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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NUMBER: 0-28096
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THE YORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0490631
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9430 OLD KATY ROAD, HOUSTON, TEXAS 77055
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES) (ZIP CODE)
(713) 984-5500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes. [X] No. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 under the Securities Exchange Act of 1934) is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 17, 1997, there were 7,999,864 shares of The York Group, Inc.
Common Stock, $.01 par value, issued and outstanding, 6,559,684 of which, having
an aggregate market value of approximately $127,913,838, were held by
non-affiliates of the registrant (affiliates being, for these purposes only,
directors, executive officers and holders of more than 5% of the registrant's
Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 1997 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1996, are incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
PAGE
----
Item 1. Business...................... 1
Item 2. Properties.................... 4
Item 3. Legal Proceedings............. 5
Item 4. Submission of Matters to a
Vote of Security Holders...... 5
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters ...................... 5
Item 6. Selected Financial Data....... 6
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations ................... 7
General................ 7
Results of
Operations............. 8
Liquidity and Capital
Resources.............. 8
Selected Quarterly
Operating Results and
Seasonality............ 9
Inflation.............. 10
Foward-Looking
Statements............. 10
Item 8. Financial Statements and
Supplementary Data............ 10
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure ..... 10
Item 10. Directors and Executive
Officers of the Registrant.... 10
Item 11. Executive Compensation........ 11
Item 12. Security Ownership of Certain
Beneficial Owners and
Management.................... 11
Item 13. Certain Relationships and
Related Transactions.......... 11
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K........................... 11
i
PART I
ITEM 1. BUSINESS
INDUSTRY OVERVIEW
The York Group, Inc. (the "Company" or "York") is the second largest casket
manufacturer in the United States and has an approximate 14% share of the
finished casket market. According to industry sources, there are approximately
22,000 domestic funeral homes, which purchase approximately $1.1 billion of
finished caskets annually.
Caskets generally are categorized by the type of material from which they
are produced, with three categories: metal, wood and other. According to
statistics compiled and released by the Casket & Funeral Supply Association of
America, approximately 1.9 million caskets were sold in the United States in
1996, with metal caskets accounting for approximately 1.3 million units, wood
caskets accounting for approximately 300,000 units and other caskets accounting
for approximately 300,000 units.
The number of casket manufacturers, assemblers and distributors has
declined over the past thirty years as a result of industry consolidation. The
Company estimates that the three largest casket manufacturers accounted for over
60% of the finished casket unit volume in 1996.
The casket industry is characterized by generally favorable demographic
trends that have allowed the major manufacturers to enjoy relatively stable,
non-cyclical and fairly predictable business conditions. The number of deaths in
the United States has grown at an annual compound rate of approximately 1%,
increasing from approximately 2.0 million deaths in 1980 to approximately 2.3
million deaths in 1996. According to a 1993 report prepared by the United States
Department of Commerce, Bureau of the Census, the number of deaths in the United
States is expected to increase by approximately 1% per year between the years
1993 and 2000. While an increasing number of annual deaths would be expected to
increase the demand for caskets, a steady, gradual growth in the number of
cremations in the United States has mitigated much of the potential benefit.
According to industry statistics compiled and released by the Cremation
Association of North America ("CANA"), cremation was used in connection with
approximately 21% of the deaths in the United States in 1996, compared with
approximately 10% in 1980. As a result, the number of caskets sold in the United
States has remained fairly constant, with unit volumes of approximately 1.8
million to 1.9 million caskets per year over the past ten years. These same CANA
statistics suggest that cremation could be used in connection with approximately
26% of the deaths in the United States in 2000.
THE COMPANY
The Company produces a wide variety of metal and wood caskets, as well as
casket components. Metal caskets are made from various gauges of cold rolled
steel, stainless steel, copper and bronze. Wood caskets are made from nine
different wood species ranging from poplar to mahogany, as well as from veneer
and paper covered particle and fiber board. Casket components include stamped
metal parts, as well as various other exterior and interior parts. The Company
believes that it is the largest domestic supplier of casket components to other
casket manufacturers and assemblers.
The Company's finished caskets are marketed through a network of
approximately 60 Company and privately owned distributors that serve an
estimated 15,000 domestic funeral homes, as well as certain foreign markets.
PRODUCTS
CASKETS. The Company believes it manufactures a more comprehensive line of
metal and wood caskets than any of its major competitors. The Company produces
many basic styles of metal and wood caskets with various differentiating
elements. Caskets can be customized around several dozen basic designs in
combination with many different options relating to such features as color,
interior design, handles and trim in order to accommodate specific religious,
ethnic, or other personal preferences.
1
METAL CASKETS. Metal caskets are generally categorized by whether the
casket is non-gasketed or gasketed and by material (i.e. bronze, copper, or
steel) and in the case of steel, by the gauge, or thickness, of the metal. The
Company's metal casket line consists of non-gasketed 20 gauge steel, gasketed
20, 18 and 16 gauge steel, and gasketed stainless steel, copper and bronze. The
non-gasketed 20 gauge steel line is the least expensive of the metal caskets,
and the prices generally increase in the order listed above.
WOOD CASKETS. The Company's wood caskets are manufactured from nine
different species of wood, as well as from veneer and paper covered particle and
fiber board. The species of wood used are poplar, pine, ash, oak, maple, birch,
cherry, walnut and mahogany. The Company is the largest manufacturer of all-wood
constructed caskets, which are manufactured using pegged and dowelled
construction, and include no metal parts. All-wood constructed caskets are
preferred by certain religious groups.
COMPONENTS. The Company manufactures casket components for its own use and
for sale to other casket manufacturers and assemblers. These components include
stamped metal body parts, metal locking mechanisms for gasketed metal caskets,
adjustable beds, interior fabrics and panels, and metal and plastic handles and
corners. The Company dyes fabrics used for casket interiors and also processes a
line of fabrics for use in the production of cloth-covered caskets. In addition,
embroidered panel fabrics are also processed by the Company.
DISTRIBUTION AND MARKETING
The Company currently markets its finished caskets through approximately 60
Company and privately owned distributors. In 1996 approximately 1.3% of the
Company's net sales were to customers outside the United States. The Company
normally fills orders within one month and, therefore, does not have a
significant backlog of unfilled orders.
Though York's distributors generally concentrate their sales and service
efforts in their primary market area, they are not assigned exclusive
territories. York believes that each of its distributors is committed to
providing the highest quality service to the funeral homes within its primary
market area.
York's major marketing efforts include a recently introduced pre-need
insurance program, a cremation merchandising program, volume purchase programs,
tour/training programs and The York Children's Foundation. Additionally, in late
1996 the Company acquired The Doody Group, Inc., a provider of merchandise
planning and display services to the funeral industry.
PRE-NEED INSURANCE PROGRAM. In recent years, funeral homes have become more
active in the marketing of prearranged funeral plans as a way to maintain and
increase future market share. Through a wholly owned subsidiary, the Company has
introduced a program offering insurance policies to funeral homes for the
funding of prearranged funerals. This program, which includes policies
underwritten by life insurance companies, is designed to provide a financial
incentive to funeral home operators to specify York products through insurance
funded features, which offer additional payments to offset increases in the cost
of a York casket. This program is expected to build the Company's future market
share.
VOLUME PURCHASE PROGRAMS. York offers several discount and rebate programs
to funeral homes and groups based on the volume of York caskets purchased. The
costs of these programs are shared equally by York and the applicable
distributor.
TOUR/TRAINING PROGRAMS. The Company provides a plant tour program for
funeral directors, including training sessions which are accredited for
continuing education by many states. These programs provide funeral directors
with valuable product information and increase their knowledge of and goodwill
toward the Company.
MERCHANDISING. Through The Doody Group, Inc., the Company provides product
planning, merchandising and display expertise, as well as architectural and
interior design services to funeral homes. These services assist funeral service
professionals in providing value and satisfaction to their client families.
THE YORK CHILDREN'S FOUNDATION. The York Children's Foundation (the
"Foundation") supports charitable children's organizations across the country.
As a means of memorializing persons buried in York caskets, York and the
applicable distributor make a donation to the Foundation in the name of the
deceased.
2
Grants made by the Foundation allow the sponsoring funeral home to promote its
name and goodwill within its local community and allow the Company to further
differentiate itself from its competitors.
SUPPLY AGREEMENT WITH SERVICE CORPORATION INTERNATIONAL
The Company is party to a supply agreement (the "Supply Agreement") with an
affiliate of Service Corporation International ("SCI"). The Supply Agreement
requires the purchase of specific annual dollar volumes of the Company's caskets
and expires at the end of 1998. Sales under the Supply Agreement are made
through the Company's distributors at a discount to list price. The discount is
shared equally by the Company and the applicable distributor. Sales under the
Supply Agreement accounted for approximately 23% of the Company's net sales in
1996. Although the Company does not expect to enter into a new multi-year
contract after the Supply Agreement expires, the Company believes its
relationship with SCI is good and expects that it will continue to sell a
significant number of caskets to SCI.
MANUFACTURING
Metal casket parts are produced by stamping steel, copper and bronze into
casket body parts. Locking mechanisms and adjustable beds are produced by
stamping and assembling a variety of steel parts. Casket handles and corners are
produced from stamped or cast metal or injection molded plastic. In the
production of wood caskets, the Company purchases from sawmills various species
of uncured wood, which it dries and cures. The cured wood is cut into casket
components.
The completed metal stampings and wood components are then assembled. A
variety of designs are produced by combining multiple parts and components that
are attached to the main casket body. Other assembly areas continue the
manufacturing process through application of various paints and finishes and
installation of interiors.
SUPPLIERS AND RAW MATERIALS
The primary basic materials required for the Company's casket manufacturing
operations are cold rolled steel and lumber. The Company also purchases copper,
bronze, stainless steel and textiles.
The Company typically negotiates blanket purchase orders or 12-month supply
agreements with large, integrated steel suppliers that have demonstrated timely
delivery, high quality material and competitive prices. The Company purchases
lumber from a number of sawmills and distributors. The Company purchases
approximately 90% of its lumber from approximately 25 sawmills within 150 miles
of its wood casket manufacturing facility in York, Pennsylvania. The Company
normally purchases uncured lumber and cures it at its plant.
The Company's manufacturing and sourcing systems allow it to meet customer
requirements for quick deliveries and minimize its need to carry significant raw
material inventories. The Company has not experienced any significant shortages
of raw materials and normally does not carry inventories of raw materials or
finished products in excess of those reasonably calculated to meet production
and shipping schedules. Although the Company purchases some of its supplies and
raw materials from a limited number of suppliers, the Company believes that
alternative sources are readily available at comparable prices.
COMPETITION
The casket industry is highly competitive. The Company competes with other
casket manufacturers on the basis of product quality, price, service, design
availability and breadth of product line. The Company provides a full line of
metal and wood caskets that it believes is more comprehensive than any of its
major competitors. Although there are a large number of casket industry
participants, the three largest casket manufacturers account for over 60% of the
finished caskets produced. In addition to York, Batesville Casket Company, a
subsidiary of Hillenbrand Industries, Inc., and Aurora Casket Company, Inc. are
the most significant industry participants.
The Company believes that it is the largest supplier of casket components
to other casket manufacturers and assemblers. While price is a significant
factor in the sale of stamped metal parts and other casket
3
components, other factors, including quality, service and design availability,
are also important. The Company has a number of unique design features that are
not available elsewhere, such as embossed steel, copper and bronze parts.
TRADEMARKS
The Company owns a number of domestic trademarks and service marks.
However, the Company believes the loss of any or a significant number of its
trademarks or service marks would not have a material impact on its operations.
EMPLOYEES
The Company has approximately 1,300 employees, substantially all of whom
work full-time. Approximately 80% are engaged in manufacturing activities, 10%
are engaged in field sales and distribution activities with the balance holding
managerial, administrative, clerical or other office positions. Approximately
175 employees are covered by collective bargaining agreements, principally
production workers at the Lynn, Indiana plant, whose agreement expires in June
1998, and certain truck drivers. The Company believes that its relationship with
its employees is good.
ITEM 2. PROPERTIES
The Company owns seven production facilities and one finished casket
distribution warehouse facility. The Company also leases thirteen finished
casket distribution warehouse facilities and one plastic injection molding
facility. The Company believes that its production and distribution warehouse
facilities are adequate to support its current and projected level of
operations. The following table sets forth additional information regarding the
Company's manufacturing facilities.
APPROXIMATE
SQUARE
LOCATION PRINCIPAL PRODUCTS OR ACTIVITY FEET
- --------------------------------------------------------------------------------
York, Pennsylvania........... Manufacture of finished wood caskets 307,000
Marshfield, Missouri......... Manufacture of finished metal caskets 86,000
Lynn, Indiana................ Manufacture of finished metal caskets 76,000
Richmond, Indiana............ Manufacture of finished metal caskets 21,000
Richmond, Indiana............ Metal stamping, manufacture of casket 92,000
beds, locks and hardware items
Anniston, Alabama............ Metal stamping 63,000
Lawrenceville, Georgia....... Manufacture of metal casket handles 129,000
and corners and processing of interior
fabrics
Richmond, Indiana............ Injection molding of plastic parts, 18,000
principally casket corners
The Company operates finished casket distribution warehouse facilities in
Worcester, Massachusetts; New Haven, Connecticut; Lewiston, Maine; Westland,
Michigan; Cleveland, Columbus, and Cincinnati, Ohio; Indianapolis and
Jeffersonville, Indiana; and Chicago and Peoria, Illinois, from which it sells
and distributes caskets to funeral homes. The Worcester, Massachusetts facility
is owned by the Company and provides approximately 22,000 square feet of
warehouse space. The ten leased facilities aggregate approximately 138,000
square feet. Additionally, the Company leases warehouses near its York,
Pennsylvania; Lynn, Indiana; and Marshfield, Missouri assembly plants in order
to stock finished caskets. The finished casket inventory allows the Company to
more effectively schedule its production and better serve its customers. These
three warehouses aggregate approximately 67,000 square feet.
In addition to its production and warehouse facilities, the Company leases
approximately 19,000 square feet of space for executive and administrative
offices in Houston, Texas. The lease term expires November 30, 1998.
4
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. The Company currently is not engaged in any legal
proceeding that is expected to have a material adverse effect on the Company.
REGULATORY MATTERS
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment and the health and
safety of employees.
In 1991, the Georgia Department of Natural Resources (the "GDNR") issued a
Notice of Violation -- Consent Order alleging that the Company's Lawrenceville,
Georgia facility was storing and treating hazardous wastes without a permit and
was otherwise in violation of certain hazardous waste regulations in the
operation of its electroplating line and associated wastewater treatment system.
On November 8, 1991, the Company and the GDNR entered into a Consent Order (the
"1991 Order") in settlement of the allegations. The 1991 Order was subsequently
amended in 1993 to reflect the plan to close the facility as a landfill and to
require some additional remediation, monitoring and investigation commitments on
the Company's part. The GDNR approved the revised closure plan and post-closure
plan for the facility in August 1994. Moreover, the GDNR issued a Hazardous
Waste Facility Permit effective September 27, 1995, to document these
post-closure care requirements. The Company had a reserve of approximately $1.5
million for environmental remediation at December 31, 1996, and has provided
financial assurance in the form of a letter of credit in the amount of
approximately $1.1 million to secure its post-closure obligations. See Note 9 of
Notes to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter market
since April 2, 1996 and quoted on the Nasdaq National Market under the symbol
"YRKG". On December 31, 1996, 273 stockholders of record held the Company's
7,999,864 shares of outstanding common stock. The Company believes there are
approximately 1,800 beneficial owners of its common stock.
The following table presents the Company's high and low common stock
prices, as well as dividends per share, since April 2, 1996.
HIGH LOW DIVIDENDS
--------- --------- ---------
1996:
Second Quarter.......................... $ 19.00 $ 15.00 $ .04
Third Quarter........................... $ 17.75 $ 14.875 $ .04
Fourth Quarter.......................... $ 19.00 $ 15.00 $ .04
The Company has paid dividends on a quarterly basis since the second
quarter of 1995. Since its stock has been publicly traded, the Company has
issued three consecutive quarterly dividends of $.04 per share, or an annual
rate of $.16 per share. Any future change in the Company's dividend policy will
be made at the discretion of the Board of Directors based upon pertinent
factors, such as financial condition of the Company, bank covenants, capital and
expansion requirements and other factors the Board of Directors may consider.
Effective October 15, 1996, the Company issued 165,000 shares of common
stock to The Doody Group, Inc. pursuant to its acquisition of assets and
assumption of liabilities. The issuance of shares was made pursuant to Section
4(2) of the Securities Act of 1993.
5
On December 11, 1996, the Company acquired Brenner Casket Company in a
merger pursuant to which 125,000 shares of common stock were issued, pursuant to
Section 4(2) of the Securities Act of 1933, to William W. Grubbs, the sole
stockholder of Brenner Casket Company.
ITEM 6. SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Net sales............................... $ 138,170 $ 129,400 $ 121,725 $ 110,311 $ 101,823
Cost of goods sold...................... 107,931 102,326 96,515 88,191 77,936
----------- ----------- ----------- ----------- -----------
Gross profit............................ 30,239 27,074 25,210 22,120 23,887
Selling, general and administrative
expenses.............................. 11,774 9,932 9,562 8,303 9,074
----------- ----------- ----------- ----------- -----------
Operating income........................ 18,465 17,142 15,648 13,817 14,813
Interest expense, net................... 787 2,884 3,070 2,950 2,191
----------- ----------- ----------- ----------- -----------
Income before taxes and extraordinary
item.................................. 17,678 14,258 12,578 10,867 12,622
Income tax provision.................... 6,626 5,554 4,907 4,237 4,988
----------- ----------- ----------- ----------- -----------
Income before extraordinary item........ 11,052 8,704 7,671 6,630 7,634
Extraordinary item, net of tax.......... (736) -- (436) -- --
----------- ----------- ----------- ----------- -----------
Net income.............................. $ 10,316 $ 8,704 $ 7,235 $ 6,630 $ 7,634
=========== =========== =========== =========== ===========
Earnings per common share before
extraordinary item.................... $ 1.48 $ 1.54 $ 1.38 $ 1.20 $ 0.94
Earnings per common share............... $ 1.39 $ 1.54 $ 1.30 $ 1.20 $ 0.94
Weighted-average number of common shares
and equivalents outstanding........... 7,447,750 5,642,116 5,545,768 5,514,028 8,080,048
Cash dividends per common share......... $ 0.245 $ 0.375 $ -- $ -- $ --
BALANCE SHEET DATA:
AS OF DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Working capital......................... $ 53,827 $ 29,703 $ 19,724 $ 7,688 $ 9,216
Total assets............................ 99,935 71,280 60,449 56,986 50,964
Long-term debt, less current
maturities............................ 25,097 34,908 34,231 29,405 37,925
Stockholders' equity (deficit).......... 56,046 18,821 9,750 2,425 (4,205)
OPERATING DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Capital expenditures.................... $ 4,659 $ 4,035 $ 3,562 $ 2,640 $ 2,264
Depreciation and amortization........... 3,757 3,885 3,525 3,299 3,132
- ------------
(1) Prior year financial information has been restated and current year
information adjusted to reflect an acquisition made in 1996 which was
accounted for as a pooling of interests. See Note 2 of Notes to the
Consolidated Financial Statements.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto, included
elsewhere in this Form 10-K. Historical financial information has been restated
to reflect the acquisition of Brenner Casket Company in December 1996, which was
accounted for as a pooling of interests.
GENERAL
The Company is the second largest casket manufacturer in the United States
and produces a wide variety of metal and wood caskets, as well as casket
components. The Company's finished caskets are marketed through a network of
Company and privately owned distributors, which serve an estimated 15,000
domestic funeral homes, as well as certain foreign markets. Casket components
are sold to other casket manufacturers and assemblers (including certain of the
Company's distributors).
In certain markets, the Company believes that its privately owned
distributors will continue to be the most effective way to market the Company's
products and expects to continue to strongly support the efforts of these
privately owned distributors. However, the Company has, and will continue to,
acquire certain of its distributors if the Company believes that such
acquisitions would be complementary and result in operating efficiencies. During
1996, the Company acquired two distribution companies serving certain Midwest
markets and in early 1997, a distribution company serving Texas, New Mexico and
Louisiana was acquired. The Company already owned distribution operations
serving the New England market.
In April 1996, the Company completed an initial public offering (the
"Offering") of 2,145,000 shares of its common stock. Proceeds to the Company
from the Offering, net of associated expenses, were approximately $25.3 million.
The Company used $11.0 million of the proceeds to repay the Subordinated Series
A Note (the "Series A Note") in the second quarter of 1996. The balance of the
proceeds was available for working capital and general corporate purposes,
including acquisitions.
Funeral homes are required by federal regulation to provide price lists to
their customers, and generally publish such price lists annually. As a result,
the casket manufacturing industry has established the industry-wide practice of
setting its prices every January. In setting these prices, the Company considers
expected raw material prices, competitive considerations, the general state of
the economy and inflationary expectations. This industry practice requires the
Company to set its prices in anticipation of, rather than in response to,
changes in raw material and other costs. Over the past three years, the
Company's annual weighted average price increases have ranged from 3.5% to 5.0%.
Limitations on the timing of price increases relative to changes in costs may
cause fluctuations in operating margins, and therefore, make quarterly
year-to-year comparisons less meaningful. The major domestic casket
manufacturers have all developed discount and rebate programs, which are
commonplace in the casket manufacturing industry, designed to encourage volume
purchases by funeral homes. In the case of the Company, these discounts are
absorbed equally between the Company and the distributors.
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods presented.
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Net sales............................ 100.0% 100.0% 100.0%
Gross profit......................... 21.9 20.9 20.7
Selling, general and administrative
expenses........................... 8.5 7.7 7.9
--------- --------- ---------
Operating income..................... 13.4 13.2 12.8
Interest expense, net................ .6 2.2 2.5
Income tax provision................. 4.8 4.3 4.0
--------- --------- ---------
Net income before extraordinary
item............................... 8.0 6.7 6.3
Net income........................... 7.5% 6.7% 5.9%
7
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased $8.8 million, or 6.8%. The increase reflects a 6.1%
increase in finished casket volume, increased components sales, acquisitions
completed in the fourth quarter of 1996, and increased net sales prices,
partially offset by disproportionate growth in lower priced metal caskets.
Gross profit increased $3.2 million, or 11.7%. Gross margin increased from
20.9% to 21.9%. The increases primarily reflect the increase in casket and
components volumes, favorable raw material costs, increased margins attributable
to acquired distribution businesses and increased net sales prices, partially
offset by changes in product mix.
Selling, general and administrative expenses increased $1.8 million, or
18.6%, and as a percentage of net sales, increased from 7.7% to 8.5%. The
increase in selling, general and administrative expenses as a percentage of net
sales primarily results from the acquisition of distribution and marketing
companies that incur significant selling, general and administrative costs,
continued investment in preneed insurance marketing efforts, costs associated
with being a public company and increased personnel costs, partially offset by
increased sales volume.
Net interest expense decreased $2.1 million, or 72.7%. The decrease
reflects lower interest expense due to the early extinguishment of the Series A
Note and higher interest earnings due to increased invested cash balances.
The Company's effective tax rate decreased from 39.0% to 37.5%. The
effective rate for 1996 reflects a decrease in state income taxes and
nondeductible expenses, partially offset by an increase in the Company's
effective Federal tax rate.
In 1996, an extraordinary item of $736,000, net of tax, resulted from the
write-off of unamortized debt discount associated with the early extinguishment
of the Series A Note.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased $7.7 million, or 6.3%. The increase reflects a 3.0%
increase in finished casket volume and increased net sales prices, partially
offset by a 4.5% decrease in sales of casket components.
Gross profit increased $1.9 million, or 7.4%. Gross margin increased from
20.7% to 20.9%. The increases primarily reflect increased finished casket
volume, increased net sales prices and a change in product mix toward higher
priced units, which are generally more profitable, partially offset by higher
lumber and steel costs. In addition, no environmental remediation charges were
incurred in 1995 as compared to environmental remediation charges of $775,000 in
1994.
Selling, general and administrative expenses increased $370,000, or 3.9%,
and as a percentage of net sales, decreased from 7.9% to 7.7%. The decrease in
selling, general and administrative expenses as a percentage of net sales
reflects the effect of increased sales volume partially offset by general cost
increases.
Net interest expense decreased $186,000, or 6.1%. The decrease reflects
higher interest income, partially offset by higher amortization of debt discount
and slightly higher interest rates.
The Company's effective tax rate remained 39.0%.
In 1994, an extraordinary item of $436,000, net of tax, resulted from the
write-off of deferred financing costs associated with the refinancing of the
Company's credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
Until the Offering, the Company had historically relied on cash flow from
operations and borrowings from banks and other lenders to fund its operations.
Cash and cash equivalents were $32.1 million at December 31, 1996,
representing an increase of $21.2 million from December 31, 1995. In 1996, cash
flows from operations totaled approximately $15.3 million,
8
cash used in investing activities totaled approximately $4.5 million and cash
provided by financing activities totaled $10.4 million.
Capital expenditures were $4.7 million in 1996 and $4.0 million in 1995.
The Company has budgeted capital expenditures for 1997 of approximately $11.1
million. Major 1997 expenditures include productivity improvement and marketing
facilities projects. These expenditures are expected to enable the Company to
increase operating efficiency, reduce costs, further improve product quality and
more effectively present and support the Company's products.
Proceeds from the issuance of common stock were approximately $25.8 million
and $2.3 million in 1996 and 1995, respectively. These proceeds reflect the
Offering, the exercise of warrants issued to the original stockholders in 1990
and the exercise of stock options issued to certain key employees in 1991.
Long-term debt, including current maturities, at December 31, 1996, totaled
$25.2 million, which primarily consisted of $25.0 million of senior notes (the
"Senior Notes").
On June 30, 1994, the Company completed the private placement of $25.0
million of Senior Notes with a major insurance company. The Senior Notes, which
are unsecured, have a final maturity of June 30, 2004 and provide for a fixed
interest rate of 7.87% per annum. Interest is payable semi-annually in arrears,
and principal payments are due in seven equal annual installments beginning on
June 30, 1998. The proceeds of the Senior Notes were primarily used to retire
the Company's then outstanding term loan. The Senior Notes require that certain
financial conditions and ratios be maintained and restrict the level of dividend
payments and additional borrowings.
The Series A Note with a stated interest rate of 9.5% was discounted at
issuance to provide for an effective rate of 18.6%. The Series A Note was
unsecured and provided for the quarterly payment of interest in cash or, at the
Company's option, in kind, in the form of additional Series A Notes. The Series
A Note was repaid with a portion of the proceeds from the Offering. At the time
of the repayment, the Company recorded an extraordinary charge of $736,000, net
of tax, to write-off the then unamortized debt discount.
During 1996, the Company maintained a $10.0 million revolving credit
facility with a major bank. The revolving credit facility, which was scheduled
to expire January 31, 1997, and was unsecured, provided for borrowings and the
issuance of letters of credit up to the lesser of $10.0 million or a borrowing
base, consisting of accounts receivable and inventory. At December 31, 1996, no
borrowings were outstanding, $2.3 million of letters of credit were outstanding
and $7.7 million was available under the revolving credit facility. The terms of
this facility called for an interest rate, at the Company's option, to be based
upon either an adjusted eurodollar rate or an adjusted prime rate. The revolving
credit facility required that certain financial conditions and ratios be
maintained and restricted the level of dividend payments and additional
borrowings. Effective January 31, 1997, the Company reduced the revolving credit
facility to $6.0 million and extended the agreement to expire January 31, 1998.
Management believes that current cash balances, cash flows from operations and
the borrowing capacity available under the revolving credit facility are
sufficient to meet the Company's anticipated capital expenditures and other
operating requirements for the foreseeable future.
SELECTED QUARTERLY OPERATING RESULTS AND SEASONALITY
Historically, the Company's operations have experienced seasonal
variations. Generally, the Company's net sales are highest in the first quarter
and lowest in the third quarter of each year. These fluctuations are due in part
to the seasonal variance in the death rate, with a greater number of deaths
generally occurring in cold weather months, and the timing of the Company's
annual manufacturing facility vacation shutdowns, which occur primarily in the
third quarter. In addition, operating results can vary between quarters of the
same or different years due to, among other things, fluctuations in the number
of deaths, changes in product mix, and the timing of annual price increases
relative to changes in costs. As a result, the Company experiences variability
in its operating results on a quarterly basis, which may make quarterly
year-to-year comparisons less meaningful.
9
The following table sets forth certain income statement data for each
quarter of 1995 and 1996.
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 (2)
Net sales............................ $35,697 $ 33,044 $29,154 $ 31,505
Gross profit......................... 8,195 7,097 5,617 6,165
Operating income..................... 5,665 4,544 3,187 3,746
Net income........................... 3,005 2,360 1,546 1,793
Earnings per common share............ .54 .42 .27 .31
1996 (2)
Net sales............................ $38,666 $ 35,197 $28,973 $ 35,334
Gross profit......................... 8,813 7,699 5,976 7,751
Operating income..................... 6,001 4,706 3,284 4,474
Income before extraordinary item..... 3,323 2,906 2,081 2,742
Net income........................... 3,323 2,170 2,081 2,742
Earnings per common share............ .58 .27(1) .26 .34
- ------------
(1) Includes an extraordinary charge of $.10 per share, net of tax, for the
write-off of unamortized debt discount.
(2) Previously issued quarterly financial information has been restated to
reflect an acquisition which occurred in the fourth quarter of 1996 and was
accounted for as a pooling of interests. See Note 2 of Notes to the
Consolidated Financial Statements.
INFLATION
Inflation has not had a material net impact on the Company over the past
three years nor is it anticipated to have a material impact for the foreseeable
future.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements. Such statements are
based upon management's current expectations and assumptions. Important factors
that could cause actual results to differ materially from those in
forward-looking statements included herein include, among others, customer
demands and the Company's reaction to such demands, changes in mortality and/or
cremation rates, further consolidation in the funeral service industry, and
fluctuations in the prices of raw materials and other manufacturing costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are incorporated under
Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Proposal No. 1 -- Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act" in the Company's definitive
proxy statement which involves the election of directors and is to be filed with
the Commission pursuant to the Exchange Act of 1934, as amended (the "Exchange
Act"), within 120 days of the end of the Company's fiscal year ended December
31, 1996.
10
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
caption "Proposal No. 1 -- Election of Directors" in the Company's definitive
proxy statement which involves the election of directors and is to be filed with
the Commission pursuant to the Exchange Act within 120 days of the end of the
Company's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Common Stock Outstanding and Principal
Holders Thereof" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain relationships and
transactions with management and other related parties of the Company is hereby
incorporated by reference from the information appearing under the caption
"Certain Transactions" in the Company's definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated.
PAGE
----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995......... F-3
Consolidated Statements of Income for
the Years Ended
December 31, 1996, 1995 and 1994... F-4
Consolidated Statements of
Stockholders' Equity for the Years
Ended
December 31, 1996, 1995 and 1994... F-5
Consolidated Statements of Cash Flows
for the Years Ended
December 31, 1996, 1995 and 1994... F-6
Notes to the Consolidated Financial
Statements......................... F-7
(A) 2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
PAGE
----
Report of Independent Accountants on
Financial Statement Schedule....... F-2
Financial Statement Schedule
II -- Valuation and Qualifying
Accounts........................... S-1
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
11
(A) 3 EXHIBITS
The exhibits to this report have been included only with the copies of this
report filed with the Securities and Exchange Commission. Copies of individual
exhibits will be furnished to stockholders upon written request to the Company
and payment of a reasonable fee.
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBITS
------- --------------------------
3.1 -- Certificate of Incorporation dated January 22, 1996
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 [Reg. No. 333-00846])
("Form S-1")
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to Form
S-1)
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to Form S-1)
10.1 -- Representation Agreement effective August 1, 1992, by and
between The York Group, Inc. and International Funeral
Associates (incorporated by reference to Exhibit 10.1 to Form
S-1)
10.2 -- Agreement between York Casket Company-IN and District Lodge
90, and Local Lodge No. 2532 of the International Association
of Machinists and Aerospace Workers, AFL-CIO dated June 12,
1995 (incorporated by reference to Exhibit 10.2 to Form S-1)
10.3 -- Inventory Purchase Agreement by and among The York Group,
Inc., Yorktowne Caskets, Inc. and Meridian Bank dated February
22, 1994 (incorporated by reference to Exhibit 10.3 to Form
S-1)
10.4 -- Casket Supply and Requirements Agreement by and between
York Acquisition Corp. n/k/a The York Group, Inc. and SCI
Funeral Services, Inc., and the First Amendment to Casket
Supply and Requirements Agreement dated December 30, 1992
(incorporated by reference to Exhibit 10.5 to Form S-1)
10.5 -- Credit Agreement between The York Group, Inc. and Texas
Commerce Bank National Association dated June 30, 1994, as
amended (incorporated by reference to Exhibit 10.7 to Form
S-1)
10.6 -- Second Amendment to Credit Agreement between The York
Group, Inc. and Texas Commerce Bank National Association,
effective January 31, 1997
10.7 -- Senior Note Purchase Agreement among The York Group, Inc.
and The Variable Annuity Life Insurance Company dated June 30,
1994 (incorporated by reference to Exhibit 10.8 to Form S-1)
10.8 -- Form of Distributor Agreement (incorporated by reference to
Exhibit 10.9 to Form S-1)
10.9 -- 1990 Stock Incentive Plan (incorporated by reference to
Exhibit 10.10 to Form S-1)
10.10 -- 1991 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to Form S-1)
10.11 -- 1996 Employee Stock Option Plan (incorporated by reference
to Exhibit 10.12 to Form S-1)
10.12 -- 1996 Independent Director Stock Option Plan (incorporated
by reference to Exhibit 10.13 to Form S-1)
10.13 -- The York Group, Inc. Nonqualified Deferred Compensation
Plan
21.1 -- Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21.1 to Form S-1)
23.1 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
12
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE YORK GROUP, INC.
By:/s/ DAVID F. BECK
DAVID F. BECK
VICE PRESIDENT -- FINANCE, CHIEF
FINANCIAL OFFICER,
TREASURER AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ELDON P. NUSS Chairman of the Board March 26, 1997
ELDON P. NUSS
/s/BILL W. WILCOCK President, Chief Executive Officer, March 26, 1997
BILL W. WILCOCK Chief Operating Officer and Director
(Principal Executive Officer)
/s/DAVID F. BECK Vice President -- Finance, March 26, 1997
DAVID F. BECK Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
/s/KEITH E. PLOWMAN Controller, Assistant Secretary and March 26, 1997
KEITH E. PLOWMAN Assistant Treasurer
(Principal Accounting Officer)
/s/GEORGE L. FOLEY, JR. Director March 26, 1997
GEORGE L. FOLEY, JR.
/s/BRUCE E. ELDER Director March 26, 1997
BRUCE E. ELDER
/s/KIRK P. PENDLETON Director March 26, 1997
KIRK P. PENDLETON
/s/GERALD D. RUNNELS Director March 26, 1997
GERALD D. RUNNELS
/s/ROBERT T. RAKICH Director March 26, 1997
ROBERT T. RAKICH
13
THE YORK GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public
Accountants.................... F-2
Consolidated Balance Sheets as
of December 31, 1996 and
1995........................... F-3
Consolidated Statements of
Income for the Years Ended
December 31, 1996, 1995 and
1994........................... F-4
Consolidated Statements of
Stockholders' Equity for the
Years Ended
December 31, 1996, 1995 and
1994........................... F-5
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1996, 1995 and
1994........................... F-6
Notes to the Consolidated
Financial Statements........... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of The York Group, Inc.:
We have audited the accompanying consolidated balance sheets of The York
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The York
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for metal stamping
and casket product inventories to the last-in, first-out (LIFO) method.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Lancaster, Pennsylvania
February 7, 1997
F-2
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
ASSETS 1996 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents......... . $ 32,056 $ 10,867
Trade accounts and notes
receivable, net of allowance for
doubtful accounts and returns
and allowances of $1,755 in 1996
and $1,586 in 1995..............
Stockholders and affiliates... 5,377 6,457
Other......................... 6,848 4,959
Inventories........................ 19,101 17,551
Prepaid expenses................... 1,555 416
Deferred tax asset................. 2,258 1,918
--------- ---------
Total current assets....... 67,195 42,168
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements.............. 2,956 2,897
Buildings and improvements......... 10,515 9,973
Equipment.......................... 31,092 26,796
Construction-in-progress........... 1,134 1,197
--------- ---------
45,697 40,863
Less accumulated depreciation...... 16,377 12,943
--------- ---------
Property, plant and
equipment, net.......... 29,320 27,920
--------- ---------
NOTES RECEIVABLE:
Related party...................... 175 903
Other.............................. 171 28
GOODWILL (Note 1).................... 2,806 --
DEFERRED COSTS (net of accumulated
amortization of $114 in 1996 and
$86 in 1995) and other noncurrent
assets 268 261
--------- ---------
Total assets............... $ 99,935 $ 71,280
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt............................ $ 70 $ --
Demand note to bank................ -- 357
Accounts payable................... 3,699 3,656
Income taxes payable............... -- 164
Accrued rebates.................... 3,782 2,635
Accrued compensation............... 2,699 2,205
Accrued interest................... 5 1,158
Other accrued expenses............. 3,113 2,290
--------- ---------
Total current
liabilities............. 13,368 12,465
--------- ---------
LONG-TERM DEBT....................... 25,097 34,908
--------- ---------
OTHER NONCURRENT LIABILITIES......... 1,275 1,400
--------- ---------
DEFERRED TAX LIABILITY............... 4,149 3,686
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note
9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized and
unissued........................ -- --
Common stock, $.01 par value,
25,000,000 shares authorized;
7,999,864 and 5,513,864 shares
issued and outstanding.......... 80 55
Additional paid-in capital......... 30,939 2,428
Retained earnings.................. 25,027 16,338
--------- ---------
Total stockholders'
equity.................. 56,046 18,821
--------- ---------
Total liabilities and
stockholders' equity.... $ 99,935 $ 71,280
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
NET SALES (including sales to
stockholders and affiliates of
$74,909 in 1996, $75,595 in 1995
and $70,846 in 1994)............... $ 138,170 $ 129,400 $ 121,725
COST OF SALES........................ 107,931 102,326 96,515
---------- ---------- ----------
Gross profit............... 30,239 27,074 25,210
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 11,774 9,932 9,562
---------- ---------- ----------
Operating income........... 18,465 17,142 15,648
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income................. 1,673 742 374
Interest expense................ (2,460) (3,626) (3,444)
---------- ---------- ----------
(787) (2,884) (3,070)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM................. 17,678 14,258 12,578
INCOME TAX PROVISION................. 6,626 5,554 4,907
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM..... 11,052 8,704 7,671
EXTRAORDINARY ITEM, net of applicable
income taxes of $442 in 1996 and
$262 in 1994 (Note 13)............. (736) -- (436)
---------- ---------- ----------
NET INCOME........................... $ 10,316 $ 8,704 $ 7,235
========== ========== ==========
EARNINGS PER SHARE:
Income before extraordinary
item.......................... $ 1.48 $ 1.54 $ 1.38
========== ========== ==========
Net income...................... $ 1.39 $ 1.54 $ 1.30
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL
NUMBER COMMON PAID-IN RETAINED
OF SHARES STOCK CAPITAL EARNINGS
--------- --- ------- --------
BALANCE AT JANUARY 1, 1994 ........... 4,539,800 $45 $ -- $ 2,380
Exercise of common stock
options ....................... 39,200 -- 90 --
Net income ...................... -- -- -- 7,235
--------- --- ------- --------
BALANCE AT DECEMBER 31, 1994 ......... 4,579,000 45 90 9,615
Exercise of common stock
options ....................... 174,000 2 433 --
Exercise of warrants ............ 758,400 8 1,889 --
Common stock awards ............. 2,464 -- 16 --
Net income ...................... -- -- -- 8,704
Dividends paid ($.375 per
share) ........................ -- -- -- (1,981)
--------- --- ------- --------
BALANCE AT DECEMBER 31, 1995 ......... 5,513,864 55 2,428 16,338
Exercise of common stock
options ....................... 176,000 2 438 --
Proceeds from issuance of common
stock,
net of issuance costs ......... 2,310,000 23 28,073 --
Net income ...................... -- -- -- 10,316
Dividends paid ($.245 per
share) ........................ -- -- -- (1,627)
--------- --- ------- --------
BALANCE AT DECEMBER 31, 1996 ......... 7,999,864 $80 $30,939 $ 25,027
========= === ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 10,316 $ 8,704 $ 7,235
Adjustments to reconcile net
income to net cash
provided by operating
activities --
Depreciation and
amortization............... 3,757 3,885 3,525
Provision for doubtful
accounts................... (86) 31 89
Loss on disposition of
property, plant and
equipment.................. 68 46 141
Deferred income tax
provision.................. 165 352 234
Write-off of debt discount in
1996 and
deferred financing costs in
1994....................... 1,178 -- 698
Decrease/(increase) in:
Accounts receivable........ 729 (1,046) (1,828)
Inventories................ 814 (996) (2,281)
Prepaid taxes.............. (937) -- 10
Prepaid expenses........... (265) 82 (39)
Other noncurrent assets.... 8 -- 138
Increase/(decrease) in:
Accounts payable........... (874) 133 1,030
Accrued expenses........... 780 766 (32)
Income taxes payable....... (164) 147 46
Other noncurrent
liabilities............. (175) (60) 360
-------- --------- ---------
Net cash provided by
operating
activities......... 15,314 12,044 9,326
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes
receivable.................... 286 294 2,330
Advances under notes
receivable.................... -- -- (750)
Capital expenditures............ (4,659) (4,035) (3,562)
Securities purchased............ -- (11) --
Acquisitions, net of cash
acquired of
$49 in 1996 and $88 in 1994... (167) -- (1,047)
--------- --------- ---------
Net cash used in
investing
activities......... (4,540) (3,752) (3,029)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock,
net of issuance costs......... 25,772 2,348 90
Proceeds from issuance of
long-term debt................ -- 73 25,000
Repayment of line of credit..... -- -- (2,063)
Repayment of long-term debt..... (13,730) (515) (29,341)
Payment of deferred financing
costs......................... -- (5) (303)
Dividends paid.................. (1,627) (1,981) --
--------- --------- ---------
Net cash provided by
(used in) financing
activities......... 10,415 (80) (6,617)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 21,189 8,212 (320)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................ 10,867 2,655 2,975
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
YEAR............................... $ 32,056 $ 10,867 $ 2,655
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
The York Group, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated. Prior
year financial information has been restated and current year information
adjusted to reflect an acquisition made during 1996 which was accounted for as a
pooling of interests. See Note 2.
NATURE OF OPERATIONS
The Company manufactures wood and metal caskets and casket components in
the United States and sells its products primarily for use domestically.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be cash
equivalents. At December 31, 1996, cash equivalents represented commercial paper
and an interest in cash management funds that invest in government securities
that are subject to daily redemption. At December 31, 1995, cash equivalents
represented an interest in cash management funds that invested in government
securities that were subject to daily redemptions.
INVENTORIES
Inventories are stated at the lower of cost or market. Effective January 1,
1994, the Company changed its method of accounting for the cost of metal
stamping and casket product inventories from the first-in, first-out (FIFO)
method to the last-in, first-out (LIFO) method. The Company also values wood
product inventories using the LIFO method. All other inventories are valued
using the FIFO method. See Note 6 for further information.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and include alterations
and betterments which improve or extend useful lives. Maintenance and repairs
are reflected in operations as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets.
Estimated useful lives range from 15 to 20 years for buildings and building
improvements and 5 to 10 years for machinery, equipment, furniture and fixtures.
Depreciation expense for the periods ended December 31, 1996, 1995 and 1994 was
$3,535,000, $3,226,000 and $2,822,000, respectively. When property is retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and any resulting gains or losses are reflected in results of
operations.
F-7
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Cost in excess of the fair value of net assets acquired is amortized on a
straight-line basis over the estimated useful life, not to exceed 40 years.
Amortization expense recognized during 1996 and accumulated amortization at
December 31, 1996 were approximately $39,000. Goodwill at December 31, 1996 was
$2,806,000.
ACCRUED REBATES
The Company offers price discounts to funeral homes participating in
programs for volume purchases. In addition, the Company has a supply contract
with Service Corporation International ("SCI") that requires price discounts
(see Note 12). The cost of these programs is based on a percentage of the
distributors' selling prices. Discounts and rebates are reported as a reduction
of revenues at the time the Company's products are sold by a distributor to a
participating funeral home.
DEFERRED COSTS
Deferred costs include financing costs related to debt issuance which are
amortized over the terms of the borrowings on a straight-line basis.
DEFINED CONTRIBUTION PLANS
The Company maintains two defined contribution plans for eligible
employees, as defined. Contributions to the plans totaled $424,000, $381,000 and
$284,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Under SFAS No. 109, a current tax liability or asset is
recognized for the estimated taxes payable or refundable as reported in the
Company's Federal and state tax returns. A deferred tax liability or asset is
recognized for the estimated future tax effects attributable to temporary
differences. Deferred taxes are determined based upon current tax laws and rates
and any impact from changes in these tax regulations and rates is recorded in
the period when the related change is enacted.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares and
common stock equivalents outstanding (see Note 10). All options and warrants
outstanding are considered common stock equivalents for all periods presented.
1996 1995 1994
----------- ----------- -----------
Weighted-average common shares
outstanding........................ 7,308,421 5,134,864 4,548,776
Weighted-average common stock
equivalents outstanding............ 139,329 507,252 996,992
----------- ----------- -----------
7,447,750 5,642,116 5,545,768
=========== =========== ===========
For purposes of computing common stock equivalents outstanding, the
treasury stock method was applied using the fair value of the common stock in
the respective periods prior to the Company's initial public offering in April
1996, and the closing market price thereafter. Fully diluted earnings per share
are not presented because such amounts approximate primary earnings per share.
F-8
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS:
On September 30, 1996, the Company completed the acquisition of
substantially all the business assets and assumed the associated debts and
liabilities of Hamilton Distributing Company ("Hamilton"), a casket distributor,
with locations in Ohio, Michigan and Indiana. The acquisition was accounted for
using the purchase method of accounting and the results of operations of
Hamilton have been included in the consolidated financial statements since the
acquisition date. The purchase price was $625,000 which includes forgiven debt
owed to the Company of $588,000. In addition, two major stockholders of Hamilton
entered into four year non-competition agreements. The Company will recognize
the cost ratably over the term of the agreements.
Effective October 15, 1996, the Company acquired the business assets and
assumed the associated debts and liabilities of The Doody Group, Inc. ("Doody").
Doody is located in Louisiana and is a provider of architectural and interior
design services and merchandising programs to the funeral service industry. The
acquisition was accounted for using the purchase method of accounting and the
results of operations of Doody have been included in the consolidated financial
statements since the date of the acquisition. Total consideration was
$2,810,000, which includes 165,000 shares of The York Group, Inc. common stock
valued at $16.75 per share. The purchase price was allocated based on the fair
values of assets and liabilities at the date of acquisition. The excess of
purchase price over net assets acquired amounted to approximately $2,845,000 and
is being amortized on a straight-line basis over 15 years. In addition, certain
employees of Doody entered into non-competition agreements that require the
Company to pay a total of $117,500 annually for five years, beginning in 1996.
The Company will recognize the cost ratably over the terms of the agreements.
Pro forma unaudited consolidated operating results of the Company and the
acquired companies for the years ended December 31, 1996 and 1995, assuming the
acquisitions had been made as of January 1, 1996 and 1995, are summarized and
included in the table below.
PROFORMA RESULTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------- DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE ----------------------
AMOUNTS) 1996 1995
---------- ----------
Net sales............................ $ 147,067 $ 141,497
Net income........................... 10,247 8,464
Net earnings per share............... 1.38 1.50
On December 11, 1996, the Company issued 125,000 shares of its common stock
for all the outstanding shares of Brenner Casket Company ("Brenner"), a
distributor of caskets with locations in Illinois. The merger has been accounted
for as a pooling of interests and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts and operations
of Brenner for all periods prior to the merger.
F-9
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate net sales and net income for each of the merged entities for the
nine months ended September 30, 1996 are presented in the following table. In
connection with the merger, $26,000 of merger costs and expenses were incurred
and have been charged to expense in the fourth quarter of 1996. The merger costs
and expenses consisted of legal, accounting and other professional fees.
SEPTEMBER 30,
1996
---------------
(IN THOUSANDS)
Net sales:
The York Group, Inc............. $ 99,038
Brenner......................... 3,798
---------------
Total...................... $ 102,836
===============
Net income:
The York Group, Inc............. $ 7,472
Brenner......................... 102
---------------
Total...................... $ 7,574
===============
3. RECAPITALIZATION:
On January 24, 1996, the stockholders voted to reincorporate the Company in
the State of Delaware and issued four shares in the new company for each share
outstanding in the old company. This transaction has been accounted for as a
stock split and all shares and per share information is restated for all periods
presented.
4. INITIAL PUBLIC OFFERING:
In April 1996, the Company completed an initial public offering (the
"Offering") of 2,145,000 shares of its common stock. Proceeds to the Company
from the Offering, after deduction of associated expenses, were approximately
$25,300,000.
5. NOTES RECEIVABLE:
Long-term notes bear interest at prime to prime plus 2% with maturities
through 2000. Annual maturities are as follows:
(IN THOUSANDS)
---------------
1997................................. $ 115
1998................................. 305
1999................................. 34
2000................................. 7
---------------
461
Less current portion................. 115
---------------
Total long-term notes receivable..... $ 346
===============
F-10
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES:
Inventories consisted of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Raw materials........................ $ 7,414 $ 8,173
Work in process...................... 2,568 2,871
Finished goods....................... 9,119 6,507
--------- ---------
$ 19,101 $ 17,551
========= =========
The Company values substantially all of its metal stamping and casket
product inventories and its wood product inventories under the LIFO method,
which approximates 91% of consolidated inventories. All other inventories are
valued under the FIFO method of inventory valuation. At December 31, 1996 and
1995, the replacement value of inventories was approximately $20,400,000 and
$18,800,000, respectively.
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Senior notes with interest due semi-annually
through June 30, 2004 and principal
due annually June 1998 through June 2004.... $ 25,000 $ 25,000
Subordinated Series A Note due April
1998, net of unamortized discount
of $1,340,000 at December 31,
1995............................... -- 9,660
Other, interest payable at 8.77% to
9.25%.............................. -- 248
Capitalized lease obligations........ 167 --
--------- ---------
25,167 34,908
Less current portion................. 70 --
--------- ---------
Total long-term debt................. $ 25,097 $ 34,908
========= =========
On June 30, 1994, the Company completed the private placement of $25
million of senior notes (the "Senior Notes") with a major insurance company. The
Senior Notes, which are unsecured, have a final maturity of June 30, 2004 and
provide for a fixed interest rate of 7.87% per annum. Interest is payable
semi-annually in arrears, with principal payments due in seven equal annual
installments beginning on June 30, 1998. The proceeds of the Senior Notes were
primarily used to retire the Company's then outstanding term loan. The Senior
Notes require that certain financial conditions and ratios be maintained and
restrict the level of dividend payments and additional borrowings. Further, the
Senior Notes contain cross-default provisions with the Company's other borrowing
facilities.
The Company maintained a $10 million revolving credit facility with a major
bank. The revolving credit facility, which was scheduled to expire January 31,
1997, and was unsecured, provided for borrowings and the issuance of letters of
credit up to the lesser of $10 million or a borrowing base, as defined. At
December 31, 1996, no borrowings were outstanding, $2.3 million of letters of
credit were outstanding and $7.7 million was available under the revolving
credit facility. The terms of this facility called for an interest rate, at the
Company's option, to be based upon an adjusted eurodollar rate or an adjusted
prime rate. Adjustment factors to the eurodollar rate and prime rate were based
upon certain financial ratios, as defined, with specified ceilings (eurodollar +
2.375%; prime + 1.25%) and floors (eurodollar + 1.375%; prime). The revolving
credit facility required that certain financial conditions and
F-11
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratios be maintained, restricted the level of dividend payments and contained
cross-default provisions with the Company's other borrowing facilities. The
revolving credit facility required a fee of 3/8 of 1%, payable quarterly, on the
unused portion of the facility. Effective January 31, 1997, the Company reduced
the revolving credit facility to $6 million and extended the agreement to expire
January 31, 1998.
In April 1996, the Company repaid the Subordinated Series A Note (the
"Series A Note"), which had a stated interest rate of 9.5% and was discounted at
issuance in 1990 to provide for an effective rate of 18.6% (see Note 13). The
Series A Note was unsecured and provided for quarterly payments of interest in
cash, or at the Company's option, in kind, in the form of additional Series A
Notes. The Company utilized a portion of the proceeds from the Offering (see
Note 4) to repay the Series A Note.
Aggregate annual maturities of long-term debt, excluding capitalized
leases, for each of the five years subsequent to December 31, 1996 are as
follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------------- ---------------
1997............................ $ --
1998............................ 3,571
1999............................ 3,571
2000............................ 3,571
2001............................ 3,571
2002 and thereafter............. 10,716
---------------
$ 25,000
===============
Interest paid during 1996, 1995 and 1994 totaled $3,450,000, $2,156,000 and
$3,302,000, respectively.
The estimated fair value of the Company's long-term debt at December 31,
1996 approximates the carrying value. The fair value was estimated using market
interest rates for similar types of instruments. The fair value of all other
financial instruments approximates the carrying value.
8. INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal......................... $ 5,961 $ 4,740 $ 4,320
State........................... 500 462 353
--------- --------- ---------
6,461 5,202 4,673
--------- --------- ---------
Deferred:
Federal......................... 143 340 222
State........................... 22 12 12
--------- --------- ---------
165 352 234
--------- --------- ---------
$ 6,626 $ 5,554 $ 4,907
========= ========= =========
Prepaid income taxes of $937,000, which were included in prepaid expenses
in the accompanying balance sheet, at December 31, 1996, represent the
difference between interim estimated federal and state income tax payments made
during 1996 and the current estimated income taxes due for the period.
F-12
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities result from temporary differences
between the financial statement and tax bases of assets and liabilities. The
significant components of deferred tax assets/(liabilities) are as follows:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Environmental reserves............... $ 597 $ 648
Self-insurance reserves.............. 137 194
Bad debt reserves.................... 290 305
Employee benefit accruals............ 340 314
Rebate reserves...................... 753 615
Depreciable assets................... (3,237) (3,040)
Other, net........................... (771) (804)
--------- ---------
Net deferred tax
liability............... $ (1,891) $ (1,768)
========= =========
No valuation allowance has been provided against the deferred tax assets as
the Company has concluded these tax benefits are realizable either through
carryback availability against prior years' taxable income, the reversal of
existing deferred tax liabilities or future taxable income.
A reconciliation between the Federal statutory rate and the Company's
effective tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Federal statutory rate............... 34.6% 34.3% 34.1%
State income taxes, net of Federal
tax benefit........................ 1.8 2.2 2.1
Miscellaneous other non-deductible
expenses........................... 1.1 2.5 2.8
---- ---- ----
37.5% 39.0% 39.0%
==== ==== ====
On a cash basis, income taxes paid during 1996, 1995 and 1994 were
$7,104,000, $4,953,000 and $4,307,000, respectively.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain office and warehouse facilities and data
processing and transportation equipment under noncancelable operating and
capital leases. The leases vary from periods of one to six years and interest
rates on capital leases approximate 7.0%. In most cases, operating leases
contain renewal options. The leases generally provide that the Company shall pay
for utilities, insurance, taxes and maintenance. At December 31, 1996, the
capital leases are collateralized by vehicles with a book value of $204,000 (net
of accumulated amortization of $19,000).
F-13
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under the Company's lease commitments as of
December 31, 1996 are as follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------- ---------- --------
(IN THOUSANDS)
1997................................. $1,033 $ 79
1998................................. 866 51
1999................................. 377 44
2000................................. 170 8
2001................................. 64 --
2002 and thereafter.................. 4 --
---------- --------
Total minimum lease payments......... $2,514 182
==========
Less amount representing interest.... 15
--------
Present value of future minimum lease
payments............................. 167
Less current portion of principal
payments............................. 70
--------
$ 97
========
The Company's rental expense under operating leases for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,485,000, $1,385,000, and
$1,323,000, respectively.
ENVIRONMENTAL MATTERS
In 1991, the Georgia Department of Natural Resources (the "GDNR") issued a
Notice of Violation -- Consent Order alleging that the Company's Lawrenceville,
Georgia facility was storing and treating hazardous wastes without a permit and
was otherwise in violation of certain hazardous waste regulations in the
operation of its electroplating line and associated wastewater treatment system.
On November 8, 1991, the Company and the GDNR entered into a Consent Order (the
"1991 Order") in settlement of the allegations. The 1991 Order was subsequently
amended in 1993 to reflect the plan to close the facility as a landfill and to
require some additional remediation, monitoring and investigation commitments on
the Company's part. The GDNR approved the revised closure plan and post-closure
plan for the facility in August 1994. Moreover, the GDNR issued a Hazardous
Waste Facility Permit effective September 27, 1995, to document these
post-closure care requirements. The Company has provided financial assurance in
the form of a letter of credit in the amount of approximately $1,100,000 to
secure its post-closure obligations.
During 1994, approximately $775,000 was charged to expense in connection
with the remediation of the environmental issues at this facility. No amounts
were charged to expense in 1996 or 1995.
At December 31, 1996, the Company had a reserve of approximately $1,500,000
for the estimated future costs to complete the implementation of the revised
plan. The reserve is based on management's best estimate of the closure costs to
be incurred, which was developed predicated on the information available to date
and the advice of an independent environmental consultant. It is possible that
the remediation costs could be different than the reserve due to unforeseen
factors that arise as the closure occurs and due to the length of time during
which monitoring activities will be conducted. Accordingly, the reserve will be
adjusted as information becomes available indicating that higher or lower
remediation costs will be incurred.
F-14
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
The Company has a letter of credit outstanding in the amount of $1,214,000
related to its worker's compensation insurance arrangements, which expires
October 31, 1997. As of December 31, 1996, no amounts have been drawn against
this facility.
OTHER MATTERS
The Company is a party to various claims and legal proceedings generally
incidental to its business. Although the ultimate disposition of these
proceedings is not presently determinable, management does not believe that
ultimate settlement of any or all of such proceedings will have a material
adverse effect upon the financial condition and results of operations of the
Company.
10. STOCKHOLDERS' EQUITY:
Warrants to purchase 760,000 shares of common stock were issued to the
Company's original stockholders in connection with their initial equity
investment in the Company. Each warrant had an exercise price of $2.50 per share
and was exercisable at any time prior to its expiration date of October 2, 1995.
In 1995, 758,400 warrants were exercised.
STOCK OPTIONS
The 1990 Stock Incentive Plan (the "1990 Plan") and the 1991 Stock
Incentive Plan (the "1991 Plan") permitted the grant of options to purchase
shares and also the award of shares. The 1990 and 1991 Plans were designed as an
incentive for key employees and directors. Exercise prices of options were
determined by the Board of Directors within the provisions of the 1990 and 1991
Plans. Options generally vest over a three to five year period and may be
exercised from three to ten years from the date of grant.
In 1996, the stockholders approved the adoption of two new stock option
plans, the 1996 Employee Stock Option Plan (the "1996 Employee Plan") and the
1996 Independent Director Stock Option Plan (the "1996 Director Plan"), which
replaced the 1990 and 1991 Plans. With the approval of the 1996 plans, no
additional shares may be granted under the 1990 or 1991 Plans.
The 1996 Employee Plan is designed as an incentive for key employees. The
plan permits the grant of options to purchase shares. The maximum number of
shares of common stock for which options may be issued is 500,000 shares through
January 24, 2006, the plan termination date. Exercise prices and vesting periods
of options are determined by the Board of Directors within the provisions of the
plan. The Board of Directors established the exercise price of the options
granted to be equal to the fair market value of the stock at the date of grant.
Options may be exercised up to 10 years from the date of grant.
The 1996 Director Plan is designed as incentive for independent members of
the Board of Directors. The Plan permits the grant of options to purchase
shares. The maximum number of shares of common stock for which options may be
issued is 50,000 shares through January 24, 2006, the plan termination date.
Exercise prices of options granted were equal to the fair market value of the
stock at the date of grant. The sale of shares issued upon exercise of options
shall not be allowed until at least six months after the date the option is
granted.
There are no stock awards or stock appreciation rights outstanding under
the 1990, 1991, 1996 Employee or 1996 Director Plans as of December 31, 1996.
The Company accounts for these stock option plans in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and, accordingly, no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123),
F-15
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income:
As reported..................... $10,316
Pro forma....................... 9,964
Primary EPS:
As reported..................... 1.39
Pro forma....................... 1.34
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. In
addition, since no options were granted during 1995, pro forma results have not
been presented for 1995.
A summary of the status of the Company's four stock option plans at
December 31, 1996, 1995 and 1994 and changes during the years then ended is
presented in the tables and narrative below:
THE 1990 PLAN
1994 1995 1996
-------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year..... 457,200 $ 2.85 410,000 $ 2.99 236,000 $ 3.35
Granted.............................. 10,000 6.50 -- -- 25,000 13.00
Exercised............................ (41,200) 2.50 (174,000) 2.50 (176,000) 2.50
Expired/Canceled..................... (16,000) 2.50 -- -- (10,000) 2.50
-------- --------- ---------
Outstanding at
end of year........................ 410,000 2.99 236,000 3.35 75,000 8.67
======== ========= =========
Options exercisable at year end...... 328,000 214,000 63,000
Weighted-average fair value of
options granted during the year.... $ -- $ -- $ 3.83
THE 1991 PLAN*
1996
--------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
Outstanding at beginning of year..... -- $ --
Granted.............................. 176,500 13.00
Expired/Canceled..................... (5,000) 13.00
-------
Outstanding at end of year........... 171,500 $13.00
=======
Options exercisable at year end...... 8,333
Weighted-average fair value of
options granted during the year.... $ 3.83
* There was no activity, nor were any options outstanding related to the 1991
Plan in 1994 and 1995.
F-16
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE 1996 PLANS
1996 EMPLOYEE PLAN 1996 DIRECTOR PLAN
--------------------------- --------------------------
1996 1996
--------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- --------------
Outstanding at beginning of year.... -- $ -- -- $ --
Granted.............................. 250,000 13.00 10,000 15.69
--------- ---------
Outstanding at end of year........... 250,000 13.00 10,000 15.69
========= =========
Options exercisable at year end...... -- 10,000
========= =========
Weighted-average fair value of
options granted during the year.... $ 3.83 $ 4.74
During 1994, stock options for 5,200 shares were exercised through the
exchange feature of the 1990 Plan. This resulted in the net issuance of 3,200
additional shares of common stock in 1994.
50,000 of the 506,500 options outstanding at December 31, 1996 have an
exercise price equal to their weighted-average exercise price of $6.50 and a
weighted-average remaining contractual life of 1.8 years; 38,000 of those shares
are exercisable. The remaining 456,500 options have exercise prices of $13.00
and $18.375, with a weighted-average exercise price of $13.06 and a remaining
contractual life of 9.2 years; 43,333 of these are exercisable with a
weighted-average exercise price of $13.62.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rate of 6.2%; expected
annual dividend yield of $.16 per share; expected life of five years; and
expected volatility of 23.7%.
11. RELATED PARTY TRANSACTIONS:
TRADE TRANSACTIONS WITH STOCKHOLDERS
During the years ended December 31, 1996, 1995, and 1994, the Company
purchased goods and services from certain stockholders amounting to $3,011,000,
$2,702,000 and $1,884,000, respectively. At December 31, 1996 and 1995, the
Company had trade liabilities to stockholders of $168,000 and $87,000,
respectively.
The Company has a management agreement with a stockholder to operate both a
textile warehouse and delivery service and a plastic injection molding
operation. The stockholder provides manufacturing/warehouse space, utilities,
direct and supervisory labor, consultation and marketing services. The Company
is charged fees based on certain sales volumes. During 1996, 1995 and 1994, the
Company paid the stockholder $426,000, $439,000 and $321,000, respectively,
under this agreement.
OTHER TRANSACTIONS
The Company has a $750,000 note receivable from Yorktowne Caskets, Inc.
("Yorktowne"), a stockholder, which bears interest at prime plus 1.5%, calls for
monthly principal payments of $12,500 plus accrued interest, with the remaining
principal and any accrued interest thereon due February 1, 1999. The promissory
note is subordinate to Yorktowne's senior bank debt. The balance outstanding on
the note as of December 31, 1996 and 1995 was $325,000 and $475,000,
respectively. Interest income from the note was $39,000, $56,000 and $75,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company's
Executive Vice President is a significant stockholder of Yorktowne.
The Company had a note receivable from Hamilton. The note, which bore
interest at prime plus 2%, called for monthly principal payments of $3,373 plus
accrued interest. The remaining principal balance of
F-17
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$588,000 was forgiven in 1996 as a portion of the consideration for the
Company's acquisition of Hamilton (see Note 2). The balance of the note at
December 31, 1995 was $619,000. Interest income from the note was $46,000,
$69,000 and $62,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's Vice President -- Sales and Marketing is a majority
stockholder of Hamilton.
The Company had a note receivable from Houston Casket Company ("Houston
Casket"). The note, which bore interest at prime, called for monthly principal
payments of $4,584 plus accrued interest and was paid off on July 27, 1996. The
balance of the note at December 31, 1995 was $41,176. Interest income from the
note was $1,000, $5,839 and $8,425 for the years ended December 31, 1996, 1995
and 1994, respectively. One of the Company's Directors is a significant
stockholder of Houston Casket Company. See Note 15.
In connection with the 1993 acquisition of Kenco Manufacturing, Inc., the
Company entered into a non-competition agreement with the former owner, the
Company's Vice President -- Manufacturing / Stamping, which calls for ten annual
payments of $138,000, which began in December 1993.
12. SCI SUPPLY AGREEMENT:
The Company is involved in a supply agreement (the "Supply Agreement") with
an affiliate of SCI. The Supply Agreement requires the purchase of specific
annual dollar volumes of the Company's caskets and expires at the end of 1998.
Sales under the Supply Agreement are made through the Company's distributors at
a discount to list price, and accounted for approximately 23% of the Company's
net sales in each of 1996, 1995 and 1994.
13. EXTRAORDINARY ITEM:
In 1996, the Company repaid its $11,000,000 Series A Note, which was
originally issued at a discount. The early extinguishment of this debt resulted
in an extraordinary charge of $736,000, net of tax, or $.09 per share related to
the write-off of the unamortized discount.
In 1994, the Company retired its outstanding term loan and revolving line
of credit. The related deferred financing costs of $436,000, net of tax, or $.08
per share, were charged against earnings and reported as an extraordinary item.
F-18
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
Net sales....................... $35,697 $ 33,044 $29,154 $ 31,505
Gross profit.................... 8,195 7,097 5,617 6,165
Operating income................ 5,665 4,544 3,187 3,746
Net income...................... 3,005 2,360 1,546 1,793
Earnings per common share....... .54 .42 .27 .31
1996 (2)
Net sales....................... $38,666 $ 35,197 $28,973 $ 35,334
Gross profit.................... 8,813 7,699 5,976 7,751
Operating income................ 6,001 4,706 3,284 4,474
Income before extraordinary
item.......................... 3,323 2,906 2,081 2,742
Net income...................... 3,323 2,170 2,081 2,742
Earnings per common share....... .58 .27(1) .26 .34
- ------------
(1) The second quarter of 1996 includes an extraordinary charge of $.10 per
share, net of tax, for the write-off of unamortized debt discount.
(2) Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings per share in 1996 does not
equal the total computed for the year due to stock transactions which
occurred during 1996.
15. SUBSEQUENT EVENT:
On January 17, 1997, the Company acquired substantially all the business
assets and assumed the associated debts and liabilities of Houston Casket, a
casket distributor with several locations in Texas and New Mexico for
approximately $9,100,000. The acquisition will be accounted for using the
purchase method of accounting. The Company's Vice President -- National Accounts
and International Markets has served as President and Chief Executive Officer of
Houston Casket since December 1983.
F-19
THE YORK GROUP, INC. -- SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
(IN THOUSANDS)
BALANCE AT AMOUNTS BALANCE AT
JANUARY 1, CHARGED TO DECEMBER 31,
DESCRIPTION 1996 EXPENSE OTHER DEDUCTIONS 1996
- ------------------------------------- ---------- ---------- ----- ----------- ------------
Allowance for doubtful accounts and
returns and allowances............. $1,586 $ 6 $ 219 $ (56) $1,755
Allowance for notes receivable....... 100 -- -- -- 100
Environmental reserve................ 1,662 -- 231 (361) 1,532
S-1