UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-28096
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THE YORK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0490631
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9430 OLD KATY ROAD, HOUSTON, TEXAS 77055
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(713) 984-5500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes. [X] No. [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 under the Securities Exchange Act of 1934) is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of March 12, 1998, there were 8,906,950 shares of The York Group, Inc.
Common Stock, $.01 par value, issued and outstanding, 7,501,514 of which, having
an aggregate market value of approximately $182,849,404 were held by
non-affiliates of the registrant (affiliates being, for these purposes only,
directors, executive officers and holder of more than 5% of the registrant's
Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 1998 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1997, are incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
PAGE
----
Item 1. Business............................. 1
Item 2. Properties........................... 4
Item 3. Legal Proceedings.................... 6
Item 4. Submission of Matters to a Vote of
Security Holders................... 6
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.... 6
Item 6. Selected Financial Data.............. 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 8
General.............................. 8
Results of Operations................ 9
Liquidity and Capital Resources...... 10
The Year 2000 Issue.................. 11
Inflation............................ 11
Selected Quarterly Operating Results
and Seasonality.................... 11
Forward-Looking Statements........... 12
Item 8. Financial Statements and
Supplementary Data................. 12
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 12
Item 10. Directors and Executive Officers of
the Registrant..................... 12
Item 11. Executive Compensation............... 13
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 13
Item 13. Certain Relationships and Related
Transactions....................... 13
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K................................ 14
i
PART I
ITEM 1. BUSINESS
INDUSTRY OVERVIEW
The York Group, Inc. (the "Company" or "York") is the second largest
casket manufacturer in the United States and has an approximate 21% share of the
finished casket market. According to industry sources, there are approximately
22,000 domestic funeral homes, which purchase approximately $1.1 billion of
finished caskets annually.
Caskets generally are categorized by the type of material from which they
are produced, with three categories: metal, wood and other. According to
statistics compiled and released by the Casket & Funeral Supply Association of
America, approximately 1.9 million caskets were sold in the United States in
1997, with metal caskets accounting for approximately 1.3 million units, wood
caskets accounting for approximately 300,000 units and other caskets accounting
for approximately 300,000 units.
The number of casket manufacturers, assemblers and distributors has
declined over the past thirty years as a result of industry consolidation. The
Company estimates that the three largest casket manufacturers accounted for over
60% of the finished casket unit volume in 1997.
The casket industry is characterized by generally favorable demographic
trends that have allowed the major manufacturers to enjoy relatively stable,
non-cyclical and fairly predictable business conditions. The number of deaths in
the United States has grown at an annual compound rate of approximately 1%,
increasing from approximately 2.0 million deaths in 1980 to approximately 2.3
million deaths in 1997. According to a 1994 report prepared by the United States
Department of Commerce, Bureau of the Census, the number of deaths in the United
States is expected to increase by approximately 1% per year between the years
1994 and 2000. While an increasing number of annual deaths would be expected to
increase the demand for caskets, a steady, gradual growth in the number of
cremations in the United States has mitigated much of the potential benefit.
According to industry statistics compiled and released by the Cremation
Association of North America ("CANA"), cremation was used in connection with
approximately 21% of the deaths in the United States in 1997, compared with
approximately 10% in 1980. As a result, the number of caskets sold in the United
States has remained fairly constant, with unit volumes of approximately 1.8
million to 1.9 million caskets per year over the past ten years. These same CANA
statistics suggest that cremation could be used in connection with approximately
26% of the deaths in the United States in 2000.
THE COMPANY
The Company produces a wide variety of all three types of caskets, as well
as casket components. Metal caskets are made from various gauges of cold rolled
steel, stainless steel, copper and bronze. Wood caskets are made from nine
different wood species ranging from poplar to mahogany, as well as from veneer
and paper covered particle board and fiber board. The Company also produces
caskets made from cloth and paper covered particle board and corrugated
materials. Casket components include stamped metal parts, as well as various
other exterior and interior parts. The Company believes that it is the largest
domestic supplier of casket components to other casket manufacturers and
assemblers. Beginning in 1997, the Company also manufactures metal burial vaults
for use in the interment segment of the death care industry.
The Company's finished caskets are marketed through a network of Company
and privately owned distributors that serve an estimated 15,000 domestic funeral
homes, as well as certain foreign markets.
PRODUCTS AND SERVICES
CASKETS. The Company believes it manufactures a more comprehensive line of
caskets than any of its major competitors. Caskets can be customized around
several dozen basic designs in combination with many different options relating
to such features as color, interior design, handles and trim in order to
accommodate specific religious, ethnic, or other personal preferences.
1
METAL CASKETS. Metal caskets are generally categorized by whether the
casket is non-gasketed or gasketed, and by material (i.e. bronze, copper or
steel) and in the case of steel, by the gauge, or thickness, of the metal. The
Company's metal casket line consists of non-gasketed 20 gauge steel, gasketed
20, 18 and 16 gauge steel, and gasketed stainless steel, copper and bronze. The
non-gasketed 20 gauge steel line is the least expensive of the metal caskets,
and the prices generally increase in the order listed above.
WOOD CASKETS. The Company's wood caskets are manufactured from nine
different species of wood, as well as from veneer and paper covered particle and
fiber board. The species of wood used are poplar, pine, ash, oak, maple, birch,
cherry, walnut and mahogany. The Company is the largest manufacturer of all-wood
constructed caskets, which are manufactured using pegged and dowelled
construction, and include no metal parts. All-wood constructed caskets are
preferred by certain religious groups.
OTHER CASKETS. The Company's other caskets, including cremation
containers, are manufactured from particle board and corrugated materials
covered with cloth or paper. These products are used, although not exclusively,
in cremation.
COMPONENTS. The Company manufactures casket components for its own use and
for sale to other casket manufacturers and assemblers. These components include
stamped metal body parts, metal locking mechanisms for gasketed metal caskets,
adjustable beds, interior fabrics and panels, and metal and plastic handles and
corners. The Company dyes fabrics used for casket interiors and also processes a
line of fabrics for use in the production of cloth-covered caskets. In addition,
embroidered panel fabrics are also produced by the Company.
VAULTS. Metal vaults are manufactured from various gauges of steel, as
well as stainless steel, copper and bronze. The vaults have various exterior
finishes, including paint and porcelain.
MERCHANDISING AND DESIGN PRODUCTS AND SERVICES. The Company provides
product planning, merchandising and display products and consulting services, as
well as architectural and interior design services to funeral service
businesses. These products and services assist funeral service professionals in
providing value and satisfaction to their client families.
DISTRIBUTION AND MARKETING
The Company currently markets its finished caskets through Company and
privately owned distributors. In 1997 approximately 40% of the Company's
finished casket sales were made through Company owned distributors and
approximately 60% through privately owned distributors. Burial vaults are sold
directly to funeral home and cemetery operators as well as to privately owned
distributors. In 1997 approximately 1% of the Company's net sales were to
customers outside the United States. The Company normally fills orders within
one month and, therefore, does not have a significant backlog of unfilled
orders.
Though York's distributors generally concentrate their sales and service
efforts in their primary market area, they are not assigned exclusive
territories. York believes that each of its distributors is committed to
providing the highest quality service to the funeral homes within its primary
market area.
York's major marketing efforts include a recently introduced merchandise
planning and display concept, pre-need insurance and trust programs, a cremation
training and merchandising program, volume purchase programs, tour/training
programs and The York Children's FoundationSM.
PRE-NEED INSURANCE AND TRUST PROGRAMS. In recent years, funeral homes have
become more active in the marketing of prearranged funeral plans as a way to
maintain and increase future market share. Through a wholly-owned subsidiary,
the Company has introduced a program offering insurance policies to funeral
homes for the funding of prearranged funerals. This program, which includes
policies underwritten by a major life insurance company, is designed to provide
a financial incentive to funeral home operators to specify York products through
insurance funded features, which offer additional payments to offset increases
in the cost of a York casket. The Company has recently expanded its pre-need
program to include a trust alternative, similar to the insurance funded program,
which allows the Company to serve all segments of the pre-need market. These
programs are expected to enhance the Company's future market share.
2
VOLUME PURCHASE PROGRAMS. York offers several discount and rebate programs
to funeral homes and groups based on the volume of York caskets purchased. The
costs of these programs are shared equally by York and the applicable
distributor.
TOUR/TRAINING PROGRAMS. The Company provides a plant tour program for
funeral directors, including training sessions which are accredited for
continuing education by many states. These programs provide funeral directors
with valuable product information and increase their knowledge of and goodwill
toward the Company.
THE YORK CHILDREN'S FOUNDATIONSM. The York Children's FoundationSM (the
"Foundation") supports charitable children's organizations across the country.
As a means of memorializing persons buried in York caskets, York and the
applicable distributor make a donation to the Foundation in the name of the
deceased each time a York casket is purchased by a family and registered with
the Foundation. Grants made by the Foundation allow the sponsoring funeral home
to promote its name and goodwill within its local community and allow the
Company to further differentiate itself from its competitors.
SUPPLY AGREEMENT WITH SERVICE CORPORATION INTERNATIONAL
The Company is party to a supply agreement (the "Supply Agreement") with
an affiliate of Service Corporation International ("SCI"). The Supply
Agreement requires the purchase of specific annual dollar volumes of the
Company's caskets and expires at the end of 1998. Sales under the Supply
Agreement are made through the Company's distributors at a discount to list
price. The discount is shared equally by the Company and the applicable
distributor. Sales under the Supply Agreement accounted for approximately 22% of
the Company's net sales in 1997. In early 1998, SCI notified the Company that it
would not renew the Supply Agreement and beginning January 1, 1999 it would
purchase substantially all of its casket requirements from a supplier other than
York. See Note 11 of Notes to the Consolidated Financial Statements.
MANUFACTURING
Metal casket parts are produced by stamping steel, copper and bronze into
casket body parts. Locking mechanisms and adjustable beds are produced by
stamping and assembling a variety of steel parts. Casket handles and corners are
produced from stamped or cast metal or injection molded plastic. In the
production of wood caskets, the Company purchases from sawmills various species
of uncured wood, which it dries and cures. The cured wood is cut into casket
components. Other caskets are produced by cutting and forming particle board and
corrugated materials into component parts for assembly.
The completed metal stampings, wood and corrugated components are then
assembled. A variety of designs are produced by combining multiple parts and
components that are attached to the main casket body. Other assembly areas
continue the manufacturing process through application of various paints, stains
and other finishes and installation of interiors. Metal vaults are manufactured
in a manner very similar to that used to manufacture metal caskets.
SUPPLIERS AND RAW MATERIALS
The primary basic materials required for the Company's casket and vault
manufacturing operations are cold rolled steel, lumber and corrugated materials.
The Company also purchases copper, bronze, stainless steel and textiles.
The Company typically negotiates blanket purchase orders or 12-month supply
agreements with large, integrated steel suppliers that have demonstrated timely
delivery, high quality material and competitive prices. The Company purchases
lumber from a number of sawmills and distributors. The Company purchases
approximately 90% of its lumber from approximately 25 sawmills within 150 miles
of its wood casket manufacturing facility in York, Pennsylvania. The Company
normally purchases uncured lumber and cures it at its plant. Corrugated material
is obtained primarily from a major supplier of wood and paper products.
3
The Company's manufacturing and sourcing systems allow it to meet customer
requirements for quick deliveries and minimize its need to carry significant raw
material inventories. The Company has not experienced any significant shortages
of raw materials and normally does not carry inventories of raw materials or
finished products in excess of those reasonably calculated to meet production
and shipping schedules. Although the Company purchases some of its supplies and
raw materials from a limited number of suppliers, the Company believes that
alternative sources are readily available at comparable prices.
COMPETITION
The casket industry is highly competitive. The Company competes with other
casket manufacturers on the basis of product quality, price, service, design
availability and breadth of product line. The Company provides a full line of
caskets that it believes is more comprehensive than any of its major
competitors. Although there are a large number of casket industry participants,
the three largest casket manufacturers account for over 60% of the finished
caskets produced. In addition to York, Batesville Casket Company, a subsidiary
of Hillenbrand Industries, Inc., and Aurora Casket Company, Inc. are the most
significant industry participants.
The Company believes that it is the largest supplier of casket components
to other casket manufacturers and assemblers. While price is a significant
factor in the sale of stamped metal parts and other casket components, other
factors, including quality, service and design availability, are also important.
The Company has a number of unique design features that are not available
elsewhere, such as embossed steel, copper and bronze parts.
INTELLECTUAL PROPERTY
The Company owns a number of domestic trademarks, service marks, copyrights
and patents. However, the Company believes the loss of any or a significant
number of its trademarks, service marks, copyrights or patents would not have a
material impact on its operations.
EMPLOYEES
The Company has approximately 1,700 employees, substantially all of whom
work full-time. Approximately 72% are engaged in manufacturing activities, 12%
are engaged in field sales and distribution activities with the balance holding
managerial, administrative, clerical or other office positions. Approximately
200 employees are covered by collective bargaining agreements, principally
production workers at the Lynn, Indiana and Birmingham, Alabama plants, whose
agreements expire in June 1998 and July 2000, respectively, and certain
transportation employees. The Company believes that its relationship with its
employees is good.
ITEM 2. PROPERTIES
The Company owns eight production facilities and four finished casket
distribution warehouse facilities. The Company also leases twenty-two finished
casket distribution warehouse facilities and three manufacturing facilities.
Additionally, the Company leases warehouses, with an aggregate of approximately
67,000 square feet near its York, Pennsylvania; Lynn, Indiana and Marshfield,
Missouri assembly plants in order to stock finished caskets, allowing the
Company to more effectively schedule production and better serve its customers.
4
The Company believes that its production and distribution warehouse
facilities are adequate to support its current and projected level of
operations. The following table sets forth additional information regarding the
Company's manufacturing facilities:
APPROXIMATE
SQUARE
LOCATION PRINCIPAL PRODUCTS OR ACTIVITY FEET
- ------------------------------------- --------------------------------------------- ------------
York, Pennsylvania................... Manufacture of finished wood caskets 307,000
Marshfield, Missouri................. Manufacture of finished metal caskets 86,000
Lynn, Indiana........................ Manufacture of finished metal caskets 76,000
Richmond, Indiana.................... Manufacture of finished metal caskets 21,000
West Point, Mississippi.............. Manufacture of finished metal caskets 99,000
Richmond, Indiana.................... Metal stamping, manufacture of casket 92,000
beds, locks and hardware items
Anniston, Alabama.................... Metal stamping 63,000
Lawrenceville, Georgia............... Manufacture of metal casket handles and 129,000
corners and processing of interior fabrics
Richmond, Indiana.................... Manufacture of cloth covered caskets and 164,000
cremation containers (leased)
Birmingham, Alabama.................. Manufacture of metal burial vaults (leased) 37,000
Richmond, Indiana.................... Injection molding of plastic parts, 18,000
principally casket corners (leased)
The following table sets forth additional information regarding the
Company's distribution warehouse facilities:
APPROXIMATE
AGGREGATE
NUMBER OF SQUARE
STATE LOCATIONS FEET
- ------------------------------------- ---------- ------------
Alabama.............................. 1 14,000
California........................... 1 23,000
Connecticut.......................... 1 14,000
Florida.............................. 3 38,000
Georgia.............................. 1 14,000
Illinois............................. 2 29,000
Indiana.............................. 2 13,000
Kentucky............................. 1 14,000
Louisiana............................ 1 15,000
Maine................................ 1 5,000
Massachusets (owned)................. 1 18,000
Michigan............................. 1 16,000
Mississippi (owned).................. 1 20,000
New Mexico........................... 1 8,000
North Carolina....................... 1 15,000
Ohio................................. 3 40,000
Texas (2 owned)...................... 4 89,000
In addition to its production and warehouse facilities, the Company leases
approximately 19,000 square feet of space for executive and administrative
offices in Houston, Texas. The lease term expires November 30, 1998. The Company
also owns a 20,400 square foot facility in New Orleans, Louisiana which serves
as its merchandising and design center.
5
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. The Company currently is not engaged in any legal
proceeding that is expected to have a material adverse effect on the Company.
REGULATORY MATTERS
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment and the health and
safety of employees.
In 1991, the Georgia Department of Natural Resources (the "GDNR") issued
a Notice of Violation -- Consent Order alleging that the Company's
Lawrenceville, Georgia facility was storing and treating hazardous wastes
without a permit and was otherwise in violation of certain hazardous waste
regulations in the operation of its electroplating line and associated
wastewater treatment system. On November 8, 1991, the Company and the GDNR
entered into a Consent Order (the "1991 Order") in settlement of the
allegations. The 1991 Order was subsequently amended in 1993 to reflect the plan
to close the facility as a landfill and to require some additional remediation,
monitoring and investigation commitments on the Company's part. The GDNR
approved the revised closure plan and post-closure plan for the facility in
August 1994. Moreover, the GDNR issued a Hazardous Waste Facility Permit
effective September 27, 1995, to document these post-closure care requirements.
The Company had a reserve of approximately $1.4 million for environmental
remediation at December 31, 1997, and has provided financial assurance in the
form of a letter of credit in the amount of approximately $1.1 million to secure
its post-closure obligations. See Note 8 of Notes to the Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded in the over-the-counter market
since April 2, 1996 and quoted on the Nasdaq National Market under the symbol
"YRKG". On December 31, 1997, 240 stockholders of record held the Company's
8,906,950 shares of outstanding common stock. The Company believes there are
approximately 1,900 beneficial owners of its common stock.
The following table presents the Company's high and low common stock
prices, as well as dividends per share, since April 2, 1996:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
--------- --------- ---------- --------- --------- ----------
First Quarter........................ $23.00 $ 18.00 $ 0.04 -- -- --
Second Quarter....................... $19.25 $ 18.00 $ 0.04 $ 19.00 $15.00 $ 0.04
Third Quarter........................ $22.25 $ 17.25 $ 0.04 $ 17.75 $14.875 $ 0.04
Fourth Quarter....................... $26.625 $ 20.00 $ 0.04 $ 19.00 $15.00 $ 0.04
The Company has paid dividends on a quarterly basis since the second
quarter of 1995. Since its stock has been publicly traded, the Company has
issued seven consecutive quarterly dividends of $.04 per share. Any future
change in the Company's dividend policy will be made at the discretion of the
Board of Directors based upon pertinent factors, such as financial condition of
the Company, bank covenants, capital and expansion requirements and other
factors the Board of Directors may consider.
6
ITEM 6. SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net sales............................ $ 178,690 $ 149,178 $ 140,577 $ 131,391 $ 117,209
Cost of goods sold................... 130,144 116,408 111,939 104,906 93,921
---------- ---------- ---------- ---------- ----------
Gross profit......................... 48,546 32,770 28,638 26,485 23,288
Other operating expenses............. 28,439 13,359 11,097 10,695 9,110
---------- ---------- ---------- ---------- ----------
Operating income..................... 20,107 19,411 17,541 15,790 14,178
Interest expense, net................ 650 983 3,147 3,244 3,067
---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary
item............................... 19,457 18,428 14,394 12,546 11,111
Income tax provision................. 7,394 6,907 5,554 4,907 4,237
---------- ---------- ---------- ---------- ----------
Income before extraordinary item..... 12,063 11,521 8,840 7,639 6,874
Extraordinary item, net of tax....... -- (736) -- (436) --
---------- ---------- ---------- ---------- ----------
Net income........................... $ 12,063 $ 10,785 $ 8,840 $ 7,203 $ 6,874
========== ========== ========== ========== ==========
Earnings per share:
Basic:
Income before extraordinary
item.................... $ 1.38 $ 1.53 $ 1.60 $ 1.55 $ 1.40
========== ========== ========== ========== ==========
Net income................. $ 1.38 $ 1.43 $ 1.60 $ 1.46 $ 1.40
========== ========== ========== ========== ==========
Diluted:
Income before extraordinary
item.................... $ 1.34 $ 1.46 $ 1.47 $ 1.29 $ 1.16
========== ========== ========== ========== ==========
Net income................. $ 1.34 $ 1.37 $ 1.47 $ 1.22 $ 1.16
========== ========== ========== ========== ==========
Average shares outstanding:
Basic...................... 8,712,496 7,517,662 5,519,136 4,935,964 4,914,325
========== ========== ========== ========== ==========
Diluted.................... 8,978,689 7,873,900 6,030,402 5,920,323 5,901,283
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
AS OF DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Working capital...................... $ 56,607 $ 53,736 $ 29,202 $ 20,377 $ 7,854
Total assets......................... 130,545 102,896 74,873 64,732 59,029
Long-term debt, less current
maturities......................... 25,925 26,435 36,210 36,710 30,216
Stockholders' equity................. 75,647 56,072 18,758 9,661 2,370
OPERATING DATA:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Capital expenditures................. $ 9,376 $ 4,717 $ 4,381 $ 3,993 $ 2,738
Depreciation and amortization........ 5,212 4,092 3,741 3,716 3,371
- ------------
(1) Prior year financial information has been restated and current year
information adjusted to reflect an acquisition made in 1997 which was
accounted for as a pooling of interests. See Note 2 of Notes to the
Consolidated Financial Statements.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto, included
elsewhere in this Form 10-K. Historical financial information has been restated
to reflect the acquisition of Elder Davis, Inc. in July 1997, which was
accounted for as a pooling of interests. Further, the financial information has
been reclassified to include certain warehouse and delivery expenses, previously
included in cost of sales, with selling, general and administrative expenses,
and to report such expenses as other operating expenses. The Company believes
that this presentation more appropriately reflects its cost structure as it
expands its sales and distribution operations.
GENERAL
The Company is the second largest casket manufacturer in the United States
and produces a wide variety of caskets, as well as casket components and burial
vaults. The Company's finished caskets are marketed through a network of Company
and privately owned distributors, which serve an estimated 15,000 domestic
funeral homes, as well as certain foreign markets. Casket components are sold to
other casket manufacturers and assemblers (including certain of the Company's
distributors). Burial vaults are sold directly to funeral home and cemetery
operators as well as to privately owned distributors.
In certain markets, the Company believes that its privately owned
distributors will continue to be the most effective way to market the Company's
products and expects to continue to strongly support the efforts of these
privately owned distributors. However, the Company has, and will continue to,
acquire certain of its distributors if the Company believes that such
acquisitions would be complementary and result in operating efficiencies. During
1997, the Company acquired distribution companies serving southeast and
southwest United States and northern California markets. The Company already
owned distribution operations serving New England and certain midwest markets.
In April 1996, the Company completed an initial public offering (the
"Offering") of 2,145,000 shares of its common stock. Proceeds to the Company
from the Offering, net of associated costs, were approximately $25.3 million.
The Company used $11.0 million of the proceeds to repay the Subordinated Series
A Note (the "Series A Note") in the second quarter of 1996. The balance of the
proceeds was available for working capital and general corporate purposes,
including acquisitions.
Funeral homes are required by federal regulation to provide price lists to
their customers, and generally publish such price lists annually. As a result,
the casket manufacturing industry has established the industry-wide practice of
setting its prices every January. In setting these prices, the Company considers
expected raw material prices, competitive considerations, the general state of
the economy and inflationary expectations. This industry practice requires the
Company to set its prices in anticipation of, rather than in response to,
changes in raw material and other costs. Over the past three years, the
Company's annual weighted average price increases have ranged from 3.0% to 5.0%.
Limitations on the timing of price increases relative to changes in costs may
cause fluctuations in operating margins, and therefore, make quarterly year-
to-year comparisons less meaningful. The major domestic casket manufacturers
have all developed discount and rebate programs, which are commonplace in the
casket manufacturing industry, designed to encourage volume purchases by funeral
homes. In the case of the Company, these discounts are absorbed equally between
the Company and the distributors.
8
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods presented:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales............................... 100.0% 100.0% 100.0%
Gross profit............................ 27.2 22.0 20.4
Other operating expenses................ 15.9 9.0 7.9
--------- --------- ---------
Operating income........................ 11.3 13.0 12.5
Interest expense, net................... .4 .7 2.2
Income tax provision.................... 4.1 4.6 4.0
--------- --------- ---------
Net income before extraordinary item.... 6.8 7.7 6.3
Net income.............................. 6.8% 7.2% 6.3%
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased $29.5 million, or 19.8%. The increase reflects an
approximate 4% increase in same store finished casket unit volume, added volume
of acquired manufacturing companies and increased sales margins from
distributors acquired in late 1996 and during 1997, as well as increased net
sales prices.
Gross profit increased $15.8 million, or 48.1%. Gross margin increased from
22.0% to 27.2%. The improvement in gross margin reflects the effects of late
1996 and 1997 distributor and service company acquisitions, which generally
generate higher gross margins relative to manufacturing facilities, partially
offset by slightly lower than average margins from manufacturing facilities
acquired in 1997, due to a mix of lower margin products. Additionally, the
Company incurred approximately $2.9 million of expenses related to the
realignment of its manufacturing facilities in order to focus production of
various product lines at specific plants during the second half of 1997. These
realignment expenses relate primarily to labor inefficiencies, production
disruption costs and severance.
Other operating expenses increased $15.1 million, or 112.9%, and as a
percentage of net sales, increased from 9.0% to 15.9%. The increase in other
operating expenses as a percentage of net sales primarily results from the
acquisition of distribution and marketing companies that incur significant
selling, general and administrative costs, continued investment in pre-need
insurance marketing efforts, increased personnel costs, and approximately
$200,000 of transaction expenses related to an acquisition accounted for as a
pooling of interests, partially offset by increased sales volume.
Net interest expense decreased $333,000, or 33.9%. The decrease reflects
lower interest expense due to the early extinguishment of the Series A Note in
April of 1996 and higher interest earnings due to increased invested cash
balances.
The Company's effective tax rate increased from 37.5% to 38.0%. The
effective rate for 1997 reflects a decrease in nondeductible expenses and an
increase in state income taxes and the Company's Federal statutory tax rate.
In 1996, an extraordinary item of $736,000, net of tax, resulted from the
write-off of unamortized debt discount associated with the early extinguishment
of the Series A Note.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased $8.6 million, or 6.1%. The increase reflects an
approximate 4% increase in finished casket volume, increased components sales,
acquisitions completed in the fourth quarter of 1996, and increased net sales
prices, partially offset by disproportionate growth in lower priced metal
caskets.
Gross profit increased $4.1 million, or 14.4%. Gross margins increased from
20.4% to 22.0%. The increases primarily reflect the increase in casket and
components volumes, favorable raw material costs, increased margins attributable
to acquired distribution businesses and increased net sales prices, partially
offset by changes in product mix.
9
Other operating expenses increased $2.3 million, or 20.4%, and as a
percentage of net sales, increased from 7.9% to 9.0%. The increase in other
operating expenses as a percentage of net sales primarily results from the
acquisition of distribution and marketing companies that incur significant
selling, general and administrative costs, continued investment in pre-need
insurance marketing efforts, costs associated with being a public company and
increased personnel costs, partially offset by increased sales volume.
Net interest expense decreased $2.2 million, or 68.8%. The decrease
reflects lower interest expense due to the early extinguishment of the Series A
Note and higher interest earnings due to increased invested cash balances.
The Company's effective tax rate decreased from 38.6% to 37.5%. The
effective rate for 1996 reflects a decrease in state income taxes and
nondeductible expenses, partially offset by an increase in the Company's Federal
statutory tax rate.
In 1996, an extraordinary item of $736,000, net of tax, resulted from the
write-off of unamortized debt discount associated with the early extinguishment
of the Series A Note.
LIQUIDITY AND CAPITAL RESOURCES
Until the Offering, the Company had historically relied on cash flow from
operations and borrowings from banks and other lenders to fund its operations.
Cash and cash equivalents were $15.5 million at December 31, 1997,
representing a decrease of $16.5 million from December 31, 1996. In 1997, cash
flows from operations totaled approximately $8.5 million, cash used in investing
activities totaled approximately $18.6 million and cash used in financing
activities totaled $6.4 million.
Capital expenditures were $9.4 million in 1997 and $4.7 million in 1996.
The Company has budgeted capital expenditures for 1998 of approximately $11.7
million. Major 1998 expenditures include primarily productivity improvement and
information systems projects. These expenditures are expected to enable the
Company to increase operating efficiency, reduce costs, further improve product
quality and more effectively support the Company's information needs.
Proceeds from the issuance of common stock were approximately $265,000 and
$25.3 million in 1997 and 1996, respectively. These proceeds reflect the
Offering and the exercise of stock options issued to certain key employees.
Long-term debt, including current maturities, at December 31, 1997, totaled
$29.5 million, which primarily consisted of $25.0 million of senior notes (the
"Senior Notes") and subordinated promissory notes totaling $4.5 million issued
in conjunction with an acquisition.
During 1997, the Company maintained a $6.0 million revolving credit
facility with a major bank. The revolving credit facility, which expired January
31, 1998, was unsecured, provided for borrowings and the issuance of letters of
credit up to the lesser of $6.0 million or a borrowing base, consisting of
accounts receivable and inventory. At December 31, 1997, no borrowings were
outstanding, $2.3 million of letters of credit were outstanding and $3.7 million
was available under the revolving credit facility. The terms of this facility
called for an interest rate, at the Company's option, to be based upon either an
adjusted eurodollar rate or an adjusted prime rate. The revolving credit
facility required that certain financial conditions and ratios be maintained and
restricted the level of dividend payments and additional borrowings.
On March 12, 1998, the Company entered into a five year revolving credit
facility (the "Revolver") with a major bank. The Revolver, which is unsecured,
provides for borrowings and the issuance of letters of credit up to $60.0
million through March 11, 2001, $50.0 million from March 12, 2001 through March
11, 2002, and $40.0 million from March 12, 2002 through March 11, 2003. The
terms of the facility call for an interest rate, at the Company's option to be
based upon an adjusted LIBOR rate or the prime rate. Adjustment factors for the
LIBOR rate are based upon certain financial ratios, as defined, with a specified
ceiling (LIBOR + 1.375%) and floor (LIBOR + .875%). The Revolver requires that
certain financial conditions and ratios be maintained, restricts the level of
dividend payments and contains cross-default
10
provisions with the Company's other borrowing facilities. The Revolver requires
a fee of .25%, payable quarterly, on the unused portion of the facility.
On March 16, 1998 the Company consummated its merger with Colonial Guild,
Ltd., a leading manufacturer of bronze memorialization and commemorative
products (see Note 14 of Notes to the Consolidated Financial Statements). The
purchase price of approximately $78.4 million was financed using the Company's
cash and the funds available under the Revolver. After completion of the
acquisition, approximately $5.2 million is available under the Revolver.
Management believes that current cash balances, cash flows from operations
and the remaining borrowing capacity available under the Revolver are sufficient
to meet the Company's anticipated capital expenditures and other operating
requirements for the foreseeable future.
THE YEAR 2000 ISSUE
The Company has recognized the need to ensure that its computer operations
and operating systems will not be adversely affected by the upcoming calendar
year 2000 and is cognizant of the time sensitive nature of the issue. The
Company has assessed how it may be impacted by year 2000 and has formulated and
commenced implementation of a plan to address information systems issues. This
plan involves a combination of hardware and software modifications, upgrades and
replacement, including implementation of a new software package which will not
only address the year 2000 issue, but provide additional business process
functionality. The Company estimates that the cost of year 2000 compliance for
its information systems, combined with capital expenditures for hardware and
software involving functionality improvements will approximate $5.0 million. The
Company does not believe that year 2000 compliance issues with respect to
customers and suppliers will have a material effect on its operations or
financial results.
INFLATION
Inflation has not had a material net impact on the Company over the past
three years nor is it anticipated to have a material impact for the foreseeable
future.
SELECTED QUARTERLY OPERATING RESULTS AND SEASONALITY
Historically, the Company's operations have experienced seasonal
variations. Generally, the Company's net sales are highest in the first quarter
and lowest in the third quarter of each year. These fluctuations are due in part
to the seasonal variance in the death rate, with a greater number of deaths
generally occurring in cold weather months, and the timing of the Company's
annual manufacturing facility vacation shutdowns, which occur primarily in the
third quarter. In addition, operating results can vary between quarters of the
same or different years due to, among other things, fluctuations in the number
of deaths, changes in product mix, and the timing of annual price increases
relative to changes in costs. As a result, the Company experiences variability
in its operating results on a quarterly basis, which may make quarterly
year-to-year comparisons less meaningful.
11
The following table sets forth certain income statement data for each
quarter of 1997 and 1996:
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Net sales............................... $45,551 $45,611 $ 40,413 $47,115
Gross profit............................ 12,276 12,057 11,192 13,021
Operating income........................ 6,481 5,245 2,989 5,392
Net income.............................. 3,956 3,206 1,792 3,109
Earnings per common share:
Basic.............................. .47 .37 .20 .35
Diluted............................ .46 .36 .20 .34
1996(2)
Net sales............................... $42,113 $37,949 $ 31,333 $37,783
Gross profit............................ 9,405 8,286 6,413 8,666
Operating income........................ 6,280 5,014 3,456 4,661
Income before extraordinary item........ 3,461 3,065 2,163 2,832
Net income.............................. 3,461 2,329 2,163 2,832
Earnings per common share:
Basic.............................. .57 .29(1) .27 .35
Diluted............................ .57 .28(1) .26 .33
- ------------
(1) Includes an extraordinary charge of $.10 per share basic and $.09 per share
diluted, net of tax, for the write-off of unamortized debt discount.
(2) Previously issued quarterly financial information has been restated to
reflect an acquisition which occurred in the third quarter of 1997 and was
accounted for as a pooling of interests. See Note 2 of Notes to the
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements. Such statements are
based upon management's current expectations and assumptions. Important factors
that could cause actual results to differ materially from those in
forward-looking statements included herein include, among others, customer
demands and the Company's reaction to such demands, changes in mortality and/or
cremation rates, further consolidation in the funeral service industry, and
fluctuations in the prices of raw materials and other manufacturing costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are incorporated under
Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Proposal No. 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Exchange Act of 1934, as amended (the
"Exchange Act"), within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
12
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
caption "Compensation Tables", "Director Compensation", "Employment
Arrangements" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Common Stock Outstanding and Principal
Holders Thereof" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain relationships and
transactions with management and other related parties of the Company is hereby
incorporated by reference from the information appearing under the caption
"Certain Transactions" in the Company's definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1997.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated.
PAGE
----
Report of Independent Public
Accountants............................. F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996............ F-3
Consolidated Statements of Income for
the Years Ended
December 31, 1997, 1996 and 1995...... F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended
December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows
for the Years Ended
December 31, 1997, 1996 and 1995...... F-6
Notes to the Consolidated Financial
Statements............................ F-7
(A) 2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
PAGE
----
Report of Independent Accountants
on Financial Statement Schedule... F-2
Financial Statement Schedule
II -- Valuation and Qualifying
Accounts...................... S-1
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(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.
14
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
3.1 -- Certificate of Incorporation dated January 22, 1996 (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 [Reg. No. 333-00846]) ("Form
S-1")
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to Form S-1)
4.1 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Form S-1)
10.1 -- Representation Agreement effective August 1, 1992, by and between The York Group, Inc. and
International Funeral Associates (incorporated by reference to Exhibit 10.1 to Form S-1)
10.2 -- Agreement between York Casket Company-IN and District Lodge 90, and Local Lodge No. 2532
of the International Association of Machinists and Aerospace Workers, AFL-CIO dated June
12, 1995 (incorporated by reference to Exhibit 10.2 to Form S-1)
10.3 -- Inventory Purchase Agreement by and among The York Group, Inc., Yorktowne Caskets, Inc.
and Meridian Bank dated February 22, 1994 (incorporated by reference to Exhibit 10.3 to
Form S-1)
10.4 -- Casket Supply and Requirements Agreement by and between York Acquisition Corp. n/k/a The
York Group, Inc. and SCI Funeral Services, Inc., and the First Amendment to Casket Supply
and Requirements Agreement dated December 30, 1992 (incorporated by reference to Exhibit
10.5 to Form S-1)
10.5 -- Credit Agreement between The York Group, Inc. and Texas Commerce Bank National Association
dated June 30, 1994, as amended (incorporated by reference to Exhibit 10.7 to Form S-1)
10.6 -- Senior Note Purchase Agreement among The York Group, Inc. and The Variable Annuity Life
Insurance Company dated June 30, 1994 (incorporated by reference to Exhibit 10.8 to Form
S-1)
10.7 -- 1990 Stock Incentive Plan (incorporated by reference to Exhibit 10.10 to Form S-1)
10.8 -- 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.11 to Form S-1)
10.9 -- 1996 Employee Stock Option Plan (incorporated by reference to Exhibit 10.12 to Form S-1)
10.10 -- 1996 Independent Director Stock Option Plan (incorporated by reference to Exhibit 10.13 to
Form S-1)
10.11 -- The York Group, Inc. Nonqualified Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
10.12 -- Employment Agreement between The York Group, Inc. and Gerald D. Runnels dated January 17,
1997
10.13 -- The York Group, Inc. Non-Employee Director Cash and Equity Compensation Plan (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.14 -- Form of Distributor Agreement
10.15 -- Distributor Agreement between The York Group, Inc. and Artco Casket Company, Inc. dated
effective January 1, 1997 (reference Exhibit 10.14 of this Annual Report on Form 10-K for
the year ended December 31, 1997)
10.16 -- Agreement and Plan of Merger by and among The York Group, Inc., Colonial Guild Acquisition
Corp., and Colonial Guild, Ltd. dated February 17, 1998 (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K dated March 25, 1998)
10.17 -- Credit Agreement among The York Group, Inc., ABN-AMRO Bank, N.V., Houston Agency and
certain financial institutions dated March 12, 1998
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K
Form 8-K filed on March 25, 1998
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 30, 1998 THE YORK GROUP, INC.
By: /s/ DAVID F. BECK
DAVID F. BECK
VICE PRESIDENT FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------- ---------------
/s/ELDON P. NUSS Chairman of the Board March 30, 1998
ELDON P. NUSS
/s/BILL W. WILCOCK President, Chief Executive Officer March 30, 1998
BILL W. WILCOCK and Director (Principal Executive
Officer)
/s/DAVID F. BECK Vice President Finance, Chief March 30, 1998
DAVID F. BECK Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
/s/BRUCE E. ELDER Director March 30, 1998
BRUCE E. ELDER
/s/KIRK P. PENDLETON Director March 30, 1998
KIRK P. PENDLETON
/s/ROBERT T. RAKICH Director March 30, 1998
ROBERT T. RAKICH
/s/ROGER W. SEVEDGE Director March 30, 1998
ROGER W. SEVEDGE
16
THE YORK GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public
Accountants.................... F-2
Consolidated Balance Sheets as
of December 31, 1997 and
1996........................... F-3
Consolidated Statements of
Income for the Years Ended
December 31, 1997, 1996 and
1995........................... F-4
Consolidated Statements of
Stockholders' Equity for the
Years
Ended December 31, 1997, 1996
and 1995....................... F-5
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1997, 1996 and
1995........................... F-6
Notes to the Consolidated
Financial Statements........... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of The York Group, Inc.:
We have audited the accompanying consolidated balance sheets of The York
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The York
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, 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.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Lancaster, Pennsylvania
February 16, 1998
F-2
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 15,478 $ 31,940
Trade accounts and notes
receivable, net of allowance
for doubtful accounts and
returns and allowances of
$3,117 in 1997 and $1,829 in
1996
Stockholders and
affiliates.............. 5,128 5,377
Other...................... 16,857 7,652
Inventories, net................ 36,325 19,838
Prepaid expenses................ 1,228 1,636
Deferred tax asset.............. 4,506 2,258
---------- ----------
Total current assets....... 79,522 68,701
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET... 38,718 30,347
GOODWILL, NET........................ 10,867 2,888
DEFERRED COSTS AND OTHER ASSETS (net
of accumulated amortization of $909
in 1997 and $642 in 1996).......... 1,438 960
---------- ----------
Total assets............... $ 130,545 $ 102,896
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 3,608 $ 633
Accounts payable................ 4,409 4,008
Income taxes payable............ 1,565 491
Accrued expenses................ 13,333 9,833
---------- ----------
Total current
liabilities............. 22,915 14,965
---------- ----------
LONG-TERM DEBT....................... 25,925 26,435
---------- ----------
OTHER NONCURRENT LIABILITIES......... 870 1,275
---------- ----------
DEFERRED TAX LIABILITY............... 5,188 4,149
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note
8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
1,000,000 shares authorized and
unissued....................... -- --
Common stock, $.01 par value,
25,000,000 shares authorized;
8,906,950 and 8,387,119 shares
issued and outstanding......... 89 84
Additional paid-in capital...... 40,209 30,946
Retained earnings............... 35,349 25,042
---------- ----------
Total stockholders'
equity.................. 75,647 56,072
---------- ----------
Total liabilities and
stockholders' equity.... $ 130,545 $ 102,896
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
NET SALES (including sales to
stockholders and affiliates of
$50,426 in 1997, $74,886 in 1996
and $82,416 in 1995)............... $ 178,690 $ 149,178 $ 140,577
COST OF SALES........................ 130,144 116,408 111,939
---------- ---------- ----------
Gross profit............... 48,546 32,770 28,638
OTHER OPERATING EXPENSES............. 28,439 13,359 11,097
---------- ---------- ----------
Operating income........... 20,107 19,411 17,541
OTHER INCOME (EXPENSE):
Interest income.................... 1,679 1,673 742
Interest expense................... (2,329) (2,656) (3,889)
---------- ---------- ----------
(650) (983) (3,147)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM................. 19,457 18,428 14,394
INCOME TAX PROVISION................. 7,394 6,907 5,554
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM..... 12,063 11,521 8,840
EXTRAORDINARY ITEM, net of applicable
income taxes of $442 (Note 12)..... -- (736) --
---------- ---------- ----------
NET INCOME........................... $ 12,063 $ 10,785 $ 8,840
========== ========== ==========
EARNINGS PER SHARE:
Basic:
Income before extraordinary
item............................ $ 1.38 $ 1.53 $ 1.60
========== ========== ==========
Net income...................... $ 1.38 $ 1.43 $ 1.60
========== ========== ==========
Diluted:
Income before extraordinary
item............................ $ 1.34 $ 1.46 $ 1.47
========== ========== ==========
Net income...................... $ 1.34 $ 1.37 $ 1.47
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ADDITIONAL
NUMBER COMMON PAID-IN RETAINED
OF SHARES STOCK CAPITAL EARNINGS
---------- ------- ----------- ---------
BALANCE AT DECEMBER 31, 1994......... 4,966,255 $ 49 $ 97 $ 9,515
Common stock issued:
Exercise of common stock
options......................... 174,000 2 433 --
Exercise of warrants............ 758,400 8 1,889 --
Common stock awards............. 2,464 -- 16 --
Net income......................... -- -- -- 8,840
Dividends declared ($.375 per
share)............................. -- -- -- (2,091)
---------- ------- ----------- ---------
BALANCE AT DECEMBER 31, 1995......... 5,901,119 59 2,435 16,264
Common stock issued:
Proceeds from initial public
offering, net of
issuance costs................ 2,145,000 21 25,311 --
Exercise of common stock
options....................... 176,000 2 438 --
Acquisitions.................... 165,000 2 2,762 --
Net income......................... -- -- -- 10,785
Dividends declared ($.245 per
share)............................. -- -- -- (2,007)
---------- ------- ----------- ---------
BALANCE AT DECEMBER 31, 1996......... 8,387,119 84 30,946 25,042
Common stock issued:
Exercise of common stock
options......................... 26,500 -- 265 --
Acquisitions.................... 493,331 5 8,998 --
Net income......................... -- -- -- 12,063
Dividends declared ($.16 per
share)............................. -- -- -- (1,756)
---------- ------- ----------- ---------
BALANCE AT DECEMBER 31, 1997......... 8,906,950 $ 89 $40,209 $ 35,349
========== ======= =========== =========
The accompanying notes are an integral part of these financial statements.
F-5
THE YORK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 12,063 $ 10,785 $ 8,840
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization...... 5,212 4,092 3,741
Provision for doubtful accounts.... 104 (86) 31
Loss on disposition of property,
plant and equipment.............. 187 68 46
Deferred income tax (benefit)
provision........................ (644) 165 352
Write-off of debt discount......... -- 1,178 --
Decrease/(increase) in:
Accounts receivable........... (1,459) 541 (769)
Inventories................... (4,714) 1,172 (704)
Prepaid taxes................. -- (937) --
Prepaid expenses.............. 1,168 (251) 191
Other noncurrent assets....... (2,428) 16 495
Increase/(decrease) in:
Accounts payable.............. (2,328) (959) (147)
Accrued expenses.............. (731) 845 808
Income taxes payable.......... -- 117 147
Other noncurrent
liabilities................ 2,059 (152) (60)
--------- --------- ---------
Net cash provided by
operating
activities............ 8,489 16,594 12,971
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable.... 637 286 294
Capital expenditures............... (9,376) (4,717) (4,381)
Securities purchased............... -- -- (11)
Acquisitions, net of cash acquired
of $3,525 in 1997 and $49 in
1996............................. (9,825) (167) --
--------- --------- ---------
Net cash used in
investing
activities............ (18,564) (4,598) (4,098)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs..... 265 25,749 2,348
Proceeds from issuance of long-term
debt............................. -- -- 68
Repayment of long-term debt........ (4,896) (14,905) (1,003)
Dividends paid..................... (1,756) (1,814) (2,081)
--------- --------- ---------
Net cash provided by
(used in) financing
activities............ (6,387) 9,030 (668)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (16,462) 21,026 8,205
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................. 31,940 10,914 2,709
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
YEAR.................................. $ 15,478 $ 31,940 $ 10,914
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
The York Group, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated. Prior
year financial information has been restated and current year information
adjusted to reflect an acquisition made during 1997 which was accounted for as a
pooling of interests. See Note 2. Further, the financial information has been
reclassified to include certain warehouse and delivery expenses, previously
included in cost of sales, with selling, general and administrative expenses,
and to report such expenses as other operating expenses. The Company believes
that this presentation more appropriately reflects its cost structure as it
expands its sales and distribution operations.
NATURE OF OPERATIONS
The Company manufactures caskets, casket components and metal vaults in the
United States and sells those products primarily for use domestically. The
Company also provides merchandising and product assortment planning displays and
architectural and interior design services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped and services
rendered.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. At December 31, 1997
and 1996, cash equivalents represented commercial paper and an interest in cash
management funds that invest in government securities that are subject to daily
redemption.
INVENTORIES
The Company values wood product, metal stamping and casket product
inventories using the LIFO method. All other inventories are valued using the
FIFO method. See Note 13.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and include alterations
and betterments which improve or extend useful lives. Maintenance and repairs
are reflected in operations as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets.
Estimated useful lives range from 15 to 20 years for buildings and building
improvements and 5 to 10 years for machinery, equipment, furniture and fixtures.
Depreciation expense for the periods ended December 31, 1997, 1996 and 1995 was
$4.5 million, $3.7 million and $3.4 million, respectively. When property is
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gains or losses are reflected in
results of operations. See Note 13.
F-7
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill represents cost in excess of the fair value of net assets acquired
in acquisitions and is being amortized on a straight-line basis, generally for
periods of 25 and 40 years for distribution operations and manufacturing
operations, respectively. Amortization expense recognized during 1997 and 1996
was approximately $478,000 and $39,000, respectively.
DEFERRED COSTS AND OTHER ASSETS
Deferred costs include financing costs related to debt issuance which are
amortized over the terms of the borrowings on a straight-line basis.
ACCRUED REBATES
The Company offers price discounts to funeral homes participating in
programs for volume purchases. In addition, the Company has a supply contract
with Service Corporation International ("SCI") that requires price discounts
(see Notes 11 and 13). The cost of these programs is based on a percentage of
the distributors' selling prices. Discounts and rebates are reported as a
reduction of revenues at the time the Company's products are sold by a
distributor to a participating funeral home.
DEFINED CONTRIBUTION PLANS
The Company maintains two defined contribution plans for eligible
employees, as defined. Contributions to the plans totaled $514,000, $424,000 and
$381,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Under SFAS No. 109, a current tax liability or asset is
recognized for the estimated taxes payable or refundable as reported in the
Company's Federal and state tax returns. A deferred tax liability or asset is
recognized for the estimated future tax effects attributable to temporary
differences. Deferred taxes are determined based upon current tax laws and rates
and any impact from changes in these tax regulations and rates is recorded in
the period when the related change is enacted.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares
outstanding. Diluted earnings per share considers stock options and other
dilutive securities. See Note 9.
1997 1996 1995
----------- ----------- -----------
Basic weighted-average shares
outstanding........................ 8,712,496 7,517,662 5,519,136
Dilutive securities consisting of
options and convertible debt....... 266,193 356,238 511,266
----------- ----------- -----------
Diluted weighted-average shares
outstanding........................ 8,978,689 7,873,900 6,030,402
=========== =========== ===========
For purposes of computing dilutive securities outstanding, the treasury
stock method was applied using the fair value of the common stock in the
respective periods prior to the Company's initial public offering in April 1996,
and the closing market price thereafter.
2. ACQUISITIONS:
On September 30, 1996, the Company completed the acquisition of
substantially all the business assets and assumed the associated debts and
liabilities of Hamilton Distributing Company ("Hamilton"), a casket
distributor, with locations in Ohio, Michigan and Indiana. The acquisition was
accounted for using the
F-8
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase method of accounting. The purchase price was $625,000 which includes
forgiven debt owed to the Company of $588,000. In addition, two major
stockholders of Hamilton entered into four year non-competition agreements. The
Company will recognize the cost ratably over the term of the agreements.
Effective October 15, 1996, the Company acquired the business assets and
assumed the associated debts and liabilities of The Doody Group, Inc.
("Doody"). Doody is located in Louisiana and is a provider of architectural
and interior design services and merchandising programs to the funeral service
industry. The acquisition was accounted for using the purchase method of
accounting. Total consideration was approximately $2.8 million, which includes
165,000 shares of The York Group, Inc. common stock valued at $16.75 per share.
The excess of purchase price over the fair market value of assets acquired
amounted to approximately $2.8 million and is being amortized on a straight-line
basis over 15 years. In addition, certain employees of Doody entered into five
year non-competition agreements. The Company will recognize the cost ratably
over the terms of the agreements.
On January 17, 1997, the Company acquired substantially all of the business
assets and assumed the associated debts and liabilities of Houston Casket
Company, Inc. ("Houston Casket" ), a casket distributor with operations in
Texas and New Mexico. The acquisition was accounted for using the purchase
method of accounting. The purchase price of approximately $9.1 million consisted
of $1.9 million in cash, $2.5 million of subordinated promissory notes, $2.0
million of convertible subordinated promissory notes and the assumption of $2.7
million of debt. The excess of purchase price over the fair market value of
assets acquired amounted to approximately $4.9 million and is being amortized on
a straight-line basis over 25 years. In addition, the two shareholders of
Houston Casket entered into five year non-competition agreements, the cost of
which will be recognized ratably over the term of the agreements.
On May 13, 1997, the Company acquired all of the outstanding shares of West
Point Casket Company, Inc., a manufacturer and distributor of caskets and metal
burial vaults. The merger was accounted for using the purchase method of
accounting. The excess of purchase price over the fair market value of assets
acquired amounted to approximately $600,000 and is being amortized on a
straight-line basis over 40 years. The purchase price consisted of 493,331
shares of The York Group, Inc. common stock valued at $9.2 million and $7.8
million in cash.
On October 31, 1997, the Company acquired substantially all of the
operating assets and assumed the associated liabilities of Sacramento Casket
Company, Inc., a casket distributor serving northern California. The acquisition
was accounted for using the purchase method of accounting. The purchase price
consisted of $3.2 million in cash. The excess of purchase price over the fair
market value of assets acquired amounted to approximately $2.2 million and is
being amortized on a straight-line basis over 40 years.
Pro forma unaudited consolidated operating results of the Company and the
acquired companies for the years ended December 31, 1997 and 1996, assuming the
acquisitions had been made as of January 1, 1996, are summarized and included in
the table below. Pro forma adjustments include only the effects of events
directly attributable to transactions that are factually supportable and
expected to have a continuing impact. Pro forma adjustments do not reflect
anticipated "efficiencies" in operations. The Company believes that this
unaudited pro forma information is not indicative of future results of
operations, nor the results of historical operations had the acquisitions been
consummated as of the assumed dates.
F-9
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED
DECEMBER 31,
PRO FORMA RESULTS OF OPERATIONS ----------------------
(UNAUDITED) 1997 1996
- ------------------------------------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net sales............................ $ 185,588 $ 173,648
Income before extraordinary item..... 12,012 14,022
Net income........................... 12,012 13,286
Basic earnings per share:
Income before extraordinary
item.......................... 1.35 1.72
Net income...................... 1.35 1.63
Diluted earnings per share:
Income before extraordinary
item.......................... 1.31 1.64
Net income...................... 1.31 1.56
On December 11, 1996, the Company issued 125,000 shares of its common stock
for all the outstanding shares of Brenner Casket Company ("Brenner"), a
distributor of caskets with locations in Illinois. The merger has been accounted
for as a pooling of interests and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts and operations
of Brenner for all periods prior to the merger.
On July 31, 1997, the Company issued 387,255 shares of its common stock for
all the outstanding shares of Elder Davis, Inc. ("Elder Davis"), a
manufacturer of cloth covered caskets and cremation containers, with operations
in Indiana. The merger has been accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of Elder Davis for all periods prior to
the merger.
3. RECAPITALIZATION:
On January 24, 1996, the stockholders voted to reincorporate the Company in
the State of Delaware and issued four shares in the new company for each share
outstanding in the old company. This transaction has been accounted for as a
stock split and all shares and per share information is restated for all periods
presented.
4. INITIAL PUBLIC OFFERING:
In April 1996, the Company completed an initial public offering (the
"Offering") of 2,145,000 shares of its common stock. Proceeds to the Company
from the Offering, after deduction of associated expenses, were approximately
$25.3 million.
F-10
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES RECEIVABLE:
Long-term notes, included in deferred costs and other assets, bear interest
at prime to prime plus 5% with maturities through 2008. Annual maturities are as
follows:
(IN THOUSANDS)
--------------
1998.................................... $ 245
1999.................................... 142
2000.................................... 75
2001.................................... 38
2002.................................... 27
2003 and thereafter..................... 145
--------------
672
Less current portion.................... 245
--------------
Total long-term notes receivable........ $ 427
==============
6. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Senior notes with interest due
semi-annually through June 30, 2004
and principal due annually June 1998
through June 2004..................... $ 25,000 $ 25,000
Convertible subordinated promissory
notes, interest rate 6%,
due January 2000, conversion price
$22.00 per share...................... 2,000 --
Subordinated promissory notes, interest
rate 7.5%, due January 2000........... 2,500 --
Other, interest payable at 6.58% to
9.25%................................. 33 1,901
Capitalized lease obligations........... -- 167
--------- ---------
29,533 27,068
Less current portion.................... 3,608 633
--------- ---------
Total long-term debt.................... $ 25,925 $ 26,435
========= =========
On June 30, 1994, the Company completed the private placement of $25.0
million of senior notes (the "Senior Notes") with a major insurance company.
The Senior Notes, which are unsecured, have a final maturity of June 30, 2004
and provide for a fixed interest rate of 7.87% per annum. Interest is payable
semi-annually in arrears, with principal payments due in seven equal annual
installments beginning on June 30, 1998. The proceeds of the Senior Notes were
primarily used to retire the Company's then outstanding term loan. The Senior
Notes require that certain financial conditions and ratios be maintained and
restrict the level of dividend payments and additional borrowings. Further, the
Senior Notes contain cross-default provisions with the Company's other borrowing
facilities.
The convertible subordinated promissory notes and the subordinated
promissory notes were issued in connection with the Company's acquisition of
Houston Casket in January 1997, and are due January 2000.
During 1997 the Company maintained a $6.0 million revolving credit facility
with a major bank. The revolving credit facility, which expired January 31,
1998, was unsecured and provided for borrowings and the issuance of letters of
credit up to the lesser of $6.0 million or a borrowing base, as defined. At
December 31, 1997, no borrowings were outstanding, $2.3 million of letters of
credit were outstanding and $3.7 million was available under the revolving
credit facility.
F-11
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 12, 1998, the Company entered into a five year revolving credit
facility (the "Revolver") with a major bank. The Revolver, which is unsecured,
provides for borrowings and the issuance of letters of credit up to $60.0
million through March 11, 2001, $50.0 million from March 12, 2001 through March
11, 2002, and $40.0 million from March 12, 2002 through March 11, 2003. The
terms of the facility call for an interest rate, at the Company's option, to be
based upon an adjusted LIBOR rate or the prime rate. Adjustment factors for the
LIBOR rate are based upon certain financial ratios, as defined, with a specified
ceiling (LIBOR +1.375%) and floor (LIBOR +.875%). The Revolver requires that
certain financial conditions and ratios be maintained, restricts the level of
dividend payments and contains cross-default provisions with the Company's other
borrowing facilities. The Revolver requires a fee of .25%, payable quarterly, on
the unused portion of the facility.
Aggregate annual maturities of long-term debt, for each of the five years
subsequent to December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------- --------------
1998............................ $ 3,608
1999............................ 3,571
2000............................ 8,071
2001............................ 3,571
2002............................ 3,571
2003 and thereafter............. 7,141
--------------
$ 29,533
==============
Interest paid during 1997, 1996 and 1995 totaled approximately $2.3
million, $3.7 million and $2.4 million, respectively.
The estimated fair value of the Company's long-term debt at December 31,
1997 approximates the carrying value. The fair value was estimated using market
interest rates for similar types of instruments. The fair value of all other
financial instruments approximates the carrying value.
7. INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes".
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal......................... $ 7,233 $ 6,242 $ 4,740
State........................... 805 500 462
--------- --------- ---------
8,038 6,742 5,202
--------- --------- ---------
Deferred:
Federal......................... (530) 143 340
State........................... (114) 22 12
--------- --------- ---------
(644) 165 352
--------- --------- ---------
$ 7,394 $ 6,907 $ 5,554
========= ========= =========
F-12
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities result from temporary differences
between the financial statement and tax bases of assets and liabilities. The
significant components of deferred tax assets/(liabilities) are as follows:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Environmental reserves............... $ 544 $ 597
Self-insurance reserves.............. 311 137
Bad debt reserves.................... 891 290
Employee benefit accruals............ 338 340
Rebate reserves...................... 1,026 753
Depreciable assets................... (3,450) (3,237)
Other, net........................... (342) (771)
--------- ---------
Net deferred tax liability...... $ (682) $ (1,891)
========= =========
No valuation allowance has been provided against the deferred tax assets as
the Company has concluded these tax benefits are realizable either through
carryback availability against prior years' taxable income, the reversal of
existing deferred tax liabilities or future taxable income.
A reconciliation between the Federal statutory rate and the Company's
effective tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Federal statutory rate............... 35.0% 34.6% 34.3%
State income taxes, net of Federal
tax benefit........................ 2.1 1.8 2.2
Miscellaneous other non-deductible
expenses........................... .9 1.1 2.1
---- ---- ----
38.0% 37.5% 38.6%
==== ==== ====
On a cash basis, income taxes paid during 1997, 1996 and 1995 were $7.5
million, $7.1 million and $5.0 million, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain office and warehouse facilities and data
processing and transportation equipment under noncancelable operating leases.
The leases vary from periods of one to six years. In most cases, operating
leases contain renewal options. The leases generally provide that the Company
shall pay for utilities, insurance, taxes and maintenance.
The annual payments for operating leases are as follows:
(IN THOUSANDS)
--------------
1998.................................... $1,761
1999.................................... 1,054
2000.................................... 672
2001.................................... 574
2002.................................... 369
2003 and thereafter..................... 1,914
--------------
Total minimum lease payments............ $6,344
==============
F-13
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's rental expense under operating leases for the years ended
December 31, 1997, 1996 and 1995 amounted to $2.6 million, $1.8 million and $1.7
million, respectively.
ENVIRONMENTAL MATTERS
In 1991, the Georgia Department of Natural Resources (the "GDNR") issued
a Notice of Violation -- Consent Order alleging that the Company's
Lawrenceville, Georgia facility was storing and treating hazardous wastes
without a permit and was otherwise in violation of certain hazardous waste
regulations in the operation of its electroplating line and associated
wastewater treatment system. On November 8, 1991, the Company and the GDNR
entered into a Consent Order (the "1991 Order") in settlement of the
allegations. The 1991 Order was subsequently amended in 1993 to reflect the plan
to close the facility as a landfill and to require some additional remediation,
monitoring and investigation commitments on the Company's part. The GDNR
approved the revised closure plan and post-closure plan for the facility in
August 1994. Moreover, the GDNR issued a Hazardous Waste Facility Permit
effective September 27, 1995, to document these post-closure care requirements.
The Company has provided financial assurance in the form of a letter of credit
in the amount of approximately $1.1 million to secure its post-closure
obligations.
At December 31, 1997, the Company had a reserve of approximately $1.4
million for the estimated future costs to complete the implementation of the
revised plan. The reserve is based on management's best estimate of the closure
costs to be incurred, which was developed predicated on the information
available to date and the advice of an independent environmental consultant. It
is possible that the remediation costs could be different than the reserve due
to unforeseen factors that arise as the closure occurs and due to the length of
time during which monitoring activities will be conducted. Accordingly, the
reserve will be adjusted, if necessary, as information becomes available
indicating that higher or lower remediation costs will be incurred.
LETTER OF CREDIT
The Company has a letter of credit outstanding in the amount of $1.2
million related to its worker's compensation insurance arrangements, which
expires October 31, 1998. As of December 31, 1997, no amounts have been drawn
against this facility.
OTHER MATTERS
The Company is a party to various claims and legal proceedings generally
incidental to its business. Although the ultimate disposition of these
proceedings is not presently determinable, management does not believe that
ultimate settlement of any or all of such proceedings will have a material
adverse effect upon the financial condition and results of operations of the
Company.
9. STOCKHOLDERS' EQUITY:
Warrants to purchase 760,000 shares of common stock were issued to the
Company's original stockholders in connection with their initial equity
investment in the Company. Each warrant had an exercise price of $2.50 per share
and was exercisable at any time prior to its expiration date of October 2, 1995.
In 1995, 758,400 warrants were exercised.
STOCK OPTIONS
The 1990 Stock Incentive Plan (the "1990 Plan") and the 1991 Stock
Incentive Plan (the "1991 Plan") permitted the grant of options to purchase
shares and also the award of shares. The 1990 and 1991 Plans were designed as an
incentive for key employees and directors. Exercise prices of options were
determined by the Board of Directors within the provisions of the 1990 and 1991
Plans. Options generally vest over a three to five year period and may be
exercised from three to ten years from the date of grant.
F-14
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the stockholders approved the adoption of two new stock option
plans, the 1996 Employee Stock Option Plan (the "1996 Employee Plan") and the
1996 Independent Director Stock Option Plan (the "1996 Director Plan"), which
replaced the 1990 and 1991 Plans. With the approval of the 1996 Plans, no
additional shares may be granted under the 1990 or 1991 Plans.
The 1996 Employee Plan is designed as an incentive for key employees. The
plan permits the grant of options to purchase shares. The maximum number of
shares of common stock for which options may be issued is 500,000 shares through
January 24, 2006, the plan termination date. Exercise prices and vesting periods
of options are determined by the Board of Directors within the provisions of the
plan. The Board of Directors established the exercise price of the options
granted to be equal to the fair market value of the stock at the date of grant.
Options may be exercised up to 10 years from the date of grant.
The 1996 Director Plan is designed as incentive for independent members of
the Board of Directors. The plan permits the grant of options to purchase
shares. The maximum number of shares of common stock for which options may be
issued is 50,000 shares through January 24, 2006, the plan termination date.
Exercise prices of options granted were equal to the fair market value of the
stock at the date of grant. The sale of shares issued upon exercise of options
shall not be allowed until at least six months after the date the option is
granted.
There are no stock awards or stock appreciation rights outstanding under
the 1990, 1991, 1996 Employee or 1996 Director Plans as of December 31, 1997.
The Company accounts for these stock option plans in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and, accordingly, no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123), the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
1997 1996
------------------ ---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income:
As reported......... $12,063 $10,785
Pro forma........... 11,967 10,565
Basic EPS:
As reported......... 1.38 1.43
Pro forma........... 1.37 1.41
Diluted EPS:
As reported......... 1.34 1.37
Pro forma........... 1.33 1.34
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. In
addition, since no options were granted during 1995, pro forma results have not
been presented for 1995.
F-15
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's four stock option plans at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the tables and narrative below:
1997 1996 1995
-------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year..... 506,500 $12.41 236,000 $ 3.35 410,000 $ 2.99
Granted.............................. 140,250 20.71 461,500 13.06 -- --
Exercised............................ (26,500) 8.09 (176,000) 2.50 (174,000) 2.50
Expired/Canceled..................... (34,850) 15.10 (15,000) 6.00 -- --
-------- --------- ---------
Outstanding at end of year........... 585,400 14.44 506,500 12.41 236,000 3.35
======== ========= =========
Options exercisable at year end...... 153,266 81,333 214,000
======== ========= =========
Weighted-average fair value of
options granted during the year.... $ 5.50 $ 3.85 $ --
Thirty thousand of the 585,400 options outstanding at December 31, 1997
have an exercise price equal to their weighted-average exercise price of $6.50
and a weighted-average remaining contractual life of 8.0 years; 28,000 of those
shares are exercisable. The remaining 555,400 options have exercise prices of
$13.00 to $21.25, with a weighted-average exercise price of $14.39 and a
remaining contractual life of 8.4 years; 125,266 of these are exercisable with a
weighted-average exercise price of $13.45.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: risk-free interest rate of 5.3%; expected
annual dividend yield of $.16 per share; expected life of five years; and
expected volatility of 20.3%.
10. RELATED PARTY TRANSACTIONS:
TRADE TRANSACTIONS WITH STOCKHOLDERS
During the years ended December 31, 1997, 1996 and 1995, the Company
purchased goods and services from certain stockholders amounting to $6.2
million, $3.0 million and $2.7 million, respectively. At December 31, 1997 and
1996, the Company had trade liabilities to stockholders of $176,000 and
$168,000, respectively.
The Company has a management agreement with a stockholder to operate both a
textile warehouse and delivery service and a plastic injection molding
operation. The stockholder provides manufacturing/warehouse space, utilities,
direct and supervisory labor, consultation and marketing services. The Company
is charged fees based on certain sales volumes. During 1997, 1996 and 1995, the
Company paid the stockholder and recognized as operating expense $463,000,
$426,000 and $439,000, respectively, under this agreement.
OTHER TRANSACTIONS
The Company had a $750,000 note receivable from Yorktowne Caskets, Inc.
("Yorktowne"), a stockholder, which bore interest at prime plus 1.5%, called
for monthly principal payments of $12,500 plus accrued interest, with the
remaining principal and any accrued interest thereon due February 1, 1999. The
promissory note was subordinate to Yorktowne's senior bank debt. The note, which
was paid in full during
F-16
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, had a balance outstanding as of December 31, 1996 of $325,000. Interest
income from the note was $16,000, $39,000 and $56,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company's Executive Vice
President is a significant stockholder of Yorktowne.
The Company had a note receivable from Hamilton. The note, which bore
interest at prime plus 2%, called for monthly principal payments of $3,373 plus
accrued interest. The remaining principal balance of $588,000 was forgiven in
1996 as a portion of the consideration for the Company's acquisition of Hamilton
(see Note 2). Interest income from the note was $46,000 and $69,000 for the
years ended December 31, 1996 and 1995, respectively. The Company's Vice
President Sales and Marketing at the time of the acquisition was a majority
stockholder of Hamilton.
The Company had a note receivable from Houston Casket (see Note 2). The
note, which bore interest at prime, called for monthly principal payments of
$4,584 plus accrued interest and was paid off on July 27, 1996. The balance of
the note at December 31, 1995 was $41,176. Interest income from the note was
$1,000, $5,839 and $8,425 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's Vice President National Accounts, International
Sales and Distributor Relations was a significant stockholder of Houston Casket.
In connection with the 1994 acquisition of Kenco Manufacturing, Inc., the
Company entered into a non-competition agreement with the former owner, the
Company's Vice President Manufacturing/Stamping, which calls for ten annual
payments of $138,000, which began in December 1993.
11. SCI SUPPLY AGREEMENT:
The Company is involved in a supply agreement (the "Supply Agreement")
with an affiliate of SCI. The Supply Agreement requires the purchase of specific
annual dollar volumes of the Company's caskets and expires at the end of 1998.
Sales under the Supply Agreement are made through the Company's distributors at
a discount to list price, and accounted for approximately 22% of the Company's
net sales in 1997 and 23% in each of 1996 and 1995.
In February 1998, SCI informed the Company that beginning in 1999 it would
purchase substantially all of its casket requirements from another supplier. On
a pro forma basis, assuming no sales to SCI, the Company's sales for 1997 would
have been approximately $138.6 million (unaudited), and its operating income for
1997 would have been approximately $4.8 million (unaudited). Pro forma
adjustments do not reflect anticipated changes in operations. The Company
believes that this unaudited pro forma information is not necessarily indicative
of future operations, nor the results of historical operations had the loss of
SCI business been effective as of January 1, 1997.
12. EXTRAORDINARY ITEM:
In 1996, the Company repaid its $11.0 million Series A Note, which was
originally issued at a discount. The early extinguishment of this debt resulted
in an extraordinary charge of $736,000, net of tax, or $.10 per share basic and
$.09 per share diluted, related to the write-off of the unamortized discount.
F-17
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTARY INFORMATION:
The detail of certain balance sheet accounts at December 31, was as
follows:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Inventories:
Raw materials......................... $ 10,123 $ 7,923
Work in process....................... 4,039 2,675
Finished goods........................ 22,163 9,240
--------- ---------
$ 36,325 $ 19,838
========= =========
Replacement value..................... $ 38,100 $ 21,200
========= =========
The Company values substantially all of its metal stamping and casket
product inventories and its wood product inventories under the LIFO method,
which approximates 94.5% of consolidated inventories. All other inventories are
valued under the FIFO method of inventory.
Property, plant and equipment:
Land and improvements.............. $ 3,825 $ 2,956
Buildings and improvements......... 12,721 10,533
Equipment.......................... 38,245 32,593
Construction-in-progress........... 5,003 1,134
--------- ---------
59,794 47,216
Less accumulated depreciation...... 21,076 16,869
--------- ---------
$ 38,718 $ 30,347
========= =========
Accrued expenses:
Accrued rebates.................... $ 3,885 $ 3,782
Accrued compensation............... 2,966 2,831
Other accrued expenses............. 6,482 3,220
--------- ---------
$ 13,333 $ 9,833
========= =========
14. SUBSEQUENT EVENT (UNAUDITED):
On March 16, 1998, the Company acquired all of the outstanding shares of
Colonial Guild, Ltd., a leading manufacturer of bronze memorialization and
commemorative products, with 1997 annual revenues of approximately $40 million.
The purchase price of approximately $78.4 million was financed using available
cash and the Company's line of credit facility entered into on March 12, 1998
(see Note 6). The acquisition will be accounted for as a purchase and,
accordingly, the purchase price will be allocated to the underlying assets and
liabilities based on their respective fair values at the date of acquisition.
F-18
THE YORK GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Net sales............................ $45,551 $ 45,611 $40,413 $ 47,115
Gross profit......................... 12,276 12,057 11,192 13,021
Operating income..................... 6,481 5,245 2,989 5,392
Net income........................... 3,956 3,206 1,792 3,109
Earnings per common share:(2)
Basic........................... .47 .37 .20 .35
Diluted......................... .46 .36 .20 .34
1996
Net sales............................ $42,113 $ 37,949 $31,333 $ 37,783
Gross profit......................... 9,405 8,286 6,413 8,666
Operating income..................... 6,280 5,014 3,456 4,661
Income before extraordinary item..... 3,461 3,065 2,163 2,832
Net income........................... 3,461 2,329 2,163 2,832
Earnings per common share:(2)
Basic........................... .57 .29(1) .27 .35
Diluted......................... .57 .28(1) .26 .33
- ------------
(1) The second quarter of 1996 includes an extraordinary charge of $.10 per
share basic and $.09 per share diluted, net of tax, for the write-off of
unamortized debt discount.
(2) Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings per share does not equal the
total computed for the year due to stock transactions which occurred during
each year.
F-19
THE YORK GROUP, INC. -- SCHEDULE II VALUATION
AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997
(IN THOUSANDS)
BALANCE AT AMOUNTS BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF YEAR EXPENSE OTHER DEDUCTIONS YEAR
- ----------------------------------------------------------------------------------------------------------
December 31, 1997:
Allowance for doubtful accounts and
returns and allowances............. $1,829 $ 104 $1,437 $ (253) $ 3,117
Allowance for notes receivable....... 100 -- -- -- 100
December 31, 1996:
Allowance for doubtful accounts and
returns and allowances............. 1,659 7 219 (56) 1,829
Allowance for notes receivable....... 100 -- -- -- 100
S-1