Carriage Services Inc: Form 10-Q for the period ended Sep 30, 2011

Cautionary Statement on Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words. Forward-looking statements are not guarantees of performance. Important factors that could cause actual results to differ materially from our expectations reflected in our forward-looking statements include those risks related to our business and our industry set forth in Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2010. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

OVERVIEW

General

We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. As of September 30, 2011, we operated 155 funeral homes in 25 states and 33 cemeteries in 12 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.

We have implemented long-term initiatives in our operations designed to improve operating and financial results by growing market share and increasing profitability. We have a decentralized, entrepreneurial and local operating model that includes operating and financial standards developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The model essentially eliminates the use of line-item financial budgets in favor of the standards. The operating model and standards, which we refer to as the “Standards Operating Model”, focus on the key drivers of a successful operation, organized around three primary areas – market share, people and operating and financial metrics. The model and standards are the measures by which we judge the success of each business. To date, the Standards Operating Model has driven significant changes in our organization, leadership and operating practices. Most importantly, the Standards Operating Model allowed us to measure the sustainable revenue growth and earning power of our portfolio of deathcare businesses, which then led to the development of a Strategic Acquisition Model, described below under “Acquisitions,” that guides our acquisition and disposition strategies. We expect both models to drive longer term, sustainable increases in market share, revenue, earnings and cash flow. The standards are not designed to produce maximum short-term earnings because we do not believe such performance is sustainable without ultimately stressing the business, which often leads to declining market share, revenues and earnings. Important elements of the Standards Operating Model include:

• Balanced Operating Model – We believe a decentralized structure works best in the deathcare industry. Successful execution of the Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers.
• Incentives Aligned with Standards – Empowering Managing Partners to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby they earn a percentage of their business’ earnings based upon the actual standards achieved. Each Managing Partner has the opportunity to share in the earnings of the business as long as the performance exceeds our minimum standards.
• The Right Local Leadership – Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. Over time, a Managing Partner’s performance is judged according to achievement of the Standards for that business.

Funeral and Cemetery Operations

Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional burial and cremation services because our average cremation service

- 21 - revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.

Our funeral volumes have increased gradually from 23,366 in 2007 to 25,801 in 2010 (compound annual increase of 3.4%). Our funeral operating revenue has increased from $119.2 million in 2007 to $129.7 million in 2010 (compound annual increase of 2.9%). The increases are primarily because of businesses we acquired in 2007 through 2010 and our ability to increase the average revenue per funeral through expanded service offerings and packages. We experienced an increase of 9.5% in volumes in the first nine months of 2011 compared to the first nine months of 2010, 0.1% of which resulted from organic growth and 9.4% through acquisitions. Funeral operating revenues for the nine months ended September 30, 2011 were up 7.0% compared to the nine months ended September 30, 2010 primarily due to the acquisitions.

The percentage of funeral services involving cremations has increased from 35.8% for the year ended 2007 to 44.1% for the year ended 2010 and was 46.4% for the first nine months of 2011. A significant portion of that trend is the result of acquiring businesses in high cremation areas. On a same store basis, the cremation rate has risen to 41.9% for the nine months ended September 30, 2011, up from 40.6% for the comparable period in 2010.

Cemetery operating results are affected by the size and success of our sales organization. Approximately 52% of our 2010 cemetery revenues related to preneed sales of interment rights and mausoleums and related merchandise and services. As of September 30, 2011, those preneed sales were approximately 50.2% of cemetery revenues. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affect the amount of cemetery revenues. Currently, approximately 14.2% of our cemetery revenues are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Our cemetery financial performance from 2007 through 2010 was characterized by fluctuating operating revenues and field level profit margins. Cemetery operating revenue for the first nine months of 2011 decreased 2.9% over the comparable period in 2010, net of a 7.0% increase in trust fund earnings and finance charges. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Additionally, a portion of our capital expenditures in 2011 is designed to expand our cemetery product offerings.

Financial Revenue

We 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. Preneed contracts permit families to eliminate issues of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.

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 an element of growth (earnings) designed to offset future inflationary cost increases. Revenue from preneed funeral contracts, along with accumulated earnings, is not recognized until the time the funeral service is performed. The accumulated earnings from the trust investments and insurance policies is intended to offset the inflation in funeral prices. Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies reflected as Preneed Insurance Commission. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors).

Preneed sales of cemetery interment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such earnings 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% per annum. Occasionally, we have offered zero percent interest financing to promote sales for limited-time offers.

We have established a variety of trusts in connection with 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 the Company. Independent financial advisors are also used for investment management and advisory services.

Preneed funeral trust fund income earned and the receipt and recognition of any insurance benefits are deferred until the service is performed. Applicable state laws generally require us 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 preneed cemetery merchandise and service sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. In most

- 22 - states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and memorials in perpetuity. This perpetual care trust fund income is recognized, as earned, in cemetery revenues.

Acquisitions

Our growth strategy includes the execution of the Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We use six strategic ranking criteria to assess acquisition candidates 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; and
• Barriers to entry.

In general terms, our price expectations range from four to five times pre-tax earnings before depreciation for “tuck-ins” to six to seven times pre-tax earnings before depreciation for businesses that rank very high in the ranking criteria. We derive the pre-tax earnings amounts based primarily on the size and product mix of the target business applied to our standards-based operating model. During 2010, we acquired one cemetery and five funeral home businesses. The consideration paid for these acquisitions was cash, which was generated from our operations. During the first half of 2011, we acquired two funeral home businesses and during the third quarter of 2011, we acquired two more funeral homes. The consideration paid for the acquisitions in the third quarter of 2011 was $5.2 million cash and totaled $10.3 million for the nine months ended September 30, 2011.

Financial Highlights

Net income for the three months ended September 30, 2011 totaled $0.8 million, equal to $0.04 per diluted share, compared to net income for the three months ended September 30, 2010 which totaled $0.9 million, equal to $0.05 per diluted share. Net income for the nine months ended September 30, 2011 totaled $6.7 million, equal to $0.36 per diluted share, compared to $5.9 million for the nine months ended September 30, 2010, or $0.33 per diluted share. Total revenue for the three and nine months ended September 30, 2011 was $44.1 million and $142.8 million, respectively, a decrease of 3.1% and an increase of 4.4%, respectively, compared to $45.5 million and $136.8 million for the comparable periods in 2010. Our funeral segment experienced increases in revenue and profit, whereas the cemetery segment experienced declines. We experienced increases in overhead costs due in part to acquisition costs and incentive compensation.

The Company is providing a reconciliation below from the GAAP results to Non-GAAP results in order to present financial results that would have been reported when considering special items detailed in the reconciliation. The Company provides this information for investors to help facilitate the comparison of the current period results with the Company’s previous results and the competitors’ operating results. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP.

(In millions, except diluted EPS)

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(In millions, except diluted EPS)

(1) Withdrawable trust income is realized income from cemetery preneed trust funds in certain states in which the income can be withdrawn currently but will be recognized in future periods when the death has occurred and the products delivered.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other 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, because there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended December 31, 2010.

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RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and nine month periods ended September 30, 2010 and 2011. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2007 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after January 1, 2007 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on the total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.

Funeral Home Segment. The following table sets forth certain information regarding the revenues and operating profit from the funeral home operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2011.

Three months ended September 30, 2010 compared to three months ended September 30, 2011 (dollars in thousands):

Funeral home same store operating revenues for the three months ended September 30, 2011 decreased $1.1 million, or 4.3%, when compared to the three months ended September 30, 2010. We experienced a 4.5% decrease in the number of contracts, and the average revenue per contract decreased 0.3%, or $18 per contract, to $5,504 for those existing operations. The average revenue per contract includes the impact of the funeral trust fund earnings recognized at the time that we provide the needed services for preneed families. Excluding funeral trust earnings, the average revenue per contract increased 0.2% to $5,260. The number of traditional burial contracts declined 7.0% while the average revenue per burial contract increased 1.2% to $8,167. The cremation rate for the same store businesses rose from 41.7% to 42.5%. The average revenue per same store cremation contract decreased 0.3% to $3,084 and the number of cremation contracts decreased 2.5%. Cremations with services declined from 42.5% of total cremation contracts in the third quarter of 2010 to 38.2% in the third quarter of 2011. The average revenue for “other” contracts, which make up approximately 6.9% of the number of contracts, increased 4.0% from $1,987 to $2,066. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

Same store operating profit for the three months ended September 30, 2011 increased $0.4 million, or 5.7%, from the comparable three months of 2010, and as a percentage of funeral same store operating revenue, increased from 30.6% to 33.8%. Lower promotional expenses, salaries and benefits and general liability insurance expenses were the primary reasons for the increase in operating profit.

Funeral home acquired revenues for the three months ended September 30, 2011 increased $1.6 million, or 29.0%, when compared to the three months ended September 30, 2010, as we experienced a 21.3% increase in the number of contracts, and an increase of 7.8%, to $4,132, in the average revenue per contract for those acquired operations. Excluding funeral trust earnings, the average revenue per contract increased 6.3% to $3,918. The cremation rate for the acquired businesses was 56.8% for the third quarter of 2011, down from 60.1% in the prior year period. The average revenue per cremation contract increased 7.7% to $2,557 for the third quarter of 2011 and the number of cremation contracts increased 14.5% compared to the same period of 2010.

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Acquired operating profit for the three months ended September 30, 2011 increased $1.4 million from the comparable three months of 2010 and, as a percentage of revenue from acquired businesses, was 15.0% for the third quarter of 2010 compared to 30.6% for the third quarter of 2011. As those funeral homes acquired in 2010 and 2011 transition into Carriage’s Standard Operating Model, we expect to see profit margins similar to those on a same store basis.

Nine months ended September 30, 2010 compared to six months ended September 30, 2011 (dollars in thousands):

Funeral home same store operating revenues for the nine months ended September 30, 2011 remained flat, when compared to the nine months ended September 30, 2010. We experienced a 0.1% increase in the number of contracts, however, the average revenue per contract decreased 0.3% to $5,577 for those existing operations. The average revenue per contract includes the impact of the funeral trust fund earnings recognized at the time that we provide the funeral services for preneed families. Excluding funeral trust earnings, the average revenue per contract decreased 0.1% to $5,329. The number of traditional burial contracts declined from 51.5% to 50.4% while the average revenue per burial contract increased 1.4% to $8,196. The cremation rate for the same store businesses rose from 40.6% to 41.9%. The average revenue per same store cremation contract decreased 1.2% to $3,059 and the number of cremation contracts increased 3.5%. Cremations with services decreased from 45.0% of total cremation contracts in the nine months ended September 30, 2010 to 38.7% in the nine months ended September 30, 2011. The average revenue for “other” contracts, which make up approximately 7.6% of the number of contracts, increased 6.3% from $1,985 to $2,111.

Same store operating profit for the nine months ended September 30, 2011 increased $1.5 million, or 5.5%, from the comparable nine months of 2010, and as a percentage of funeral same store operating revenue, increased from 33.6% to 35.5%. Lower merchandise costs and a decline in bad debt expense were the primary reasons for the increase in operating profit.

Funeral home acquired revenues for the nine months ended September 30, 2011 increased $6.7 million, or 43.7%, when compared to the nine months ended September 30, 2010 as we experienced a 45.9% increase in the number of contracts, yet a decrease of 0.9%, to $4,080, in the average revenue per contract for those acquired operations. Excluding funeral trust earnings, the average revenue per contract declined 1.5% to $3,883. The cremation rate for the acquired businesses was 58.2% for the nine months ended September 30, 2011, up from 55.3% in the prior year period, as these businesses are located in higher cremation areas compared to our existing locations. The average revenue per cremation contract increased 6.8% to $2,590 for the nine months ended September 30, 2011 and the number of cremation contracts increased 53.4% compared to the same period of 2010.

Acquired operating profit for the nine months ended September 30, 2011 increased $2.8 million, or 77.7%, from the comparable nine months of 2010 and, as a percentage of revenue from acquired funeral homes, was 23.5% for the nine months ended September 30, 2010 compared to 29.1% for the nine months ended September 30, 2011 as those businesses acquired in 2010 had not fully transitioned into Carriage’s Standard Operating Model until later in 2011.

The two categories of financial revenue, insurance commissions and trust earnings on matured preneed contracts, on a combined basis, decreased 2.1% in revenue and decreased 3.2% in operating profit, compared to the nine months ended September 30, 2010.

Cemetery Segment. The following table sets forth certain information regarding our revenues and operating profit from the cemetery operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2011.

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Three months ended September 30, 2010 compared to three months ended September 30, 2011 (dollars in thousands):

Cemetery same store operating revenues for the three months ended September 30, 2011 decreased $1.6 million, or 17.7%, compared to the three months ended September 30, 2010. Same store revenue from preneed property sales and deliveries of preneed merchandise and services deliveries decreased $1.3 million, or 23.4%, and atneed revenues decreased $0.4 million, or 11.9%. We experienced a 15.1% decrease in the number of interment rights (property) sold and a 18.9% decrease in the average price per interment compared to the third quarter of 2010. The percentage of those interment rights sold that we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, increased 4.1% to 77.5%.

Cemetery same store operating profit for the three months ended September 30, 2011 decreased $0.7 million, or 36.9%. As a percentage of revenues, cemetery same store operating profit decreased from 20.9% to 16.0%. The decrease in operating profit is primarily a result of the decline in revenue.

Cemetery acquired revenues for the three months ended September 30, 2011 was relatively flat compared to the three months ended September 30, 2010. Acquired revenue from preneed property sales increased 5.9%, whereas preneed revenue from merchandise and services deliveries decreased slightly and atneed revenues decreased 11.7%. Cemetery acquired operating profit increased 9.1% compared to the third quarter of 2010. The most recent cemetery acquired was in 2007.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings decreased 11.7%, when compared to the three months ended September 30, 2010. Earnings from perpetual care trust funds totaled $0.6 million for the three months ended September 30, 2011 compared to $1.0 million for the three months ended September 30, 2010, a decrease of $0.4 million, or 41.4%. Trust earnings recognized upon the delivery of merchandise and service contracts increased $0.3 million to $0.4 million compared to the same period in 2010. Finance charges on the preneed contracts declined slightly.

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Nine months ended September 30, 2010 compared to nine months ended September 30, 2011 (dollars in thousands):

Cemetery same store operating revenues for the nine months ended September 30, 2011 decreased $1.1 million, or 4.4%, compared to the nine months ended September 30, 2010 primarily because preneed property sales decreased $1.2 million, or 10.3%. We experienced a 14.0% decrease in the number of interment rights (property) sold and a 2.0% decrease in the average price per interment compared to the nine months ended September 30, 2010. The percentage of those interment property rights sold that we were able to recognize as revenue, because we received at least 10% of the sales price from the customer increased from 82.2% to 84.6%.

Cemetery same store operating profit for the nine months ended September 30, 2011 increased $0.2 million, or 3.4%. As a percentage of revenues, cemetery same store operating profit increased from 21.9% to 23.7%. The increase in operating profit is primarily a result from a decline of $0.6 million, or 12.7%, in promotional expenses (primarily preneed sales commissions) and a decrease of $0.3 million, or 27.4%, in bad debts, in addition to an approximate 3.3% decrease in other controllable costs.

Cemetery acquired revenues for the nine months ended September 30, 2011 increased $0.2 million, or 5.1%, compared to the nine months ended September 30, 2010. Acquired revenue from preneed property sales increased $0.3 million, or 12.3%, and preneed revenue from merchandise and services deliveries increased approximately $0.1 million, or 9.0%, while atneed revenues declined $0.1 million, or 3.9%. Cemetery acquired operating profit increased $0.2 million due to the increase in revenue.

The two categories of financial revenue which consist of trust earnings and finance charges on preneed receivables had a meaningful impact on cemetery revenues and operating profit. Total trust earnings increased $0.3 million, or 7.1%, when compared to the nine months ended September 30, 2010. Earnings from perpetual care trust funds totaled $2.9 million for the nine months ended September 30, 2011 compared to $3.0 million for the nine months ended September 30, 2010, because of greater capital gains taken in 2010. Trust earnings recognized upon the delivery of merchandise and service contracts increased $0.7 million compared to the same period in 2010. Finance charges on the preneed contracts declined $0.2 million, or 14.9%.

Other. General and administrative expenses totaled $14.4 million for the nine months ended September 30, 2011, an increase of $3.0 million, or 26.5% compared to the nine months ended September 30, 2010, primarily due to the expansion and upgrade of talent in our regional operations organization and home office support departments, increases in costs for incentive compensation, director fees and activity related to acquisitions.

Income Taxes. The Company recorded income taxes at the estimated effective rate of 40.5% for the year ended December 31, 2010 and for the first nine months of 2011. Carriage has utilized its remaining $12.6 million of net operating loss carryforwards to offset Federal taxable income during the nine months and will become a Federal cash tax payer in the fourth quarter of 2011. Carriage also has approximately $52 million of state net operating loss carryforwards that will expire between 2013 and 2030, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that the Company will not be able to realize tax benefits of a substantial amount for the state losses. Accordingly, a valuation allowance of approximately $1.5 million was established and is reviewed every quarter related to the deferred tax asset for the state operating losses.

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LIQUIDITY AND CAPITAL RESOURCES

Carriage began 2011 with $1.3 million in cash and other liquid investments and ended the third quarter with $4.3 million in cash and an undrawn $60.0 million bank credit facility. The elements of cash flow for the nine months ended September 30, 2011 consisted of the following (in millions):

For the nine months ended September 30, 2011, cash provided by operating activities was $25.3 million as compared to $16.5 million for the nine months ended September 30, 2010. Capital expenditures totaled $7.8 million for the nine months ended September 30, 2011 compared to $6.9 million for the nine months ended September 30, 2010. Capital expenditures for the first nine months of 2011 included $2.4 million for cemetery inventory development projects and funeral home expansion projects.

The outstanding principal of senior debt at September 30, 2011 totaled $136.2 million and consisted of $130.0 million in 77/8% Senior Notes maturing in 2015, and $6.2 million in acquisition indebtedness and capital lease obligations.

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%. At September 30, 2011, the maximum drawdown allowed on the credit facility was approximately $54.0 million. Prior to August 11, 2011 the Company had a credit facility which contained commitments for an aggregate of $40 million with an accordion provision up at an additional $20 million. 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.

A total of $89.8 million was outstanding at September 30, 2011 under the convertible junior subordinated debenture. Amounts outstanding under the debenture are payable to our affiliate trust, Carriage Services Capital Trust, bear interest at 7.0% and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debentures. In 1999, the Trust issued 1.875 million shares of 7% convertible preferred securities, termed “TIDES”. The rights under the debentures are functionally equivalent to those of the TIDES. 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 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 repurchased 61,742 shares of TIDES for approximately $2,241,000 and recorded gains totaling $846,000.

The convertible junior subordinated debenture payable to the affiliated Trust, and the TIDES, each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During any period in which distribution payments are deferred, distributions will continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is prohibited from paying dividends on the common stock or repurchasing common stock, subject to limited exceptions. The Company currently expects to continue paying the distributions as due.

On May 17, 2011, our Board of Directors initiated a quarterly cash dividend policy for our common stock. The Board declared a quarterly dividend of $0.025 per share 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 totaling $0.05 per share, or $920,000.

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The Company intends to use its cash flow and credit facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development. We believe our cash on hand, cash flow from operations, and the available capacity under our credit facility described above will be adequate to meet our working capital needs and other financial obligations over the next twelve months.

SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate. Generally, the rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

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 debt obligations and changes in the values of securities associated with the preneed and perpetual care trusts. For information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes in the Company’s market risk from that disclosed in the Form 10-K for the year ended December 31, 2010.

The 77/8% Senior Notes were issued to the public at par and are carried at a cost of $130.0 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.

The convertible junior subordinated debentures, payable to Carriage Services Capital Trust, pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $89.8 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.

In accordance with Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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There have been no material changes in our risk factors from those disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.