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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 1-11961
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CARRIAGE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0423828
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 POST OAK BLVD., SUITE 1500, HOUSTON, TX 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 556-7400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, $.01 Par Value
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the voting stock held by nonaffiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Company's Class A Common Stock) of the Registrant
as of February 28, 1997 was approximately $16,045,000.
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The number of shares of the Registrant's Class A Common Stock, $.01 par
value per share, and Class B Common Stock, $.01 par value per share, outstanding
as of February 28, 1997 was 4,274,495 and 5,566,650, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1997 annual meeting of shareholders,
incorporated in Part III of this Report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Carriage Services, Inc. (the "Company") believes that it is the sixth
largest provider of death care services and products in the United States based
on 1996 revenues. The Company provides a complete range of funeral services and
products to meet families' needs, including consultation, removal and
preparation of remains, sale of caskets and related funeral merchandise,
transportation services and the use of funeral home facilities for visitation.
The Company also offers cemetery products and services, including rights to
interment in cemetery sites, interment services and related cemetery
merchandise. As of December 31, 1996, the Company operated 76 funeral homes and
10 cemeteries in 16 states. Funeral services constituted approximately 93% of
revenues in 1995 and 1996.
Since the Company's formation in 1991, management has undertaken a
disciplined approach to growth that has allowed the Company the necessary time
to integrate acquisitions, develop effective operating, administrative and
financial systems and controls, recruit an experienced operating management team
and promote a decentralized, entrepreneurial service culture. From 1992 through
1995, the Company acquired 42 funeral homes and four cemeteries for
consideration ranging from approximately $9 million to $14 million in each of
the four years. The Company believes that the infrastructure it developed during
this period positioned the Company to pursue an accelerated growth strategy
beginning in late 1995. As a result, the Company acquired 38 funeral homes and
seven cemeteries for consideration of $68 million during 1996 and an additional
16 funeral homes and two cemeteries for consideration of $55 million through
February 28, 1997. In addition, as of February 28, 1997, the Company had letters
of intent to acquire eight funeral homes for consideration of $10 million.
The Company was incorporated in Delaware on December 29, 1993. The
Company's principal executive office is located at 1300 Post Oak Blvd., Suite
1500, Houston, Texas 77056, and its telephone number is (281) 556-7400.
DEATH CARE INDUSTRY
Death care companies provide products and services to families in three
principal areas: (i) ceremony and tribute, generally in the form of a funeral or
memorial service; (ii) disposition of remains, either through burial or
cremation; and, (iii) memorialization, generally through monuments, markers or
inscriptions. The death care industry in the United States is characterized by
the following fundamental attributes:
HIGHLY FRAGMENTED OWNERSHIP. A significant majority of death care
operators consist of small, family-owned businesses that control one or several
funeral homes or cemeteries in a single community. Management estimates that
there are approximately 22,000 funeral homes and 9,600 commercial (as opposed to
religious, family, fraternal, military or municipal) cemeteries in the United
States. Less than 20% of the 1995 United States death care industry revenues are
represented by the Company and the four largest publicly traded domestic death
care companies.
BARRIERS TO ENTRY. Death care businesses have traditionally been
transferred to successive generations within a family and in most cases have
developed a local heritage and tradition that act as a formidable barrier for
those wishing to enter an existing market. Heritage and tradition afford an
established funeral home or cemetery a local franchise and provides the
opportunity for repeat business. Other difficulties faced by entities desiring
to enter a market include local zoning restrictions, substantial capital
requirements, increasing regulatory burdens and scarcity of cemetery land in
certain urban areas. In addition, established firms' backlog of preneed,
prefunded funerals or presold cemetery and mausoleum spaces also makes it
difficult for new entrants to gain entry into the marketplace.
STABILITY. The death rates in the United States are fairly predictable,
thereby affording stability to the death care industry. Since 1980, the number
of deaths in the United States has increased at a compounded rate of
approximately 1% per year. According to a 1993 report prepared by the U.S.
Department of
1
Commerce Bureau of the Census, the number of deaths in the United States is
expected to increase by approximately 1% per year between 1997 and 2010. Because
the industry is relatively stable, non-cyclical and fairly predictable, business
failures are uncommon. As a result, ownership of funeral home and cemetery
businesses generally has not experienced significant turnover, and the
aggregate number of funeral homes and cemeteries in the United States has
remained relatively constant.
INCREASED CONSOLIDATION. In the past several years the industry has
experienced a trend toward consolidation of small death care operations with
large, primarily publicly owned death care providers that can benefit from
economies of scale, improved managerial control and more effective strategic
planning and greater financial resources. This trend appears to result
principally from increased regulation, a desire on the part of small, family
operated funeral businesses to address family succession and estate planning
issues, a desire for liquidity, and the increasing competitive threat posed by
the large death care providers. The active acquisition market for funeral homes
and cemeteries provides a source of potential liquidity that was not as readily
available to individual owners in the past. The consolidation trend has
accelerated in recent years as several large death care companies have expanded
their operations significantly through acquisitions.
CLUSTERED OR COMBINED OPERATIONS. The death care industry has also
witnessed a trend by companies to cluster their funeral home and cemetery
operations. Clusters refer to funeral homes and/or cemeteries which are grouped
together in a geographical region. Clusters provide a company with the ability
to generate cost savings through the sharing of personnel, vehicles and other
resources. Firms also are increasingly combining funeral home and cemetery
operations at a single site to allow cross-marketing opportunities and for
further cost reductions through shared resources. The ability to offer the full
range of products and services at one location or to cluster funeral home and
cemetery operations and cross-market the full range of death care services has
proven to be a competitive advantage which tends to increase the market share
and profitability of both the funeral home and cemetery.
PRENEED MARKETING. In addition to sales at the time of death or on an "at
need" basis, an increasing number of death care products and services are being
sold prior to the time of death or on a "preneed" basis by death care
providers who have developed sophisticated marketing organizations to actively
promote such products and services. At the same time, consumers are becoming
more aware of the benefits of advanced planning, such as the financial assurance
and peace of mind achieved by establishing in advance a fixed price and type of
service, and the elimination of the emotional strain of making death care plans
at the time of need. Effective marketing of preneed products and services
assures a backlog of future business.
CREMATION. In recent years, there has been steady, gradual growth in the
number of families in the United States that have chosen cremation as an
alternative to traditional methods of burial. According to industry studies,
cremations represented approximately 21% of the United States burial market in
1995, as compared to approximately 10% in 1980. Many parts of the Southern and
Midwestern United States and many non-metropolitan communities exhibit
significantly lower rates of cremation as a result of religious and cultural
traditions. Cremation historically has been marketed as a less costly
alternative to interment. However, cremation is increasingly marketed as part of
a complete death care package that includes traditional funeral services and
memorialization.
BUSINESS STRATEGY
The Company's objective is to become the preferred succession planning
alternative for premier funeral homes throughout the United States while
continuing to promote a decentralized, entrepreneurial service culture.
Management believes that the Company's reputation and collaborative operating
style have allowed it to successfully pursue attractive acquisition candidates.
The Company also has been successful in implementing programs to increase
profitability at newly acquired properties.
OPERATING STRATEGY. Since its formation, the Company has focused on
becoming a succession planning alternative to the larger death care providers.
The Company believes that its decentralized operating style, which provides
autonomy and flexibility to local management, is attractive to owners of funeral
homes seeking to sell their operations. Management believes that its operating
style is also a key
2
component in its ability to attract and retain quality managers. While the
Company's management style allows local operators significant responsibility in
the daily operating decisions, financial parameters, jointly established during
the budgeting process, are monitored by senior management through the Company's
management and accounting systems. The Company utilizes computer systems linked
to most of the Company's funeral home locations. These systems enable a location
to function on its own by maintaining accounts receivables and payables locally,
at a cluster processing site, or at the Company's centralized processing center
at the option of the local manager. The same information is provided to the
Company's senior management which allows the Company, on a timely basis, to
access critical operating and financial data from a site in order to analyze the
performance of individual locations and institute corrective action if
necessary.
The Company has established a compensation structure that is designed to
maintain and create a sense of ownership. Local management is awarded meaningful
cash bonuses and stock options for exceptional performance when achieving
specified earnings objectives. The Company has also structured a stock option
program which awards options over a two year period to most full-time employees
based upon the performance of their local business during the period. As a
result, all management and most full-time employees have the opportunity to
increase their personal net worth through strong local and corporate
performance.
Management also believes that implementing its operating strategy in newly
acquired businesses leads to enhanced profitability of acquired operations. The
Company has an extensive merchandising and training program that is designed to
educate local funeral home operators about opportunities to improve marketing of
products and services, to share sales leads and other cross-marketing
opportunities, and to become familiar with, and adopt, the Company's business
objectives. The larger size of the Company, as compared to local operators, also
allows favorable pricing and terms to be achieved from vendors through volume
discounts on significant expenditures, such as caskets, vaults, memorials and
vehicles. In addition, while operational functions and management autonomy are
retained at the local level, centralizing certain financial, accounting, legal,
administrative and employee benefit functions allows for more efficient and
cost-effective operations. The Company also has recently greatly expanded its
preneed sales programs in selected local markets to maintain or increase market
presence and assure a backlog of future business.
ACQUISITION STRATEGY. The Company believes that significant acquisition
opportunities currently exist in the death care industry that the Company
intends to aggressively pursue. In evaluating specific acquisition candidates,
the Company considers such factors as the property's location, reputation,
heritage, physical size, volume of business, profitability, name recognition,
aesthetics, potential for development or expansion, competitive market position,
pricing structure and quality of operating management. The Company will continue
to aggressively pursue the acquisition of premier funeral homes that have a
strong local market presence and that conduct from 100 to 600 funeral services
per year, as well as funeral homes in close proximity to the Company's existing
businesses. In addition, although the Company traditionally has not focused on
acquiring cemetery operations, the Company intends to more aggressively pursue
cemetery acquisitions in markets where the Company operates, or plans to
operate, funeral homes to take advantage of cross-marketing opportunities. The
Company is also pursuing larger acquisition transactions which provides
significant strategic benefits to the Company, such as new market penetration.
For example, in January 1997, the Company merged with CNM, a premier
California-based company which operates 10 funeral homes and one cemetery. This
operation as a whole performs 2,100 funerals and 1,470 interments annually and
represents the Company's first entry into California. The Company also seeks to
issue, and has been successful in issuing, equity securities to the previous
owners of acquired businesses. Since inception through March 10, 1997, the
Company has issued 37,775,608 shares of redeemable preferred stock (convertible
into 1,361,338 shares of Class A Common Stock and 1,227,812 shares of Class B
Common Stock) and 225,857 shares of Class A Common Stock in conjunction with
acquisition transactions. As of March 10, 1997, a total of 16,039,116 shares of
redeemable preferred stock have converted into shares of Class A and Class B
Common Stock. Management believes that its success in issuing equity securities
in conjunction with acquisitions reflects in large part previous owners' desires
to remain affiliated with and to be invested in the Company.
3
In purchasing the premier location in a particular market, management
believes that the Company is able to attract the most talented personnel,
minimize downside risk of loss of volume to competitors and provide
opportunities for increased profitability when such operations are coupled with
the Company's management techniques. In addition, the Company generally retains
the former owners and other key personnel of acquired funeral homes and provides
them with significant operating responsibility to assure the continuation of
high quality services and the maintenance of the acquired firm's reputation and
heritage. In nearly all cases, acquired funeral homes continue operations under
the same trade name as those of the prior owners. In addition, the Company views
experienced management of certain acquired operations as potential corporate
management candidates. Management believes that this potential for advancement
with the Company, combined with the Company's decentralized operating structure
and incentive-based compensation system, makes it a particularly attractive
acquirer to some independent owners. The Company also will continue to analyze
the possibility of acquiring additional funeral homes in present markets so that
personnel and vehicles can be shared and profit margins enhanced.
The Company follows a disciplined approach to acquisitions utilizing
specific operating and financial criteria. The Company develops pro forma
financial statements for acquisition targets reflecting estimates of revenue and
costs under the Company's ownership and then utilizes such information to
determine a purchase price which it believes is reasonable. The Company
anticipates that the consideration for future acquisitions will consist of a
combination of cash, deferred purchase price and preferred and common equity.
The Company also will typically enter into management, consulting and
non-competition agreements with former owners and key executive personnel of
acquired businesses.
Although the Company has not historically focused on acquiring cemetery
operations, as a result of the increased access to capital and the Company's
enhanced profile in the industry, the Company is encountering significant
cemetery acquisition opportunities. The Company will continue to pursue cemetery
acquisitions in markets where they operate funeral homes to take advantage of
cross-marketing opportunities and in markets where a funeral home acquisition
strategy is viable.
While the Company focuses its efforts on identifying individual acquisition
candidates with the potential for a negotiated, non-competitive acquisition
process, the Company also competes for more broadly marketed acquisition
opportunities. In many cases, the Company has been successful in acquiring
operations where it has not been the highest bidder because of the Company's
reputation, operating strategy and corporate culture. Management believes that
the issuance of equity securities to fund certain funeral home acquisitions has
been, and will continue to be, attractive to select acquisition candidates.
The Company has successfully executed this acquisition strategy since its
inception, as demonstrated in the table set forth below.
FUNERAL
YEAR CONSIDERATION HOMES(1) CEMETERIES(2)
- ------------------ ---------------------- -------- -------------
(DOLLARS IN THOUSANDS)
1992............... $ 11,832 14 2
1993............... 13,843 11 1
1994............... 9,153 9 1
1995............... 12,191 8 0
1996(3)............ 68,181 38 7
---------------------- -- --
$115,200 80 11
====================== == ==
- ------------
(1) The Company subsequently divested four of these funeral homes.
(2) The Company subsequently divested one of these cemeteries.
(3) From January 1, 1997 through March 10, 1997, the Company has acquired
16 funeral homes and two cemeteries for aggregate consideration of $55
million.
4
OPERATIONS
The Company's funeral home operations, cemetery operations and preneed
programs are managed by service-minded professionals with extensive death care
industry experience. In response to the rapid growth experienced in 1996, the
Company increased operations staffing, including a new transition team, to
provide local managers with the additional support and direction needed during
the integration of newly acquired properties.
Although certain financial management and policy matters are centralized,
local funeral home and cemetery managers have substantial autonomy in
determining the manner in which their services and products are marketed and
delivered and their funeral homes are managed. The Company believes that this
strategy permits each local firm to maintain its unique style of operation and
to capitalize on its reputation and heritage while the Company maintains
centralized supervisory controls and provides specialized services at the
corporate level.
FUNERAL HOME OPERATIONS. As of December 31, 1996, the Company operated 76
funeral homes in 16 states. Funeral home revenues accounted for approximately
93% of the Company's net revenues for each of the years ended December 31, 1995
and 1996. The Company's funeral home operations are managed by a team of
experienced death care industry professionals.
The Company's funeral homes offer a complete range of services to meet
family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and worship, and transportation services. Most of
the Company's funeral homes have a non-denominational chapel on the premises,
which permits family visitation and religious services to take place at one
location, which reduces transportation costs to the Company and inconvenience to
the family.
CEMETERY OPERATIONS. As of December 31, 1996, the Company operated 10
cemeteries in six states. Cemetery revenues accounted for approximately 7% of
the Company's net revenues for each of the years ended December 31, 1995 and
1996.
As of December 31, 1996, the Company employed a staff of approximately 70
cemetery sales counselors for the sale of interment rights and merchandise. As a
result of a growing number of potential cemetery acquisition candidates, the
Company has made additional investments in the cemetery operations
infrastructure. During the fourth quarter of 1996, experienced preneed marketing
professionals were added at the national and regional levels. This investment in
additional preneed sales management should allow the Company to increase preneed
sales at existing cemetery properties and will position the Company to more
effectively integrate future cemetery acquisitions.
The Company's cemetery products and services include interment services,
the rights to interment in cemetery sites (including grave sites, mausoleum
crypts and niches) and related cemetery merchandise such as memorials and
vaults. Cemetery operations generate revenues through sales of interment rights,
memorials, fees for interment and cremation services, memorial installations,
interest income from installment sales contracts and investment income from
preneed cemetery merchandise and perpetual care trusts.
PRENEED PROGRAMS. In addition to sales of funeral merchandise and services
and cemetery interment rights, merchandise and services at the time of need, the
Company also markets funeral and cemetery services and products on a preneed
basis. Preneed funeral or cemetery contracts enable families to establish in
advance the type of service to be performed, the products to be used and the
cost of such products and services in accordance with prices prevailing at the
time the contract is signed rather than when the products and services are
delivered. Preneed contracts permit families to eliminate the emotional strain
of making death care plans at the time of need and enable the Company to
establish a portion of its future market
5
share. Proceeds from the sale of preneed funeral contracts are not recognized as
revenues until the time the funeral service is performed. The Company sold 2,610
and 3,760 preneed funeral contracts in the years ended December 31, 1995 and
1996, respectively. At December 31, 1996, the Company had a backlog of 22,925
preneed funeral contracts to be delivered in the future.
Preneed funeral contracts are usually paid on an installment basis. The
performance of preneed funeral contracts is usually secured by placing the funds
collected in trust for the benefit of the customer or by the purchase of a life
insurance policy, the proceeds of which will pay for such services at the time
of need. Insurance policies intended to fund preneed funeral contracts cover the
original contract price and generally include built-in escalation clauses
designed to offset future inflationary cost increases.
In addition to preneed funeral contracts, the Company also offers
"preplanned" funeral arrangements whereby a client determines in advance
substantially all of the details of a funeral service without any financial
commitment or other obligation on the part of the client, until the actual time
of need. Preplanned funeral arrangements permit families to avoid the emotional
strain of making death care plans at the time of need and enable a funeral home
to establish relationships with clients that frequently lead to at need sales.
Preneed cemetery sales are usually financed by the Company through
installment sale contracts, generally with terms of five years. Preneed sales of
cemetery interment rights and other related services and merchandise are
recorded as revenues when the contract is signed, with concurrent recognition of
related costs. The Company typically receives an initial payment at the time the
contract is signed. Allowances for customer cancellations and refunds are
accrued at the date of sale based upon historical experience. Preneed cemetery
sales represented approximately 42% and 67% of the Company's net cemetery
revenues for the years ended December 31, 1995 and 1996, respectively.
COMPETITION
The acquisition environment in the death care industry is highly
competitive. The four major publicly held death care companies, Service
Corporation International ("SCI"), The Loewen Group, Inc., Stewart
Enterprises, Inc. and Equity Corporation International, are substantially larger
than the Company and have significantly greater financial and other resources
than the Company. In addition, a number of smaller companies are actively
acquiring funeral homes and cemeteries. Prices for funeral homes and cemeteries
have increased substantially in recent years, and, in some cases, competitors
have paid acquisition prices substantially in excess of the prices offered by
the Company. Accordingly, no assurance can be given that the Company will be
successful in expanding its operations through acquisitions or that funeral
homes and cemeteries will be available at reasonable prices or on reasonable
terms.
The Company's funeral home and cemetery operations generally face
competition in the markets that they serve. Market share for funeral homes and
cemeteries is largely a function of reputation and heritage, although
competitive pricing, professional service and attractive, well-maintained and
conveniently located facilities are also important. The sale of preneed funeral
services and cemetery property has increasingly been used by many companies as
an important marketing tool to build market share. Due to the importance of
reputation and heritage, market share increases are usually gained over a long
period of time.
TRUST FUNDS
GENERAL. The Company has established a variety of trusts in connection
with its funeral home and cemetery operations as required under applicable state
law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery
merchandise and service trusts; and, (iii) perpetual care trusts. These trusts
are typically administered by independent financial institutions selected by the
Company. The Company also uses independent professional managers to advise the
Company on investment matters.
PRENEED FUNERAL TRUSTS. Preneed funeral sales are facilitated by deposits
to a trust or purchase of a third-party insurance product. All preneed funeral
sales are deferred until the service is performed. The trust income earned and
any increase in insurance benefits are also deferred until the service is
performed in order to offset possible inflation in cost when providing the
service in the future. Although direct marketing costs and commissions incurred
for the sale of preneed funeral contracts are a current use of cash, such costs
6
are also deferred and amortized over 12 years, which approximates the expected
timing of the performance of the services related to the preneed funeral
contracts. Since the Company does not have access to the trust fund principal or
earnings, the related assets and liabilities are not reflected on the Company's
balance sheet. In most states, the Company is not permitted to withdraw
principal or investment income from such trusts until the funeral service is
performed. Some states, however, allow for the retention of percentage
(generally 10%) of the receipts to offset any administrative and selling
expenses, which the Company defers until the service is provided. The aggregate
balance of the Company's preneed funeral contracts held in trust was
approximately $36.4 million as of December 31, 1996.
PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. The Company is generally
required under applicable state laws to deposit a specified amount (which varies
from state to state, generally 110% of wholesale cost) into a merchandise and
service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income is recognized in current revenues as trust
earnings. These earnings are offset by any current period inflation costs
accrued related to the merchandise that has not yet been purchased. Liabilities
for undelivered cemetery merchandise and services, including accruals for
inflation increases, are reflected in the balance sheet net of the merchandise
and service trust balance. The Company is permitted to withdraw the trust
principal and the accrued income when the merchandise is purchased or service is
provided by the Company or when the contract is canceled. The merchandise and
service trust fund balances, in the aggregate, were approximately $1.1 million
as of December 31, 1996.
PERPETUAL CARE TRUSTS. In certain states, regulations require a portion,
generally 10%, of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income is recognized in current revenues as trust earnings. While the Company is
entitled to withdraw the income from its perpetual care trust to provide for the
maintenance of the cemetery and memorials, they are not entitled to withdraw any
of the principal balance of the trust fund, and therefore, none of the principal
balances are reflected in the Company's balance sheet. The Company's perpetual
care trust balances were approximately $2.0 million as of December 31, 1996.
For additional information with respect to the Company's trusts, see Note 1
of the Consolidated Financial Statements.
REGULATION
The Company's funeral home operations are subject to substantial regulation
by the Federal Trade Commission (the "FTC"). Certain regulations contain
minimum standards for funeral industry practices, require extensive price and
other affirmative disclosures to the customer at the time of sale and impose
mandatory itemization requirements for the sale of funeral products and
services.
The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the United States Environmental Protection Agency
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and similar state statutes require the Company
to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens. The Company is also subject
to the Federal Americans with Disabilities Act and similar laws which, among
other things, may require that the Company modify its facilities to comply with
minimum accessibility requirements for disabled persons.
The Company's operations, including its preneed sales and trust funds, are
also subject to extensive regulation, supervision and licensing under numerous
other Federal, state and local laws and regulations. See "-- Trust Funds."
The Company believes that it is in substantial compliance with all such
laws and regulations. Federal and state legislatures and regulatory agencies
frequently propose new laws, rules and regulations some of which, if enacted,
could have a material adverse effect on the Company's results of operations. The
7
Company cannot predict the outcome of any proposed legislation or regulations or
the effect that any such legislation or regulations might have on the Company.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed 387
full-time employees, 392 part-time employees and 135 preneed sales counselors.
All of the Company's funeral directors and embalmers possess licenses required
by applicable regulatory agencies. Management believes that its relationship
with its employees is good. No employees of the Company or its subsidiaries are
members of a collective bargaining unit.
ITEM 2. PROPERTIES
At December 31, 1996, the Company operated 76 funeral homes and 10
cemeteries in 16 states. The Company owns the real estate and buildings of 54 of
its funeral homes and all of its cemeteries and leases facilities in connection
with 22 of its funeral homes. The 10 cemeteries operated by the Company cover a
total of approximately 370 acres. The Company's inventory of unsold developed
lots totaled approximately 44,000 at December 31, 1996. In addition,
approximately 175 acres, or approximately 47% of the total acreage, is available
for future development. The Company does not anticipate any shortage of
available space in any of its current cemeteries for the foreseeable future.
The following table sets forth certain information as of December 31, 1996
regarding the Company's funeral homes and cemeteries by state:
NUMBER OF
FUNERAL HOMES
------------------
STATE OWNED LEASED(1) CEMETERIES
- ------------------------------------- ----- --------- -----------
Texas................................ 9(2) 1 3
Kentucky............................. 6 4 1
Ohio................................. 9 2 0
Idaho................................ 5(3) 0 3
Georgia.............................. 3 3 0
South Carolina....................... 5 0 1
Michigan............................. 3 2 0
Florida.............................. 2 1 1
Illinois............................. 0 4 0
Tennessee............................ 3 1 0
Connecticut.......................... 2 1 0
Indiana.............................. 1 2 0
North Carolina....................... 1 1 1
Kansas............................... 2 0 0
Washington........................... 2 0 0
Alabama.............................. 1 0 0
----- -- --
Total(4)........................ 54 22 10
===== == ==
- ------------
(1) The leases, with respect to these funeral homes, have remaining terms
ranging from two to fifteen years, and the Company generally has a right of
first refusal on any proposed sale of the property where these funeral homes
are located.
(2) One of these funeral homes is located on property contiguous to and operated
in combination with a Company cemetery.
(3) Two of these funeral homes are located on property contiguous to and
operated in combination with Company cemeteries.
(4) From January 1, 1997 through March 10, 1997, the Company has acquired
ten funeral homes and one cemetery in California, four funeral homes
in Ohio, one funeral home in Tennessee, one funeral home in Rhode Island
and one cemetery in Indiana for an aggregate consideration of $55 million.
The Company's corporate headquarters occupy approximately 19,700 square
feet of leased office space in Houston, Texas.
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At December 31, 1996, the Company operated 309 vehicles, of which 234 were
owned and 75 were leased.
The specialized nature of the Company's business requires that its
facilities be well-maintained. Management believes that this standard is met.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are parties to a number of
legal proceedings that arise from time to time in the ordinary course of
business. While the outcome of these proceedings cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the Company.
The Company carries insurance with coverages and coverage limits that it
believes to be customary in the funeral home and cemetery industries. Although
there can be no assurance that such insurance will be sufficient to protect the
Company against all contingencies, management believes that its insurance
protection is reasonable in view of the nature and scope of the Company's
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded in the over-the-counter market
and quoted on the Nasdaq National Market under the symbol "CRSV". The
following table presents the quarterly high and low sale prices as reported by
the Nasdaq National Market since the shares became publicly traded on August 9,
1996 at an initial price of $13.50. These quotations reflect the inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
1996 HIGH LOW
--------- ---------
Third Quarter (beginning August 9,
1996)................................ $ 22.75 $ 14.25
Fourth Quarter....................... $ 23.50 $ 18.375
As of February 28, 1997, there were 4,274,495 shares of the Company's Class
A Common Stock and 5,566,650 shares of the Company's Class B Common Stock
outstanding. The holders of Class A Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of Common stockholders. The
holders of Class B Common Stock are entitled to ten votes for each share held on
all matters submitted to a vote of Common stockholders. The Class A Common Stock
shares outstanding are held by approximately 136 stockholders of record. The
Company believes there are approximately 2,000 beneficial owners of the Class A
Common Stock.
The Company has never paid a cash dividend on its Class A or Class B Common
Stock. The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. Any future change in
the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings and prospects of the Company and any restrictions under credit
agreements, as well as other factors the Board of Directors may deem relevant.
RECENT SALES OF UNREGISTERED SECURITIES
On January 1, 1994, the Company sold an aggregate of 2,520,000 shares of
Common Stock to C. Byron Snyder, Melvin C. Payne, Mark W. Duffey and Reid A.
Millard in exchange for shares of capital stock of three entities. The Company
relied on an exemption under Section 4(2) of the Securities Act in effecting
these transactions.
On October 12, 1994, the Company sold one share of Common Stock for $8.00
to a former owner of an acquired funeral home. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting this
transaction.
On December 31, 1994, the Company sold one share of Common Stock in
exchange for one share of the capital stock of a subsidiary. The Company relied
on an exemption under Section 4(2) of the Securities Act in effecting this
transaction.
From January 18, 1994 to February 28, 1994, the Company sold in a private
placement an aggregate of 7,000,000 shares of Preferred Stock. The Company acted
as its own placement agent. Such shares were purchased for $1.00 per share. The
Company relied on an exemption under Section 4(2) of the Securities Act in
effecting this placement.
From October 28, 1994 to May 29, 1996, the Company sold an aggregate of
715,000 shares of Preferred Stock, valued at $1.00 per share, to the former
owners of acquired funeral homes. Consideration for such shares consisted of
ownership interests in funeral home businesses and contract rights. The Company
relied on an exemption under Section 4(2) of the Securities Act in effecting
these transactions.
On September 25, 1995, the Company sold in a private placement an aggregate
of 8,500,000 shares of Preferred Stock. The Chicago Corporation acted as
placement agent in connection with this
10
offering. Such shares were purchased for $1.00 per share. The Company relied on
an exemption under Section 4(2) of the Securities Act in effecting the
placement.
From March 8, 1996 to September 6, 1996, the Company sold an aggregate of
17,775,616 shares of Series D Preferred Stock, valued at $1.00 per share, to the
former owners of acquired funeral homes. Consideration for such shares consisted
of ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.
On May 28, 1996, an employee exercised options to purchase 1,000 shares of
Common Stock pursuant to the Company's 1995 Stock Incentive Plan at an exercise
price of $10.00 per share. The Company relied on an exemption under Section 4(2)
of the Securities Act in effecting this transaction.
From August 30, 1996 to February 28, 1997, the Company sold an aggregate of
225,857 shares of Class A Common Stock, valued at market prices, to the former
owners of acquired funeral homes. Consideration for such shares consisted of
ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.
On January 7, 1997, the Company sold 19,999,992 shares of Series F
Preferred Stock, valued at $1.00 per share, to the former owners of acquired
funeral homes. Consideration for such shares consisted of
ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting this
transaction.
11
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
INCOME STATEMENT DATA:
Revenues, net:
Funeral ..................................... $ 1,625 $ 10,651 $ 17,368 $ 22,661 $ 37,445
Cemetery .................................... 178 614 1,036 1,576 2,903
-------- -------- -------- -------- ---------
Total net revenues .......................... 1,803 11,265 18,404 24,237 40,348
-------- -------- -------- -------- ---------
Gross profit:
Funeral ..................................... (88) 917 2,856 3,740 6,804
Cemetery .................................... 113 143 158 250 362
-------- -------- -------- -------- ---------
Total gross profit .......................... 25 1,060 3,014 3,990 7,166
General and administrative
expenses .................................... 490 985 1,266 2,106 2,474
-------- -------- -------- -------- ---------
Operating income (loss) ..................... (465) 75 1,748 1,884 4,692
Interest expense, net ....................... 295 1,745 2,671 3,684 4,347
-------- -------- -------- -------- ---------
Income (loss) before income
taxes ....................................... (760) (1,670) (923) (1,800) 345
Provision for income taxes .................. -- (1) -- (1) 40 694 138
-------- -------- -------- -------- ---------
Income (loss) before extraordinary
item ........................................ (760) (1,670) (963) (2,494) 207
Extraordinary item, net ..................... -- -- -- -- (498)
-------- -------- -------- -------- ---------
Loss after extraordinary item ............. (760) (1,670) (963) (2,494) (291)
Preferred stock dividends ................... -- -- -- -- 622
-------- -------- -------- -------- ---------
Net loss attributable to common
stockholders ................................ $ (760) $ (1,670) $ (963) $ (2,494) $ (913)
======== ======== ======== ======== =========
Loss per common share
Continuing operations ....................... $ (.30)(1) $ (.66)(1) $ (.28) $ (.66) $ (.09)
Extraordinary item .......................... -- -- -- -- (.10)
-------- -------- -------- -------- ---------
Net loss per common share ................... $ (.30) $ (.66) $ (.28) $ (.66) $ (.19)
======== ======== ======== ======== =========
Weighted average number of common
and common equivalent shares
outstanding ................................. 2,543 (1) 2,543 (1) 3,406 3,781 4,869
======== ======== ======== ======== =========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period .............. 14 25 34 41 76
Funeral services performed during
period ...................................... 389 2,265 3,529 4,414 7,181
Preneed funeral contracts sold .............. 451 644 762 2,610 3,760
Backlog of preneed funeral
contracts ................................... 2,576 5,170 6,855 8,676 22,925
Depreciation and amortization ............... $ 261 $ 947 $ 1,476 $ 1,948 $ 3,629
BALANCE SHEET DATA:
Working capital ............................. $ 678 $ (142) $ 4,271 $ 6,472 $ 5,089
Total assets ................................ 13,089 28,784 44,165 61,746 131,308
Long-term debt, net of current
maturities .................................. 12,656 26,270 32,622 42,057 42,733
Redeemable preferred stock .................. -- -- -- -- 17,251
Stockholders' equity (deficit) .............. $ (958) $ (2,626) $ 3,429 $ 9,151 $ 57,043
- ------------
(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 2,520,000
shares of common stock of the Company effective January 1, 1994.
Accordingly, shares of common stock shown outstanding for these periods
assume the exchange had taken place at the beginning of the periods
presented. In 1992 and 1993, the entities were subchapter S corporations,
and taxes were the direct responsibility of the owners. Thus, the tax
provisions reflected above for these periods are based on assumptions about
what tax provisions (benefits) would have been if the Company had been a
taxable entity. In the opinion of management, no pro forma tax provision
(benefit) was appropriate for these periods because the Company followed a
policy of not recognizing the benefits associated with net operating losses
during such periods.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was formed in 1991 in order to take advantage of the attractive
fundamentals and significant opportunities to consolidate the death care
industry. From 1992 through 1995, the Company acquired 42 funeral homes and four
cemeteries, for consideration ranging from approximately $9 million to $14
million in each of the four years. The Company intentionally took a disciplined,
deliberate approach to acquisitions that allowed management the time to
integrate early acquisitions, to develop and implement systems, including
operational procedures, administrative policies, financial systems and related
controls, and to promote a decentralized service culture.
Management believes that the Company's focus on controlled growth while
implementing operational and administrative systems and related controls to
effectively manage a highly decentralized management structure positioned it to
pursue an accelerated growth strategy beginning in late 1995. The Company
significantly expanded its corporate development and acquisition activities in
1996 and early 1997, thus requiring additions to the corporate infrastructure.
During 1996, the Company acquired 38 funeral homes and seven cemeteries for an
aggregate consideration of approximately $68 million. Sixteen funeral homes and
two cemeteries were acquired in January and February 1997 for approximately $55
million. These acquisitions were funded through cash flow from operations,
additional borrowings under the Company's credit facilities and issuance of
preferred and common stock. In addition, as of February 28, 1997, the Company
had letters of intent to acquire eight funeral homes for an aggregate
consideration of approximately $10 million. The Company will continue to pursue
attractive acquisition candidates as further consolidation of the industry
occurs.
Upon acquisition, the operations team focuses on increasing historic
operating income by improving the merchandising approach, pricing structure and
marketing strategy of acquired businesses. These enhancements, complemented by
discounts from consolidated purchasing, generally result in improved margins of
the acquired businesses within the first 12 months following acquisition.
In certain instances, a review of the marketing strategy of an acquired
business results in increased preneed funeral and cemetery sales efforts to
secure or gain future market share. Preneed funeral sales are affected by
deposits to a trust or purchases of third party insurance products. Since the
Company does not have access to these funds, the sale is not recorded until the
service is performed nor are the related assets and liabilities reflected on the
Company's consolidated balance sheet. The trust income earned and increases in
insurance benefits are also deferred until the service is performed in order to
offset possible inflation in cost to provide the service in the future. Unlike
preneed funeral sales, the Company has access to the funds related to preneed
cemetery sales. Therefore, preneed cemetery sales and the related estimated
costs are recorded at the time of sale. Trust fund requirements relate only to
the estimated costs of providing merchandise and service. Any income from the
merchandise and service trust funds is recorded as cemetery revenue in the
period earned. These earnings are offset by any inflation in the cost of
providing the merchandise and services in the future. These estimated costs are
reviewed at least annually, and any significant increase in estimated costs are
recorded at that time. Due to the Company's small number of cemetery operations,
the impact of these trust earnings and any inflation in estimated costs have not
historically been significant.
Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
but are not limited to, the following: the Company's ability to sustain its
rapid acquisition rate, to manage an increasing number of funeral homes and
cemeteries, and to obtain adequate performance from acquired businesses; the
economy and financial market conditions, including stock prices, interest rates
and credit availability; and death rates and competition in the Company's
markets.
12
FACTORS AFFECTING HISTORICAL FINANCIAL RESULTS
Prior to 1995, the Company's corporate infrastructure required only modest
additions to support its disciplined approach to acquisitions. As a result,
general and administrative expenses declined as a percentage of revenues over
these years. In anticipation of accelerating its acquisition activity, the
Company began in 1995 to significantly expand its corporate infrastructure to
support more rapid growth. As a result, general and administrative expenses in
1995 increased as a percentage of revenues over 1994. Although general and
administrative expenses have continued to increase in response to the Company's
acceleration of its acquisition activities, in 1996 these expenses grew at a
lower rate relative to revenues compared to 1995 (6.1% of revenues in 1996 as
compared to 8.7% of revenues in 1995). Management anticipates that general and
administrative expenses as a percentage of revenues will continue to decline.
The Company achieved positive net income in the fourth quarter of 1996 due
to several factors, including the repayment of higher rate debt from proceeds of
the Company's initail public offering (the "IPO"), the improved performances of
existing and newly acquired businesses and the lower interest rates under its
credit facility used to fund the acquisitions. In response to the acceleration
of acquisition activity and the accompanying increase in the number of
operations to be managed, the Company further strengthened its corporate staff.
To support an operating style which continues to focus heavily on service and
careful integration of newly acquired operations, management additions were made
to the funeral home operations group, and financial and administrative personnel
were added. Additionally, near the end of 1996, the prearranged funeral and
cemetery sales organization was significantly restructured and expanded.
The Company believes its increased recognition in the death care industry
as an established purchaser of funeral homes and cemeteries has improved its
ability to finance its acquisitions with debt and equity, thereby reducing the
negotiated value of agreements not to compete. Since the Company's agreements
not to compete have generally been amortized over four to ten years, whereas any
purchase price allocated to names and reputations is amortized over 40 years,
any reduction in the non-competition agreement payments (assuming the same
purchase price) results in a reduction in operating expense during the
amortization period of the agreements not to compete. Since mid-1995, the
Company has experienced a reduction in the operating expenses for amortization
of agreements not to compete compared to prior years.
As a result of this significant increase in operating scale and
substantially improved capital structure, the Company believes that the
financial results prior to the fourth quarter of 1996 are not necessarily
comparable to those periods subsequent to its IPO. The Company's future results
of operations will depend in large part on the Company's ability to continue to
make acquisitions on attractive terms and to successfully integrate and manage
the acquired properties.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues for the periods presented:
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Total revenues, net.................. 100.0% 100.0% 100.0%
Total gross profit................... 16.4 16.5 17.8
General and administrative
expenses........................... 6.9 8.7 6.1
Operating income..................... 9.5 7.8 11.6
Interest expense, net................ 14.5 15.2 10.8
Income (loss) before extraordinary
item............................... (5.2) (10.3) 0.5
13
The following table sets forth the number of funeral homes and cemeteries
owned and operated by the Company for the periods presented:
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
Funeral homes at beginning of
period............................. 25 34 41
Acquisitions......................... 9 8 38
Divestitures......................... 0 1 3
---- ---- ----
Funeral homes at end of period....... 34 41 76
==== ==== ====
Cemeteries at beginning of period.... 2 3 3
Acquisitions......................... 1 0 7
Divestitures......................... 0 0 0
---- ---- ----
Cemeteries at end of period.......... 3 3 10
==== ==== ====
The following is a discussion of the Company's results of operations for
1994, 1995 and 1996. For purposes of this discussion, funeral homes and
cemeteries owned and operated for the entirety of each year being compared are
referred to as "existing operations." Operations acquired or opened during
either year being compared are referred to as "acquired operations."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information regarding the net
revenues and gross profit of the Company from its operations during the years
ended December 31, 1995 and 1996:
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ------------------
1995 1996 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations....... $ 21,482 $ 20,921 $ (561) (2.6%)
Acquired operations....... 2,755 19,427 16,672 *
--------- --------- -------
Total net revenues... $ 24,237 $ 40,348 $16,111 66.5%
========= ========= =======
Gross profit:
Existing operations....... $ 3,451 $ 3,481 $ 30 0.9%
Acquired operations....... 539 3,685 3,146 *
--------- --------- -------
Total gross profit... $ 3,990 $ 7,166 $ 3,176 79.6%
========= ========= =======
- ------------
* Not meaningful.
Total net revenues for the year ended December 31, 1996 increased $16.1
million or 66.5% over 1995. The higher net revenues reflect an increase of $16.7
million in net revenues from acquired operations and a decrease in net revenues
of $561,000 or 2.6% from existing operations. The decrease in net revenues for
the existing operations primarily resulted from fewer funeral services being
performed, which was partially offset by a 3.9% increase in the average revenue
per funeral service. Fewer services were performed in 1996 due to the
divestiture of three funeral homes and a longer than normal seasonal decline in
the number of deaths in certain of the Company's markets. This seasonal decline
in the number of services ended in mid-November. At December 31, 1996, the
Company operated 10 cemeteries. The net revenues and gross profit of cemeteries
represented less than eight percent of the Company's total operations.
Total gross profit for the year ended December 31, 1996 increased $3.2
million or 79.6% over 1995. The higher total gross profit reflected an increase
of $3.1 million from acquired operations and an increase of $30,000 or 0.9% from
existing operations. Gross profit for existing operations increased due to the
efficiencies gained by consolidation and the increasing effectiveness of the
Company's merchandising
14
strategy, which was partially offset by lower revenues. Total gross margin
increased from 16.5% for 1995 to 17.8% for 1996 due to these factors. As a
result of the acceleration of the Company's acquisition program in 1996, the
profit contribution from acquired properties exceeded that of existing
operations even though most were not owned for the entire year. The acquisition
and integration of these new properties received the majority of the corporate
operations group's management focus during the year. During the fourth quarter,
significant additional management resources were added to this group to provide
assistance in increasing revenue and profit margins from existing ongoing
operations and to more rapidly achieve targeted margins for acquired businesses.
General and administrative expenses for the year ended December 31, 1996
increased $368,000 or 17.5% over 1995 due primarily to the increased personnel
expense necessary to support a higher rate of growth and acquisition activity.
However, general and administrative expenses as a percentage of net revenues
decreased from 8.7% for 1995 to 6.1% for 1996, reflecting economies of scale
realized by the Company as the expenses were spread over a larger operations
revenue base.
Interest expense for the year ended December 31, 1996 increased $663,000
over 1995 principally due to increased borrowings for acquisitions. In August
1996, the Company utilized the net proceeds from the IPO and borrowings under a
new credit facility to repay the majority of its outstanding debts. In
connection with repayment of debt, the Company recognized an extraordinary
charge of approximately $498,000, net of income tax benefit of approximately
$332,000, to reflect the write-off of the deferred loan costs associated with
the early retirement of debt. The new credit facility reflects substantially
improved terms and reduced interest costs compared to the previous arrangements.
During 1996, the Company issued approximately $18 million of redeemable
preferred stock to fund a portion of its acquisition program. Dividends on the
majority of this preferred stock range from 6-7% per annum. Preferred dividends
of $622,000 were subtracted from the $207,000 of income before extraordinary
item in computing earnings attributable to common stockholders resulting in a
net loss of $415,000 for purposes of computing primary earnings per common
share. Approximately $16 million of redeemable preferred stock converted into
Common Stock subsequent to December 31, 1996.
For 1996, the Company provided for income taxes on net income before income
taxes and extraordinary item at a combined state and federal tax rate of 40%.
Prior to 1996, the Company experienced net operating losses. The tax benefits
associated with these net operating loss carryforwards were reserved. The
Company continues to analyze the benefits associated with these losses and will
adjust the recorded valuation allowance as appropriate in future periods.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following table sets forth certain information regarding the net
revenues and gross profit of the Company from its operations during the years
ended December 31, 1994 and 1995:
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ------------------
1994 1995 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations............. $ 16,593 $ 16,838 $ 245 1.5%
Acquired operations............. 1,811 7,399 5,588 *
--------- --------- -------
Total net revenues......... $ 18,404 $ 24,237 $ 5,833 31.7%
========= ========= =======
Gross profit:
Existing operations............. $ 2,685 $ 2,792 $ 107 4.0%
Acquired operations............. 329 1,198 869 *
--------- --------- -------
Total gross profit......... $ 3,014 $ 3,990 $ 976 32.4%
========= ========= =======
- ------------
* Not meaningful.
15
Total net revenues for the year ended December 31, 1995 increased $5.8
million or 31.7% over 1994. The higher net revenues were due primarily to an
increase of $5.6 million in net revenues from acquired operations. Net revenues
from existing operations increased $245,000 or 1.5% over 1994. The increase in
net revenues from existing operations resulted from a 4.4% increase in average
revenue per funeral service which was partially offset by fewer funeral services
being performed primarily as a result of the divestiture of one funeral home and
the planned divestiture of two additional funeral homes. At December 31, 1995,
the Company operated three cemeteries, the net revenues and gross profit of
which were not significant.
Total gross profit for the year ended December 31, 1995 increased $976,000
or 32.4% over 1994. The higher total gross profit reflects an increase of
$869,000 from acquired operations and an increase of $107,000 or 4.0% from
existing operations. The gross profit increase for the existing operations was
due to the efficiencies gained by consolidation and implementation of a new
merchandising strategy. Total gross margin remained relatively consistent
between years.
General and administrative expense for the year ended December 31, 1995
increased $840,000 over 1994 and increased as a percentage of net revenues to
8.7% for 1995 from 6.9% for 1994. These increases resulted primarily from
increased personnel expense necessary to support a higher rate of growth and
increased acquisition activity.
Interest expense for the year ended December 31, 1995 increased $1.0
million over 1994, principally due to increased borrowings for acquisitions.
Although the Company experienced net operating losses before tax, the
Company reserved the operating loss carryforwards creating a tax provision of
$40,000 in 1994 and $694,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1.7 million at December 31, 1996,
representing a decrease of $5.9 million from December 31, 1995. For the year
ended December 31, 1996, cash provided by operations was $314,000 as compared to
$997,000 for the year ended December 31, 1995. The decrease in cash provided by
operations was due in part to the payment of commissions on the sale of preneed
funeral contracts, which was offset by the positive cash flow from acquired
operations. Cash used in investing activities was $46 million for the year ended
December 31, 1996 compared to $12 million in 1995, due primarily to the
significant increase in acquisitions. In 1996, cash flow provided by financing
activities amounted to approximately $40 million, primarily due to the net
proceeds of approximately $48 million from the issuance of Class A Common Stock
in the Company's IPO.
Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of preferred stock. As of December 31, 1996, the Company
has 17,253,116 shares of Series D Preferred Stock issued and outstanding of
which 1,200,000 shares are convertible into Class A Common Stock and 16,053,116
shares are convertible into Class B Common Stock. The holders of Series D
Preferred Stock are entitled to receive cash dividends at an annual rate of
$.06-$.07 per share depending upon when such shares were issued. Commencing on
the second anniversary of the completion of the IPO (August 8, 1998), the
Company may, at its option, redeem all or any portion of the shares of Series D
Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends. Such redemption is subject to
the right of each holder of Series D Preferred Stock to convert such holder's
shares into shares of Class A or Class B Common Stock. On December 31, 2001, the
Company must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends. As of February 28, 1997, holders of 15,570,616 shares of Series D
Preferred Stock elected to convert their shares into 88,888 shares of Class A
and 1,064,481 shares of Class B Common Stock leaving 1,682,500 shares of Series
D Preferred Stock outstanding all which are convertible into the Class B Common
Stock.
In conjunction with the closing of the IPO, the Company entered into a new
credit facility (the "Credit Facility") which provides for a $75 million
revolving line of credit with both LIBOR and base rate interest options. The
facility is unsecured with a term of three years and contains customary
restrictive covenants, including a restriction on the payment of dividends on
common stock, and requires the Company to
16
maintain certain financial ratios, which may effectively limit the Company's
borrowing capacity. At December 31, 1996, the Company believes that it was in
compliance with all financial covenants and ratios. As of December 31, 1996,
$36.5 million was outstanding under the Credit Facility with an average
effective interest rate of 7.17%.
In August 1996, the Company used the net proceeds from the IPO, along with
funding from the Credit Facility, to pay down all previously existing debt from
Provident Services, Inc., Texas Commerce Bank N.A., and C. Byron Snyder (one of
the Company's directors). In connection with the repayment of this debt, the
Company recognized an extraordinary charge of approximately $498,000, net of
income tax benefit of approximately $332,000, to reflect the write-off of the
deferred loan costs associated with the early retirement of debt.
The Company issued 188,413 shares of Class A Common Stock and approximately
20,000,000 shares of Series F Preferred Stock and paid $27 million in cash to
fund acquisitions in January and February 1997. The Series F Preferred Stock is
convertible into an aggregate of 1,272,450 shares of Class A Common Stock based
on exercise prices at February 28, 1997. The holders of the Series F Preferred
Stock are entitled to receive cash dividends at the annual rate initially of
$.04 per share, with the annual rate increasing by 5% per year commencing
January 1, 1998 until January 1, 2001, at which time the annual rate becomes
fixed at $.0486 per share. On December 31, 2007, the Company must redeem all
shares of Series F Preferred Stock, as discussed above, then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends. The Company does not have the option to redeem any Series F Preferred
Stock prior to December 31, 2007.
The balance outstanding under the Credit Facility as of February 28, 1997
was $64 million. The Company has had discussions with various financial
institutions that lead it to believe that it has the ability to increase the
amount available under the Credit Facility. The Company intends to fund future
acquisitions through borrowings under the Credit Facility and additional
issuances of Class A Common Stock or additional preferred stock. As of February
28, 1997, the Company had letters of intent for acquisitions involving an
aggregate purchase price of $10 million. The Company has budgeted $125 million
for its acquisition program in 1997.
The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. In addition, the Company currently
expects to incur less than $5 million of capital expenditures during 1997,
primarily for upgrading funeral home facilities. The Company believes that cash
flow from operations, borrowings under the Credit Facility and its ability to
issue additional debt and equity securities should be sufficient to fund
acquisitions and its anticipated capital expenditures and other operating
requirements for the remainder of 1997. However, because future cash flows and
the availability of financing are subject to a number of variables, such as the
number and size of acquisitions made by the Company, there can be no assurance
that the Company's capital resources will be sufficient to fund its capital
needs. Additional debt and equity financing may be required to maintain the
Company's acquisition program. The availability and terms of these capital
sources will depend on prevailing market conditions and interest rates and the
then existing financial condition of the Company.
SEASONALITY
Although the death care business is relatively stable and fairly
predictable, the Company's business can be affected by seasonal fluctuations in
the death rate. Generally, death rates are higher during the winter months. In
addition, the quarterly results of the Company may fluctuate depending on the
magnitude and timing of acquisitions.
INFLATION
Inflation has not had a significant impact on the results of operations of
the Company during the last three years.
17
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 Item 10 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1997 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") within
120 days after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1997 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1997 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1997 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A of
the Exchange Act within 120 days after the end of the last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Public
Accountants are filed as a part of this report on the pages indicated:
PAGE
----
Report of Independent Public Accountants........................ 24
Consolidated Balance Sheets as of December 31, 1995 and 1996.... 25
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996.............................. 26
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996.......... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.............................. 28
Notes to Consolidated Financial Statements...................... 29
18
(A)2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
PAGE
----
Report of Independent Public Accountants on Financial
Statement Schedule........................................... 42
Financial Statement Schedule II -- Valuation and
Qualifying Accounts.......................................... 43
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(A)3 EXHIBITS
The exhibits to this report have been included only with the copies of this
report filed with the Securities and Exchange Commission. Copies of individual
exhibits will be furnished to stockholders upon written request to the Company
and payment of a reasonable fee.
EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
*3.1 -- Amended and Restated Certificate of Incorporation, as amended, of the Company
3.2 -- Amended and Restated Bylaws of the Company, incorporated by reference herein by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.1 -- 1995 Stock Incentive Plan, as amended, incorporated herein by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.2 -- 1996 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (File No. 333-05545)
10.3 -- 1996 Nonemployee Directors' Stock Option Plan, incorporated herein by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.4 -- Asset Purchase Agreement dated May 10, 1995 among Carriage Funeral Holdings, Inc., West
End Funeral Home, Inc., and James C. Hirsch and Cynthia Hirsch, incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No.
333-05545)
10.5 -- Agreement and Plan of Merger dated March 8, 1996 among Carriage Funeral Services, Inc.,
Hennessy-Bagnoli Funeral Home, Inc., Hennessy Funeral Home, Inc., Terrance P. Hennessy and
Lawrence Bagnoli, incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-05545)
10.6 -- Real Property Purchase Agreement dated the Closing Date among Hennessy-Bagnoli Funeral
Home, Inc., Hennessy and Patricia Hennessy, and Bagnoli and Brenda Bagnoli, incorporated
herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1
(File No. 333-05545)
10.7 -- Stock Purchase Agreement dated January 4, 1996 among Carriage Funeral Holdings, Inc., The
Lusk Funeral Home, Incorporated and Gerald T. McFarland, Jr., incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (File No.
333-05545)
10.8 -- Stock Purchase Agreement dated February 29, 1996 among Carriage Funeral Holdings, Inc.,
James E. Drake Funeral Home, Inc., and James E. Drake and Patricia A. Drake, incorporated
herein by reference to Exhibit 10.12 to the Company's registration Statement on Form S-1
(File No. 333-05545)
10.9 -- Asset Purchase Agreement dated April 10, 1996 between CFS Funeral Services, Inc. and SCI
Texas Funeral Services, Inc., incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No. 333-05545)
10.10 -- Asset Purchase Agreement dated April 10, 1996 between CFS Funeral Services, Inc. and SCI
Funeral Services of Florida, Inc., incorporated herein by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1 (File No. 333-05545)
19
10.11 -- Asset Purchase Agreement dated April 10, 1996 between CFS Funeral Services, Inc. and Fort
Myers Memorial Gardens, Inc., incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No. 333-05545)
10.12 -- Asset Purchase Agreement dated April 10, 1996 between CFS Funeral Services, Inc. and SCI
Funeral Services of Florida, Inc., incorporated herein by reference to Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.13 -- Stock and Real Property Purchase Agreement dated March 29, 1996 among Carriage Funeral
Holdings, Inc., Dwayne R. Spence Funeral Home, Inc., Dwayne R. Spence, Patricia Spence and
James H. Sheridan, incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (File No. 333-05545)
10.14 -- Merger Agreement dated March 22, 1996 among Carriage Funeral Services, Inc., Carriage
Funeral Services of Idaho, Inc., Merchant Funeral Home, Inc., Coeur d'Alene Memorial
Gardens, Inc., Lewis Clark Memorial Park, Inc., Robert D. Larrabee, I. Renee Larrabee and
Larrabee Land Company, Inc., incorporated herein by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File No. 333-05545)
10.15 -- Real Property Purchase Agreement dated March 22, 1996 among Carriage Funeral Services,
Inc. and Larrabee Investments, L.L.C., incorporated herein by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.16 -- Merger Agreement dated July 3, 1996 among Carriage Services, Inc., CSI Funeral Services of
Connecticut, Inc., C. Funk & Son Funeral Home, Incorporated and Ronald F. Duhaime and
Christopher J. Duhaime, incorporated herein by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (File No. 333-05545)
10.17 -- Merger Agreement dated July 3, 1996 among Carriage Services, Inc., CFS Funeral Services of
Connecticut, Inc., O'Brien Funeral Home, Incorporated and Thomas P. O'Brien, incorporated
herein by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1
(File No. 333-05545)
10.18 -- Merger Agreement dated June 26, 1996 among Carriage Services, Inc., Carriage Funeral
Services of South Carolina, Inc., Forest Lawn of Chesnee Inc. and shareholders,
incorporated herein by reference to Exhibit 10.22 to the Company's Registration Statement
on Form S-1 (File No. 333-05545)
10.19 -- Employment Agreement with Melvin C. Payne, incorporated herein by reference to Exhibit
10.23 to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.20 -- Employment Agreement with Mark W. Duffey, incorporated herein by reference to Exhibit
10.24 to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.21 -- Employment Agreement with Russell W. Allen, incorporated herein by reference to Exhibit
10.25 to the Company's Registration Statement on Form S-1 (File No. 333-05545)
10.22 -- Merger Agreement dated October 17, 1996 among Carriage Services, Inc., Carriage Funeral
Services of California, Inc., CNM and the shareholders of CNM, incorporated by reference
to Exhibit 10.22 to the Company's Current Report on Form 8-K/A dated January 7, 1997.
*10.23 -- Amended and Restated 1995 Stock Incentive Plan
*10.24 -- Amended and Restated 1996 Stock Option Plan
*10.25 -- Amended and Restated 1996 Directors' Stock Option Plan
*10.26 -- Employment Agreement with Gary O'Sullivan
*10.27 -- Employment Agreement with Thomas C. Livengood
20
*21.1 -- Subsidiaries of the Company
*27.1 -- Financial Data Schedule
- ------------
(*) Filed herewith.
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended
December 31, 1996.
21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 17, 1997.
CARRIAGE SERVICES, INC.
By: /s/ MELVIN C. PAYNE
MELVIN C. PAYNE
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------- -------------------------------- ---------------
/s/ MELVIN C. PAYNE Chairman of the Board, Chief March 17, 1997
MELVIN C. PAYNE Executive Officer and Director
(Principal Executive Officer)
/s/ MARK W. DUFFAY President and Director March 17, 1997
MARK W. DUFFEY
/s/ THOMAS C. LIVENGOOD Executive Vice President, Chief March 17, 1997
THOMAS C. LIVENGOOD Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
_________________________ Director
C. BYRON SNYDER
/s/ ROBERT D. LARRABEE Director March 17, 1997
ROBERT D. LARRABEE
/s/ BARRY K. FINGERHUT Director March 17, 1997
BARRY K. FINGERHUT
/s/ STUART W. STEDMAN Director March 17, 1997
STUART W. STEDMAN
/s/ RONALD A. ERICKSON Director March 17, 1997
RONALD A. ERICKSON
/s/ MARK F. WILSON Director March 17, 1997
MARK F. WILSON
22
CARRIAGE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Independent Public Accountants.................... 24
Consolidated Balance Sheets as of December 31, 1995
and 1996................................................... 25
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996........................... 26
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996....... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996........................... 28
Notes to Consolidated Financial Statements.................. 29
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Carriage Services, Inc.:
We have audited the accompanying consolidated balance sheets of Carriage
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Carriage
Services, Inc., and subsidiaries as of December 31, 1995 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, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997
24
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------
1995 1996
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 7,573 $ 1,712
Accounts receivable --
Trade, net of allowance for
doubtful accounts of $305
in 1995 and $530 in
1996...................... 2,637 5,665
Other...................... 505 673
--------- ----------
3,142 6,338
Marketable securities, available
for sale....................... 864 53
Inventories and other current
assets......................... 2,106 3,297
--------- ----------
Total current
assets............... 13,685 11,400
--------- ----------
PROPERTY, PLANT AND EQUIPMENT, at
cost:
Land............................ 4,416 9,640
Buildings and improvements...... 14,200 31,750
Furniture and equipment......... 5,365 8,817
--------- ----------
23,981 50,207
Less -- accumulated
depreciation................... (2,311) (4,095)
--------- ----------
21,670 46,112
CEMETERY PROPERTY, at cost........... 496 4,061
NAMES AND REPUTATIONS, net of
accumulated amortization of $959 in
1995 and $2,007 in 1996............ 22,559 62,568
DEFERRED CHARGES AND OTHER NONCURRENT
ASSETS............................. 3,336 7,167
--------- ----------
$ 61,746 $ 131,308
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 1,041 $ 2,192
Accrued liabilities............. 2,957 3,033
Current portion of long-term
debt and obligations under
capital leases................. 3,215 1,086
--------- ----------
Total current
liabilities.......... 7,213 6,311
PRENEED LIABILITIES, net............. 709 3,664
LONG-TERM DEBT, net of current
portion............................ 42,057 42,733
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 716 557
DEFERRED INCOME TAXES................ 1,900 3,749
--------- ----------
Total liabilities..... 52,595 57,014
--------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK........... -- 17,251
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
50,000,000 shares authorized;
15,660,000 and none issued and
outstanding in 1995 and 1996,
respectively................... 157 --
Class A Common Stock, $.01 par
value; 15,000,000 shares
authorized; none and 3,990,000
issued and outstanding in 1995
and 1996, respectively......... -- 40
Class B Common Stock; $.01 par
value; 15,000,000 shares
authorized; 2,520,000 and
4,502,000 issued and
outstanding in 1995 and 1996,
respectively................... 25 45
Contributed capital............. 15,100 63,966
Unrealized loss on marketable
securities, available for
sale........................... (36) --
Retained deficit................ (6,095) (7,008)
--------- ----------
Total stockholders'
equity............... 9,151 57,043
--------- ----------
$ 61,746 $ 131,308
========= ==========
The accompanying notes are an integral part of these financial statements.
25
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES, net
Funeral......................... $ 17,368 $ 22,661 $ 37,445
Cemetery........................ 1,036 1,576 2,903
--------- --------- ---------
18,404 24,237 40,348
COSTS AND EXPENSES
Funeral......................... 14,512 18,921 30,641
Cemetery........................ 878 1,326 2,541
--------- --------- ---------
15,390 20,247 33,182
--------- --------- ---------
Gross profit.................... 3,014 3,990 7,166
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,266 2,106 2,474
--------- --------- ---------
Operating income................ 1,748 1,884 4,692
INTEREST EXPENSE, net................ 2,671 3,684 4,347
--------- --------- ---------
Income (loss) before income
taxes and extraordinary
item.......................... (923) (1,800) 345
PROVISION FOR INCOME TAXES........... 40 694 138
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM............................... (963) (2,494) 207
Extraordinary item -- loss on early
extinguishment of debt, net of
income tax benefit of $332......... -- -- (498)
--------- --------- ---------
NET (LOSS)........................... (963) (2,494) (291)
Preferred stock dividend
requirements....................... -- -- 622
--------- --------- ---------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS....................... $ (963) $ (2,494) $ (913)
========= ========= =========
(LOSS) PER SHARE:
(Loss) per common and common
equivalent share before
extraordinary item
attributable to common
stockholders.................. $ (.28) $ (.66) $ (.09)
Extraordinary item.............. -- -- (.10)
--------- --------- ---------
Net (loss) per common and common
equivalent share attributable
to common stockholders........ $ (.28) $ (.66) $ (.19)
========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding............ 3,406 3,781 4,869
========= ========= =========
The accompanying notes are an integral part of these financial statements.
26
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CONTRIBUTED
NUMBER PREFERRED NUMBER COMMON CAPITAL UNREALIZED RETAINED
OF SHARES STOCK OF SHARES STOCK (DEFICIT) GAIN (LOSS) DEFICIT TOTAL
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1993......... -- $ -- 2,520 $ 25 $ (13) $-- $ (2,638) $(2,626)
Net loss -- 1994..................... -- -- -- -- -- -- (963) (963)
Issuance of preferred stock.......... 7,160 72 -- -- 7,005 -- -- 7,077
Unrealized net loss -- available for
sale securities.................... -- -- -- -- -- (59) -- (59)
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1994......... 7,160 72 2,520 25 6,992 (59) (3,601) 3,429
Net loss -- 1995..................... -- -- -- -- -- -- (2,494) (2,494)
Issuance of preferred stock.......... 8,500 85 -- -- 8,108 -- -- 8,193
Unrealized net gain -- available for
sale securities.................... -- -- -- -- -- 23 -- 23
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1995......... 15,660 157 2,520 25 15,100 (36) (6,095) 9,151
Net loss -- 1996..................... -- -- -- -- -- -- (291) (291)
Issuance of preferred stock.......... 555 5 -- -- 540 -- -- 545
Issuance of common stock............. -- -- 3,947 40 47,942 -- -- 47,982
Conversion of preferred stock to
common stock....................... (16,045) (160) 1,980 20 140 -- -- --
Conversion of redeemable preferred
stock to common stock.............. -- -- 39 -- 522 -- -- 522
Unrealized net gain -- available for
sale securities.................... -- -- -- -- -- 36 -- 36
Purchase of treasury stock........... (170) (2) -- -- (339) -- -- (341)
Exercise of stock options............ -- -- 6 -- 61 -- -- 61
Preferred dividends.................. -- -- -- -- -- -- (622) (622)
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1996......... -- $ -- 8,492 $ 85 $63,966 $-- $ (7,008) $57,043
========= ========= ========= ====== =========== =========== ======== =======
The accompanying notes are an integral part of these financial statements.
27
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)...................... $ (963) $ (2,494) $ (291)
Adjustments to reconcile net
(loss) to net cash provided by
operating activities --
Depreciation and
amortization............ 1,476 1,948 3,629
Provision for losses on
accounts receivable..... 510 488 683
Loss on early
extinguishment of debt,
net of income taxes..... -- -- 498
Deferred income taxes...... (27) 659 54
Changes in assets and
liabilities net of effects from
acquisitions:
Increase in accounts
receivable.............. (708) (1,125) (3,440)
Decrease (increase) in
inventories and other
current assets.......... (91) 115 (465)
Increase in other deferred
charges................. -- (144) (1,146)
Increase (decrease) in
accounts payable........ (214) 45 1,151
Increase (decrease) in
accrued liabilities..... 1,098 1,461 (403)
Increase (decrease) in
preneed liabilities..... (4) 44 44
---------- ---------- ----------
Net cash provided by
operating
activities........ 1,077 997 314
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash
acquired....................... (9,073) (12,191) (42,707)
Disposition of businesses
formerly owned................. -- -- 393
Purchase of marketable
securities available for
sale........................... (4,417) (1,795) --
Disposal of marketable
securities available for
sale........................... -- 5,312 976
Purchase of property, plant and
equipment...................... (1,179) (3,019) (4,630)
---------- ---------- ----------
Net cash used in
investing
activities........ (14,669) (11,693) (45,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.... 7,781 11,563 59,849
Payments on long-term debt and
obligations under capital
leases......................... (1,705) (2,273) (65,925)
Proceeds from subordinated
notes.......................... 390 -- --
Proceeds from sale of preferred
stock.......................... 6,992 8,192 --
Proceeds from issuance of common
stock.......................... -- -- 47,694
Preferred stock dividends....... -- -- (622)
Exercise of stock options....... -- -- 61
Purchase of treasury stock...... -- -- (341)
Payment of deferred debt
charges........................ (45) (49) (923)
---------- ---------- ----------
Net cash provided by
financing
activities........ 13,413 17,433 39,793
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (179) 6,737 (5,861)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 1,015 836 7,573
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 836 $ 7,573 $ 1,712
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid through issuance
of new debt.................... $ 231 $ 644 $ --
========== ========== ==========
Retirement of debt through
issuance of stock.............. $ -- $ 500 $ --
========== ========== ==========
Cash interest paid.............. $ 2,038 $ 3,127 $ 4,466
========== ========== ==========
Retirement of debt through
disposition of business........ $ -- $ -- $ 2,642
========== ========== ==========
Non-cash consideration for
acquisitions................... $ -- $ -- $ 25,474
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
28
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
BUSINESS
Carriage Services, Inc. (the "Company") was organized under the laws of
the State of Delaware on December 29, 1993. The Company owns and operates
funeral homes and cemeteries throughout the United States. The Company provides
professional services related to funerals and interments at its funeral homes
and cemeteries. Prearranged funerals and preneed cemetery property are marketed
in the geographic markets served by the Company's locations.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The financial statements include the consolidated financial statements of
Carriage Services, Inc. and its subsidiaries. In consolidation, all significant
intercompany balances and transactions have been eliminated. The consolidated
financial statements have been restated as of the earliest period presented to
reflect a one for two reverse stock split as further discussed in Note 7.
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with current year presentation.
FUNERAL AND CEMETERY OPERATIONS
The Company records the sale of funeral merchandise and services upon
performance of the funeral service. The Company records the sale of the right of
cemetery interment or mausoleum entombment and related merchandise at the time
of sale. The cost for cemetery merchandise and services sold, but not yet
provided, is accrued as an expense at the same time the cemetery revenue is
recognized. Allowances for customer cancellations, refunds and bad debts are
provided at the date of sale based on the historical experience of the Company.
Accounts receivable-trade, net consists of approximately $2,546,000 and
$4,977,000 of funeral receivables and approximately $91,000 and $688,000 of
current cemetery receivables at December 31, 1995 and 1996, respectively.
Noncurrent cemetery receivables, those payable after one year, are included in
Deferred Charges and Other Noncurrent Assets on the Consolidated Balance Sheets
(see Note 3).
PRENEED FUNERAL ARRANGEMENTS
Preneed funeral sales are effected by deposits to a trust or purchase of a
third-party insurance product. Since the Company does not have access to these
funds, the sale is not recorded until the service is performed, nor generally,
are the related assets and liabilities reflected on the Consolidated Balance
Sheets. The trust income earned and the increases in insurance benefits on the
insurance products are also deferred until the service is performed in order to
offset inflation in cost to provide the service in the future. The preneed
funeral trust assets were approximately $14,934,000 and $36,523,000 at December
31, 1995 and 1996, respectively, which in the opinion of management, exceed the
future obligations under such arrangements.
29
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summary reflects the composition of the assets held in trust
to satisfy the Company's future obligations under preneed funeral arrangements:
HISTORICAL UNREALIZED
COST BASIS GAIN (LOSS) FAIR VALUE
----------- ----------- ----------
(IN THOUSANDS)
As of December 31, 1995 --
Cash and cash equivalents...... $10,275 $ -- $10,275
Fixed income investment
contracts.................... 1,396 -- 1,396
Mutual funds, corporate bonds
and stocks................... 3,206 57 3,263
----------- ----------- ----------
Total..................... $14,877 $ 57 $14,934
As of December 31, 1996
Cash and cash equivalents...... $16,022 $ -- $16,022
Fixed income investment
contracts.................... 8,434 -- 8,434
Mutual funds, corporate bonds
and stocks................... 11,965 102 12,067
----------- ----------- ----------
Total..................... $36,421 $ 102 $36,523
CEMETERY MERCHANDISE AND SERVICE TRUST
The Company is also generally required by certain states to deposit a
specified amount into a merchandise and service trust fund for cemetery
merchandise and service contracts sold on a preneed basis. The principal and
accumulated earnings of the trust may be withdrawn by the Company upon maturity
(generally, the death of the purchaser) or cancellation of the contracts. Trust
fund investment income is recognized in current revenues as trust earnings
accrue, net of current period inflation costs recognized related to the
merchandise that has not yet been purchased. Merchandise and service trust fund
balances, in the aggregate, were approximately $60,000 and $1,134,000 at
December 31, 1995, and 1996, respectively, and are included in Preneed
Liabilities, net on the accompanying Consolidated Balance Sheets.
PERPETUAL AND MEMORIAL CARE TRUST
In accordance with respective state laws, the Company is required to
deposit a specified amount into perpetual and memorial care trust funds for each
interment/entombment right and memorial sold. Income from the trust fund is used
to provide care and maintenance for the cemeteries and mausoleums and is
periodically distributed to the Company and recognized as revenue upon
distribution. The perpetual and memorial care trust assets were approximately
$599,000 and $2,002,000 at December 31, 1995 and 1996, respectively, which, in
the opinion of management, will cover future obligations to provide care and
maintenance for the Company's cemeteries and mausoleums. The Company does not
have the right to withdraw any of the principal balances of these funds and,
accordingly, these trust fund balances are not reflected in the accompanying
Consolidated Balance Sheets.
DEFERRED OBTAINING COSTS
Deferred obtaining costs consist of sales commissions and other net direct
marketing costs applicable to preneed funeral sales. These costs are deferred
and amortized in funeral costs and expenses over 12 years which approximates the
expected timing of the performance of the services covered by the preneed
funeral contracts. These amounts were not significant prior to 1995 (see Note
3).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
30
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, and all of the Company's
investment securities are classified as available for sale securities. At
December 31, 1995 and 1996, the Company had gross unrealized gains of
approximately $4,000 and $0 and gross unrealized losses of approximately $40,000
and $0, respectively. The Company does not use derivative financial instruments
or participate in hedging activities.
INVENTORY
Inventory is recorded at the lower of its cost basis (determined by the
specific identification method) or net realizable value.
NAMES AND REPUTATIONS
The excess of the purchase price over the fair value of net identifiable
assets acquired, as determined by management in transactions accounted for as
purchases, is recorded as Names and Reputations. Such amounts are amortized over
40 years. Many of the Company's acquired funeral homes have provided high
quality service to families for generations. The resulting loyalty often
represents a substantial portion of the value of a funeral business. The Company
reviews the carrying value of Names and Reputations at least quarterly on a
location-by-location basis to determine if facts and circumstances exist which
would suggest that this intangible asset may be impaired or that the
amortization period needs to be modified. If indicators are present which
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the location and determine if the intangible assets
are recoverable based on these undiscounted cash flows. If impairment is
indicated, then an adjustment will be made to reduce the carrying amount of the
intangible asset to its fair value. At December 31, 1996, no impairment was
deemed to have occurred.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," as of January 1, 1996, and such adoption
did not have a material impact on the Company's consolidated financial position
or results of operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The costs of ordinary
maintenance and repairs are charged to operations as incurred, while renewals
and betterments are capitalized. Capitalized interest was minimal in 1994 and
1995 and $162,000 in 1996. Depreciation of property, plant and equipment is
computed based on the straight-line method over the following estimated useful
lives of the assets:
YEARS
---------
Buildings and improvements........... 15 to 40
Furniture and fixtures............... 5 to 10
Machinery and equipment.............. 5 to 10
Automobiles.......................... 5
INCOME TAXES
The Company files a consolidated U.S. federal income tax return. The
Company records deferred taxes for temporary differences between the tax basis
and financial reporting basis of assets and liabilities.
LOSS PER COMMON SHARE
For 1994 and 1995, the loss per common share is computed by dividing net
loss by the weighted average number of common and common equivalent shares
outstanding during each period, as calculated pursuant to various SEC
pronouncements for companies contemplating an initial public offering (see
31
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 9). For 1996, loss per share is computed by dividing the net loss after
deduction of preferred stock dividends by the weighted average number of common
and common equivalent shares outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that carrying value approximates fair value for cash
and cash equivalents and marketable equity securities which are designated as
available-for-sale. Additionally, the carrying amount of its floating rate
credit facility approximates its fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
During 1996, the Company acquired 38 funeral homes and seven cemeteries
through the purchase of stock and assets. In 1995, the Company acquired eight
funeral homes through the purchase of stock and assets. These transactions have
been accounted for utilizing the purchase method of accounting, and the results
of operations of the acquired businesses have been included in the results of
the Company from the respective dates of acquisition.
In accordance with APB Opinion 16, purchase prices were allocated to the
net assets acquired based on management's estimate of the fair value of the
acquired assets and liabilities at the date of acquisition. Many of the
Company's acquired funeral homes have provided high quality service to families
for generations. The resulting loyalty often represents a substantial portion of
the value of a funeral business. As a result, the excess of the consideration
paid over the fair value of net tangible and other identifiable intangible
assets is allocated to Names and Reputations. Future adjustments to the
allocation of the purchase price may be made during the 12 months following the
date of acquisition due to resolution of uncertainties existing at the
acquisition date, which may include obtaining additional information regarding
asset and liability valuations. There were no material purchase price allocation
adjustments made during 1994, 1995 or 1996.
32
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the above acquisitions on the Consolidated Balance Sheets at
December 31, 1995 and 1996 was as follows:
1995 1996
--------- ---------
(IN THOUSANDS)
Current Assets....................... $ 291 $ 3,532
Cemetery Property.................... -- 3,610
Property, Plant and Equipment........ 2,727 22,574
Deferred Charges and Other Noncurrent
Assets............................. 210 1,542
Names and Reputations................ 9,349 43,139
Current Liabilities.................. (67) (1,025)
Debt................................. (87) --
Other Liabilities.................... (232) (5,191)
--------- ---------
12,191 68,181
Consideration:
Redeemable preferred stock issued.... -- (17,775)
Debt................................. -- (6,582)
Preferred stock issued............... -- (555)
Cash acquired in acquisitions........ -- (274)
Common Stock issued.................. -- (288)
--------- ---------
Cash used for acquisitions...... $ 12,191 $ 42,707
========= =========
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during 1995 and 1996 as if
such acquisitions had taken place at the beginning of 1995. Appropriate
adjustments have been made to reflect the accounting basis used in recording
these acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that would have resulted had the combination been in effect on the date
indicated, that have resulted since the respective dates of acquisition or that
may result in the future.
1995 1996
--------- ---------
(UNAUDITED AND
IN THOUSANDS)
Revenues, net........................ $ 49,696 $ 51,868
(Loss) before income taxes........... (4,419) (1,160)
Net (loss) attributable to common
stockholders....................... (3,739) (2,282)
Net (loss) per common and common
equivalent share................... (.99) (.47)
33
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEFERRED CHARGES AND OTHER NONCURRENT ASSETS:
Deferred charges and other noncurrent assets at December 31, 1995 and 1996
were as follows (in thousands):
1995 1996
--------- ---------
Agreements not to compete, net of
accumulated amortization of $1,198
and $1,722 respectively............ $ 2,269 $ 3,297
Deferred debt expense, net of
accumulated amortization of $337
and $78, respectively.............. 492 511
Noncurrent cemetery and notes
receivable......................... 443 2,114
Deferred obtaining costs, net of
accumulated amortization of $12 and
$44, respectively.................. 132 1,245
--------- ---------
$ 3,336 $ 7,167
========= =========
The cost of agreements not to compete with former owners of businesses
acquired is amortized over the term of the respective agreements, ranging from
four to 10 years. Deferred debt expense is being amortized over the term of the
related debt. Noncurrent cemetery receivables result from the multi-year payment
terms in the underlying contracts. These cemetery receivables are recorded net
of allowances for customer cancellations, refunds and bad debts.
4. LONG-TERM DEBT:
The Company's long-term debt consisted of the following at December 31 (in
thousands):
1995 1996
--------- ---------
Credit Facility, unsecured floating
rate $75 million line, interest is
due on a quarterly basis at prime
to prime plus .25% or at the
applicable eurodollar rate plus
.75% to 2.0% (weighted average
interest rate was 7.17% at December
31, 1996), matures in September,
1999............................... $ -- $ 36,500
Notes payable, secured by deeds of
trust and security agreements
covering certain real property,
bearing interest rates of 7.31% to
9.75%. Notes were repaid on August
14, 1996........................... 36,316 --
Subordinated notes payable to
stockholder, with interest at a
predetermined rate plus 3% which is
subject to adjustment under certain
conditions. Interest is payable in
the form of cash if certain
conditions are met, otherwise
interest is paid in the form of
additional subordinated notes
issued annually. Notes were repaid
on August 14, 1996................. 7,016 --
Acquisition debt..................... -- 6,395
Other................................ 1,542 574
Less -- Current portion.............. (2,817) (736)
--------- ---------
$ 42,057 $ 42,733
========= =========
In conjunction with the closing of the initial public offering (the
"IPO") in August 1996, the Company entered into a new floating rate $75
million credit facility (the "Credit Facility") with a group of financial
institutions. The Credit Facility contains provisions regarding minimum net
worth and cash flow leverage ratio (as defined), as well as other financial
covenants. The Credit Facility also contains restrictions regarding other
borrowings, payment of dividends, capital expenditures and acquisitions. The
Company was in compliance with all covenants at December 31, 1996. In August
1996, the Company repaid a majority of the Company's outstanding indebtedness
with the proceeds from the issuance of its Class A Common Stock in connection
with the Company's IPO (see Note 7) and utilization of the Credit Facility. In
connection with repayment of debt, the Company recognized an extraordinary loss
of approximately $498,000, net of
34
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income tax benefit of approximately $332,000 for the write-off of the deferred
loan costs associated with the early retirement of debt. At February 28, 1997,
approximately $64 million was outstanding under the Credit Facility.
Acquisition debt primarily consists of deferred purchase price, seller held
debt and subordinated notes bearing interest at 0%, discounted at imputed
interest rates ranging from 6% to 8%, with maturities from 10 to 15 years.
The aggregate maturities of long-term debt for the year ended December 31,
1997 and for the subsequent four years, are approximately $736,000, $463,000,
$37,758,000, $477,000, $507,000, respectively and $3,528,000 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain office facilities, vehicles and equipment under
operating leases for terms ranging from one to fifteen years. Certain of these
leases provide for an annual adjustment. Rent expense was approximately
$734,000, $951,000 and $924,000 for 1994, 1995 and 1996, respectively.
Assets acquired under capital leases are included in property, plant and
equipment on the accompanying Consolidated Balance Sheets.
At December 31, 1996 minimum lease payments were as follows:
MINIMUM LEASE PAYMENTS
-----------------------
OPERATING CAPITAL
LEASES LEASES
--------- --------
(IN THOUSANDS)
Years ended December 31,
1997............................ $ 1,038 $ 402
1998............................ 994 281
1999............................ 933 155
2000............................ 702 63
2001............................ 646 39
Thereafter...................... 2,282 64
--------- --------
Total minimum lease payments......... $ 6,595 1,004
=========
Less: amount representing interest... 96
--------
Long-term obligations under capital
leases............................. $ 908
========
AGREEMENTS AND EMPLOYEE BENEFITS
The Company has entered into various employment and agreements not to
compete with key employees and former owners of businesses acquired. Payments
for such agreements are not made in advance. These agreements are generally for
one to ten years and provide for future payments annually, quarterly or monthly.
The aggregate payments due under these agreements for the subsequent five years,
are approximately $1,118,000, $1,112,000, $1,099,000, $858,000 and $711,000,
respectively and $2,277,000 thereafter. In conformity with industry practice,
these agreements are not included in the accompanying Consolidated Balance
Sheets.
The Company sponsors one defined contribution plan for the benefit of its
employees. The expense for this plan has not been significant for the periods
presented. In addition, the Company does not offer any other post-retirement or
post-employment benefits.
35
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is, from time to time, subject to routine litigation arising in
the normal course of its business. Management, with the advice of legal counsel,
believes that the results of any litigation or other pending legal proceedings
will not have a material effect on the Company's consolidated financial position
or results of operations.
6. INCOME TAXES:
Prior to January 1, 1994, the Company was an S corporation, was not subject
to federal income taxes, and instead, the owners were taxed on the Company's
income in a manner similar to partnerships. On January 1, 1994, the Company
became a C corporation and adopted SFAS No. 109. Accordingly, a charge to income
taxes in 1994 for approximately $57,000 was made to establish deferred taxes
payable. The Company did not pay any federal taxes in 1994, 1995 or 1996. The
provision (benefit) for income taxes for 1994, 1995 and 1996 consisted of:
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Current:
U. S. Federal................... $ -- $ -- $ --
State........................... 10 35 84
--------- --------- ---------
Total current provision.... 10 35 84
--------- --------- ---------
Deferred:
U. S. Federal................... (35) 585 48
State........................... 8 74 6
--------- --------- ---------
Total deferred (benefit)
provision............... (27) 659 54
--------- --------- ---------
Provision resulting from change in
tax status......................... 57 -- --
--------- --------- ---------
Total income tax provision........... $ 40 $ 694 $ 138
========= ========= =========
A reconciliation of taxes to the U.S. federal statutory rate to those
reflected in the Consolidated Statements of Operations for 1994, 1995 and 1996
is as follows:
1994 1995 1996
--------- --------- ---------
Federal statutory rate............... (34.0)% (34.0)% 34.0%
Effect of state income taxes......... (2.6) (6.0) 4.0
Effect of nondeductible expenses..... 6.2 3.9 57.3
Effect of valuation allowance........ 30.3 74.7 (55.3)
Effect of change in tax status....... 4.4 -- --
--------- --------- ---------
4.3% 38.6% 40.0%
========= ========= =========
36
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities at December 31, 1995 and 1996 were as
follows:
1995 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss
carryforwards.................. $ 1,536 $ 2,369
Reserves not currently
deductible..................... 117 200
Accrued liabilities and other... 130 104
Amortization of non-compete
agreements..................... 292 387
Accrued interest not currently
deductible..................... 190 --
--------- ---------
2,265 3,060
Valuation allowance.................. (1,517) (1,442)
--------- ---------
Total deferred tax assets....... $ 748 $ 1,618
========= =========
Deferred tax liability:
Amortization and depreciation... (2,229) (5,063)
--------- ---------
Total deferred tax
liabilities............. (2,229) (5,063)
========= =========
Net deferred tax liability........... (1,481) (3,445)
========= =========
Current net deferred asset........... 419 304
Noncurrent net deferred liability.... (1,900) (3,749)
--------- ---------
$ (1,481) $ (3,445)
========= =========
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets for which realization is uncertain. At December
31, 1996, the Company has approximately $5,723,000 of federal net operating loss
("NOL") carryforwards which will expire between 2009 and 2011, if not
utilized, and $8,700,000 of state NOL carryforwards which will expire between
the years 2000 and 2011, if not utilized. As a result of the IPO (see Note 7),
there may be a limitation placed on the Company's utilization of its NOL's by
Section 382 of the Internal Revenue Code. The Company reviews the valuation
allowance at the end of each quarter and makes adjustments if it is determined
that it is more likely than not that the NOL's will be realized.
7. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
On August 8, 1996, the Company completed its IPO of 3,910,000 shares of its
Class A Common Stock at $13.50 per share for net proceeds of approximately $48
million, after selling commissions and related expenses of approximately $5
million. The net proceeds of the IPO were used to repay outstanding indebtedness
of the Company. In connection with the IPO, the Company performed a
recapitalization of its common stock into two classes of common stock (Class A
and Class B), provided separate voting rights to each class and converted
existing common stock to Class B Common Stock. The holders of Class A Common
Stock are entitled to one vote for each share held on all matters submitted to a
vote of common stockholders. The holders of Class B Common Stock are entitled to
ten votes for each share held on all matters submitted to a vote of common
stockholders. The Series A, B and C Preferred Stocks automatically converted
into Class B Common Stock upon the closing of the IPO. Series D Preferred Stock
remained outstanding after the IPO (see Note 8).
37
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PREFERRED STOCK
Prior to the IPO, the Company had four classes of preferred stock
outstanding, Series A, B, C and D. The Series A, B and C preferred stocks
automatically converted into shares of Class B Common Stock at the effective
date of the IPO (August 8, 1996). The Series D preferred stock remains
outstanding at December 31, 1996 (see Note 8).
TREASURY STOCK
During 1996, the Company purchased 170,000 shares of Series B Preferred
Stock for total cash consideration of $341,000. Such shares have been canceled.
STOCK OPTION PLANS
The Company has three stock option plans currently in effect under which
future grants may be issued: the 1995 Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Nonemployee Director
Stock Option Plan (the "Directors' Plan").
Options granted under the 1995 Plan have a ten-year term. All options
granted under the 1995 Plan prior to the IPO vest immediately, while those
issued in conjunction with and after the IPO vest over a four-year period at 25%
per year. Options issued under this plan prior to the Company's IPO are
satisfied with shares of Class B Common Stock, but options issued after that
date are satisfied with shares of Class A Common Stock. A total of 400,000
shares are reserved for issuance under the 1995 Plan of which 194,500 were
outstanding at December 31, 1996.
Options granted under the 1996 Plan and the Directors' Plan have ten-year
terms and vest 8.33% per year on the first through fourth anniversary dates of
the grant date and 16.66% per year on the fifth through eighth anniversary dates
of the grant date; provided, however, the options scheduled to vest in years 5-8
from the grant date (i.e., 66 2/3 of the total grant) vest immediately if the
average of the daily high and low prices of the Class A Common Stock for 20
consecutive trading days exceeds $27.99 prior to the fourth anniversary of the
grant date. A total of 600,000 shares of Class A Common Stock are reserved for
issuance under the 1996 Plan and 200,000 shares of Class A Common Stock are
reserved for issuance under the Directors' Plan. Options to purchase a total of
560,000 and 95,000 shares of Class A Common Stock were outstanding under the
1996 Plan and Directors' Plan, respectively.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been the following pro forma amounts:
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
Net (loss) attributable to common
stockholders
As reported..................... $ (2,494) $ (913)
Pro forma....................... (2,721) (1,122)
Net (loss) per common and common
equivalent share attributable to
common stockholders:
As reported..................... (.66) (.19)
Pro forma....................... (.72) (.23)
Each of the plans is administered by a stock option committee appointed by
the Board of Directors. The plans allow for options to be granted as
non-qualified options, incentive stock options, reload options, alternative
appreciation rights and stock bonus options. As of December 31, 1996, only
non-qualified
38
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options and incentive stock options have been issued. The options are granted
with an exercise price equal to the then fair market value of the Company's
common stock as determined by the Board of Directors.
A summary of the status of the plans at December 31, 1995 and 1996 and
changes during the year ended is presented in the table and narrative below:
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996
------------------ ------------------
SHARES WTD AVG. SHARES WTD AVG.
(000) EX PRICE (000) EX PRICE
------ -------- ------ --------
Outstanding at beginning of period. -- $-- 50 $ 9.80
Granted............................ 50 9.80 818 13.90
Exercised.......................... -- -- (5) 10.43
Canceled........................... -- -- (13) 10.11
------ ------
Outstanding at end of year......... 50 9.80 850 13.74
------ ------
Exercisable at end of year......... 50 9.80 74 10.34
------ ------
Weighted average fair value of
options granted.................. $ 4.57 $ 8.00
All of the options outstanding at December 31, 1996 have exercise prices
between $8.00 and $20.875, with a weighted average exercise price of $13.74 and
a weighted average remaining contractual life of 9.7 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.27% and 6.67%; expected dividend yields of 0% and 0%; expected lives
of ten years and ten years; expected volatility of 0% and 30.45%.
During 1996, in fulfillment of a previous contractual obligation, the
Company repurchased 106,470 shares of Class B Common Stock from an executive
officer of the Company. Concurrently therewith, the Company sold such shares to
several members of management at the same price, which price approximated the
fair market value of the Company's common stock at the date of contract.
REVERSE STOCK SPLIT
On July 18, 1996, the Company's Board of Directors and stockholders
approved an amendment to the Company's Certificate of Incorporation which
authorized a one for two reverse stock split. The Consolidated Financial
Statements have been restated as if the reverse stock split had occurred at the
beginning of the earliest period presented. For each two shares of Class B
Common Stock at $.01 par, the stockholder received one share of Class B Common
Stock at $.01 par. Upon completion of the IPO, the Series A, B and C Preferred
Stocks automatically converted into Class B Common Stock. The number of shares
held by each Series A, B and C Preferred stockholder remained the same; however,
the conversion prices for Class B Common Stock on those preferred shares doubled
in conjunction with the above-mentioned reverse stock split. In addition, the
exercise prices on outstanding stock options also doubled related to this
reverse stock split, and the number of shares of Class B Common Stock covered by
such options decreased by 50%.
8. REDEEMABLE PREFERRED STOCK:
The Company has 20,000,000 authorized shares of Series D Preferred Stock
with a par value of $.01 per share, of which approximately 17,253,000 shares
were issued and outstanding at December 31, 1996. The Series D Preferred Stock
is convertible at any time into common stock at an initial conversion base price
of $13.50 per share through February 28, 1997. Thereafter, the conversion price
increases every six months by $1.00 until February 28, 1998 whereupon the
conversion price is the average market price for the ten days preceding the date
of delivery of notice of conversion on the principal securities market on which
the Class A Common Stock is then traded. The holders of Series D Preferred Stock
are entitled to receive preferential dividends at an annual rate ranging from
$0.06 to $0.07 per share, payable quarterly. Dividends are payable quarterly as
long as the stock is outstanding. The Series D Preferred Stock is redeemable, in
whole or in part, at the option of the Company, at any time during the period
commencing with the second anniversary of the
39
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's IPO (August 8, 1998) and ending December 31, 2001. On December 31,
2001, the Company must redeem all shares of Series D Preferred Stock then
outstanding at a redemption price of $1.00 per share, together with all accrued
and unpaid dividends.
Concurrent with every issuance of Series D Preferred Stock, an irrevocable
standby letter of credit, issued by a financial institution and guaranteed by
the Company, was given to the holder (or a designated beneficiary) and can be
drawn upon if certain events occur, including the following: the Company has
failed to pay preferred stock dividends, the Company has failed to redeem the
preferred stock shares on the designated mandatory redemption date or a
liquidation, dissolution or winding up of affairs of the Company occurs. As of
December 31, 1996, letters of credit of approximately $10.0 million were
outstanding relative to Series D Preferred Stock. This stock is classified as
Redeemable Preferred Stock on the Consolidated Balance Sheets of the Company.
9. LOSS PER SHARE:
For 1994 and 1995, the loss per share is calculated based on the weighted
average number of common and common equivalent shares outstanding during each
year using guidance provided by the SEC for companies that are contemplating an
initial public offering. For 1996, loss per share is computed by dividing the
net loss, after deduction of preferred stock dividends, by the weighted average
number of common and common equivalent shares outstanding. Loss per common and
common equivalent share for 1994, 1995 and 1996 was as follows:
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net (loss)........................... $ (963) $ (2,494) $ (291)
Preferred stock dividend
requirements......................... -- -- 622
--------- --------- ---------
Net (loss) attributable to common
stockholders......................... $ (963) $ (2,494) $ (913)
========= ========= =========
Common shares outstanding............ 2,520 2,520 4,869
Common equivalent shares:
Stock options, treasury stock
method(a)..................... 23 23 --
Assumed conversion of preferred
stock(b)...................... 863 1,238 --
--------- --------- ---------
Total weighted average common and
common equivalent shares
outstanding........................ 3,406 3,781 4,869
========= ========= =========
(Loss) per common and common
equivalent share before
extraordinary item attributable to
common stockholders................ $ (.28) $ (.66) $ (.09)
Extraordinary item.............. -- -- (.10)
--------- --------- ---------
Net (loss) per common and common
equivalent share attributable
to common stockholders........ $ (.28) $ (.66) $ (.19)
========= ========= =========
Weighted average number of common and
common equivalent shares
outstanding (in thousands)......... 3,406 3,781 4,869
========= ========= =========
- ------------
(a) In accordance with the SEC's Staff Accounting Bulletin No. 83, the loss per
share presented assumes that all stock options granted by the Company within
one year prior to the Company's IPO were outstanding for 1994 and 1995. The
effect of such stock options was calculated using the "treasury stock"
method, using the IPO price of $13.50 per share and was included in the
calculation of common equivalent shares outstanding despite the fact that
the effect of the assumed exercise of such options is anti-dilutive.
(b) Pursuant to the terms of their respective agreements, the Company's Series
A, B and C Preferred Stock automatically converted to common stock upon the
Company's IPO. Therefore, in accordance with the SEC's position relative to
securities with these conversion characteristics, the effect of such
conversions was reflected from the respective dates of issuance of the
preferred stocks in common equivalent shares outstanding, despite the fact
that the effect of the assumed exercise of stock options is anti-dilutive.
40
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EVENTS SUBSEQUENT TO DECEMBER 31, 1996:
ACQUISITIONS
The Company closed six transactions in January and February of 1997 which
included 16 funeral homes and two cemeteries, for total consideration of
approximately $55 million. These include CNM, a California corporation which
through its subsidiaries owns and operates the ten Wilson & Kratzer funeral
homes located in Alameda and Contra Costa Counties, California and the Rolling
Hills Memorial Park Cemetery located in Richmond, California. The combined
operations of CNM perform 2,100 funerals and 1,470 interments annually.
The Company issued 19,999,992 shares of Series F Preferred Stock in
conjunction with the merger with CNM. These shares are convertible into an
aggregate of 1,272,450 shares of Class A Common Stock. Of the issued and
outstanding shares, 5,388,315 shares are "designated" meaning they are
convertible at $15.00 per share through March 31, 1997. The remaining 14,611,677
shares are convertible at $16.00 per share until January 1, 1998 at which time
the conversion price increases to $17.00 per share and increases by $1.00 per
share each January 1 thereafter until January 1, 2002 at which time the
conversion base price will be equal to the market price of the Class A Common
Stock.
The holders of
Series F Preferred Stock are entitled to receive preferential dividends at an
annual rate initially of $.04 per share, with the annual rate increasing by 5%
per year commencing January 1, 1998 until January 1, 2001, at which time the
annual rate becomes fixed at $.0486 per share. On December 31, 2007, the Company
must redeem all shares of Series F Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends. The Company does not have the option to redeem any Series F Preferred
Stock prior to December 31, 2007.
SERIES D PREFERRED CONVERSION
As of February 28, 1997, holders of 15,570,616 shares of Series D Preferred
Stock have elected to convert their shares into shares of the Company's common
stock, leaving 1,682,500 shares of Series D Preferred Stock outstanding.
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1995 and 1996 (in thousands, except per share
data):
FIRST SECOND THIRD FOURTH
------ ------ ------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1995(1)
Revenues, net....................... $5,715 $5,786 $ 6,028 $ 6,708
Gross profit........................ 1,250 922 862 956
Net (loss).......................... (331) (367) (859) (937)
Net (loss) per common share......... $(0.09) $(0.10) $ (0.24) $ (0.21)
1996(1)
Revenues, net....................... $7,635 $9,290 $10,145 $13,278
Gross profit........................ 1,670 1,719 994 2,783
Income (loss) before extraordinary
item.............................. (193) (468) (414) 1,282
Extraordinary item.................. -- -- (498) --
Preferred stock dividend
requirements...................... 10 91 250 271
Net income (loss)................... (203) (559) (1,162) 1,011
Net income (loss) per common share:
Continuing operations.......... $(0.08) $(0.22) $ (0.11) $ 0.12
Extraordinary item............. -- -- (0.09) --
------ ------ ------- -------
Net income (loss) per
common share........... $(0.08) $(0.22) $ (0.20) $ 0.12
- ------------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total computed for the year due to stock transactions which
occurred during the periods presented.
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Carriage Services, Inc.:
We have audited in accordance with generally accepted auditing standards,
the Consolidated Financial Statements of Carriage Services, Inc. and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated February 28, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in Part IV, Item 14 (a)(2) for Carriage Services, Inc. and subsidiaries is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997
42
CARRIAGE SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
==============================================================================================
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
- ----------------------------------------------------------------------------------------------
Year ended December 31, 1994:
Allowance for bad debts and
contract cancellations........... $ 196 $ 510 $ 501 $ 205
Year ended December 31, 1995:
Allowance for bad debts and
contract cancellations........... $ 205 $ 488 $ 388 $ 305
Year ended December 31, 1996:
Allowance for bad debts and
contract cancellations........... $ 305 $ 683 $ 458 $ 530
43