 million proceeds from the sales of assets in
the fourth quarter of 2000.
During 2000 the Company modified its approach to marketing preneed funeral
contracts to: (1) emphasize insurance products over trust products;
(2) eliminate the national and regional overhead management structure: and
(3) outsource a significant portion of the administration. These changes
significantly reduced the cash investment that has historically been required to
generate this backlog of business. In 1999, $49.1 million of preneed funeral
sales were generated for a cash outlay of $9.5 million. In 2000, $37.9 million
of preneed funeral sales were generated for a cash outlay of $6.0 million. In
2001, it is anticipated that both the level of preneed funeral sales and the
related cash outlay will be further reduced.
During the twelve months ended December 31, 2000, the Company incurred
approximately $10.5 million in capital expenditures, primarily related to
constructing new funeral home facilities at a number of our locations. The
Company believes that cash flow from operations and borrowings under the credit
facility should be sufficient to fund any acquisitions and anticipated capital
expenditures as well as other ongoing operating requirements. During 2000, the
Company spent approximately $2 million for the acquisition of a cemetery
municipal agreement, one funeral home and other acquisition related activity.
Acquisition spending during 2001 is anticipated to be less than the amounts
during either of the two preceding years. The Company anticipates that the
capital expenditures in 2001 will primarily be limited to those that are
required to maintain the revenue capability of its existing businesses. It does
not anticipate making significant capital expenditures to grow or enhance new
revenue streams or acquire new businesses. Because future cash flows and the
availability of financing are subject to a number of variables 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 in the
future. The availability and terms of these capital sources will depend on
prevailing market conditions and interest rates and the then-existing financial
condition of the Company.
25
ACCOUNTING CHANGES
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, which, as amended, was implemented for the fourth quarter of 2000,
and applied retroactively to the first three quarters of this fiscal year, to
provide guidance related to recognizing revenue in circumstances in which no
specific authoritative literature exists. Members of the death care industry, in
consultation with the Commission, have agreed to certain changes in the manner
in which cemetery preneed sales and costs are recorded. The change that is most
meaningful to the Company is a change from recording cemetery merchandise and
service revenue and their related costs at the time the contract is executed, to
the period in which they are delivered. These accounting changes do not result
in a material change in net cash flows nor the amount of revenues we ultimately
expect to realize.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and
Hedging Activities", for which the effective date was deferred to years
beginning after June 15, 2000 by SFAS No. 137, and amended by SFAS No. 138 to
establish accounting and financial reporting standards for certain derivative
instruments and certain hedging activities. The key provisions of SFAS No. 133,
as amended, are that every derivative will be recognized as an asset or
liability at its fair value and that later changes in fair value are generally
reported in earnings or other comprehensive income. The Company is currently
engaged in interest rate swaps that have a notional amount of $30 million to
hedge against rising interest rates on its variable rate long-term debt. The
swaps, which had a fair value of $2.2 million and $2,341 at December 31, 1999
and December 31, 2000, respectively, are currently carried off-balance sheet,
but will be reflected on the balance sheet at fair value when the Company
implements SFAS 133 effective January 1, 2001.
POTENTIAL ACCOUNTING CHANGE
The Financial Accounting Standards Board has issued an exposure draft, which
would change certain aspects in the manner in which businesses account for
business combinations. We expect these changes to be prospective in the nature
of adoption. The most significant of the proposed changes to Carriage would be
the elimination of the amortization of Names and Reputations, which would have
an estimated pre-tax impact of approximately $4 million or $.21 per diluted
share per year, and testing to determine impairments, if any, for long-lived
assets. The final pronouncement may change from the exposure draft.
SEASONALITY
Although the death care business is relatively stable and fairly
predictable, our business can be affected by seasonal fluctuations in the death
rate. Generally, death rates are higher during the winter months. In addition,
our quarterly results may fluctuate depending on the magnitude and timing of
acquisitions.
INFLATION
Inflation has not had a significant impact on the results of Carriage's
operations during the last three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
Carriage is exposed to market risk primarily related to potential adverse
changes in interest rates as discussed below. Management is actively involved in
monitoring exposure to market risk and developing and utilizing appropriate risk
management techniques. We are not exposed to any other significant market risks
including commodity price risk, nor foreign currency exchange risk.
26
Carriage is currently exposed to market risk from changes in interest rates.
Our variable rate long-term borrowings primarily consist of the $48.5 million
outstanding under our $100 million floating rate line of credit maturing in
2004. Any change in the floating rate will cause a change in interest expense.
We seek to minimize the risk that interest rates will increase by entering into
interest rate swap transactions. As of December 31, 2000, we were engaged in two
interest rate swaps in which we exchange the floating rate payments for fixed
rate payments at 90-day intervals. The interest rate swaps have a combined
notional amount of $30 million, mature in 2003, and have a weighted average
fixed rate of 6.048% and a fair value of $2,341 at December 31, 2000. Any
decrease in market interest rates, assuming all other things being equal, causes
the fair value of our interest rate swaps to decrease. The remainder of
Carriage's long-term debt and leases consist of non-interest bearing notes and
fixed rate instruments. Any increase in market interest rates causes the fair
value of those liabilities to decrease.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
incorporated under Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2001 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within
120 days after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2001 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2001 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2001 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Public
Accountants are filed as a part of this report on the pages indicated:
PAGE
--------
Report of Independent Public Accountants.................... 35
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... 36
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1999 and 2000.......................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1999 and 2000...... 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... 39
Notes to Consolidated Financial Statements.................. 40
(A) 2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
PAGE
--------
Report of Independent Public Accountants on Financial
Statement Schedule........................................ 62
Financial Statement Schedule II--Valuation and Qualifying
Accounts.................................................. 63
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
28
(A) 3 EXHIBITS
The exhibits to this report have been included only with the copies of this
report filed with the Securities and Exchange Commission. Copies of individual
exhibits will be furnished to stockholders upon written request to Carriage
Services, Inc. and payment of a reasonable fee.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation, as
amended, of the Company. Incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for
its fiscal year ended December 31, 1996.
3.2 Certificate of Amendment dated May 7, 1997. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for its fiscal quarter ended September 30,
1997.
3.3 Certificate of Decrease, reducing the authorized Series D
Preferred Stock. Incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ended September 30, 1997.
3.4 Certificate of Decrease, reducing the authorized Series F
Preferred Stock. Incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ended September 30, 1997.
3.5 Certificate of Elimination of the Series F Preferred Stock.
Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ended
June 30, 1999.
3.6 Certificate of Designation of the Company's Series G Junior
Participating Preferred Stock. Incorporated by reference to
Exhibit C to the Rights Agreement with American Stock
Transfer & Trust Company dated December 18, 2000, which is
attached as Exhibit 1 to the Company's Form 8-A filed
December 29, 2000.
3.7 Amended and Restated Bylaws of the Company. Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-05545).
*3.8 Amendments to the Bylaws of the Company effective December
18, 2000.
4.1 Certificate of Trust of Carriage Services Capital Trust.
Incorporated by reference to Exhibit 4.6 to the Company's
Form S-3 Registration Statement No. 333-84141.
4.2 Amended and Restated Declaration of Trust of Carriage
Services Capital Trust, dated June 3, 1999 among the
Company, Wilmington Trust Company, Wilmingto