CARRIAGE SERVICES INC - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-11961

 

CARRIAGE SERVICES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		76-0423828 (I.R.S. Employer Identification No.)
3040 Post Oak Boulevard, Suite 300, Houston, TX		77056
(Address of principal executive offices)		(Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer o		Accelerated filer þ		Non-Accelerated filer o		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

     The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of November 1, 2011 was 18,447,452

 

 

CARRIAGE SERVICES, INC.

INDEX

			Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2010 and September 30, 2011			3
Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2010 and 2011			4
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2011			5
Condensed Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. [Removed and Reserved]			31
Item 5. Other Information			31
Item 6. Exhibits			31
Signature
EX-11.1
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

		December 31,				September 30,
		2010				2011
						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,279			$	4,264
Accounts receivable, net of allowance for bad debts of $979 in 2010 and $822 in 2011			15,587				13,393
Inventories and other current assets			10,828				11,281
Total current assets			27,694				28,938
Preneed cemetery trust investments			79,691				62,322
Preneed funeral trust investments			81,143				70,798
Preneed receivables, net of allowance for bad debts of $1,933 in 2010 and $1,774 in 2011			24,099				24,224
Receivables from preneed funeral trusts			21,866				22,380
Property, plant and equipment, net of accumulated depreciation of $71,700 in 2010 and $76,223 in 2011			128,472				131,493
Cemetery property			71,128				71,450
Goodwill			183,324				190,430
Deferred charges and other non-current assets			7,860				11,844
Cemetery perpetual care trust investments			45,735				37,933
Total assets		$	671,012			$	651,812
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of senior long-term debt and capital lease obligations		$	563			$	574
Accounts payable and other liabilities			9,700				14,963
Accrued liabilities			14,896				13,402
Total current liabilities			25,159				28,939
Senior long-term debt, net of current portion			132,416				131,471
Convertible junior subordinated debentures due in 2029 to an affiliate			92,858				89,770
Obligations under capital leases, net of current portion			4,289				4,187
Deferred preneed cemetery revenue			50,125				58,914
Deferred preneed funeral revenue			39,517				40,331
Deferred preneed cemetery receipts held in trust			79,691				62,322
Deferred preneed funeral receipts held in trust			81,143				70,798
Care trusts’ corpus			45,941				37,927
Total liabilities			551,139				524,659
Commitments and contingencies
Redeemable preferred stock			200				200
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized; 21,311,000 and 21,546,000 shares issued at December 31, 2010 and September 30, 2011, respectively			213				216
Additional paid-in capital			200,987				201,020
Accumulated deficit			(70,951	)			(64,283	)
Treasury stock, at cost; 3,153,000 and 3,108,000 shares at December 31, 2010 and September 30, 2011, respectively			(10,576	)			(10,000	)
Total stockholders’ equity			119,673				126,953
Total liabilities and stockholders’ equity		$	671,012			$	651,812

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Revenues:
Funeral		$	33,292			$	33,689			$	101,817			$	108,361
Cemetery			12,193				10,389				35,032				34,482
			45,485				44,078				136,849				142,843
Field costs and expenses:
Funeral			22,866				21,546				65,956				68,378
Cemetery			8,329				7,351				23,462				22,160
Depreciation and amortization			2,184				2,035				6,417				6,459
Regional and unallocated funeral and cemetery costs			2,047				2,501				5,405				6,532
			35,426				33,433				101,240				103,529
Gross profit			10,059				10,645				35,609				39,314
Corporate costs and expenses:
General and administrative costs and expenses			3,808				4,788				11,375				14,390
Home office depreciation and amortization			314				255				1,038				750
			4,122				5,043				12,413				15,140
Operating income			5,937				5,602				23,196				24,174
Interest expense			(4,571	)			(4,564	)			(13,696	)			(13,628	)
Gain on repurchase of junior subordinated debentures			—				481				316				846
Loss on early extinguishment of debt			—				(201	)			—				(201	)
Interest income and other, net			1				13				154				34
Total interest and other			(4,570	)			(4,271	)			(13,226	)			(12,949	)
Income before income taxes			1,367				1,331				9,970				11,225
Provision for income taxes			(508	)			(539	)			(4,038	)			(4,546	)
Net income			859				792				5,932				6,679
Preferred stock dividend			4				5				11				12
Net income available to common stockholders		$	855			$	787			$	5,921			$	6,667
Basic earnings per common share:		$	0.05			$	0.04			$	0.34			$	0.36
Diluted earnings per common share:		$	0.05			$	0.04			$	0.33			$	0.36
Dividends declared per share		$	—			$	0.025			$	—			$	0.05
Weighted average number of common and common equivalent shares outstanding:
Basic			17,520				18,414				17,549				18,339
Diluted			17,726				18,461				17,775				18,381

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

		For the nine months ended September 30,
		2010				2011
Cash flows from operating activities:
Net income		$	5,932			$	6,679
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			7,455				7,209
Amortization of deferred financing costs			545				534
Gain on repurchase of convertible junior subordinated debentures			(316	)			(846	)
Loss on early extinguishment of debt			—				201
Provision for losses on accounts receivable			2,813				2,360
Stock-based compensation expense			1,396				1,558
Deferred income taxes			500				(3,642	)
Other			(149	)			(37	)
Changes in operating assets and liabilities that provided (required) cash:
Accounts and preneed receivables			(2,252	)			250
Inventories and other current assets			2,015				(775	)
Deferred charges and other			—				(38	)
Preneed funeral and cemetery trust investments			(987	)			3,604
Accounts payable and accrued liabilities			(1,799	)			3,321
Deferred preneed funeral and cemetery revenue			316				8,708
Deferred preneed funeral and cemetery receipts held in trust			1,080				(3,816	)
Net cash provided by operating activities			16,549				25,270
Cash flows from investing activities:
Acquisitions			(16,792	)			(10,300	)
Net proceeds from the sale of assets			400				—
Capital expenditures			(6,892	)			(7,774	)
Net cash used in investing activities			(23,284	)			(18,074	)
Cash flows from financing activities:
Borrowings under (payments on) the bank credit facility			5,000				(600	)
Payments on senior long-term debt and obligations under capital leases			(346	)			(436	)
Proceeds from the exercise of stock options and employee stock purchase plan			441				325
Dividends on common stock			—				(920	)
Dividends on redeemable preferred stock			(11	)			(12	)
Repurchase of convertible junior subordinated debentures			(576	)			(2,241	)
Payment of loan origination fees			—				(333	)
Other financing costs			(43	)			6
Net cash provided by (used in) financing activities			4,465				(4,211	)
Net (decrease) increase in cash and cash equivalents			(2,270	)			2,985
Cash and cash equivalents at beginning of period			3,616				1,279
Cash and cash equivalents at end of period		$	1,346			$	4,264

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company

     Carriage Services, Inc. (“Carriage”, the “Company”, “we”, “us” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of September 30, 2011, the Company owned and operated 155 funeral homes in 25 states and 33 cemeteries in 12 states.

     Principles of Consolidation

     The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

     Interim Condensed Disclosures

     The information for the three and nine month periods ended September 30, 2010 and 2011 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of financial position and results of operations as of and for the interim periods presented. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted. The accompanying Consolidated Financial Statements have been prepared consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2010 and should be read in conjunction therewith.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

     Use of Estimates

     The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.

     Business Combinations

     Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, assets, or liabilities associated with the acquisition. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.

     During the third quarter of 2010, the Company acquired a funeral home business in Huntington Beach, California. During the third quarter of 2011, the Company completed two funeral home acquisitions, one located in Duncan, Oklahoma and the other in Modesto, California. See Note 3 to the Consolidated Financial Statements herein for further information on the 2011 acquisitions.

     Stock Plans and Stock-Based Compensation

     The Company has stock-based employee and director compensation plans in the form of restricted stock, performance units, stock options and employee stock purchase plans, which are described in more detail in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010. The Company recognizes compensation expense in an amount equal to the fair value of the share-based awards issued over the period of vesting. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation

model. See Note 13 to the Consolidated Financial Statements included herein for additional information on the Company’s stock-based compensation plans.

     Computation of Earnings Per Common Share

     Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options.

     Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in both the basic and diluted weighted average shares outstanding calculation. See Exhibit 11.1 to this Quarterly Report on Form 10-Q for the computation of per share earnings.

     Preneed Funeral and Cemetery Trust Funds

     The Company’s preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus in the Company’s Consolidated Balance Sheets. The Company’s future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.

     In accordance with respective state laws, the Company is required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and memorial sold. Income from the trust funds is distributed to Carriage and used to provide care and maintenance for the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to the Company. The Company is restricted from withdrawing any of the principal balances of these funds.

     An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company’s analysis continues to support its position as the primary beneficiary in certain of our funeral and cemetery trust funds.

     Fair Value Measurements

     We define fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Additional required disclosures are provided in Note 10 to the Consolidated Financial Statements. The fair value disclosures to disclose transfers in and out of Levels 1 and 2 and the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy are also presented herein in Note 10 to the Consolidated Financial Statements. The Company currently does not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.

     To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the three months ended September 30, 2011, we did not incur significant decreases in the volume or level of activity of any asset or liability. The Company considers an impairment of debt and equity securities other-than-temporary unless (a) the investor has the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before the Company is more

likely than not required to sell the investment. If impairment is indicated, then an adjustment will be made to reduce the carrying amount to fair value. As of September 30, 2011, no impairment has been identified.

     In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. Our 7⅞% Senior Notes were issued to the public at par in January 2005 and are carried at a cost of $130 million. At September 30, 2011, these securities were typically trading at a price of approximately $98.0, indicating a fair market value of approximately $127.4 million. Our convertible junior subordinated debentures, payable to Carriage Services Capital Trust (the “Trust”), pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $90 million. The fair value of these securities is estimated to be approximately $79 million at September 30, 2011 based on available broker quotes of the corresponding preferred securities issued by the Trust.

     Income Taxes

     The Company and its subsidiaries file a consolidated U.S. Federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

     The Company analyzes tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provides certain disclosures of uncertain tax matters; and specifies how reserves for uncertain tax positions should be classified on the Consolidated Balance Sheets. The Company has reviewed its income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate a significant increase or decrease in its unrecognized tax benefits during the next twelve months.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

     Allowance for Credit Losses of Financing Receivables

     In July 2010, new guidance was issued which increased the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses. The intent of the disclosure is to provide additional information about the nature of credit risks inherent in our financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The disclosures related to period-end information were required for annual reporting periods ending after December 15, 2010, and thus effective for the Company at December 31, 2010. Disclosures of activity that occurs during the reporting period are required for interim periods beginning after December 15, 2010, and thus was effective for the Company for the period beginning January 1, 2011. The additional required disclosures are provided in Note 6 to the Consolidated Financial Statements.

     Goodwill Impairment Testing

     In September 2011, new guidance was issued to modify the method used to perform the first step of the two step process for the annual goodwill impairment test. The guidance permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests

performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company adopted this update early for its annual impairment testing as of August 31, 2011.

     Pro Forma Information for Business Combinations

     In December 2010, new guidance was issued for disclosing supplementary pro forma information for business combinations that are material on an individual or aggregate basis. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, and thus was effective for the Company for the period beginning January 1, 2011. The adoption of this accounting standard update will apply to material business combinations and is not expected to have a material impact on our Consolidated Financial Statements.

     Fair Value Measurements

     In May 2011, additional guidance was issued regarding how fair value measurements and disclosures should be applied where it is already required or permitted under International Financial Reporting Standards or United States Generally Accepted Accounting Principles. This new guidance clarifies and aligns the existing application of fair value measurement guidance and revises certain language. This guidance is effective for the first interim or annual period beginning after December 15, 2011, thus effective for the Company for the period beginning January 1, 2012. The Company is currently evaluating the impact the adoption will have on its Consolidated Financial Statements.

     Comprehensive Income

     In June 2011, new guidance was issued regarding the reporting of comprehensive income in the financial statements. Entities will have the option to present the components of net income and comprehensive income in either a single continuous statement or two separate but consecutive statements. This new guidance eliminates the option to report other comprehensive income and its components in the statement of changes in stockholder’s equity. This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, thus effective for the Company for the period beginning January 1, 2012. The Company is currently evaluating the impact, if any, the adoption will have on its Consolidated Financial Statements.

3. ACQUISITIONS

     Our growth strategy includes the execution of our Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We assess acquisition candidates using six strategic ranking criteria and to differentiate the price we are willing to pay. Those criteria are:

•

Size of business

•

Size of market

•

Competitive standing

•

Demographics

•

Strength of brand

•

Barriers to entry

     During the third quarter of 2011, the Company completed two acquisitions. The consideration paid for those businesses was $5.2 million in cash. The Company acquired substantially all the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts of a funeral business in Oklahoma. The second acquisition was a funeral business in California in which the Company is leasing the funeral home facilities for approximately $142,000 annually. The assets and liabilities were recorded at fair value and included goodwill. The results of the acquired businesses are included in the Company’s results from the date of acquisition. Selected information on the acquisitions follows (in millions):

Assets

Acquired

Liabilities

(Excluding

Goodwill

and Debt

Acquisition Date

Type of Business

Market

Goodwill)

Recorded

Assumed

August 2011

Funeral Home

Duncan, OK

$

1.6

$

2.4

—

September 2011

3 Funeral Homes

Modesto, CA

$

0.1

$

1.1

—

     The effect of the acquisitions on the Consolidated Balance Sheets at September 30, 2011 was as follows (in thousands):

Current assets			55
Property, plant & equipment			1,638
Goodwill			3,514
Preneed funeral trust investment			104
Deferred preneed receipts held in trust			(104	)
Accrued liabilities			(7	)
Total consideration		$	5,200

4. GOODWILL

     Many of the former owners and staff of acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.

     The following table presents the changes in goodwill in the accompanying Consolidated Balance Sheets (in thousands):

		September 30, 2011
Goodwill at beginning of year		$	183,324
Acquisitions and changes in previous estimates			7,106
Goodwill at end of period		$	190,430

     Changes in previous estimates are related to adjustments for inventory values.

5. PRENEED TRUST INVESTMENTS

     Preneed Cemetery Trust Investments

     Preneed cemetery trust investments represent trust fund assets that the Company will withdraw when the merchandise or services are provided. The components of preneed cemetery trust investments in our Consolidated Balance Sheets at December 31, 2010 and September 30, 2011 are as follows (in thousands):

		December 31, 2010				September 30, 2011
Preneed cemetery trust investments		$	81,771			$	64,580
Less: allowance for contract cancellation			(2,080	)			(2,258	)
		$	79,691			$	62,322

     Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss provision would be recorded.

     The cost and fair market values associated with preneed cemetery trust investments at September 30, 2011 are detailed below (in thousands). The Company determines whether or not the assets in the preneed cemetery trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded in Deferred preneed cemetery receipts held in trust. There will be no impact on earnings unless and until such time that this asset is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

						Unrealized				Unrealized
		Cost				Gains				Losses				Fair Market Value
Cash and money market accounts		$	1,139			$	—			$	—			$	1,139
Fixed income securities:
Corporate debt			39,016				405				(3,264	)			36,157
Other			2				—				—				2
Common stock			31,326				49				(8,808	)			22,567
Mutual funds:
Equity			3,769				33				—				3,802
Trust securities		$	75,252			$	487			$	(12,072	)		$	63,667
Accrued investment income		$	913											$	913
Preneed cemetery trust investments														$	64,580
Fair market value as a percentage of cost															84.6	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	—
Due in one to five years			2,576
Due in five to ten years			12,273
Thereafter			21,310
		$	36,159

     Preneed cemetery trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2011 are as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Investment income		$	844			$	840			$	2,423			$	2,704
Realized gains			3,182				3,779				8,938				13,871
Realized losses			(27	)			(597	)			(733	)			(1,143	)
Expenses and taxes			(130	)			(252	)			(449	)			(1,105	)
Increase in deferred preneed cemetery receipts held in trust			(3,869	)			(3,770	)			(10,179	)			(14,327	)
		$	—			$	—			$	—			$	—

     Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Purchases		$	(10,449	)		$	(42,832	)		$	(42,818	)		$	(87,897	)
Sales			10,028				51,730				41,214				97,406

     Preneed Funeral Trust Investments

     Preneed funeral trust investments represent trust fund assets that the Company expects to withdraw when the services and merchandise are provided. Preneed funeral contracts are secured by funds paid by the customer to the Company. Preneed funeral trust investments are reduced by the trust earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. The components of preneed funeral trust investments in our Consolidated Balance Sheets at December 31, 2010 and September 30, 2011 are as follows (in thousands):

		December 31, 2010				September 30, 2011
Preneed funeral trust investments		$	83,324			$	73,245
Less: allowance for contract cancellation			(2,181	)			(2,447	)
		$	81,143			$	70,798

     Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss provision would be recorded.

     The cost and fair market values associated with preneed funeral trust investments at September 30, 2011 are detailed below (in thousands). The Company determines whether or not the assets in the preneed funeral trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded as a reduction to Deferred preneed funeral receipts held in trust. There will be no impact on earnings unless and until such time that this asset is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

						Unrealized				Unrealized				Fair Market
		Cost				Gains				Losses				Value
Cash and money market accounts		$	10,173			$	—			$	—			$	10,173
Fixed income securities:
U.S. Treasury debt			5,657				127				(36	)			5,748
Mortgage backed securities			540				16				(3	)			553
Corporate debt			26,291				464				(1,886	)			24,869
Common stock			22,908				116				(6,079	)			16,945
Mutual funds:
Equity			9,301				—				(1,681	)			7,620
Fixed income			4,405				151				(88	)			4,468
Other investments			2,268				—				—				2,268
Trust securities		$	81,543			$	874			$	(9,773	)		$	72,644
Accrued investment income		$	601											$	601
Preneed funeral trust investments														$	73,245
Fair market value as a percentage of cost															89.1	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	1,402
Due in one to five years			4,636
Due in five to ten years			10,071
Thereafter			15,061
		$	31,170

     Preneed funeral trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2011 are as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Investment income		$	845			$	625			$	2,425			$	2,177
Realized gains			4,469				2,241				9,645				10,611
Realized losses			(20	)			(608	)			(496	)			(1,096	)
Expenses and taxes			(154	)			(259	)			(662	)			(987	)
Increase in deferred preneed funeral receipts held in trust			(5,140	)			(1,999	)			(10,912	)			(10,705	)
		$	—			$	—			$	—			$	—

     Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Purchases		$	(1,520	)		$	(26,857	)		$	(3,972	)		$	(71,560	)
Sales			17				25,867				2,791				68,404

6. PRENEED CEMETERY RECEIVABLES

     Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such interest income reflected as Preneed Cemetery Finance Charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. The interest rates generally range between 9.5% and 12%. Occasionally, we have offered zero percent interest financing to promote sales for limited-time offers. At September 30, 2011, the balance of preneed receivables for cemetery interment rights and for merchandise and services was $18.3 million and $9.6 million, respectively, of which $8.2 million is presented in Accounts Receivable and $19.7 million is presented in Preneed Receivables.

     The Company determines an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 120 days past due or more, which was approximately 1.9% of the total receivables on recognized sales at September 30, 2011. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the nine months ended September 30, 2011, changes in the allowance for contract cancellations was as follows (in thousands):

		September 30, 2011
Beginning balance		$	1,488
Write-offs and cancellations			—
Recoveries			—
Provision			187
Ending balance		$	1,301

     The Company has a collections policy where past due notifications are sent to the customer beginning at 15 days past due and thereafter periodically until 90 days past due. Any items on contracts that are past due 120 days are sent to a third-party collector.

     The aging of past due financing receivables as of September 30, 2011 is as follows (in thousands):

		31-60				61-90				91-120				>120												Total Financing
		Past Due				Past Due				Past Due				Past Due				Total Past Due				Current				Receivables
Recognized revenue		$	713			$	421			$	204			$	379			$	1,717			$	17,801			$	19,518
Deferred revenue			290				168				84				164				706				7,715				8,421
Total contracts		$	1,003			$	589			$	288			$	543			$	2,423			$	25,516			$	27,939

7. RECEIVABLES FROM PRENEED FUNERAL TRUSTS

     The receivables from preneed funeral trusts represent assets in trusts which are controlled and operated by third parties in which the Company does not have a controlling financial interest (less than 50%) in the trust assets. The Company accounts for these investments at cost. As of September 30, 2011, receivables from preneed funeral trusts was as follows (in thousands):

		December 31, 2010				September 30, 2011
Preneed funeral trust funds		$	22,542			$	23,071
Less: allowance for contract cancellation			(676	)			(691	)
		$	21,866			$	22,380

8. CONTRACTS SECURED BY INSURANCE

     Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to the Company and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance totaled $205.0 million and $214.7 million at December 31, 2010 and September 30, 2011, respectively, and are not included in the Company’s Consolidated Balance Sheets.

9. CEMETERY PERPETUAL CARE TRUST INVESTMENTS

     Cemetery Care trusts’ corpus on the Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Cemetery Care trusts’ corpus as of December 31, 2010 and September 30, 2011 are as follows (in thousands):

		December 31, 2010				September 30, 2011
Trust assets, at fair value		$	45,735			$	37,933
Pending withdrawals of income from trust			—				(6	)
Obligations due to trust			206				—
Care trusts’ corpus		$	45,941			$	37,927

     The Company is required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2011 (in thousands). The Company determines whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded as a reduction to Care trusts’ corpus.

						Unrealized				Unrealized				Fair Market
		Cost				Gains				Losses				Value
Cash and money market accounts		$	216			$	—			$	—			$	216
Fixed income securities:
Corporate debt			25,586				250				(2,224	)			23,612
Common stock			18,815				29				(5,341	)			13,503
Other			1				—				—				1
Trust securities		$	44,618			$	279			$	(7,565	)		$	37,332
Accrued investment income		$	601											$	601
Cemetery perpetual care trust investments														$	37,933
Fair market value as a percentage of cost															83.7	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	—
Due in one to five years			1,475
Due in five to ten years			8,811
Thereafter			13,326
		$	23,612

     Perpetual care trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2011 are as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Undistributable realized gains		$	1,037			$	1,350			$	3,579			$	7,032
Undistributable realized losses			(3	)			(330	)			(741	)			(645	)
Increase in Care trusts’ corpus			(1,034	)			(1,020	)			(2,838	)			(6,387	)
		$	—			$	—			$	—			$	—

     Perpetual care trust investment security transactions recorded in Cemetery revenue for the three and nine months ended September 30, 2010 and 2011 are as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Investment income		$	288			$	605			$	1,521			$	1,782
Realized gains			682				—				1,532				1,085
Expenses			—				(37	)			(21	)			—
Total		$	970			$	568			$	3,032			$	2,867

     Purchases and sales of investments in the perpetual care trusts were as follows (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Purchases		$	(6,757	)		$	(2,609	)		$	(29,831	)		$	(26,539	)
Sales			7,498				17,463				31,060				40,121

10. FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.

     The Company evaluated its assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The Company identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual trust investments categories on the Consolidated Balance Sheets as having met such criteria. The following three-level valuation hierarchy based upon the transparency of inputs is utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:

•

Level 1—Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include common stock, certain fixed income securities, and equity mutual funds;

•

Level 2—Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating and tax-exempt status. Our investments classified as Level 2 securities include certain fixed income securities and fixed income mutual funds.

•

Level 3—Unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability. As of September 30, 2011, the Company did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.

     The Company accounts for its investments as available-for-sale and measures them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities.

     The following table summarizes the fair value hierarchy of the valuation techniques utilized by us to determine the fair values as of September 30, 2011 (in thousands). Certain fixed income and other securities are reported at fair value using Level 2 inputs. For these securities, the Company uses pricing services and dealer quotes. As of September 30, 2011, the Company did not have any liabilities measured at fair value.

						Significant Other				Significant
		Quoted Prices in				Observable				Unobservable
		Active Markets				Inputs				Inputs				September 30,
		(Level 1)				(Level 2)				(Level 3)				2011
Assets:
Fixed income securities:
U.S. Treasury debt		$	5,748			$	—			$	—			$	5,748
Mortgage backed securities			—				556				—				556
Corporate debt			—				84,638				—				84,638
Common stock			53,015				—				—				53,015
Mutual funds:
Equity			11,423				—				—				11,423
Fixed income			—				6,735				—				6,735
Total Assets		$	70,186			$	91,929			$	—			$	162,115

     There were no significant transfers between Levels 1 and 2 for the three and nine months ended September 30, 2011.

11. LONG-TERM DEBT

     The Company has outstanding a principal amount of $130.0 million of 7⅞% unsecured Senior Notes, due in 2015, with interest payable semi-annually. The Company had a $40.0 million senior secured revolving credit facility with a $20.0 million accordion feature that was to mature in November 2012 and was collateralized by all personal property and funeral home real property in certain states. Effective August 11, 2011, the Company entered into a new secured revolving credit facility with Wells Fargo Bank, N.A. which contains commitments for an aggregate of $60.0 million with an accordion provision for up to an additional $15.0 million. The credit facility matures in October 2014 and under certain conditions may be extended to October 2016. The credit facility is collateralized by the accounts receivable and all personal property of the Company. Borrowings under the credit facility bear interest at either prime or LIBOR options. At September 30, 2011 the prime rate option was equivalent to 4.125% and the LIBOR margin was 1.875%. During the third quarter of 2011, the Company recorded a charge of approximately $201,000 to write-off the remaining unamortized fees on the prior credit facility. The fees related to the new credit facility were approximately $334,000 and are being amortized over the life of the facility.

     Carriage, the parent entity, has no material assets or operations independent of its subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which (except for Carriage Services Capital Trust, which is a single purpose entity that holds our 7% debentures issued in connection with the issuance of the Trust’s term income deferrable equity securities (“TIDES”) 7% convertible preferred securities) have fully and unconditionally guaranteed the Company’s obligations under the 7⅞% Senior Notes. Additionally, the Company does not currently have any significant restrictions on its ability to receive dividends or loans from any subsidiary guarantor under the 7⅞% Senior Notes. In August 2011, the Company repurchased 35,000 shares of these TIDES for approximately $1,269,000 and recorded a gain of $481,000. The Company converted and immediately cancelled these preferred shares at the current conversion rate of 2.4465 into shares of common stock equal to 85,628 shares. No repurchases were made in the third quarter of 2010. For the nine months ended September 30, 2010, the Company had repurchased 17,850 shares of TIDES for approximately $576,000 and recorded gains of $316,000. For the nine months ended September 30, 2011, the Company has repurchased 61,742 shares of TIDES for approximately $2,241,000 and recorded gains totaling $846,000. At September 30, 2011, amounts outstanding under the convertible junior subordinated debenture totaled $89.8 million.

     The Company was in compliance with the covenants contained in the previous and new credit facilities, as applicable, and the Senior Notes as of September 30, 2010 and 2011.

12. COMMITMENTS AND CONTINGENCIES

     Litigation

     We are a party to various litigation matters and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to defend ourselves in the lawsuits described herein. If we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters.

     Leathermon, et al. v. Grandview Memorial Gardens, Inc., et al., United States District Court, Southern District of Indiana, Case No. 4:07-cv-137. On August 17, 2007, five plaintiffs filed a putative class action against the current and past owners of Grandview Cemetery in Madison, Indiana, including the Carriage subsidiaries that owned the cemetery from January 1997 until February 2001, on behalf of all individuals who purchased cemetery and burial goods and services at Grandview Cemetery. Plaintiffs claim that the cemetery owners performed burials negligently, breached Plaintiffs’ contracts, and made misrepresentations regarding the cemetery. The Plaintiffs also allege that the claims occurred prior, during and after the Company owned the cemetery. On October 15, 2007, the case was removed from Jefferson County Circuit Court, Indiana to the Southern District of Indiana. On April 24, 2009, shortly before Defendants had been scheduled to file their briefs in opposition to Plaintiffs’ motion for class certification, Plaintiffs moved to amend their complaint to add new class representatives and claims, while also seeking to abandon other claims. The Company, as well as several other Defendants, opposed Plaintiffs’ motion to amend their complaint and add parties. In April 2009, two Defendants moved to disqualify Plaintiffs’ counsel from further representing Plaintiffs in this action. On March 31, 2010, the Court granted the Defendants’ motion to disqualify Plaintiffs’ counsel. In that order, the Court gave Plaintiffs 60 days within which to retain new counsel. On May 6, 2010, Plaintiffs filed a petition for writ of mandamus with the Seventh Circuit Court of Appeals seeking relief from the trial court’s order of disqualification of counsel. On May 19, 2010, the Defendants responded to the petition of mandamus. On July 8, 2010, the Seventh Circuit denied Plaintiffs’ petition for writ of mandamus. Thus, pursuant to the trial court’s order, Plaintiffs were given 60 days from July 8, 2010 in which to retain new counsel to prosecute this action on their behalf. Plaintiffs retained new counsel and the trial Court granted the newly retained Plaintiffs’ counsel 90 days to review the case and advise the Court whether or not Plaintiffs would seek leave to amend their complaint to add and/or change the allegations as are currently stated therein and whether or not they would seek leave to amend the proposed class representatives for class certification. Plaintiffs moved for leave to amend both the class representatives and the allegations stated within the complaint. Defendants filed oppositions to such amendments. The Court issued an order permitting the Plaintiffs to proceed with amending the class representatives and a portion of their claims; however, certain of Plaintiffs’ claims have been dismissed. Discovery in this matter will now proceed. Carriage intends to defend this action vigorously. Because the lawsuit is in its preliminary stages, we are unable to evaluate the likelihood of an unfavorable outcome to the Company or to estimate the amount or range of any potential loss, if any, at this time.

13. STOCK-BASED COMPENSATION

     Stock Options and Employee Stock Purchase Plan

     During the third quarter of 2011, 3,000 stock options were awarded to an employee. The value of these options was $15,630. The stock options vest in 33⅓% increments over a three year period and expire August 10, 2021. As of September 30, 2011, 628,000 stock options are outstanding and 338,000 stock options remain unvested.

     For the third quarter of 2011, employees purchased a total of 23,998 shares of common stock through the employee stock purchase plan (“ESPP”) at a weighted average price of $4.18 per share. The Company recorded pre-tax stock-based compensation expense for the ESPP and for stock options totaling $75,000 and $100,000 for the three months ended September 30, 2010 and 2011, respectively, and $199,000 and $272,000 for the nine months ended September 30, 2010 and 2011, respectively.

     The fair value of the right (option) to purchase shares under the ESPP is estimated on the date of grant (January 1, 2011) associated with the four quarterly purchase dates using the following assumptions:

		2010				2011
Dividend yield			0	%			0	%
Expected volatility			70	%			29	%
Risk-free interest rate			0.08%, 0.18%, 0.31%, 0.45	%			0.15%, 0.19%, 0.24%, 0.29	%
Expected life (years)			.25, .50, .75, 1				.25, .50, .75, 1

     Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of grant (January 1). The expected life of the ESPP grants represents the calendar quarters from the grant date (January 1) to the purchase date (end of each quarter).

     Common Stock Grants

     The Company, from time to time, issues shares of restricted common stock to certain officers, directors and key employees of the Company from its stock benefit plans. The restricted stock issued to officers and key employees vest in either 25% or 33⅓% increments over four or three year periods, respectively. On September 1, 2011, L. William Heiligbrodt was appointed to serve as a full-time executive officer as the Vice Chairman of the Board of Directors of the Company. In connection with his appointment, Mr. Heiligbrodt was granted 22,500 shares of common stock valued at $130,725 which vest over a three year period. Related to the vesting of restricted stock awards previously awarded to our officers and employees, the Company recorded $366,000 and $330,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended September 30, 2010 and 2011, respectively, and $977,000 and $1,081,000 in pre-tax compensation expense for the nine months ended September 30, 2010 and 2011, respectively.

     Effective March 22, 2010, and as subsequently revised on July 14, 2010, the Board of Directors approved a Director Compensation Policy in which the directors no longer have an option to elect to receive all or a portion of their fees in stock. Consequently, all meeting fees after March 22, 2010 have been paid in cash. A new director joined the Board of Directors during the third quarter of 2011, at which time he was granted 19,193 shares valued in total at $100,000. One-half of those shares vested immediately; the remainder vest over two years. The Company recorded $66,000 and $160,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended September 30, 2010 and 2011, respectively, and $392,000 and $503,000 in pretax compensation expense for the nine months ended September 30, 2010 and 2011, respectively, related to the director fees, annual retainers and stock compensation amortization.

     As of September 30, 2011, the Company had $2.1 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.8 years.

     Cash Dividends

     On May 17, 2011, our Board of Directors approved the initiation of a quarterly cash dividend policy for our common stock. The Board declared a quarterly dividend of $0.025 per share, totaling approximately $460,000, which was paid on September 1, 2011 to record holders of our common stock as of August 12, 2011. For the nine months ended September 30, 2011, the Company has declared dividends of $0.05 per share, totaling $920,000. The Company has a dividend reinvestment program so that stockholders may elect to reinvest their dividends into additional shares of the Company’s common stock.

14. RELATED PARTY TRANSACTIONS

     A member of the Company’s Board of Directors is a key member of management and Chief Investment Officer of an otherwise unrelated company that holds $7.3 million of the Company’s 7⅞% Senior Notes for investment purposes.

15. MAJOR SEGMENTS OF BUSINESS

     Carriage conducts funeral and cemetery operations only in the United States. The following table presents revenue, pre-tax income and total assets by segment (in thousands):

		Funeral				Cemetery				Corporate				Consolidated
Revenues from operating activities:
Nine months ended September 30, 2011		$	108,361			$	34,482			$	—			$	142,843
Nine months ended September 30, 2010		$	101,817			$	35,032			$	—			$	136,849
Income (loss) before income taxes:
Nine months ended September 30, 2011		$	32,509			$	8,063			$	(29,347	)		$	11,225
Nine months ended September 30, 2010		$	28,218			$	7,115			$	(25,363	)		$	9,970
Total assets:
September 30, 2011		$	407,388			$	216,928			$	27,496			$	651,812
December 31, 2010		$	409,329			$	242,461			$	19,222			$	671,012

16. SUPPLEMENTAL DISCLOSURE OF STATEMENT OF OPERATIONS INFORMATION

     The following information is supplemental disclosure for the Consolidated Statements of Operations (in thousands):

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2010				2011				2010				2011
Revenues
Goods
Funeral		$	13,077			$	13,323			$	40,729			$	42,913
Cemetery			8,260				6,683				23,248				22,140
Total goods		$	21,337			$	20,006			$	63,977			$	65,053
Services
Funeral		$	18,030			$	18,327			$	54,729			$	59,192
Cemetery			2,440				2,388				7,212				7,446
Total services		$	20,470			$	20,715			$	61,941			$	66,638
Financial revenue
Preneed funeral commission income		$	632			$	513			$	1,817			$	1,400
Preneed funeral trust earnings			1,553				1,526				4,542				4,856
Cemetery trust earnings			1,121				983				3,369				3,872
Cemetery finance charges			372				335				1,203				1,024
Total financial revenue		$	3,678			$	3,357			$	10,931			$	11,152
Total revenues		$	45,485			$	44,078			$	136,849			$	142,843
Cost of revenues
Goods
Funeral		$	11,816			$	11,264			$	34,948			$	35,818
Cemetery			6,613				5,583				18,460				17,107
Total goods		$	18,429			$	16,847			$	53,408			$	52,925
Services
Funeral		$	10,637			$	9,910			$	29,937			$	31,455
Cemetery			1,716				1,768				5,002				5,053
Total services		$	12,353			$	11,678			$	34,939			$	36,508
Financial expenses
Preneed funeral commissions		$	413			$	372			$	1,071			$	1,105
Total financial expenses		$	413			$	372			$	1,071			$	1,105
Total cost of revenues		$	31,195			$	28,897			$	89,418			$	90,538

     The costs of revenues, for purposes of this supplemental disclosure, include only field costs and expenses that are directly allocable between the goods, services and financial categories in the funeral and cemetery segments. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in this disclosure.

17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):

		For the nine months
		ended September 30,
		2010				2011
Cash paid for interest and financing costs		$	15,914			$	15,958
Cash paid for income taxes			684				1,258
Fair value of stock issued to directors, officers and certain employees			1,097				1,591
Restricted common stock withheld for payroll taxes			90				352
Net (deposits)/withdrawals into/from preneed funeral trusts			1,111				(3,795	)
Net (deposits)/withdrawals into/from preneed cemetery trusts			(2,119	)			7,052
Net (deposits)/withdrawals into/from perpetual care trusts			(75	)			347
Net decrease in preneed funeral receivables			666				291
Net (increase)/decrease in preneed cemetery receivables			(1,093	)			105
Net (deposits)/withdrawals of receivables into/from preneed funeral trusts			96				(139	)
Net change in preneed funeral receivables increasing deferred revenue			69				403
Net change in preneed cemetery receivables increasing deferred revenue			247				8,305
Net deposits/(withdrawals) from preneed funeral trust accounts increasing/(decreasing) deferred preneed funeral receipts			(1,111	)			3,795
Net deposits/(withdrawals) in cemetery trust accounts increasing/(decreasing) deferred cemetery receipts			2,119				(7,052	)
Net deposits/(withdrawals) in perpetual care trust accounts increasing/(decreasing) perpetual care trusts’ corpus			72				(559	)

18. SUBSEQUENT EVENTS

     On October 20, 2011 the Company acquired a funeral home business in Northeast Kentucky for $2.5 million. In the acquisition, the Company acquired substantially all the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement on Forward-Looking Statements