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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11961
CARRIAGE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0423828
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 POST OAK BLVD., SUITE 1500, HOUSTON, TX 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 556-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Company's Class A Common Stock) of the Registrant
as of March 12, 1998 was approximately $124,268,000.
The number of shares of the Registrant's Class A Common Stock, $.01 par value
per share, and Class B Common Stock, $.01 par value per share, outstanding as of
March 12, 1998 was 6,530,827 and 4,624,823 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1998 annual meeting of shareholders,
incorporated in Part III of this Report.
PART I
ITEM 1. BUSINESS
THE COMPANY
Carriage Services, Inc. (the "Company") is the fifth largest publicly
traded provider of death care services and products in the United States. The
Company provides a complete range of funeral services and products to meet
families' needs, including consultation, removal and preparation of remains,
sale of caskets and related funeral merchandise, transportation services and the
use of funeral home facilities for visitation. The Company also offers cemetery
products and services, including rights to interment in cemetery sites,
interment services and related cemetery merchandise. As of December 31, 1997,
the Company operated 120 funeral homes and 20 cemeteries in 20 states. Funeral
services constituted approximately 93% and 84% of revenues in 1996 and 1997,
respectively.
Since the Company's formation in 1991, management has undertaken a
disciplined approach to growth that has allowed the Company the necessary time
to integrate acquisitions, develop effective operating, administrative and
financial systems and controls, recruit an experienced operating management team
and promote a decentralized, entrepreneurial service culture. From 1992 through
1995, the Company acquired 42 funeral homes and four cemeteries for
consideration ranging from approximately $9 million to $14 million in each of
the four years. The Company believes that the infrastructure it developed during
this period positioned the Company to pursue an accelerated growth strategy
beginning in late 1995. As a result, the Company acquired 38 funeral homes and
seven cemeteries for consideration of $68 million during 1996 and 44 funeral
homes and 10 cemeteries for consideration of $118 million during 1997. In
addition, as of March 12, 1998, the Company has either acquired or had letters
of intent to acquire14 funeral homes and two cemeteries for consideration of
approximately $31 million.
The Company was incorporated in Delaware on December 29, 1993, and became
a public reporting company in August, 1996. The Company's principal executive
office is located at 1300 Post Oak Blvd., Suite 1500, Houston, Texas 77056, and
its telephone number is (281) 556-7400.
DEATH CARE INDUSTRY
Death care companies provide products and services to families in three
principal areas: (i) ceremony and tribute, generally in the form of a funeral or
memorial service; (ii) disposition of remains, either through burial or
cremation; and, (iii) memorialization, generally through monuments, markers or
inscriptions. The death care industry in the United States is characterized by
the following fundamental attributes:
HIGHLY FRAGMENTED OWNERSHIP. A significant majority of death care
operators consist of small, family-owned businesses that control one or several
funeral homes or cemeteries in a single community. Management estimates that
there are approximately 22,000 funeral homes and 9,600 commercial (as opposed to
religious, family, fraternal, military or municipal) cemeteries in the United
States. Less than 21% of the 1995 United States death care industry revenues are
represented by the Company and the four largest publicly traded domestic death
care companies.
BARRIERS TO ENTRY. Death care businesses have traditionally been
transferred to successive generations within a family and in most cases have
developed a local heritage and tradition that act as a formidable barrier for
those wishing to enter an existing market. Heritage and tradition afford an
established funeral home or cemetery a local franchise and provides the
opportunity for repeat business. Other difficulties faced by entities desiring
to enter a market include local zoning restrictions, substantial capital
requirements, increasing regulatory burdens and scarcity of cemetery land in
certain urban areas. In addition, established firms' backlog of preneed,
prefunded funerals or presold cemetery and mausoleum spaces also makes it
difficult for new entrants to gain entry into the marketplace.
STABILITY. The death rates in the United States are fairly predictable,
thereby affording stability to the death care industry. Since 1980, the number
of deaths in the United States has increased at a compounded rate of
approximately 1% per year until 1997, when there was no increase from 1996. The
number of deaths in the United States is expected to increase by approximately
1% per year through 2010. Because the industry is relatively stable,
non-cyclical and fairly predictable, business failures are uncommon. As a
result, ownership of funeral home and cemetery businesses generally
has not experienced significant turnover, and the aggregate number of funeral
homes and cemeteries in the United States has remained relatively constant.
INCREASED CONSOLIDATION. In the past several years the industry has
experienced a trend toward consolidation of small death care operations with
large, primarily publicly owned death care providers that can benefit from
economies of scale, improved managerial control and more effective strategic
planning and greater financial resources. This trend appears to result
principally from increased regulation, a desire on the part of small, family
operated funeral businesses to address family succession and estate planning
issues, a desire for liquidity, and the increasing competitive threat posed by
the large death care providers. The active acquisition market for funeral homes
and cemeteries provides a source of potential liquidity that was not as readily
available to individual owners in the past. The consolidation trend has
accelerated in recent years as several large death care companies have expanded
their operations significantly through acquisitions.
CLUSTERED OR COMBINED OPERATIONS. The death care industry has also
witnessed a trend by companies to cluster their funeral home and cemetery
operations. Clusters refer to funeral homes and/or cemeteries which are grouped
together in a geographical region. Clusters provide a company with the ability
to generate cost savings through the sharing of personnel, vehicles and other
resources. Firms also are increasingly combining funeral home and cemetery
operations at a single site to allow cross-marketing opportunities and for
further cost reductions through shared resources. The ability to offer the full
range of products and services at one location or to cluster funeral home and
cemetery operations and cross-market the full range of death care services has
proven to be a competitive advantage which tends to increase the market share
and profitability of both the funeral home and cemetery.
PRENEED MARKETING. In addition to sales at the time of death or on an "at
need" basis, an increasing number of death care products and services are being
sold prior to the time of death or on a "preneed" basis by death care providers
who have developed sophisticated marketing organizations to actively promote
such products and services. At the same time, consumers are becoming more aware
of the benefits of advanced planning, such as the financial assurance and peace
of mind achieved by establishing in advance a fixed price and type of service,
and the elimination of the emotional strain of making death care plans at the
time of need. Effective marketing of preneed products and services assures a
backlog of future business.
CREMATION. In recent years, there has been steady, gradual growth in the
number of families in the United States that have chosen cremation as an
alternative to traditional methods of burial. According to industry studies,
cremations represented approximately 21% of the United States burial market in
1996, as compared to approximately 10% in 1980. Many parts of the Southern and
Midwestern United States and many non-metropolitan communities exhibit
significantly lower rates of cremation as a result of religious and cultural
traditions. Cremation historically has been marketed as a less costly
alternative to interment. However, cremation is increasingly marketed as part of
a complete death care package that includes traditional funeral services and
memorialization.
BUSINESS STRATEGY
The Company's objective is to become the most professional, ethical and
highest quality funeral and cemetery service organization in the industry while
continuing to promote a decentralized, entrepreneurial service culture.
Management believes that the Company's reputation and collaborative operating
style allows it to successfully pursue attractive acquisition candidates. The
Company also has been successful in implementing programs to increase
profitability at newly acquired properties.
OPERATING STRATEGY. Since its formation, the Company has focused on
quality service and on becoming a succession planning alternative to the larger
death care providers. The Company believes that its decentralized operating
style, which provides autonomy and flexibility to local management, is
attractive to owners of funeral homes seeking to sell their operations.
Management believes that its operating style is also a key component in its
ability to attract and retain quality managers. While the Company's management
style allows local operators significant responsibility in the daily operating
decisions, financial parameters, jointly established during the budgeting
process, are monitored by senior management through the Company's management and
accounting systems. The Company utilizes computer systems linked to most of the
Company's funeral home locations. These systems enable a location to function on
its own by maintaining accounts receivables and payables locally, at a cluster
processing site, or at the Company's centralized processing center at the option
of the local manager. The same information is provided to the Company's senior
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management which allows the Company, on a timely basis, to access critical
operating and financial data from a site in order to analyze the performance of
individual locations and institute corrective action if necessary.
The Company has established a compensation structure that is designed to
maintain and create a sense of ownership. Local management is awarded meaningful
cash bonuses and stock options for exceptional performance when achieving
specified earnings objectives. The Company has also structured a stock option
program which awards options to most full-time employees based upon the
performance of their local business during the period. As a result, all
management and most full-time employees have the opportunity to increase their
personal net worth through strong local and corporate performance.
Management also believes that implementing its operating strategy in newly
acquired businesses leads to enhanced profitability of acquired operations. The
Company has an extensive merchandising and training program that is designed to
educate local funeral home operators about opportunities to improve marketing of
products and services, to share sales leads and other cross-marketing
opportunities, and to become familiar with, and adopt, the Company's business
objectives. The larger size of the Company, as compared to local operators, also
allows favorable pricing and terms to be achieved from vendors through volume
discounts on significant expenditures, such as caskets, vaults, memorials and
vehicles. In addition, while operational functions and management autonomy are
retained at the local level, centralizing certain financial, accounting, legal,
administrative and employee benefit functions allows for more efficient and
cost-effective operations. The Company also has recently greatly expanded its
preneed sales programs in selected local markets to maintain or increase market
presence and assure a backlog of future business.
ACQUISITION STRATEGY. The Company believes that significant acquisition
opportunities currently exist in the death care industry that the Company
intends to aggressively pursue. In evaluating specific acquisition candidates,
the Company considers such factors as the property's location, reputation,
heritage, physical size, volume of business, profitability, name recognition,
aesthetics, potential for development or expansion, competitive market position,
pricing structure and quality of operating management. The Company will continue
to aggressively pursue the acquisition of premier funeral homes that have a
strong local market presence and that conduct from 100 to 600 funeral services
per year, as well as funeral homes in close proximity to the Company's existing
businesses. In addition, although the Company, in the early years, focused on
acquiring funeral home operations, the Company aggressively pursues cemetery
acquisitions in markets where the Company operates, or plans to operate, funeral
homes to take advantage of cross-marketing opportunities. The Company is also
pursuing larger acquisition transactions which provides significant strategic
benefits to the Company, such as new market penetration. For example, in January
1997, the Company merged with CNM, a premier California-based company which
operates ten funeral homes and one cemetery, and in November 1997, merged with
the John E. Day Funeral Home in New Jersey and the Forest Lawn/Evergreen
Management Co. of Florida, which together operate seven funeral homes and three
cemeteries. These three transactions accounted for over 60% of the acquisition
spending in 1997. The Company also seeks to issue, and has been successful in
issuing, equity securities to the previous owners of acquired businesses. Since
inception through March 12, 1998, the Company has issued 37,775,608 shares of
redeemable preferred stock and 982,044 shares of Class A Common Stock in
conjunction with acquisition transactions. As of March 12, 1998, a total of
23,760,823 shares of redeemable preferred stock have converted into shares of
Class A and Class B Common Stock. Management believes that its success in
issuing equity securities in conjunction with acquisitions reflects in large
part previous owners' desires to remain affiliated with and to be invested in
the Company.
In purchasing the premier location in a particular market, management
believes that the Company is able to attract the most talented personnel,
minimize downside risk of loss of volume to competitors and provide
opportunities for increased profitability when such operations are coupled with
the Company's management techniques. In addition, the Company generally retains
the former owners and other key personnel of acquired funeral homes and provides
them with significant operating responsibility to assure the continuation of
high quality services and the maintenance of the acquired firm's reputation and
heritage. In nearly all cases, acquired funeral homes continue operations under
the same trade name as those of the prior owners. In addition, the Company views
experienced management of certain acquired operations as potential corporate
management candidates. Management believes that this potential for advancement
with the Company, combined with the Company's decentralized operating structure
and incentive-based compensation system, makes it a particularly attractive
acquirer to some independent owners. The Company targets additional funeral
homes in present markets so that personnel and vehicles can be shared and profit
margins enhanced.
3
The Company follows a disciplined approach to acquisitions utilizing
specific operating and financial criteria. The Company develops pro forma
financial statements for acquisition targets reflecting estimates of revenue and
costs under the Company's ownership and then utilizes such information to
determine a purchase price which it believes is reasonable. The Company
anticipates that the consideration for future acquisitions will consist of a
combination of cash, deferred purchase price and preferred and common equity.
The Company also will typically enter into management, consulting and
non-competition agreements with former owners and key executive personnel of
acquired businesses.
Although the Company did not initially focus on acquiring cemetery
operations, as a result of the increased access to capital and the Company's
enhanced profile in the industry, the Company is encountering significant
cemetery acquisition opportunities. The Company will continue to pursue cemetery
acquisitions in markets where they operate funeral homes to take advantage of
cross-marketing opportunities and in markets where a funeral home acquisition
strategy is viable.
While the Company focuses its efforts on identifying individual
acquisition candidates with the potential for a negotiated, non-competitive
acquisition process, the Company also competes for more broadly marketed
acquisition opportunities. In many cases, the Company has been successful in
acquiring operations where it has not been the highest bidder because of the
Company's reputation, operating strategy and corporate culture. Management
believes that the issuance of equity securities to fund certain funeral home and
cemetery acquisitions has been, and will continue to be, attractive to select
acquisition candidates.
The Company has successfully executed this acquisition strategy since its
inception, as demonstrated in the table set forth below.
FUNERAL
YEAR(3) CONSIDERATION HOMES(1) CEMETERIES(2)
------------- -------- -------------
(dollars in thousands)
1992 ...... $ 11,832 14 2
1993 ...... 13,843 11 1
1994 ...... 9,153 9 1
1995 ...... 12,191 8 0
1996 ...... 68,181 38 7
1997 ...... 118,260 44 10
------------- -------- -------------
$ 233,460 124 21
============= ======== =============
(1) The Company subsequently divested four of these funeral homes.
(2) The Company subsequently divested one of these cemeteries.
(3) From January 1, 1998 through March 12, 1998, the Company has acquired four
funeral homes and one cemetery for aggregate consideration of $8 million.
OPERATIONS
The Company's funeral home operations, cemetery operations and preneed
programs are managed by service-minded professionals with extensive death care
industry experience. In response to the rapid growth experienced beginning in
1996, the Company increased operations staffing, including a new transition
team, to provide local managers with the additional support and direction needed
during the integration of newly acquired properties.
Although certain financial management and policy matters are centralized,
local funeral home and cemetery managers have substantial autonomy in
determining the manner in which their services and products are marketed and
delivered and their funeral homes are managed. The Company believes that this
strategy permits each local firm to maintain its unique style of operation and
to capitalize on its reputation and heritage while the Company maintains
centralized supervisory controls and provides specialized services at the
corporate level.
4
FUNERAL HOME OPERATIONS. As of December 31, 1997, the Company operated 120
funeral homes in 20 states. Funeral home revenues accounted for approximately
93% and 84% of the Company's net revenues for each of the years ended December
31, 1996 and 1997. The Company's funeral home operations are managed by a team
of experienced death care industry professionals.
The Company's funeral homes offer a complete range of services to meet
family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and religious services, and transportation
services. Most of the Company's funeral homes have a non-denominational chapel
on the premises, which permits family visitation and religious services to take
place at one location, which reduces transportation costs to the Company and
inconvenience to the family.
CEMETERY OPERATIONS. As of December 31, 1997, the Company operated 20
cemeteries in 10 states. Cemetery revenues accounted for approximately 7% and
16% of the Company's net revenues for each of the years ended December 31, 1996
and 1997.
As a result of a growing number of potential cemetery acquisition
candidates, the Company has made additional investments in the cemetery
operations infrastructure. Beginning in the fourth quarter of 1996, experienced
preneed marketing professionals were added at the national and regional levels.
This investment in additional preneed marketing management allowed the Company
to increase preneed sales at existing cemetery properties and positioned the
Company to more effectively integrate future cemetery acquisitions. As of
December 31, 1997, the Company employed a staff of approximately 144 advance
planning representatives for the sale of interment rights and merchandise.
The Company's cemetery products and services include interment services,
the rights to interment in cemetery sites (including grave sites, mausoleum
crypts and niches) and related cemetery merchandise such as memorials and
vaults. Cemetery operations generate revenues through sales of interment rights,
memorials and installation, fees for interment and cremation services, finance
charges from installment sales contracts and investment income from preneed
cemetery merchandise and perpetual care trusts.
PRENEED PROGRAMS. In addition to sales of funeral merchandise and
services, cemetery interment rights, cemetery merchandise and services at the
time of need, the Company also markets funeral and cemetery services and
products on a preneed basis. Preneed funeral or cemetery contracts enable
families to establish in advance the type of service to be performed, the
products to be used and the cost of such products and services in accordance
with prices prevailing at the time the contract is signed rather than when the
products and services are delivered. Preneed contracts permit families to
eliminate the emotional strain of making death care plans at the time of need
and enable the Company to establish a portion of its future market share.
Proceeds from the sale of preneed funeral contracts are not recognized as
revenues until the time the funeral service is performed. The Company sold 3,760
and 4,020 preneed funeral contracts in the years ended December 31, 1996 and
1997, respectively. At December 31, 1997, the Company had a backlog of 34,797
preneed funeral contracts to be delivered in the future.
Preneed funeral contracts are usually paid on an installment basis. The
performance of preneed funeral contracts is usually secured by placing the funds
collected in trust for the benefit of the customer or by the purchase of a life
insurance policy, the proceeds of which will pay for such services at the time
of need. Insurance policies, intended to fund preneed funeral contracts cover
the original contract price and generally include built-in escalation clauses
designed to offset future inflationary cost increases.
In addition to preneed funeral contracts, the Company also offers
"preplanned" funeral arrangements whereby a client determines in advance
substantially all of the details of a funeral service without any financial
commitment or other obligation on the part of the client, until the actual time
of need. Preplanned funeral arrangements permit families to avoid the emotional
strain of making death care plans at the time of need and enable a funeral home
to establish relationships with clients that eventually lead to at-need sales.
Preneed cemetery sales are usually financed by the Company through
installment sale contracts, generally with terms of five years. Preneed sales of
cemetery interment rights and other related services and merchandise are
recorded as revenues when the contract is signed, with concurrent recognition of
related costs. The Company always receives an initial payment at the time the
contract is signed. Allowances for customer cancellations and refunds are
accrued at the
5
date of sale based upon historical experience. Preneed cemetery sales
represented approximately 67% and 65% of the Company's net cemetery revenues for
the years ended December 31, 1996 and 1997, respectively.
COMPETITION
The acquisition environment in the death care industry is highly
competitive. Four publicly held death care companies, Service Corporation
International, The Loewen Group, Inc., Stewart Enterprises, Inc. and Equity
Corporation International, are substantially larger than the Company and have
significantly greater financial and other resources than the Company. In
addition, a number of smaller companies are actively acquiring funeral homes and
cemeteries. Prices for funeral homes and cemeteries have increased substantially
in recent years, and, in some cases, competitors have paid acquisition prices
substantially more than the prices offered by the Company. Accordingly, no
assurance can be given that the Company will be successful in expanding its
operations through acquisitions or that funeral homes and cemeteries will be
available at reasonable prices or on reasonable terms.
The Company's funeral home and cemetery operations generally face
competition in the markets that they serve. Market share for funeral homes and
cemeteries is largely a function of reputation and heritage, although
competitive pricing, professional service and attractive, well-maintained and
conveniently located facilities are also important. The sale of preneed funeral
services and cemetery property has increasingly been used by many companies as
an important marketing tool to build market share. Due to the importance of
reputation and heritage, market share increases are usually gained over a long
period of time.
TRUST FUNDS
GENERAL. The Company has established a variety of trusts in connection
with its funeral home and cemetery operations as required under applicable state
law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery
merchandise and service trusts; and, (iii) perpetual care trusts. These trusts
are typically administered by independent financial institutions selected by the
Company. The Company also uses independent professional managers to advise the
Company on investment matters.
PRENEED FUNERAL TRUSTS. Preneed funeral sales are facilitated by deposits
to a trust or purchase of a third-party insurance product. All preneed funeral
sales are deferred until the service is performed. The trust fund income earned
and any increase in insurance benefits are also deferred until the service is
performed in order to offset possible inflation in cost when providing the
service in the future. Although direct marketing costs and commissions incurred
for the sale of preneed funeral contracts are a current use of cash, such costs
are also deferred and amortized over the expected timing of the performance of
the services related to the preneed funeral sales. Since the Company does not
have access to the trust fund principal or earnings, the related assets and
liabilities are not reflected on the Company's balance sheet. In most states,
the Company is not permitted to withdraw principal or investment income from
such trusts until the funeral service is performed. Some states, however, allow
for the retention of a percentage (generally 10%) of the receipts to offset any
administrative and selling expenses, which the Company defers until the service
is provided. The aggregate balance of the Company's preneed funeral contracts
held in trust was approximately $36.5 million and $52.9 million as of December
31, 1996 and 1997, respectively.
PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. The Company is generally
required under applicable state laws to deposit a specified amount (which varies
from state to state, generally 50% to 100% of selling price) into a merchandise
and service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income earned is recognized in current revenues as
trust earnings. These earnings are offset by any current period inflation costs
accrued related to the merchandise and services that have not yet been provided.
Liabilities for undelivered cemetery merchandise and services, including
accruals for inflation increases, are reflected in the balance sheet net of the
merchandise and service trust balance. The Company is permitted to withdraw the
trust principal and the accrued income when the merchandise is purchased or
service is provided by the Company or when the contract is canceled. The
merchandise and service trust fund balances, in the aggregate, were
approximately $1.1 million and $9.6 million as of December 31, 1996 and 1997,
respectively.
PERPETUAL CARE TRUSTS. In certain states, regulations require a portion
(generally 10%), of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income earned is recognized in current
6
revenues as trust earnings. While the Company is entitled to withdraw the income
from its perpetual care trust to provide for the maintenance of the cemetery
property and memorials, they are not entitled to withdraw any of the principal
balance of the trust fund, and therefore, none of the principal balances are
reflected in the Company's balance sheet. The Company's perpetual care trust
balances were approximately $2.0 million and $8.4 million as of December 31,
1996 and 1997, respectively.
For additional information with respect to the Company's trusts, see Note
1 of the Consolidated Financial Statements.
REGULATION
The Company's funeral home operations are subject to substantial
regulation by the Federal Trade Commission (the "FTC"). Certain regulations
contain minimum standards for funeral industry practices, require extensive
price and other affirmative disclosures to the customer at the time of sale and
impose mandatory itemization requirements for the sale of funeral products and
services.
The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the United States Environmental Protection Agency
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and similar state statutes require the Company
to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens. The Company is also subject
to the Federal Americans with Disabilities Act and similar laws which, among
other things, may require that the Company modify its facilities to comply with
minimum accessibility requirements for disabled persons.
The Company's operations, including its preneed sales and trust funds,
are also subject to extensive regulation, supervision and licensing under
numerous other Federal, state and local laws and regulations. See "-- Trust
Funds."
The Company believes that it is in substantial compliance with all such
laws and regulations. Federal and state legislatures and regulatory agencies
frequently propose new laws, rules and regulations some of which, if enacted,
could have a material adverse effect on the Company's results of operations. The
Company cannot predict the outcome of any proposed legislation or regulations or
the effect that any such legislation or regulations might have on the Company.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries employed 616
full-time employees, 523 part-time employees and 186 advance planning
representatives. All of the Company's funeral directors and embalmers possess
licenses required by applicable regulatory agencies. Management believes that
its relationship with its employees is good. No employees of the Company or its
subsidiaries are members of a collective bargaining unit.
ITEM 2. PROPERTIES
At December 31, 1997, the Company operated 120 funeral homes and 20
cemeteries in 20 states. The Company owns the real estate and buildings of 89 of
its funeral homes and all of its cemeteries and leases facilities in connection
with 31 of its funeral homes. The 20 cemeteries operated by the Company cover a
total of approximately 725 acres. The Company's inventory of unsold developed
lots totaled approximately 44,000 and 80,000 at December 31, 1996 and 1997,
respectively. In addition, approximately 359 acres, or approximately 50% of the
total acreage, is available for future development. The Company does not
anticipate any shortage of available space in any of its current cemeteries for
the foreseeable future.
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The following table sets forth certain information as of December 31, 1997
regarding the Company's funeral homes and cemeteries by state:
NUMBER OF
FUNERAL HOMES
-------------------
STATE OWNED LEASED(1) CEMETERIES
----- --------- ----------
Ohio................................ 13 3 0
California.......................... 11 2 1
Texas............................... 10(2) 1 3
Kentucky............................ 7 4 1
Florida............................. 4 3 4
South Carolina...................... 5 0 4
Idaho............................... 5(3) 0 3
Kansas.............................. 8 0 0
Connecticut......................... 5 2 0
Georgia............................. 3 3 0
Michigan............................ 4 2 0
Illinois............................ 0 5 1
New Jersey.......................... 3 2 0
Tennessee........................... 3 1 1
Indiana............................. 1 2 1
North Carolina...................... 1 1 1
Alabama............................. 2 0 0
Washington.......................... 2 0 0
Montana............................. 1 0 0
Rhode Island........................ 1 0 0
--- --- ---
Total(4)......................... 89 31 20
=== === ===
(1)The leases, with respect to these funeral homes, have remaining terms
ranging from two to fifteen years, and the Company generally has a right
of first refusal on any proposed sale of the property where these funeral
homes are located.
(2)One of these funeral homes is located on property contiguous to and
operated in combination with a Company cemetery.
(3)Two of these funeral homes are located on property contiguous to and
operated in combination with Company cemeteries.
(4)From January 1, 1998 through March 12, 1998, the Company has acquired one
funeral home and one cemetery in California, one funeral home in Illinois,
one funeral home in Kentucky and one funeral home in New England for an
aggregate consideration of $8 million.
The Company's corporate headquarters occupy approximately 19,700 square feet
of leased office space in Houston, Texas.
At December 31, 1997, the Company operated 465 vehicles, of which 388
were owned and 77 were leased.
The specialized nature of the Company's business requires that its
facilities be well-maintained. Management believes that this standard is met.
ITEM 3. LEGAL PROCEEDINGS
Certain of the funeral homes located in California that were acquired by
the Company in early 1997, along with other death care providers, are defendants
in litigation in the state of California alleging that a flight service
contracted to
8
dispose of cremains failed to properly carry out its duties. While the
litigation is in the early stages, management, with advice of legal counsel,
believes that there are adequate insurance coverages, indemnities and reserves
such that the results of the litigation will not have a material effect on the
Company's consolidated financial position or result of operations. Additionally,
the Company and its subsidiaries are parties to a number of legal proceedings
that arise from time to time in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.
The Company carries insurance with coverages and coverage limits that it
believes to be customary in the funeral home and cemetery industries. Although
there can be no assurance that such insurance will be sufficient to protect the
Company against all contingencies, management believes that its insurance
protection is reasonable in view of the nature and scope of the Company's
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is traded in the over-the-counter
market and quoted on the Nasdaq National Market under the symbol "CRSV". The
following table presents the quarterly high and low sale prices as reported by
the Nasdaq National Market since the shares became publicly traded on August 9,
1996 at an initial price of $13.50. These quotations reflect the inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
1996 HIGH LOW
------- -------
Third Quarter (beginning August 9, 1996).. $22.75 $14.25
Fourth Quarter............................ $23.50 $18.375
1997
First Quarter............................. $26.00 $18.25
Second Quarter............................ $22.75 $17.00
Third Quarter............................. $22.75 $16.25
Fourth Quarter............................ $19.625 $16.50
As of March 12, 1998, there were 6,530,827 shares of the Company's Class A
Common Stock and 4,624,823 shares of the Company's Class B Common Stock
outstanding. The holders of Class A Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of Common stockholders. The
holders of Class B Common Stock are entitled to ten votes for each share held on
all matters submitted to a vote of Common stockholders. The Class A Common Stock
shares outstanding are held by approximately 194 stockholders of record. The
Company believes there are approximately 2,400 beneficial owners of the Class A
Common Stock.
The Company has never paid a cash dividend on its Class A or Class B
Common Stock. The Company currently intends to retain earnings to finance the
growth and development of its business and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. Any future change in
the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings and prospects of the Company and any restrictions under credit
agreements, as well as other factors the Board of Directors may deem relevant.
RECENT SALES OF UNREGISTERED SECURITIES
From October 28, 1994 to May 29, 1996, the Company sold an aggregate of
715,000 shares of Preferred Stock, valued at $1.00 per share, to the former
owners of acquired funeral homes. Consideration for such shares consisted of
ownership interests in funeral home businesses and contract rights. The Company
relied on an exemption under Section 4(2) of the Securities Act in effecting
these transactions.
On September 25, 1995, the Company sold in a private placement an
aggregate of 8,500,000 shares of Preferred Stock. The Chicago Corporation acted
as placement agent in connection with this offering. Such shares were purchased
for $1.00 per share. The Company relied on an exemption under Section 4(2) of
the Securities Act in effecting the placement.
From March 8, 1996 to September 6, 1996, the Company sold an aggregate of
17,775,616 shares of Series D Preferred Stock, valued at $1.00 per share, to the
former owners of acquired funeral homes. Consideration for such shares consisted
of ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.
10
On May 28, 1996, an employee exercised options to purchase 1,000 shares of
Common Stock pursuant to the Company's 1995 Stock Incentive Plan at an exercise
price of $10.00 per share. The Company relied on an exemption under Section 4(2)
of the Securities Act in effecting this transaction.
On January 7, 1997, the Company sold 19,999,992 shares of Series F
Preferred Stock, valued at $1.00 per share, to the former owners of acquired
funeral homes. Consideration for such shares consisted of ownership interests in
funeral home businesses. The Company relied on an exemption under Section 4(2)
of the Securities Act in effecting this transaction.
From August 30, 1996 to May 31, 1997, the Company sold an aggregate of
517,197 shares of Class A Common Stock, valued at market prices, to the former
owners of acquired funeral homes. Consideration for such shares consisted of
ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.
11
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- ---------
(in thousands, except per share and operating data)
INCOME STATEMENT DATA:
Revenues, net:
Funeral ...................................................... $ 10,651 $ 17,368 $ 22,661 $ 37,445 $ 64,888
Cemetery ..................................................... 614 1,036 1,576 2,903 12,533
-------- -------- -------- --------- ---------
Total net revenues ........................................... 11,265 18,404 24,237 40,348 77,421
-------- -------- -------- --------- ---------
Gross profit:
Funeral ...................................................... 917 2,856 3,740 6,804 16,484
Cemetery ..................................................... 143 158 250 362 2,899
-------- -------- -------- --------- ---------
Total gross profit ........................................... 1,060 3,014 3,990 7,166 19,383
General and administrative expenses .......................... 985 1,266 2,106 2,474 5,277
-------- -------- -------- --------- ---------
Operating income ............................................. 75 1,748 1,884 4,692 14,106
Interest expense, net ........................................ 1,745 2,671 3,684 4,347 5,889
-------- -------- -------- --------- ---------
Income (loss) before income taxes ............................ (1,670) (923) (1,800) 345 8,217
Provision for income taxes ................................... -- (1) 40 694 138 3,726
-------- -------- -------- --------- ---------
Net income (loss) before extraordinary item (1,670) (963) (2,494) 207 4,491
Extraordinary item, net ...................................... -- -- -- (498) (195)
-------- -------- -------- --------- ---------
Income (loss) after extraordinary item ....................... (1,670) (963) (2,494) (291) 4,296
Preferred stock dividends .................................... -- -- -- 622 890
-------- -------- -------- --------- ---------
Net income (loss) available to common stockholders ........... $ (1,670) $ (963) $ (2,494) $ (913) $ 3,406
======== ======== ======== ========= =========
Earnings (loss) per share
Basic:
Continuing operations ........................................ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ .35
Extraordinary item ........................................... -- -- -- (.10) (.02)
-------- -------- -------- --------- ---------
Basic earnings (loss) per share .............................. $ (.66) $ (.38) $ (.99) $ (.19) $ .33
======== ======== ======== ========= =========
Diluted:
Continuing operations ........................................ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ .34
Extraordinary item ........................................... -- -- -- (.10) (.02)
-------- -------- -------- --------- ---------
Diluted earnings (loss) per share ............................ $ (.66) $ (.38) $ (.99) $ (.19) $ .32
======== ======== ======== ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic ........................................................ 2,520 (1) 2,520 2,520 4,869 10,226
======== ======== ======== ========= =========
Diluted ...................................................... 2,520 (1) 2,520 2,520 4,869 10,485
======== ======== ======== ========= =========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period ............................... 25 34 41 76 120
Funeral services performed during period ..................... 2,265 3,529 4,414 7,181 12,131
Preneed funeral contracts sold ............................... 644 762 2,610 3,760 4,020
Backlog of preneed funeral contracts ......................... 5,170 6,855 8,676 22,925 34,797
Depreciation and amortization ................................ $ 947 $ 1,476 $ 1,948 $ 3,629 $ 7,809
BALANCE SHEET DATA:
Working capital .............................................. $ (142) $ 4,271 $ 6,472 $ 5,089 $ 5,823
Total assets ................................................. 28,784 44,165 61,746 131,308 277,940
Long-term debt, net of current maturities .................... 26,270 32,622 42,057 42,733 121,553
Redeemable preferred stock ................................... -- -- -- 17,251 13,951
Stockholders' equity (deficit) ............................... (2,626) 3,429 9,151 57,043 98,565
(1)Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 2,520,000
shares of common stock of the Company effective January 1, 1994. Accordingly,
shares of common stock shown outstanding for these periods assume the
exchange had taken place at the beginning of the periods presented. In 1993,
the entities were subchapter S corporations, and taxes were the direct
responsibility of the owners. Thus, the tax provision reflected above for
this period is based on assumptions about what tax provisions (benefits)
would have been if the Company had been a taxable entity. In the opinion of
management, no pro forma tax provision (benefit) was appropriate for the
period because the Company followed a policy of not recognizing the benefits
associated with net operating losses during such periods.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company became a public company during the third quarter of 1996, and
achieved initial profitability for the fourth quarter of 1996. The Company's
focus is on growth through acquisitions and enhancements at facilities currently
owned to increase revenues and gross profit. The Company entered 1997 with the
goals (among others) of increasing cash flow from operations; increasing margins
in the funeral home and cemetery sectors; substantially increasing the preneed
sales and marketing activities; and filling critical personnel needs in the
finance, corporate development and cemetery operations areas. The objective of
these goals was to build the infrastructure and stability of the Company as it
continues to pursue consolidation opportunities in the death care industry.
These goals were met with success and the end result was profitability in each
quarter of 1997, even though death rates were lower than expected in certain
markets.
Cash flow from operations, which the Company defines as earnings before
interest, income taxes, and depreciation and amortization, increased, as a
percentage of net revenues, from 22.6% for 1996 to 29.7% for 1997. This
improvement was largely due to the increased gross profits at the individual
locations, as general and administrative expenses on the same basis were
comparable. Gross margins for the funeral homes increased from 18% in 1996 to
25% in 1997 as a result of margin management training for the managers and
directors related to merchandising and memorialization and benefits from cost
containment and clustering, where realizable. Improvements in cemetery gross
profit margins were dramatic in 1997. Fueled by a doubling of the number of
cemeteries during the year and the restructuring of the preneed sales function
in late 1996, cemetery gross profit increased 700% while cemetery revenues
increased 332%. As a percentage of cemetery net revenues, cemetery gross profit
was 23% in 1997 compared to 12% in 1996. The Rolling Hills Cemetery, which was
part of the CNM acquisition in early 1997, contributed 87% of the revenue
increase for the year. Preneed sales and marketing efforts began to have a
significant impact in the latter part of 1997, as revenues and gross profits
from cemeteries owned at least one year increased 66% and 373%, respectively, in
the fourth quarter compared to the same period in 1996.
Beginning in late 1995, the Company began identifying infrastructure needs in
anticipation of accelerating its acquisition activity. At the end of 1995, the
Company owned 44 facilities. During 1996 and 1997, the Company acquired 45 and
54 facilities, respectively. In a deliberate and managed process, the Company
increased personnel and related infrastructure as a function of the increase in
the Company's revenue run rate. As a consequence, general and administrative
expenses increased from $2.1 million in 1995 to $2.5 million in 1996 and to $5.3
million in 1997. The additional personnel filled critical roles in expanding the
geographic coverage of both corporate development and preneed sales and
marketing activities, as well as the financial, data processing and
administrative functions needed to support the growing number of locations
operating in a decentralized management fashion with timely financial and
management information.
During 1996, the Company acquired 38 funeral homes and seven cemeteries for
an aggregate consideration of approximately $68 million. Forty-four funeral
homes and ten cemeteries were acquired during 1997 for approximately $118
million. These acquisitions were funded through cash flow from operations,
additional borrowings under the Company's credit facilities and issuance of
preferred and common stock. In addition, as of March 12, 1998, the Company has
either acquired or has letters of intent to acquire 14 funeral homes and two
cemeteries for an aggregate consideration of approximately $31 million. The
Company believes its increased recognition in the death care industry as an
established purchaser of funeral homes and cemeteries has improved its ability
to attract potential acquisitions that are larger, strategic and accretive and
its ability to finance its acquisitions with debt and equity.
Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
but are not limited to, the following: the Company's ability to sustain its
rapid acquisition rate, to manage the growth and to obtain adequate performance
from acquired businesses; the economy and financial market conditions, including
stock prices, interest rates and credit availability; and death rates and
competition in the Company's markets.
13
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues for the periods presented:
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------ ------ -------
Total revenues, net................. 100.0% 100.0% 100.0%
Total gross profit.................. 16.5 17.8 25.0
General and administrative expenses. 8.7 6.1 6.8
Operating income.................... 7.8 11.6 18.2
Interest expense, net............... 15.2 10.8 7.6
Net income (loss) before
extraordinary item................ (10.3) 0.5 5.8
The following table sets forth the number of funeral homes and cemeteries
owned and operated by the Company for the periods presented:
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
Funeral homes at beginning of period ...... 34 41 76
Acquisitions .............................. 8 38 44
Divestitures .............................. 1 3 0
---- ---- ----
Funeral homes at end of period ............ 41 76 120
==== ==== ====
Cemeteries at beginning of period ......... 3 3 10
Acquisitions .............................. 0 7 10
Divestitures .............................. 0 0 0
---- ---- ----
Cemeteries at end of period ............... 3 10 20
==== ==== ====
The following is a discussion of the Company's results of operations for
1995, 1996 and 1997. For purposes of this discussion, funeral homes and
cemeteries owned and operated for the entirety of each year being compared are
referred to as "existing operations". Operations acquired or opened during
either year being compared are referred to as "acquired operations".
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations during the years ended December 31, 1996 and 1997:
YEAR ENDED
DECEMBER 31, CHANGE
--------------------- ----------------------
1996 1997 AMOUNT PERCENT
------- ------- -------- -------
(dollars in thousands)
Net revenues:
Existing operations ........... $25,042 $24,627 $ (415) (1.7)%
Acquired operations ........... 12,403 40,261 27,858 *
------- ------- --------
Total net revenues ........ $37,445 $64,888 $ 27,443 73.3%
======= ======= ========
Gross profit:
Existing operations ........... 4,396 5,675 1,279 29.1%
Acquired operations ....... 2,408 10,809 8,401 *
------- ------- --------
Total gross profit ........ 6,804 16,484 9,680 142.3%
======= ======= ========
- -------------
*Not meaningful.
14
Due to the rapid growth of the Company, existing operations represented
only 38% of the total funeral revenues and only 34% of the total funeral gross
profit for the year ended December 31, 1997. Total funeral net revenues for the
year ended December 31, 1997 increased $27.4 million or 73.3% over 1996. The
higher net revenues reflect an increase of $27.9 million in net revenues from
acquired operations and a decrease in net revenues of $415,000 or 1.7% from
existing operations. The decrease in revenues for the existing operations
primarily resulted from fewer funeral services being performed, which was
partially offset by a 2.6% increase in the average revenue per funeral service.
Fewer services were performed in 1997 primarily due to lower than usual seasonal
death rates in certain of the Company's markets, especially in the East North
Central region of the country where the Company has a large number of existing
operations.
Total funeral gross profit for the year ended December 31, 1997 increased
$9.7 million or 142.3% over 1996. The higher total gross profit reflected an
increase of $8.4 million from acquired operations and an increase of $1.3
million or 29.1% from existing operations. Gross profit for existing operations
increased due to the efficiencies gained by consolidation, cost savings,
improved collections experience and the increasing effectiveness of the
Company's merchandising strategy, which were partially offset by lower revenues.
Total gross profit increased from 18.2% for 1996 to 25.4% for 1997 due to these
factors.
CEMETERY SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations for the years ended December 31, 1996 and 1997.
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- -------------------
1996 1997 AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
Total net revenues ........ $2,903 $12,533 $9,630 331.7%
====== ======= ======
Total gross profit ........ $ 362 $ 2,899 $2,537 700.8%
====== ======= ======
Due to the rapid growth of the Company, existing operations represented
approximately 15% of cemetery revenues and approximately 9% of cemetery gross
profit for the years ended December 31, 1997. As a result, the Company does not
believe it is meaningful to present the results for existing and acquired
operations separately.
Total cemetery net revenues for the years ended December 31, 1997 increased
$9.6 million or 331.7% over 1996 and total cemetery gross profit increased $2.5
million or 700.8% over 1996. Total gross margin increased from 12.5% for the
year ended December 31, 1996 to 23.1% for the year ended December 31, 1997.
These increases were due primarily to the Company's acquisition of ten
cemeteries during 1997 and increased preneed marketing efforts.
As a result of the acceleration of the Company's acquisition program
beginning in 1996, the profit contribution from acquired properties exceeded
that of existing operations even though most were not owned for the entire year.
The acquisition and integration of these new properties received the majority of
the corporate operations group's management focus during the year. During the
fourth quarter of 1996, significant additional management resources were added
to this group to provide assistance in increasing revenue and profit margins
from existing ongoing operations and to more rapidly achieve targeted margins
for acquired businesses.
General and administrative expenses for the year ended December 31, 1997
increased $2.8 million or 113.3% over 1996 due primarily to the increased
personnel expense necessary to support a higher rate of growth and acquisition
activity. However, the increase in general and administrative expenses as a
percentage of net revenues was less than one percentage point as the expenses
were spread over a larger volume of revenue.
Interest expense for the year ended December 31, 1997 increased $1.5
million over 1996 principally due to increased borrowings for acquisitions. In
August 1996, the Company utilized the net proceeds from its IPO and borrowings
under a credit facility to repay the majority of its outstanding debts. In
September 1997, the Company entered into a new credit facility for an increased
line of credit. In connection with repayments of debt in both years, the Company
recognized an extraordinary loss of approximately $498,000 and $195,000, net of
income tax benefits of approximately $332,000 and $159,000, for the write-off of
the deferred loan costs associated with the early retirement of debts, for the
years ended December 31, 1996 and 1997, respectively. The new credit facility
reflects substantially improved terms and reduced interest rates compared to the
previous arrangements.
15
During 1997, the Company issued approximately $20 million of redeemable
preferred stock to fund a portion of its acquisition program. Dividends on this
preferred stock are 4% per annum. Preferred dividends of $890,000 were
subtracted from the $4.5 million of net income before extraordinary item in
computing earnings attributable to common stockholders resulting in a net income
before extraordinary item of $3.6 million for purposes of computing basic and
diluted earnings per common share.
For 1997, the Company provided for income taxes on income before income
taxes and extraordinary item at a combined state and federal tax rate of 45.3%.
The provision for income taxes for 1997 includes a one-time charge in the amount
of $390,000 to revalue the historical deferred tax liability accounts because
the Company's taxable income has grown at which the federal corporate tax rate
increases from 34% to 35%. Amortization of names and reputations related to
stock acquisitions, which is nondeductible, is the primary cause of the
Company's effective rate exceeding 34%. Prior to 1997, the Company experienced
net operating losses and the tax benefits associated with these net operating
loss carryforwards were reserved. The Company continues to analyze the benefits
associated with these losses and adjusts the valuation allowance as appropriate.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information regarding the net
revenues and gross profit of the Company from its operations during the years
ended December 31, 1995 and 1996:
YEAR ENDED
DECEMBER 31, CHANGE
------------------- -------------------
1995 1996 AMOUNT PERCENT
------- ------- -------- -------
(dollars in thousands)
Net revenues:
Existing operations ........ $21,482 $20,921 $ (561) (2.6)%
Acquired operations ........ 2,755 19,427 16,672 *
------- ------- --------
Total net revenues ....... $24,237 $40,348 $ 16,111 66.5%
------- ------- --------
Gross profit:
Existing operations ......... $ 3,451 $ 3,481 $ 30 0.9%
Acquired operations ......... 539 3,685 3,146 *
------- ------- --------
Total gross profit ....... $ 3,990 $ 7,166 $ 3,176 79.6%
======= ======= ========
- --------
*Not meaningful.
Total net revenues for the year ended December 31, 1996 increased $16.1
million or 66.5% over 1995. The higher net revenues reflected an increase of
$16.7 million in net revenues from acquired operations and a decrease in net
revenues of $561,000 or 2.6% from existing operations. The decrease in net
revenues for the existing operations primarily resulted from fewer funeral
services being performed, which was partially offset by a 3.9% increase in the
average revenue per funeral service. Fewer services were performed in 1996 due
to the divestiture of three funeral homes and a longer than normal seasonal
decline in the number of deaths in certain of the Company's markets. At December
31, 1996, the Company operated 10 cemeteries. The net revenues and gross profit
of cemeteries represented less than eight percent of the Company's total
operations.
Total gross profit for the year ended December 31, 1996 increased $3.2
million or 79.6% over 1995. The higher total gross profit reflected an increase
of $3.1 million from acquired operations and an increase of $30,000 or 0.9% from
existing operations. Gross profit for existing operations increased due to the
efficiencies gained by consolidation and the increasing effectiveness of the
Company's merchandising strategy, which was partially offset by lower revenues.
Total gross margin increased from 16.5% for 1995 to 17.8% for 1996 due to these
factors. As a result of the acceleration of the Company's acquisition program in
1996, the profit contribution from acquired properties exceeded that of existing
operations even though most were not owned for the entire year. The acquisition
and integration of these new properties received the majority of the corporate
operations group's management focus during the year. During the fourth quarter,
significant additional management resources were added to this group to provide
assistance in increasing revenue and profit margins from existing ongoing
operations and to more rapidly achieve targeted margins for acquired businesses.
16
General and administrative expenses for the year ended December 31, 1996
increased $368,000 or 17.5% over 1995 due primarily to the increased personnel
expense necessary to support a higher rate of growth and acquisition activity.
However, general and administrative expenses as a percentage of net revenues
decreased from 8.7% for 1995 to 6.1% for 1996, reflecting economies of scale
realized by the Company as the expenses were spread over a larger operations
revenue base.
Interest expense for the year ended December 31, 1996 increased $663,000
over 1995 principally due to increased borrowings for acquisitions. In August
1996, the Company utilized the net proceeds from the IPO and borrowings under a
credit facility to repay the majority of its outstanding debts. In connection
with repayment of debt, the Company recognized an extraordinary charge of
approximately $498,000, net of income tax benefit of approximately $332,000, to
reflect the write-off of the deferred loan costs associated with the early
retirement of debt. This credit facility contained substantially improved terms
and reduced interest costs compared to the previous arrangements.
During 1996, the Company issued approximately $18 million of redeemable
preferred stock to fund a portion of its acquisition program. Dividends on the
majority of this preferred stock range from 6-7% per annum. Preferred dividends
of $622,000 were subtracted from the $207,000 of net income before extraordinary
item in computing earnings attributable to common stockholders resulting in a
net loss of $415,000 for purposes of computing earnings per common share.
For 1996, the Company provided for income taxes (benefits) at a combined
state and federal tax rate of 40%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $6.1 million at December 31, 1997,
representing an increase of $4.4 million from December 31, 1996. For the year
ended December 31, 1997, cash provided by operations was $9.7 million as
compared to $314,000 for the year ended December 31, 1996. The increase in cash
provided by operations was due in part to the net income in 1997 compared to the
net loss for 1996. Cash used in investing activities was $75 million for the
year ended December 31, 1997 compared to $46 million in 1996, due primarily to
the significant increase in acquisitions and construction of funeral facilities.
In 1997, cash flow provided by financing activities amounted to approximately
$70 million, primarily due to proceeds from long-term debt which were used to
fund acquisitions. In 1996, cash flow provided by financing activities amounted
to $40 million primarily due to the proceeds from the IPO.
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. The Company issued 977,736
shares of Class A Common Stock and approximately 20,000,000 shares of Series F
Preferred Stock and paid $66 million in cash to fund acquisitions in 1997. As of
December 31, 1997, the Company has 1,682,500 shares of Series D Preferred Stock
and 12,278,285 shares of Series F Preferred Stock issued and outstanding. The
Series D Preferred Stock is convertible into Class B Common Stock and the Series
F Preferred Stock is convertible into Class A Common Stock. The holders of
Series D Preferred Stock are entitled to receive cash dividends at an annual
rate of $.06-$.07 per share depending upon when such shares were issued.
Commencing on the second anniversary of the completion of the IPO (August 8,
1998), the Company may, at its option, redeem all or any portion of the shares
of Series D Preferred Stock then outstanding at a redemption price of $1.00 per
share, together with all accrued and unpaid dividends. Such redemption is
subject to the right of each holder of Series D Preferred Stock to convert such
holder's shares into shares of Class B Common Stock. On December 31, 2001, the
Company must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends.
In conjunction with the closing of the IPO, the Company entered into a
credit facility (the " Former Credit Facility") which provided for a $75 million
revolving line of credit with both LIBOR and base rate interest options. In
August 1996, the Company paid all of its outstanding indebtedness with the
proceeds from the issuance of its Class A Common Stock in connection with the
Company's IPO (see Note 7) and utilization of the Former Credit Facility. The
Former Credit facility was unsecured with a term of three years and contained
customary restrictive covenants, including a restriction on the payment of
dividends on common stock, and required the Company to maintain certain
financial ratios. During September 1997, the Company entered into a new credit
facility (the "New Credit Facility") for a $150 million revolving line of
credit. The New Credit Facility has a five-year term, is unsecured and contains
customary restrictive covenants, including a restriction on the payment of
dividends on common stock and requires the Company to maintain certain financial
ratios. Interest under the New Credit Facility is provided at both LIBOR and
prime rate options. In
17
connection with repayment of debt in August 1996 and the retirement of debt
issued with the New Credit Facility in September 1997, the Company recognized an
extraordinary loss of approximately $498,000 and $195,000, net of income tax
benefit of approximately $332,000 and $159,000 for the write-off of the deferred
loan costs associated with the early retirement of debt for the years ended
December 31, 1996 and 1997, respectively. At February 27, 1998 approximately
$115 million was outstanding under the New Credit Facility.
The holders of the Series F Preferred Stock are entitled to receive cash
dividends at the annual rate initially of $.04 per share, with the annual rate
increasing by 5% per year commencing January 1, 1998 until January 1, 2001, at
which time the annual rate becomes fixed at $.0486 per share. On December 31,
2007, the Company must redeem all shares of Series F Preferred Stock, as
discussed above, then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends. The Company does not have the
option to redeem any Series F Preferred Stock prior to December 31, 2007. The
Series F Preferred Stock is convertible at each holder's option into an
aggregate of 722,250 shares of Class A Common Stock based on the exercise price
in effect at March 12, 1998.
The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. In addition, the Company currently
expects to incur less than $10 million of capital expenditures during 1998,
primarily for upgrading funeral home facilities. The Company believes that cash
flow from operations, borrowings under the New Credit Facility and its ability
to issue additional debt and equity securities should be sufficient to fund
acquisitions and its anticipated capital expenditures and other operating
requirements for 1998. In March 1997, the Company filed a shelf registration
statement relating to 2,000,000 shares of Class A Common Stock to be issued to
fund acquisitions. As of March 12, 1998, approximately 1,500,000 shares remained
available for issuance under this shelf registration. Because future cash flows
and the availability of financing are subject to a number of variables, such as
the number and size of acquisitions made by the Company, there can be no
assurance that the Company's capital resources will be sufficient to fund its
capital needs. Additional debt and equity financing may be required to maintain
the Company's acquisition program. The availability and terms of these capital
sources will depend on prevailing market conditions and interest rates and the
then existing financial condition of the Company.
SEASONALITY
Although the death care business is relatively stable and fairly
predictable, the Company's business can be affected by seasonal fluctuations in
the death rate. Generally, death rates are higher during the winter months. In
addition, the quarterly results of the Company may fluctuate depending on the
magnitude and timing of acquisitions.
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company during the last three years.
YEAR 2000
The Company's Information Systems management group is constantly reviewing
the management and accounting software packages for internal accounting and
information requirements to meet with the continued growth of the Company. In
addition, the Company's staff has comprehensively considered existing systems
and equipment that need to be changed as a result of the Year 2000 or so-called
"Millennium Bug". The Company's staff has determined that some computer software
will require upgrading. Based on current estimates, the costs related to these
upgrades are immaterial. The Company is in contact with its vendors and
customers and no major problem has been discovered to date.
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.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") within 120
days after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Public
Accountants are filed as a part of this report on the pages indicated:
PAGE
Report of Independent Public Accountants............................ 25
Consolidated Balance Sheets as of December 31, 1996 and 1997........ 26
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.................................. 27
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997...................... 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 1996 and 1997................................... 29
Notes to Consolidated Financial Statements.......................... 30
(A) 2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of
Independent Accountants on Financial Statement Schedule are included in this
report on the pages indicated:
PAGE
Report of Independent Public Accountants on Financial Statement
Schedule.......................................................... 44
Financial Statement Schedule II -- Valuation and Qualifying
Accounts.......................................................... 45
19
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
(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
NO. DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation, as amended,
of the Company. Incorporated herein by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K for its fiscal
year ended December 31, 1996.
3.2 -- Certificate of Amendment dated May 9, 1996. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for its fiscal quarter ended September 30, 1997.
3.3 -- Certificate of Decrease, reducing the authorized Series D
Preferred Stock. Incorporated by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1997.
3.4 -- Certificate of Decrease, reducing the authorized Series F
Preferred Stock. Incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1997.
3.5 -- Amended and Restated Bylaws of the Company. Incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.1 -- Loan Agreement between the Company and NationsBank of Texas,
N.A. dated September 9, 1997. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for its fiscal quarter ended September 30, 1997.
10.2 -- Agreement and Plan of Merger dated March 8, 1996 among
Carriage Funeral Services, Inc., Hennessy-Bagnoli Funeral
Home, Inc., Hennessy Funeral Home, Inc., Terrance P. Hennessy
and Lawrence Bagnoli. Incorporated herein by reference to
Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (File No. 333-05545).
10.3 -- Real Property Purchase Agreement dated the Closing Date among
Hennessy-Bagnoli Funeral Home, Inc., Hennessy and Patricia
Hennessy, and Bagnoli and Brenda Bagnoli. Incorporated herein
by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-05545).
10.4 -- Stock Purchase Agreement dated January 4, 1996 among Carriage
Funeral Holdings, Inc., The Lusk Funeral Home, Incorporated
and Gerald T. McFarland, Jr. Incorporated herein by reference
to Exhibit 10.11 to the Company's Registration Statement on
Form S-1 (File No. 333-05545).
10.5 -- Stock Purchase Agreement dated February 29, 1996 among
Carriage Funeral Holdings, Inc., James E. Drake Funeral Home,
Inc., and James E. Drake and Patricia A. Drake. Incorporated
herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.6 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and SCI Texas Funeral Services, Inc.
Incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.7 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and SCI Funeral Services of Florida,
Inc. Incorporated herein by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.8 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and Fort Myers Memorial Gardens, Inc.
Incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.9 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and SCI Funeral Services of Florida,
Inc. Incorporated herein by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.10 -- Stock and Real Property Purchase Agreement dated March 29,
1996 among Carriage Funeral Holdings, Inc., Dwayne R. Spence
Funeral Home, Inc., Dwayne R. Spence, Patricia Spence and
James H. Sheridan. Incorporated herein by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1
(File No. 333-05545).
10.11 -- Merger Agreement dated March 22, 1996 among Carriage Funeral
Services, Inc., Carriage Funeral Services of Idaho, Inc.,
Merchant Funeral Home, Inc., Coeur d'Alene Memorial Gardens,
Inc., Lewis Clark Memorial Park, Inc., Robert D. Larrabee, I.
Renee Larrabee and Larrabee Land Company, Inc. Incorporated
herein by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.12 -- Real Property Purchase Agreement dated March 22, 1996 among
Carriage Funeral Services, Inc. and Larrabee Investments,
L.L.C. Incorporated herein by reference to Exhibit 10.19 to
the Company's Registration Statement on Form S-1 (File No.
333-05545).
10.13 -- Merger Agreement dated July 3, 1996 among Carriage Services,
Inc., CSI Funeral Services of Connecticut, Inc., C. Funk & Son
Funeral Home, Incorporated and Ronald F. Duhaime and
Christopher J. Duhaime. Incorporated herein by reference to
Exhibit 10.20 to the Company's Registration Statement on Form
S-1 (File No. 333-05545).
10.14 -- Merger Agreement dated July 3, 1996 among Carriage Services,
Inc., CFS Funeral Services of Connecticut, Inc., O'Brien
Funeral Home, Incorporated and Thomas P. O'Brien. Incorporated
herein by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.15 -- Merger Agreement dated June 26, 1996 among Carriage Services,
Inc., Carriage Funeral Services of South Carolina, Inc.,
Forest Lawn of Chesnee, Inc. and shareholders. Incorporated
herein by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.16 -- Merger Agreement dated October 17, 1996 among Carriage
Services, Inc., Carriage Funeral Services of California, Inc.,
CNM and the shareholders of CNM. Incorporated herein by
reference to Exhibit 10.22 to the Company's Current Report on
Form 8-K/A dated January 7, 1997.
*10.17 -- Asset Purchase Agreement dated November 13, 1997 among
Carriage Funeral Holdings, Inc., Sidun Funeral Group, Inc. and
Charles D. Sidun.
*10.18 -- Merger Agreement dated November 19, 1997 among Carriage
Services, Inc., Carriage Services of Florida, Inc., Forest
Lawn/Evergreen Management Corp., Greg M. Brudnicki and Charles
E. Kent.
*10.19 -- Asset Purchase Agreement dated November 19, 1997 among
Carriage Funeral Holdings, Inc., Kent-Thornton Funeral Home,
Inc., Greg Brudnicki, Charles Kent, Ricky Kent and Jane
Thornton.
20
+10.20 -- Employment Agreement with Melvin C. Payne. Incorporated herein
by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (File No. 333-05545).
+10.21 -- Employment Agreement with Mark W. Duffey. Incorporated herein
by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (File No. 333-05545).
+10.22 -- Employment Agreement with Russell W. Allen. Incorporated
herein by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
+10.23 -- Employment Agreement with Gary O'Sullivan. Incorporated herein
by reference to Exhibit 10.26 to the Company's Annual Report
on Form 10-K for its fiscal year ended December 31, 1996.
+10.24 -- Employment Agreement with Thomas C. Livengood. Incorporated
herein by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.25 -- Amended and Restated 1995 Stock Incentive Plan. Incorporated
herein by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.26 -- Amended and Restated 1996 Stock Incentive Plan. Incorporated
herein by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
21
+10.27 -- Amended and Restated 1996 Directors' Stock Option Plan.
Incorporated herein by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1996.
*11.1 -- Statement regarding computation of earnings per share.
*21.1 -- Subsidiaries of the Company
*27.1 -- Financial Data Schedule
__________________
(*) Filed herewith.
(+) Management contract or compensation plan.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on January 21, 1997 with
respect to its merger with the CNM Group on January 7, 1997. The Company also
file a Current Report on Form 8-K/A on March 14, 1997 to include in the Form 8-K
filed on January 21, 1997 the financial statements and pro forma financial
information required by item 7.
The Company filed a Current Report on Form 8-K on August 18, 1997 with
respect to its acquisition of substantially all of the operating assets of
McNary - Moore Funeral Service on August 1,1997. The Company also filed a
Current Report on Form 8-K/A on October 14, 1997 to include in the Form 8-K
filed on August 18, 1997 the financial statements and pro forma financial
information required by item 7.
The Company filed a Current Report on Form 8-K on October 10, 1997 with
respect to its merger with Cemetery Enterprises, Inc. on September 25, 1997.
The Company filed a Current Report on Form 8-K on November 26, 1997 with
respect to its acquisition of substantially all of the operating assets of Sidun
Funeral Group Inc. on November 13, 1997 and Kent-Thornton Funeral Home, Inc. on
November 20, 1997, and its merger with Forest Lawn/Evergreen Management Corp. on
November 20, 1997. The Company also filed a Current Report on Form 8-K/A on
March 25, 1998 to include in the Form 8-K filed on November 26, 1997 the
financial statements and pro forma financial information required by item 7.
The Company filed a Current Report on Form 8-K on December 31, 1997 with
respect to its acquisition of all of the outstanding shares of common stock of
Johnson Mortuary and Crematory, Inc. on December 17, 1997. The Company also
filed a Current Report on Form 8-K/A on March 25, 1998 to include in the Form
8-K filed on December 31, 1997 the financial statements and pro forma financial
information required by item 7.
The Company filed a Current Report on Form 8-K on March 23, 1998 with respect
to its acquisition of all of the outstanding shares of common stock of Redgate
Funeral Service Corporation on June 17, 1997.
The Company filed a Current Report on Form 8-K on March 25, 1998 with respect
to its merger with Barnett-Larkin-Brown Funeral Homes, Inc. on March 28, 1997.
The Company filed a Current Report on Form 8-K on March 25, 1998 with respect
to its acquisition of substantially all of the operating assets of Allen J.
Harden Funeral Home, Inc. on June 20, 1997.
22
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 ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 17, 1998.
CARRIAGE SERVICES, INC.
BY: /S/ MELVIN C. PAYNE
MELVIN C. PAYNE
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/S/ MELVIN C. PAYNE Chairman of the Board, Chief March 26, 1998
MELVIN C. PAYNE Executive Officer and Director
(Principal Executive Officer)
/S/ MARK W. DUFFEY President and Director March 26, 1998
MARK W. DUFFEY
/S/ THOMAS C. LIVENGOOD Executive Vice President, Chief March 26, 1998
THOMAS C. LIVENGOOD Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/S/ C. BYRON SNYDER Director March 26, 1998
C. BYRON SNYDER
/S/ ROBERT D. LARRABEE Director March 26, 1998
ROBERT D. LARRABEE
/S/ BARRY K. FINGERHUT Director March 26, 1998
BARRY K. FINGERHUT
/S/ STUART W. STEDMAN Director March 26, 1998
STUART W. STEDMAN
/S/ RONALD A. ERICKSON Director March 26, 1998
RONALD A. ERICKSON
/S/ MARK F. WILSON Director March 26, 1998
MARK F. WILSON
/S/ GREG M. BRUDNICKI Director March 26, 1998
GREG M. BRUDNICKI
23
CARRIAGE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS: ----
Report of Independent Public Accountants....................... 25
Consolidated Balance Sheets as of December 31, 1996 and 1997... 26
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997............................. 27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1996 and 1997......... 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997............................. 29
Notes to Consolidated Financial Statements..................... 30
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Stockholders' and Board of Directors of Carriage Services, Inc.:
We have audited the accompanying consolidated balance sheets of Carriage
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Carriage Services,
Inc., and subsidiaries as of December 31, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSON LLP
Houston, Texas
February 10, 1998
25
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
----------------------
ASSETS 1996 1997
--------- ---------
Current assets:
Cash and cash equivalents ............................ $ 1,712 $ 6,126
Accounts receivable-
Trade, net of allowance for doubtful accounts
of $530 in 1996 and
$1,291 in 1997 .................................. 5,665 11,617
Other ............................................... 673 1,295
--------- ---------
6,338 12,912
Inventories and other current assets ................. 3,350 5,691
--------- ---------
Total current assets .............. 11,400 24,729
--------- ---------
Property, plant and equipment, at cost:
Land ................................................. 9,640 21,789
Buildings and improvements ........................... 31,750 56,153
Furniture and equipment .............................. 8,817 15,046
--------- ---------
50,207 92,988
Less-accumulated depreciation ........................ (4,095) (7,123)
--------- ---------
46,112 85,865
Cemetery property, at cost ............................. 4,061 32,154
Names and reputations, net of accumulated amortization
of $2,007 in 1996 and $4,480 in 1997 ................. 62,568 118,099
Deferred charges and other non-current assets .......... 7,167 17,093
--------- ---------
$ 131,308 $ 277,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................... $ 2,192 $ 9,022
Accrued liabilities .................................. 3,033 7,545
Current portion of long-term debt and obligations
under capital leases ................................. 1,086 2,339
--------- ---------
Total current liabilities .................. 6,311 18,906
Preneed liabilities, net ............................... 3,664 7,403
Long-term debt, net of current portion ................. 42,733 121,553
Obligations under capital leases, net of current portion 557 4,449
Deferred income taxes .................................. 3,749 13,113
--------- ---------
Total liabilities .......................... 57,014 165,424
--------- ---------
Commitments and contingencies
Redeemable preferred stock ............................. 17,251 13,951
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000
shares authorized; 3,990,000 and 6,454,000 issued
and outstanding in 1996 and 1997, respectively ...... 40 64
Class B Common Stock; $.01 par value; 10,000,000
shares authorized; 4,502,000 and 4,691,000 issued and
outstanding in 1996 and 1997, respectively .......... 45 47
Contributed capital .................................. 63,966 102,056
Retained deficit ..................................... (7,008) (3,602)
--------- ---------
Total stockholders' equity ................. 57,043 98,565
--------- ---------
$ 131,308 $ 277,940
========= =========
The accompanying notes are an integral part of these financial statements.
26
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
Revenues, net
Funeral ................................... $ 22,661 $ 37,445 $ 64,888
Cemetery .................................. 1,576 2,903 12,533
-------- -------- --------
24,237 40,348 77,421
Costs and expenses
Funeral ................................... 18,921 30,641 48,404
Cemetery .................................. 1,326 2,541 9,634
-------- -------- --------
20,247 33,182 58,038
-------- -------- --------
Gross profit .............................. 3,990 7,166 19,383
General and administrative expenses ......... 2,106 2,474 5,277
-------- -------- --------
Operating income .......................... 1,884 4,692 14,106
Interest expense, net ....................... 3,684 4,347 5,889
-------- -------- --------
Income (loss) before income taxes and
extraordinary item ........................ (1,800) 345 8,217
Provision for income taxes .................. 694 138 3,726
-------- -------- --------
Net income (loss) before extraordinary item (2,494) 207 4,491
Extraordinary item--loss on early
extinguishment of debt, net of income
tax benefit of $332 in 1996 and $159 in
1997....................................... -- (498) (195)
-------- -------- --------
Net income (loss) ......................... (2,494) (291) 4,296
Preferred stock dividend requirements ....... -- 622 890
-------- -------- --------
Net income (loss) available to common
stockholders .............................. $ (2,494) $ (913) $ 3,406
======== ======== ========
Basic earnings (loss) per share:
Net income (loss) before extraordinary item $ (.99) $ (.09) $ .35
Extraordinary item ........................ -- (.10) (.02)
-------- -------- --------
Net Income (loss) ......................... $ (.99) $ (.19) $ .33
======== ======== ========
Diluted earnings (loss) per share:
Net income (loss) before extraordinary item $ (.99) $ (.09) $ .34
Extraordinary item ........................ -- (.10) (.02)
-------- -------- --------
Net Income (loss) ......................... $ (.99) $ (.19) $ .32
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ................................... 2,520 4,869 10,226
======== ======== ========
Diluted ................................... 2,520 4,869 10,485
======== ======== ========
The accompanying notes are an integral part of these financial statements.
27
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Net
Contribute Unrealized Retained
No. of Preferred No. of Common Capital Gain Earnings
Shares Stock Shares Stock (Deficit) (loss) (Deficit) Total
------- ------- ------- ---- --------- ---- ------ --------
BALANCE - DECEMBER 31, 1994 ................ 7,160 $ 72 2,520 $ 25 $ 6,992 $(59) (3,601) 3,429
Net loss - 1995 ............................ -- -- -- -- -- -- (2,494) (2,494)
Issuance of preferred
stock .................................... 8,500 85 -- -- 8,108 -- -- 8,193
Unrealized
net gain - available
for sale securities ...................... -- -- -- -- -- 23 -- 23
------- ------- ------- ---- --------- ---- ------ --------
BALANCE - DECEMBER 31, 1995 ................ 15,660 157 2,520 25 15,100 (36) (6,095) 9,151
Net loss - 1996 ............................ -- -- -- -- -- -- (291) (291)
Issuance of preferred
stock .................................... 555 5 -- -- 540 -- -- 545
Issuance of
common stock ............................. -- -- 3,947 40 47,942 -- -- 47,982
Conversion of preferred
stock to common stock .................... (16,045) (160) 1,980 20 140 -- -- 0
Conversion of redeemable
preferred stock to
common stock ............................. -- -- 39 -- 522 -- -- 522
Unrealized net gain -
available for sale
securities ............................... -- -- -- -- -- 36 -- 36
Purchase treasury
stock .................................... (170) (2) -- -- (339) -- -- (341)
Exercise of stock
options .................................. -- -- 6 -- 61 -- -- 61
Preferred dividends ........................ -- -- -- -- -- -- (622) (622)
------- ------- ------- ---- --------- ---- ------ --------
BALANCE - DECEMBER 31, 1996 ................ -- -- 8,492 85 63,966 -- (7,008) 57,043
Net income - 1997 .......................... -- -- -- -- -- -- 4,296 4,296
Issuance of common stock ................... -- -- 978 10 14,714 -- -- 14,724
Conversion of redeemable
preferred stock to
common stock ............................. -- -- 1,658 16 23,276 -- -- 23,292
Purchase of treasury stock ................. -- -- (3) -- (60) -- -- (60)
Exercise of stock options .................. -- -- 20 -- 160 -- -- 160
Preferred dividends ........................ -- -- -- -- -- -- (890) (890)
------- ------- ------- ---- --------- ---- ------ --------
BALANCE DECEMBER 31, 1997 ................. -- $ -- 11,145 $111 $ 102,056 $ 0 (3,602) $ 98,565
======= ======= ======= ==== ========= ==== ====== ========
The accompanying notes are an integral part of these financial statements.
28
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ....................................................... $ (2,494) $ (291) $ 4,296
Adjustments to reconcile net income (loss) to
net cash provided by
Operating activities --
Depreciation and amortization .......................................... 1,948 3,629 7,809
Provision for losses on accounts receivable ............................ 488 683 1,025
Loss on early extinguishment of debt, net of
income taxes .......................................................... -- 498 195
Deferred income taxes .................................................. 659 54 2,230
Changes in assets and liabilities net of
effects from acquisitions:
Increase in accounts receivable .................................... (1,125) (3,440) (4,747)
Decrease (increase) in inventories and
other current assets ............................................. 115 (465) (1,203)
Increase in other deferred charges ................................. (144) (1,146) (1,884)
Increase (decrease) in accounts payable ............................ 45 1,151 1,168
Increase (decrease) in accrued liabilities ......................... 1,461 (403) 422
Increase (decrease) in preneed liabilities ......................... 44 44 371
-------- -------- --------
Net cash provided by operating activities ........................... 997 314 9,661
Cash flows from investing activities:
Acquisitions, net of cash acquired ...................................... (12,191) (42,707) (65,607)
Disposition of businesses formerly owned ................................ -- 393 --
Purchase of marketable securities available for sale .................... (1,795) -- --
Disposal of marketable securities available for sale .................... 5,312 976 --
Purchase of property, plant and equipment ............................... (3,019) (4,630) (9,163)
-------- -------- --------
Net cash used in investing activities ............................... (11,693) (45,968) (74,770)
Cash flows from financing activities:
Proceeds from long-term debt ............................................ 11,563 59,849 79,300
Payments on long-term debt and obligations
under capital leases ................................................... (2,273) (65,925) (9,196)
Proceeds from sale of preferred stock ................................... 8,192 -- --
Proceeds from issuance of common stock .................................. -- 47,694 566
Preferred stock dividends ............................................... -- (622) (890)
Exercise of stock options ............................................... -- 61 160
Purchase of treasury stock .............................................. -- (341) (60)
Payment of deferred debt charges ........................................ (49) (923) (357)
-------- -------- --------
Net cash provided by financing activities ........................... 17,433 39,793 69,523
Net increase (decrease) in cash and cash equivalents ...................... 6,737 (5,861) 4,414
Cash and cash equivalents at beginning of year ............................ 836 7,573 1,712
-------- -------- --------
Cash and cash equivalents at end of year .................................. $ 7,573 $ 1,712 $ 6,126
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid through issuance of new debt .............................. $ 644 $ -- $ --
======== ======== ========
Retirement of debt through issuance of stock ............................ $ 500 $ -- $ --
======== ======== ========
Cash paid for interest .................................................. $ 3,127 $ 4,466 $ 5,477
======== ======== ========
Cash paid for income taxes ............................................ $ -- $ -- $ 1,385
======== ======== ========
Retirement of debt through disposition of business ...................... $ -- $ 2,642 $ --
======== ======== ========
Non-cash consideration for acquisitions ................................. $ -- $ 25,474 $ 33,412
======== ======== ========
The accompanying notes are an integral part of these financial statements.
29
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Carriage Services, Inc. (the "Company") was organized under the laws of the
State of Delaware on December 29, 1993. The Company owns and operates funeral
homes and cemeteries throughout the United States. The Company provides
professional services related to funerals and interments at its funeral homes
and cemeteries. Prearranged funerals and preneed cemetery property are marketed
in the geographic markets served by the Company's locations.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The financial statements include the consolidated financial statements of
Carriage Services, Inc. and its subsidiaries. In consolidation, all significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform with current year presentation.
FUNERAL AND CEMETERY OPERATIONS
The Company records the sale of funeral merchandise and services upon
performance of the funeral service. The Company records the sale of the right of
cemetery interment or mausoleum entombment and related merchandise at the time
of sale. The cost for cemetery merchandise and services sold, but not yet
provided, is accrued as an expense at the same time the cemetery revenue is
recognized. Allowances for customer cancellations, refunds and bad debts are
provided at the date of sale based on the historical experience of the Company.
Accounts receivable-trade, net consists of approximately $4,977,000 and
$7,245,000 of funeral receivables and approximately $688,000 and $4,372,000 of
current cemetery receivables at December 31, 1996 and 1997, respectively.
Non-current cemetery receivables, those payable after one year, are included in
Deferred Charges and Other Non-current Assets on the Consolidated Balance
Sheets.
PRENEED FUNERAL ARRANGEMENTS
Preneed funeral sales are effected by deposits to a trust or purchase of a
third-party insurance product. Since the Company does not have access to these
funds, the sale is not recorded until the service is performed, nor generally,
are the related assets and liabilities reflected on the Consolidated Balance
Sheets. The trust income earned and the increases in insurance benefits on the
insurance products are also deferred until the service is performed in order to
offset inflation in cost to provide the service in the future. The preneed
funeral trust assets were approximately $36,523,000 and $52,931,000 at December
31, 1996 and 1997, respectively, which in the opinion of management, exceed the
future obligations under such arrangements. The type of instruments that the
trusts may invest in are regulated by state agencies.
30
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summary reflects the composition of the assets held in trust to
satisfy the Company's future obligations under preneed funeral arrangements:
HISTORICAL UNREALIZED
COST BASIS GAIN (LOSS) FAIR VALUE
----------- ----------- -----------
(IN THOUSANDS)
As of December 31, 1996 --
Cash and cash equivalents ................................................... $ 16,022 $ -- $ 16,022
Fixed income investment contracts ........................................... 8,434 -- 8,434
Mutual funds, corporate
bonds and stocks .......................................................... 11,965 102 12,067
----------- ----------- -----------
Total .................................................................... $ 36,421 $ 102 $ 36,523
----------- ----------- -----------
As of December 31, 1997
Cash and cash
equivalents .............................................................. $ 23,891 $ -- $ 23,891
Fixed income investment
contracts ................................................................ 10,638 -- 10,638
Mutual funds, corporate
bonds and stocks ......................................................... 17,960 442 18,402
----------- ----------- -----------
Total ................................................................... $ 52,489 $ 442 $ 52,931
----------- ----------- -----------
CEMETERY MERCHANDISE AND SERVICE TRUST
The Company is also generally required, by certain states, to deposit a
specified amount into a merchandise and service trust fund for cemetery
merchandise and service contracts sold on a preneed basis. The principal and
accumulated earnings of the trust may be withdrawn by the Company upon maturity
(generally, the death of the purchaser) or cancellation of the contracts. Trust
fund investment income is recognized in current revenues as trust earnings
accrue, net of current period inflation costs recognized related to the
merchandise that has not yet been purchased. Merchandise and service trust fund
balances, in the aggregate, were approximately $1,134,000 and $9,567,000 at
December 31, 1996 and 1997, respectively, and are included in Preneed
Liabilities, net on the accompanying Consolidated Balance Sheets.
PERPETUAL AND MEMORIAL CARE TRUST
In accordance with respective state laws, the Company is required to deposit
a specified amount into perpetual and memorial care trust funds for each
interment/entombment right and memorial sold. Income from the trust fund is used
to provide care and maintenance for the cemeteries and mausoleums and is
periodically distributed to the Company and recognized as revenue upon
distribution. The perpetual and memorial care trust assets were approximately
$2,002,000 and $8,408,000 at December 31, 1996 and 1997, respectively, which, in
the opinion of management, will cover future obligations to provide care and
maintenance for the Company's cemeteries and mausoleums. The Company does not
have the right to withdraw any of the principal balances of these funds and,
accordingly, these trust fund balances are not reflected in the accompanying
Consolidated Balance Sheets.
DEFERRED OBTAINING COSTS
Deferred obtaining costs consist of sales commissions and other direct
marketing costs applicable to preneed funeral sales, net of insurance
commissions received. These costs are deferred and amortized in funeral costs
and expenses over the expected timing of the performance of the services covered
by the preneed funeral contracts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
31
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, and all of the Company's
investment securities are classified as available for sale securities. At
December 31, 1996 and 1997, the Company had no gross unrealized gains (losses).
The Company does not use derivative financial instruments or participate in
hedging activities.
INVENTORY
Inventory is recorded at the lower of its cost basis (determined by the
specific identification method) or net realizable value.
NAMES AND REPUTATIONS
The excess of the purchase price over the fair value of net identifiable
assets acquired, as determined by management in transactions accounted for as
purchases, is recorded as Names and Reputations. Such amounts are amortized over
40 years. Many of the Company's acquired funeral homes have provided high
quality service to families for generations. The resulting loyalty often
represents a substantial portion of the value of a funeral business. The Company
reviews the carrying value of Names and Reputations at least quarterly on a
location-by-location basis to determine if facts and circumstances exist which
would suggest that this intangible asset may be impaired or that the
amortization period needs to be modified. If indicators are present which
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the location and determine if the intangible assets
are recoverable based on these undiscounted cash flows. If impairment is
indicated, then an adjustment will be made to reduce the carrying amount of the
intangible asset to its fair value. At December 31, 1997, no impairment was
deemed to have occurred.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," as of January 1, 1996, and such adoption
did not have a material impact on the Company's consolidated financial position
or results of operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The costs of ordinary
maintenance and repairs are charged to operations as incurred, while renewals
and betterments are capitalized. Capitalized interest was $162,000 and $ 264,000
in 1996 and 1997, respectively. Depreciation of property, plant and equipment is
computed based on the straight-line method over the following estimated useful
lives of the assets:
YEARS
-------------
Buildings and improvements 15 to 40
Furniture and fixtures 7 to 10
Machinery and equipment 5 to 10
Automobiles 5 to 7
INCOME TAXES
The Company files a consolidated U.S. federal income tax return. The Company
records deferred taxes for temporary differences between the tax basis and
financial reporting basis of assets and liabilities.
EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE, which replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities.
32
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
presented have been restated to conform to the Statement 128 requirements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that carrying value approximates fair value for
cash and cash equivalents and marketable equity securities which are designated
as available-for-sale. Additionally, its floating rate Credit Facility
approximates its fair value. Management also believes that its redeemable
preferred stock is stated at fair value.
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.
Actual results could differ from those estimates.
BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related
Information. SFAS 131, effective for years beginning after December 15, 1997,
requires segment information to be reported on a basis consistent with that used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company will adopt SFAS No. 131 in 1998 and is
evaluating the way segment information is reported.
2. ACQUISITIONS:
During 1997, the Company acquired 44 funeral homes and 10 cemeteries through
the purchase of stock and assets. In 1996, the Company acquired 38 funeral homes
and 7 cemeteries through the purchase of stock and assets. These transactions
have been accounted for utilizing the purchase method of accounting, and the
results of operations of the acquired businesses have been included in the
results of the Company from the respective dates of acquisition.
In accordance with APB Opinion 16, purchase prices were allocated to the net
assets acquired based on management's estimate of the fair value of the acquired
assets and liabilities at the date of acquisition. Many of the Company's
acquired funeral homes have provided high quality service to families for
generations. The resulting loyalty often represents a substantial portion of the
value of a funeral business. As a result, the excess of the consideration paid
over the fair value of net tangible and other identifiable intangible assets is
allocated to Names and Reputations. Future adjustments to the allocation of the
purchase price may be made during the 12 months following the date of
acquisition due to resolution of uncertainties existing at the acquisition date,
which may include obtaining additional information regarding asset and liability
valuations.
33
The effect of the above acquisitions on the Consolidated Balance Sheets at
December 31, 1996 and 1997 was as follows:
1996 1997
--------- ---------
(IN THOUSANDS)
Current Assets ................................. $ 3,532 $ 11,909
Cemetery Property .............................. 3,610 28,276
Property, Plant and Equipment .................. 22,574 34,830
Deferred Charges and Other Non-current
Assets ......................................... 1,542 1,597
Names and Reputations .......................... 43,139 55,013
Current Liabilities ............................ (1,025) (1,631)
Debt ........................................... -- (1,072)
Other Liabilities .............................. (5,191) (10,662)
--------- ---------
68,181 118,260
Consideration:
Redeemable preferred stock issued .............. (17,775) (20,000)
Debt ........................................... (6,582) (18,210)
Preferred stock issued ......................... (555) --
Cash acquired in acquisitions .................. (274) (556)
Common Stock issued ............................ (288) (13,887)
--------- ---------
Cash used for acquisitions .................. $ 42,707 $ 65,607
========= =========
The following table reflects, on an unaudited pro forma basis, the
combined operations of the Company and the businesses acquired during 1996 and
1997 as if such acquisitions had taken place at the beginning of 1996.
Appropriate adjustments have been made to reflect the accounting basis used in
recording these acquisitions. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that would have resulted had the combination been in effect on the
date indicated, that have resulted since the respective dates of acquisition or
that may result in the future.
1996 1997
-------- -------
(UNAUDITED AND IN THOUSANDS)
Revenues, net ............................... $ 95,169 $98,672
Income (loss) before income taxes
and extraordinary item ................. (1,686) 7,803
Net income (loss) available to common
stockholders ............................. (2,157) 3,207
Earnings (loss) per share
Basic ............................... (.44) .31
Diluted ............................... (.44) .31
3. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS:
Deferred charges and other non-current assets at December 31, 1996 and
1997 were as follows (in thousands):
1996 1997
------- -------
Agreements not to compete, net of
accumulated amortization of
$1,722 and $2,233 respectively ............... $ 3,297 $ 4,034
Deferred debt expense, net of
accumulated amortization of $78
and $23, respectively ........................ 511 324
Non-current cemetery and notes
receivable ................................... 2,114 9,807
Deferred obtaining costs, net of
accumulated amortization of $44
and $253, respectively ....................... 1,245 2,928
------- -------
$ 7,167 $17,093
======= =======
34
The cost of agreements not to compete with former owners of businesses
acquired are amortized over the term of the respective agreements, ranging from
four to 10 years. Deferred debt expense is being amortized over the term of the
related debt. Non-current cemetery receivables result from the multi-year
payment terms in the underlying contracts. These cemetery receivables are
recorded net of allowances for customer cancellations, refunds and bad debts.
4. LONG-TERM DEBT:
The Company's long-term debt consisted of the following at December 31 (in
thousands):
1996 1997
--------- ---------
Credit Facility, unsecured floating
rate $150 million line, interest is
due on a quarterly basis for prime
borrowings and on the maturity dates
of the eurodollar borrowings at the
applicable eurodollar rate plus .50%
to 1.25% (weighted average interest
rate was 6.8772% for the quarter ended
December 31, 1997), matures in
September, 2002 .............................. $ -- $ 107,500
Credit Facility, unsecured floating
rate $75 million line, interest was
due on a quarterly basis at prime to
prime plus .25% or at the applicable
eurodollar rate plus .75% to 2.0% ............ 36,500 --
Acquisition debt ............................... 6,395 10,817
Other .......................................... 574 5,219
Less-Current portion ........................... (736) (1,983)
--------- ---------
$ 42,733 $ 121,553
========= =========
In conjunction with the closing of the initial public offering (the "IPO")
in August 1996, the Company entered into a Credit Facility (the "Former Credit
Facility") which provided for a $75 million revolving line of credit with both
LIBOR and base rate interest options. This Former Credit Facility was unsecured
and was for a term of three years. During September 1997, the Company entered
into a new credit facility (the "New Credit Facility") for a $150 million
revolving line of credit. The New Credit Facility has a five year term, is
unsecured and contains customary restrictive covenants, including a restriction
on the payment of dividends on common stock and requires the Company to maintain
certain financial ratios. The Company was in compliance with all covenants at
December 31, 1997. In August 1996, the Company paid all of its outstanding
indebtedness with the proceeds from the issuance of its Class A Common Stock in
connection with the Company's IPO (see Note 7) and utilization of the Former
Credit Facility. In connection with repayment of debt in August 1996 and the
retirement of debt issued by the Former Credit Facility in September 1997, the
Company recognized an extraordinary loss of approximately $498,000 and $195,000,
net of income tax benefit of approximately $332,000 and $159,000 for the
write-off of the deferred loan costs associated with the early retirement of
debt for the years ended December 31, 1996 and 1997, respectively.
Acquisition debt consists of deferred purchase prices, payable to
sellers. The deferred purchase price notes bearing interest at 0%, discounted at
imputed interest rates ranging from 6% to 8%, with maturities from 3 to 15
years.
The aggregate maturities of long-term debt for the year ended
December 31, 1998 and for the subsequent four years, are approximately
$1,983,000, $2,021,000, $1,196,000, $1,193,000, and $108,744,000, respectively
and $8,399,000 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain office facilities, vehicles and equipment under
operating leases for terms ranging from one to fifteen years. Certain of these
leases provide for an annual adjustment. Rent expense was approximately
$951,000, $924,000 and $1,997,000 for 1995, 1996 and 1997, respectively.
35
Assets acquired under capital leases are included in property, plant and
equipment on the accompanying Consolidated Balance Sheets.
At December 31, 1997 minimum lease payments were as follows:
MINIMUM LEASE PAYMENTS
---------------------
OPERATING CAPITAL
LEASES LEASES
--------- ---------
(IN THOUSANDS)
Years ended December 31,
1998 ................................................. $ 1,792 $ 679
1999 ................................................. 1,557 2,632
2000 ................................................. 1,099 230
2001 ................................................. 799 207
2002 ................................................. 1,449 198
Thereafter ............................................. 2,181 2,716
--------- ---------
Total minimum lease payments ........................... $ 8,877 $ 6,662
=========
Less: amount representing interest ..................... 1,857
Less: current portion of obligations
under capital leases ................................... 356
---------
Long-term obligations under capital
leases ................................................. $ 4,449
=========
AGREEMENTS AND EMPLOYEE BENEFITS
The Company has entered into various employment agreements and agreements
not to compete with key employees and former owners of businesses acquired.
Payments for such agreements are not made in advance. These agreements are
generally for one to ten years and provide for future payments annually,
quarterly or monthly. The aggregate payments due under these agreements for the
subsequent five years, are approximately $1,356,000, $1,342,000, $1,101,000,
$924,000 and $845,000, respectively and $2,576,000 thereafter. In conformity
with industry practice, these agreements are not included in the accompanying
Consolidated Balance Sheets.
The Company sponsors one defined contribution plan for the benefit of its
employees. The expense for this plan has not been significant for the periods
presented. In addition, the Company does not offer any other post-retirement or
post-employment benefits.
LITIGATION
Certain of the funeral homes located in California that were
acquired by the Company in early 1997, along with other death care providers,
are defendants in litigation in the state of California alleging that a flight
service contracted to dispose of cremains failed to properly carry out its
duties. While the litigation is in the early stages, management, with the advice
of legal counsel, believes that there are adequate insurance coverages,
indemnities and reserves such that the results of this litigation will not have
a material effect on the Company's consolidated financial position or result of
operations. Additionally, the Company is, from time to time, subject to routine
litigation arising in the normal course of its business. Management, with the
advice of legal counsel, similarly believes that the results of any such routine
litigation or other pending legal proceedings will not have a material effect on
the Company's consolidated financial position or results of operations.
36
6. INCOME TAXES:
The provision for income taxes for 1995, 1996 and 1997 consisted of:
1995 1996 1997
---- ---- ------
Current: (IN THOUSANDS)
U. S. Federal .......................... $-- $-- $1,275
State .................................. 35 84 759
---- ---- ------
Total current provision .............. 35 84 2,034
---- ---- ------
Deferred:
U. S. Federal .......................... 585 48 1,564
State .................................. 74 6 128
---- ---- ------
Total deferred provision ............. 659 54 1,692
---- ---- ------
Total income tax provision ............. $694 $138 $3,726
==== ==== ======
A reconciliation of taxes to the U.S. federal statutory rate to those
reflected in the Consolidated Statements of Operations for 1995, 1996 and 1997
is as follows:
1995 1996 1997
------ ------ ------
Federal statutory rate .................. (34.0)% 34.0% 34.0%
Effect of state income taxes,
net of federal benefit at 34% ........ (6.0) 4.0 5.3
Effect of nondeductible
expenses and other, net ............... 3.9 57.3 15.9
Effect of valuation
allowance ............................. 74.7 (55.3) (14.5)
Effect of change in
statutory rate ........................ -- -- 4.6
------ ------ ------
38.6% 40.0% 45.3%
====== ====== ======
The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities at December 31, 1996 and 1997 were as
follows:
1996 1997
-------- --------
Deferred tax assets: (IN THOUSANDS)
Net operating loss carryforwards ............. $ 2,369 $ 510
Reserves not currently deductible ............ 200 509
Accrued liabilities and other ................ 104 701
Amortization of non-compete
agreements ................................... 387 816
-------- --------
3,060 2,536
Valuation allowance ............................ (1,442) (268)
-------- --------
Total deferred tax assets ................... $ 1,618 $ 2,268
======== ========
Deferred tax liability:
Amortization and depreciation ................ $ (4,893) $(12,814)
Preneed assets, net .......................... (170) (1,670)
-------- --------
Total deferred tax
liabilities ............................ $ (5,063) $(14,484)
-------- --------
Net deferred tax liability ..................... $ (3,445) $(12,216)
======== ========
Current net deferred asset ..................... $ 304 $ 897
Non-current net deferred liability ............. (3,749) (13,113)
-------- --------
$ (3,445) $(12,216)
======== ========
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets for which realization is uncertain. The Company
reviews the valuation allowance at the end of each quarter and makes adjustments
37
if it is determined that it is more likely than not that the NOL's will be
realized. At December 31, 1997, the Company has approximately $584,000 of
federal net operating loss ("NOL") carryforwards which will expire between 2009
and 2011, if not utilized, and $3,826,000 of state NOL carryforwards which will
expire between the years 2000 and 2012, if not utilized. As a result of the IPO
(see Note 7), there may be a limitation placed on the Company's utilization of
its NOL's by Section 382 of the Internal Revenue Code in any one particular tax
year. Deferred tax liabilities were recorded with respect to purchase accounting
transactions during the year ended December 31, 1997 in the approximate amount
of $7,218,000.
7. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
On August 8, 1996 the Company completed its IPO of 3,910,000 shares of its
Class A Common Stock at $13.50 per share for net proceeds of approximately $48
million, after selling commissions and related expenses of approximately $5
million. The net proceeds of the IPO were used to repay outstanding indebtedness
of the Company. In connection with the IPO, the Company performed a
recapitalization of its Common Stock into two classes of Common Stock (Class A
and Class B), provided separate voting rights to each class and converted
existing Common Stock to Class B Common Stock. The holders of Class A Common
Stock are entitled to one vote for each share held on all matters submitted to a
vote of common stockholders. The holders of Class B Common Stock are entitled to
ten votes for each share held on all matters submitted to a vote of common
stockholders. The Series A, B and C Preferred Stocks automatically converted
into Class B Common Stock upon closing of the IPO. Series D Preferred Stock
remained outstanding after the IPO (see Note 8).
PREFERRED STOCK
Prior to the IPO, the Company had three classes of preferred stock
outstanding, Series A, B and C. These preferred stocks automatically converted
into shares of Class B Common Stock at the effective date of the IPO (August 8,
1996).
TREASURY STOCK
The Company purchased 3,292 shares of Class B Common Stock for $60,000 and
170,000 shares of Series B Preferred Stock for $341,000, during 1997 and 1996,
respectively. Such shares have been canceled.
STOCK OPTION PLANS
The Company has three stock option plans currently in effect under which
future grants may be issued: the 1995 Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Nonemployee Director
Stock Option Plan (the "Directors' Plan").
Options granted under the 1995 Plan have a ten year term. All options
granted under the 1995 Plan prior to the IPO vest immediately, while
substantially all of those issued in conjunction with and after the IPO vest
over a four year period at 25% per year. Options issued under this plan prior to
the Company's IPO are satisfied with shares of Class B Common Stock, but options
issued after that date are satisfied with shares of Class A Common Stock. A
total of 700,000 shares are reserved for issuance under the 1995 Plan of which
408,449 shares were outstanding at December 31, 1997.
Options granted under the 1996 Plan and the Directors' Plan have ten year
terms and vest 8.33% per year on the first through fourth anniversary dates of
the grant date and 16.66% per year on the fifth through eighth anniversary dates
of the grant date; provided, however, the options scheduled to vest in years 5-8
from the grant date (i.e., 66 2/3 of the total grant) vest immediately if the
average of the daily high and low prices of the Class A Common Stock for 20
consecutive trading days exceeds $27.99 prior to the fourth anniversary of the
grant date. A total of 600,000 shares of Class A Common Stock are reserved for
issuance under the 1996 Plan and 200,000 shares of Class A Common Stock are
reserved for issuance under the Directors' Plan. A total of 560,000 and 130,000
shares were outstanding under the 1996 Plan and Directors' Plan, respectively
38
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) available to
common stockholders
As reported ......................... $ (2,494) $ (913) $ 3,406
Pro forma ............................. (2,721) (1,122) 2,353
Net income (Loss) per share
available to common
stockholders:
Basic
As reported ........................ (.99) (.19) .33
Pro forma .......................... (1.08) (.23) .23
Diluted
As reported ........................ (.99) (.19) .32
Pro forma .......................... (1.08) (.23) .22
Each of the plans is administered by a stock option committee appointed by
the Board of Directors. The plans allow for options to be granted as
non-qualified options, incentive stock options, reload options, alternative
appreciation rights and stock bonus options. As of December 31, 1997, only
non-qualified options and incentive stock options have been issued. The options
are granted with an exercise price equal to the then fair market value of the
Company's Common Stock as determined by the Board of Directors.
A summary of the status of the plans at December 31, 1996 and 1997 and
changes during the year ended is presented in the table and narrative below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997
-------------------- --------------------
SHARES WTD AVG. SHARES WTD AVG.
(000) EX PRICE (000) EX PRICE
-------- -------- -------- --------
Outstanding at beginning of period 50 9.80 850 $ 13.74
Granted .......................... 818 13.9 338 20.18
Exercised ........................ (5) 10.43 (23) 11.35
Canceled ......................... (13) 10.11 (65) 16.80
-------- --------
Outstanding at end of year ....... 850 13.74 1,100 15.40
-------- --------
Exercisable at end of year ....... 74 10.34 146 12.41
-------- --------
Weighted average fair value of
options granted .................. $ 8.00 -- $ 8.52 --
All of the options outstanding at December 31, 1997 have exercise prices
between $8.00and $24.75, with a weighted average exercise price of $15.40 and a
weighted average remaining contractual life of 8.8 years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: risk-free interest
rates of 6.67% and 6.45%; expected dividend yields of zero percent and zero
percent; expected lives of ten years and five years; expected volatility of
30.45% and 35.90%.
REVERSE STOCK SPLIT
On July 18, 1996, the Company's Board of Directors and stockholders
approved an amendment to the Company's Certificate of Incorporation which
authorized a one for two reverse stock split. The Consolidated Financial
Statements
39
were restated in 1996 as if the reverse stock split had occurred at the
beginning of the earliest period presented. For each two shares of Class B
Common Stock at $.01 par, the stockholder received one share of Class B Common
Stock at $.01 par. Upon completion of the IPO, the Series A, B and C Preferred
Stocks automatically converted into Class B Common Stock. The number of shares
held by each Series A, B and C Preferred stockholder remained the same; however,
the conversion prices for Class B Common Stock on those preferred shares doubled
in conjunction with the above-mentioned reverse stock split. In addition, the
exercise prices on outstanding stock options also doubled related to this
reverse stock split, and the number of shares of Class B Common Stock covered by
such options decreased by 50%.
8. REDEEMABLE PREFERRED STOCK:
The Company has 20,000,000 authorized shares of Series D Preferred Stock
with a par value of $.01 per share, of which approximately 17,253,000 and
1,682,500 shares were issued and outstanding at December 31, 1996 and 1997,
respectively. As of December 31, 1997, these shares can be converted into Class
A Common Stock at the rate of $15.50 per share. The holders of Series D
Preferred Stock are entitled to receive preferential dividends at an annual rate
ranging from $0.06 to $0.07 per share, payable quarterly. Dividends are payable
quarterly as long as the stock is outstanding. The Series D Preferred Stock is
redeemable, in whole or in part, at the option of the Company, at any time
during the period commencing with the second anniversary of the Company's IPO
(August 8, 1998) and ending December 31, 2001. On December 31, 2001, the Company
must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends.
Concurrent with every issuance of Series D Preferred Stock, irrevocable
standby letters of credit, issued by a financial institution and guaranteed by
the Company, were given to the holders (or designated beneficiaries) and can be
drawn upon if certain events occur, including the following: the Company has
failed to pay preferred stock dividends, the Company has failed to redeem the
preferred stock shares on the designated mandatory redemption date or a
liquidation, dissolution or winding up of affairs of the Company occurs. As of
December 31, 1997, letters of credit of approximately $1,740,000 were
outstanding relative to Series D Preferred Stock.
During the first quarter of 1997, the Company issued approximately
20,000,000 shares of Series F Preferred Stock with a par value of $.01 per share
to fund a portion of the acquisitions, of which 12,278,285 were outstanding at
December 31, 1997. These shares are convertible into Class A Common Stock at the
rate of $16.00 per share as of December 31, 1997, and increasing to $17.00 per
share on January 1, 1998. The holders of the Series F Preferred Stock are
entitled to receive preferential dividends at the amount of $.04 payable
quarterly, increasing to five percent per year for the period January 1, 1998
until January 1, 2001, at which time the annual rate becomes fixed at $.0486 per
share. On December 31, 2007, the Company must redeem all shares of Series F
Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends.
40
9. EARNINGS PER SHARE:
The following table sets forth the computation of the basic and diluted
earnings (loss) per share for 1995, 1996 and 1997:
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Numerator:
Net income (loss) before
extraordinary item ..................... $(2,494) $ 207 $ 4,491
Extraordinary item ....................... -- (498) (195)
------- ------- --------
Net income (loss) ........................ (2,494) (291) 4,296
Preferred stock dividends ................ -- (622) (890)
------- ------- --------
Numerator for basic earnings per share
- net income (loss) available to
common stockholders ..................... (2,494) (913) 3,406
Effect of dilutive securities:
Preferred stock dividends ................ -- -- --
------- ------- --------
Numerator for diluted earnings per
share - net income available to
common stockholders after assumed
conversions ............................. $(2,494) $ (913) $ 3,406
Denominator:
Denominator for basic earnings per
share - weighted-average shares ......... 2,520 4,869 10,226
Effect of dilutive securities:
Stock options ............................. -- -- 259
------- ------- --------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions .......... 2,520 4,869 10,485
Basic earnings per share:
Net income (loss) before extraordinary
item ...................................... $ (.99) $ (.09) $ .35
Extraordinary item ......................... -- (.10) (.02)
------- ------- --------
Net income (loss) .......................... $ (.99) $ (.19) $ .33
======= ======= ========
Diluted earnings per share:
Net income (loss) before extraordinary
item ...................................... $ (.99) $ (.09) $ .34
Extraordinary item ......................... -- (.10) (.02)
------- ------- --------
Net income (loss) .......................... $ (.99) $ (.19) $ .32
======= ======= ========
41
10. MAJOR SEGMENTS OF BUSINESS
The Company conducts funeral and cemetery operations only in the United
States.
(IN THOUSANDS, EXCEPT NUMBER OF
OPERATING LOCATIONS) Funeral Cemetery Corporate Consolidated
- -----------------------------------------------------------------------------------------------
Revenues:
1997 ................................ $ 64,888 $ 12,533 $ -- $ 77,421
1996 ................................ 37,445 2,903 -- 40,348
1995 ................................ 22,661 1,576 -- 24,237
- -----------------------------------------------------------------------------------------------
Income from operations:
1997 ................................ $ 16,484 $ 2,899 $ (5,277) $ 14,106
1996 ................................ 6,804 362 (2,474) 4,692
1995 ................................ 3,740 250 (2,106) 1,884
- -----------------------------------------------------------------------------------------------
Identifiable assets:
1997 ................................ 208,833 57,020 12,087 277,940
1996 ................................ 117,061 9,285 4,962 131,308
1995 ................................ 48,847 2,169 10,730 61,746
- -----------------------------------------------------------------------------------------------
Depreciation and amortization:
1997 ................................ 5,195 1,454 1,160 7,809
1996 ................................ 2,863 129 637 3,629
1995 ................................ 1,609 72 267 1,948
- -----------------------------------------------------------------------------------------------
Capital expenditures: (a)
1997 ................................ 34,858 34,653 2,758 72,269
1996 ................................ 24,737 5,073 1,004 30,814
1995 ................................ 4,530 100 1,116 5,746
- -----------------------------------------------------------------------------------------------
Number of operating locations at year end:
1997 ................................ 120 20 -- 140
1996 ................................ 76 10 -- 86
1995 ................................ 41 3 -- 44
- -----------------------------------------------------------------------------------------------
(a)Includes $2,727, $26,184 and $63,106 for the three years ended December
31, 1997, respectively, for purchases of property, plant and equipment and
cemetery property of acquired businesses.
42
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1996 and 1997 (in thousands, except per share
data):
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1996 (A)
Revenues, net .................... $ 7,635 $ 9,290 $ 10,145 $13,278
Gross profit ..................... 1,670 1,719 994 2,783
Net income (loss) before
extraordinary item ............... (193) (468) (414) 1,282
Extraordinary item ............... -- -- (498) --
Preferred stock dividend
requirements ..................... 10 91 250 271
Net income (loss) ................ (203) (559) (1,162) 1,011
Basic earnings (loss) per
common share
Continuing operations ......... (.08) (.22) (.11) .12
Extraordinary item ............ -- -- (.09) --
-------- -------- -------- -------
Net income (loss) ............. $ (.08) $ (.22) $ (.20) $ .12
-------- -------- -------- -------
Diluted earnings (loss) per
common share
Continuing operations ......... $ (.08) $ (.22) $ (.11) $ .12
Extraordinary item ............ -- -- (.09) --
-------- -------- -------- -------
Net income (loss) ............. $ (.08) $ (.22) $ (.20) $ .12
-------- -------- -------- -------
1997 (A)
Revenues, net .................... $ 17,989 $ 19,061 $ 18,245 $22,126
Gross profit ..................... 5,143 5,003 3,557 5,680
Net income before
extraordinary item ............. 1,825 1,489 347 830(b)
Extraordinary item ............... -- -- (195) --
Preferred stock dividend
requirements ................... 363 174 176 177
Net income (loss) ................ 1,462 1,315 (24) 653(b)
Basic earnings per common share:
Continuing operations ......... $ .16 $ .13 $ 0.02 $ .06(b)
Extraordinary item ............ -- -- (0.02) --
-------- -------- -------- -------
Net income .................... $ .16 $ .13 $ -- $ .06(b)
-------- -------- -------- -------
Diluted earnings per common share:
Continuing operations ......... $ .16 $ .12 $ 0.02 $ .06(b)
Extraordinary item ............ -- -- (0.02) --
-------- -------- -------- -------
Net income .................... $ .16 $ .12 $ -- $ .06(b)
-------- -------- -------- -------
(a) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does
not equal the total computed for the year due to stock transactions
which occurred during the periods presented.
(b) Includes a one-time charge of $390,000 (equivalent to $.04 per share) to
revalue historical deferred tax accounts from 34% to 35%.
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Carriage Services, Inc.:
We have audited in accordance with generally accepted auditing standards, the
Consolidated Financial Statements of Carriage Services, Inc. and subsidiaries
included in this Form 10-K, and have issued our report thereon dated February
10, 1998. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in Part IV,
Item 14 (a)(2) for Carriage Services, Inc. and subsidiaries is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
44
CARRIAGE SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTION YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Allowance for bad debts and contract cancellations ................ $205 $ 488 $388 $ 305
Year ended December 31, 1996:
Allowance for bad debts and contract cancellations ................ $305 $ 683 $458 $ 530
Year ended December 31, 1997:
Allowance for bad debts and contract cancellations ................ $530 $1,025 $264 $1,291
45