UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K/A
-------------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 30, 1999
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-11961 76-0423828
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
1300 POST OAK BLVD., SUITE 1500, HOUSTON, TX 77056
(Address of principal executive offices) (Zip Code)
(281) 556-7400
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 30, 1999, Carriage Services, Inc. (the "Company"), through its wholly
owned subsidiaries, acquired the operating assets and assumed certain
liabilities of nine cemeteries and five funeral homes ("the Acquired
Businesses") from Service Corporation International, Inc. The Acquired
Businesses are located in California, Florida, Georgia, Indiana, Ohio, Oregon,
Tennessee, Texas and Virginia. The consideration for the acquisition consisted
of cash of approximately $12.6 million. The source of the consideration was a
draw on the Company's line of credit in the ordinary course of business. The
consideration was determined through negotiations between the Company and
representatives of Service Corporation International, Inc. In connection with
this acquisition, the Company assumed customary employment and non-compete
agreements with certain employees and former owners of the Acquired Businesses.
The acquisition will be accounted for under the purchase method of accounting
for financial reporting purposes.
The Company is not aware of any pre-existing material relationships between (i)
the Acquired Businesses, Service Corporation International, Inc. or any if its
affiliates, directors and officers, on the one hand, and (ii) the Company, any
of the Company's affiliates, directors and officers or any associate of such
directors and officers, on the other.
The Company also completed the merger or acquisition of several other businesses
(the "Other Acquisitions") since the filing of the Company's 1997 Form 10-K on
March 30, 1998. None of the Other Acquisitions (other than ones previously filed
on Form 8-K) is believed to be individually material to the results of
operations or financial condition of the Company. However, the acquisition of
the Acquired Businesses requires the filing of financial statements and pro
forma financial information pursuant to Rules 3-05(b) and 11-01 of Regulation
S-X to the extent such businesses would constitute a "significant subsidiary"
under such Rules.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
This Form 8-K/A is being filed to include in the Current Report on Form
8-K filed by the Registrant with the Securities and Exchange Commission on
April 13, 1999 the financial statements and pro forma financial information
required by Item 7.
CARRIAGE/ECI GROUP PAGE
- ------------------ ----
Auditor's Report ......................................................... 10
Combined Balance Sheet as of December 31, 1997 .......... ................ 11
Combined Statement of Operations for the Year Ended December 31, 1997 .. 12
Combined Statement of Stockholders' Equity for the Year
Ended December 31, 1997................................................. 13
Combined Statement of Cash Flows for the Years Ended December 31, 1997 .. 14
Notes to Combined Financial Statements ................................... 15
2
<PAGE>
CARRIAGE 1998 GROUP PAGE
- ------------------- ----
Auditor's Report ......................................................... 27
Combined Balance Sheet as of December 31, 1997 ........................... 28
Combined Statement of Operations for the Year Ended
December 31, 1997 ...................................................... 29
Combined Statement of Stockholders' Equity for the Year Ended
December 31, 1997 ...................................................... 30
Combined Statement of Cash Flows for the Years Ended
December 31,1997 ....................................................... 31
Notes to Combined Financial Statements ................................... 32
(b) PRO FORMA FINANCIAL INFORMATION
CARRIAGE SERVICES, INC.
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1998 .. 5
Unaudited Pro Forma Consolidated Statement of Operations--Nine
Months Ended September 30, 1998 ........................................ 6
Unaudited Pro Forma Consolidated Statement of Operations--Year
Ended December 31, 1997 ................................................ 7
Notes to Unaudited Pro Forma Consolidated Financial Statements ........... 8
(c) EXHIBITS. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARRIAGE SERVICES, INC.
Dated: June 11, 1999 By: /s/ THOMAS C. LIVENGOOD
Thomas C. Livengood
Executive Vice President and
Chief Financial Officer
3
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On March 30, 1999, Carriage Services, Inc. (the "Company"), through its wholly
owned subsidiaries, acquired the operating assets and assumed certain
liabilities of nine cemeteries and five funeral homes ("the Acquired
Businesses") from Service Corporation International, Inc. The Acquired
Businesses are located in California, Florida, Georgia, Indiana, Ohio, Oregon,
Tennessee, Texas and Virginia. The consideration for the acquisition consisted
of cash of approximately $12.6 million. The source of the consideration was a
draw on the Company's line of credit in the ordinary course of business. The
consideration was determined through negotiations between the Company and
representatives of Service Corporation International, Inc. In connection with
this acquisition, the Company assumed customary employment and non-compete
agreements with certain employees and former owners of the Acquired Businesses.
The acquisition will be accounted for under the purchase method of accounting
for financial reporting purposes.
The accompanying Unaudited Pro Forma Consolidated Financial Statements have been
prepared based upon certain assumptions and include adjustments as detailed in
the Notes to Unaudited Consolidated Pro Forma Financial Statements. The
estimated fair market values reflected in the Unaudited Consolidated Financial
Statements are based on preliminary estimates and assumptions and are subject to
revision as more information regarding asset and liability valuations becomes
available. In management's opinion, the preliminary allocation reflected herein
is not expected to be materially different from the final allocation.
The Unaudited Pro Forma Consolidated Statements of Operations do not assume any
additional profitability resulting from the application of the Company's revenue
enhancement measures or cost reduction programs to the historical results of the
Acquired Businesses, nor do they assume increases in corporate general and
administrative expenses which may have resulted from the Company managing the
Acquired Businesses for the periods presented.
The following Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements of the Company
and the related notes thereto as included in the Company's Form 10-Q as of
September 30, 1998 and Form 10-K as of December 31, 1997. Such pro forma
information is based on historical data with respect to the Company and the
Acquired Businesses. The pro forma information is not necessarily indicative of
the results that might have occurred had such transactions actually taken place
at the beginning of the period specified and is not intended to be a projection
of future results. The pro forma information presented herein is provided to
comply with the requirements of the Securities and Exchange Commission. The pro
forma information does not reflect any adjustments to reflect the manner in
which the acquired entities are being or will be operated under the control of
the Company.
4
<PAGE>
CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CARRIAGE ACQUIRED PRO FORMA TOTAL
ASSETS SERVICES, INC. BUSINESSES ADJUSTMENTS(1) PRO FORMA
-------------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 4,100 $ 608 $ (608) $ 4,100
Accounts receivable net of allowance .............................. 18,662 2,506 -- 21,168
-------- -------- --------- ---------
18,662 2,506 -- 21,168
Inventories and other current assets .............................. 7,640 1,527 (1,296) 7,871
-------- -------- --------- ---------
Total current assets .......................................... 30,402 4,641 (1,904) 33,139
-------- -------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, net .................................... 118,407 4,765 123 123,295
CEMETERY PROPERTY ..................................................... 57,862 12,753 (10,782) 59,833
NAMES AND REPUTATIONS, net ............................................ 177,502 3,581 (2,646) 178,437
DEFERRED CHARGES AND OTHER
NONCURRENT ASSETS ............................................. 24,070 21,733 (17,534) 28,269
-------- -------- --------- ---------
$408,243 $ 47,473 $ (32,743) $ 422,973
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES ................................................... $ 17,957 $ 1,375 $ (1,254) $ 18,078
PRENEED LIABILITIES, net .............................................. 4,825 13,900 (13,526) 5,199
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, net of
current portion ..................................................... 175,414 239 14,005 189,658
DEFERRED INCOME TAXES ................................................. 16,277 2,543 (2,552) 16,268
OTHER LIABILITIES ..................................................... 3,304 -- -- 3,304
-------- -------- --------- ---------
Total liabilities ............................................. 217,777 18,057 (3,327) 232,507
-------- -------- --------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ............................................ 13,951 -- -- 13,951
STOCKHOLDERS' EQUITY:
Common Stock ...................................................... 148 -- -- 148
Contributed capital ............................................... 174,332 -- -- 174,332
Retained earnings ................................................. 2,035 -- -- 2,035
Acquired Business equity .......................................... -- 29,416 (29,416) --
-------- -------- --------- ---------
Total stockholders' equity .................................... 176,515 29,416 (29,416) 176,515
-------- -------- --------- ---------
$408,243 $ 47,473 $ (32,743) $ 422,973
======== ======== ========= =========
</TABLE>
See the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
5
<PAGE>
CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CARRIAGE ACQUIRED PRO FORMA TOTAL
SERVICES, INC. BUSINESS ADJUSTMENTS PRO FORMA
-------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues, net ................................................ $81,951 $ 9,458 $ -- $91,409
Costs and expenses ........................................... 58,854 5,560 (29)(2) 64,385
------- ------- ----- -------
Gross profit ............................................. 23,097 3,898 29 27,024
General and administrative expenses .......................... 5,661 1,004 -- 6,665
------- ------- ----- -------
Operating income ......................................... 17,436 2,894 (29) 20,359
Interest expense, net ........................................ 6,511 262 384 (3) 7,157
------- ------- ----- -------
Income before income taxes ................................ 10,925 2,632 (355) 13,202
Provision for income taxes ................................... 4,833 1,045 (43)(4) 5,835
------- ------- ----- -------
Net income ............................................... 6,092 1,587 (312) 7,367
Preferred stock dividend requirements ........................ 454 -- -- 454
------- ------- ----- -------
Net income available to common stockholders .............. $ 5,638 $ 1,587 $(312) $ 6,913
======= ======= ===== =======
Earnings per share:
Basic .................................................... $ .44 $ .54
======= =======
Diluted .................................................. $ .43 $ .52
======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic .................................................... 12,772 12,772
======= =======
Diluted .................................................. 13,198 13,198
======= =======
</TABLE>
See the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
6
<PAGE>
CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CARRIAGE ACQUIRED PRO FORMA TOTAL
SERVICES, INC. BUSINESS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues, net ...................................................... $ 77,421 $ 9,872 $-- $ 87,293
Costs and expenses ................................................. 58,038 5,171 50(2) 63,259
-------- -------- ----- --------
Gross profit ................................................... 19,383 4,701 (50) 24,034
General and administrative expenses ................................ 5,277 1,621 -- 6,898
-------- -------- ----- --------
Operating income ............................................... 14,106 3,080 (50) 17,136
Interest expense, net .............................................. 5,889 527 393(3) 6,809
-------- -------- ----- --------
Income before income taxes and extraordinary item ............... 8,217 2,553 (443) 10,327
Provision for income taxes ......................................... 3,726 1,014 (62)(4) 4,678
-------- -------- ----- --------
Income before extraordinary item ................................ 4,491 1,539 (381) 5,649
Extraordinary item:
Loss on early extinguishment of debt, net of income tax
benefit of $159 ............................................ (195) -- -- (195)
-------- -------- ----- --------
Net income ..................................................... 4,296 1,539 (381) 5,454
Preferred stock dividend requirements .............................. 890 -- -- 890
-------- -------- ----- --------
Net income available to common stockholders .................... $ 3,406 $ 1,539 $(381) $ 4,564
======== ======== ===== ========
Basic earnings per share:
Net earnings before extraordinary item ......................... $ .35 $ .47
Extraordinary item ............................................. (.02) (.02)
-------- --------
Net income ..................................................... $ .33 $ .45
======== ========
Diluted earnings per share:
Net earnings before extraordinary item ......................... $ .34 $ .46
Extraordinary item ............................................. (.02) (.02)
-------- --------
Net income ..................................................... $ .32 $ .44
======== ========
Weighted average number of common and common
equivalent shares outstanding:
Basic .......................................................... 10,226 10,226
======== ========
Diluted ........................................................ 10,485 10,485
======== ========
</TABLE>
See the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
7
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The accompanying Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1998 gives effect to the acquisition of the Acquired Business. The
estimated fair market values reflected herein are based on preliminary estimates
and assumptions and are subject to revision as more information becomes
available. In management's opinion, the preliminary allocation is not expected
to be materially different from the final allocation.
(1) To record the elimination of assets and liabilities not acquired or assumed
by the Company and record the total consideration (including estimated
transaction costs) and the preliminary allocation of total consideration to
the identifiable net assets of the acquired business.
The effect of the Acquired Business on the Consolidated Balance Sheet at
September 30, 1998 was as follows:
1998
--------------
(in thousands)
Current Assets $ 6,474
Property, Plant and Equipment 4,888
Cemetery Property 1,971
Deferred Charges and Other Non-current
Assets 462
Names and Reputations 935
Current Liabilities (121)
Debt assumed in acquisition (920)
Other Liabilities (365)
--------------
13,324
Consideration:
Cash used for acquisition drawn on
line of credit $ 13,324
==============
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
The accompanying Unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 1997 and nine months ended September 30, 1998 give
effect to the acquisition of the Acquired Business.
(2) To record adjustment to amortization expense relative to the Company's new
basis in net assets acquired in conjunction with the acquisition of the
Acquired Business as if it had occurred as of the beginning of each of the
respective periods presented. Names and reputations of $935,000, recorded in
conjunction with the acquisition of the Acquired Businesses, is amortized
over 40 years.
Pro forma depreciation expense has been recorded based on the Company's
estimate of the useful lives of the acquired assets using the Company's
depreciation methods.
8
<PAGE>
Non-compete agreements, assumed in connection with the acquisition of the
Acquired Businesses, are amortized over the term of the agreements.
(3) To record additional interest expense of $384,000 and $393,000 for the nine
months ended September 30, 1998 and the year ended December 31, 1997,
respectively, which would have been incurred by the Company assuming the
acquisition of the Acquired Business had occurred as of the beginning of
each of the respective periods presented.
(4) To record the income tax expense as if the effective rate is 44.2% for the
nine months ended September 30, 1998 and 45.3% for the year ended December
31, 1997. This adjustment represents income tax benefit of $43,000 and
$62,000 for the nine months ended September 30, 1998 and the year ended
December 31, 1997, respectively. The Company's management believes that this
is the effective rate that would be indicative of the Company's normal tax
position assuming the acquisition was made as of the beginning of the
respective periods presented.
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Carriage/ECI Group:
We have audited the accompanying combined balance sheet of Carriage/ECI Group as
of December 31, 1997, and the related combined statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Carriage/ECI Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
At December 31, 1997 and for the year then ended Carriage/ECI Group was included
in certain operating divisions of Equity Corporation International. Equity
Corporation International was organized with centralized financial, managerial,
accounting and administrative functions and, accordingly, a portion of the cost
of such centralized functions has been allocated and reported in the financial
statements of Carriage/ECI Group.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Carriage/ECI Group as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Ham, Langston & Brezina L.L.P.
Houston, Texas
January 25, 1999
-10-
<PAGE>
CARRIAGE/ECI GROUP
COMBINED BALANCE SHEET
DECEMBER 31, 1997
----------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 78,780
Accounts receivable, net ............................... 251,786
Inventories ............................................ 144,305
Prepaids and other ..................................... 18,003
-----------
Total current assets ................................. 492,874
Preneed funeral contracts ................................ 5,509,615
Cemetery property, at cost ............................... 6,379,513
Long-term receivables .................................... 4,020,887
Property, plant and equipment, net ....................... 2,857,441
Names and reputations, net ............................... 2,755,557
Deferred charges and other assets ........................ 420,579
-----------
Total assets ....................................... $22,436,466
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............... $ 264,243
Current portion of long-term debt ...................... 194,046
Deferred income taxes .................................. 591,863
-----------
Total current liabilities ............................ 1,050,152
Deferred preneed funeral contract revenues ............... 5,747,689
Deferred cemetery costs .................................. 1,823,359
Deferred income taxes .................................... 1,481,750
Other liabilities ........................................ 87,779
-----------
Total liabilities .................................. 10,190,729
Commitments and contingencies
Stockholders' equity ..................................... 12,245,737
-----------
Total liabilities and stockholders'
equity ......................................... $22,436,466
===========
See notes to combined financial statements.
-11-
<PAGE>
CARRIAGE/ECI GROUP
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Revenues, net:
Funeral ................................................ $1,452,559
Cemetery ............................................... 4,667,014
----------
Total revenues, net .................................. 6,119,573
----------
Costs and expenses:
Funeral ................................................ 1,112,712
Cemetery ............................................... 1,688,200
----------
Total costs and expenses ............................. 2,800,912
----------
Gross profit ............................................. 3,318,661
General and administrative expenses ...................... 638,384
Corporate expense allocations ............................ 171,255
----------
Income from operations ................................... 2,509,022
Interest expense ......................................... 205,166
----------
Income before provision for income taxes ................. 2,303,856
Provision for income taxes ............................... 910,023
----------
Net income ............................................... $1,393,833
==========
See notes to combined financial statements.
-12-
<PAGE>
CARRIAGE/ECI GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Balance at January 1, 1997 .............................. $ 7,249,346
Capital contribution from the Parent .................... 3,602,558
Net income .............................................. 1,393,833
-----------
Balance at December 31, 1997 ............................ $12,245,737
===========
See notes to combined financial statements.
-13-
<PAGE>
CARRIAGE/ECI GROUP
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Cash flows from operating activities:
Net income .............................................. $ 1,393,833
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization ......................... 175,074
Loss on sale of assets ................................ 2,417
Provision for bad debts and contract
cancellations ....................................... 291,127
Deferred income tax ................................... 5,647
Changes in assets and liabilities, net
of effects from acquisitions:
Increase in accounts receivable ..................... (1,458,654)
Increase in inventories ............................. (26,218)
Increase in other current assets .................... (10,800)
Increase in other non-current assets ................ (44,299)
Decrease in accounts payable and accrued
liabilities ....................................... (271,524)
Increase in preneed funeral contracts and
associated deferred revenues ...................... 1,695
-----------
Net cash provided by operating activities ......... 58,298
-----------
Cash flows from investing activities:
Capital expenditures .................................... (307,130)
Cemetery and funeral home acquisitions .................. (2,765,683)
Proceeds from sale of property and equipment ............ 3,800
-----------
Net cash used in investing activities ............. (3,069,013)
-----------
Cash flows from financing activities:
Payments on long-term debt .............................. (528,322)
Capital contributions from the Parent ................... 3,602,558
-----------
Net cash provided by financing activities ......... 3,074,236
-----------
Net increase in cash and cash equivalents ................. 63,521
Cash and cash equivalents, beginning of
period .................................................. 15,259
-----------
Cash and cash equivalents, end of period .................. $ 78,780
===========
See notes to combined financial statements.
-14-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
----------
1. ORGANIZATION AND NATURE OF OPERATIONS
On December 31, 1998, Carriage Services, Inc. ("Carriage"), through one of
its wholly owned subsidiaries, signed definitive asset purchase agreements
to acquire the operations of six cemeteries and four funeral homes (located
in non-metropolitan and suburban areas of Alabama, California, Georgia,
Indiana, Ohio, Tennessee and Texas) from Service Corporation International
("SCI"). SCI had previously acquired the cemeteries and funeral homes in a
merger with Equity Corporation International (the "Parent"), for which SCI
received final regulatory approval to consummate the merger in January,
1999. The cemeteries and funeral homes included in this transaction are,
hereinafter, collectively referred to as "Carriage/ECI Group". Carriage/ECI
Group performs personal and professional services related to funerals and
internments/entombments at its funeral and cemetery locations. Preneed
funerals are marketed in the geographic markets served by Carriage/ECI
Group's funeral service locations.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared from the
separate records of Carriage/ECI Group. Certain expenses of a general and
administrative nature, either directly attributable to Carriage/ECI Group,
or allocations of actual expenses incurred by the Parent for the benefit of
Carriage/ECI Group, have been allocated by the Parent based upon net
revenue and included in the accompanying combined statement of operations.
Such allocated costs include, among others, legal, payroll, employee
benefits, insurance and professional services. In addition, Carriage/ECI
Group is charged interest expense based upon net payables to the Parent
(See Note 5). Management of Carriage/ECI Group believes that such expenses
have been allocated on a reasonable basis.
The accompanying combined financial statements include Carriage/ECI Group
funeral homes and cemeteries from the date of acquisition by the Parent.
Accordingly, these combined financial statements include the operations of
only four funeral homes and five cemeteries because other locations were
not acquired by the Parent until 1998.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 periods.
Actual results could differ from those estimates.
Continued
-15-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FUNERAL OPERATIONS
Carriage/ECI Group recognizes revenue on funeral sales at the time the
services are performed. Carriage/ECI Group's trade receivables consist
primarily of funeral services already performed. An allowance for doubtful
accounts has been provided for those accounts which management estimates
will not be collected in the future. All price guaranteed preneed funeral
sales contracts (including insurance funded contracts) are included in the
accompanying combined balance sheet as a long-term asset with a
corresponding credit to deferred preneed funeral contract revenues. Preneed
funeral trust earnings are deferred until the funeral service is performed.
Additionally, increasing benefits under insurance funded contracts are
accrued and deferred until the funeral service is performed.
CEMETERY OPERATIONS
Sales of cemetery interment rights, interment services and related
merchandise are recorded as revenues when customer contracts are executed
with concurrent recognition of related costs. Costs related to the sales of
cemetery interment rights include cemetery property and costs related to
cemetery development activities and are charged to operations using the
specific identification method. Costs related to sales of interment
services and merchandise are based on actual costs incurred or estimates of
future costs. Allowances for customer cancellations and refunds are
provided at the date of sale based upon historical experience.
Generally, a portion of the proceeds from the sale of cemetery interment
rights is required by state law to be paid into perpetual care trust funds.
Principal balances in these trusts (including realized and unrealized
capital gains in some states) must generally be held in perpetuity.
Accordingly, the trust fund corpus is not reflected in Carriage/ECI Group's
combined financial statements. Earnings from these trusts are recognized
currently and are intended to defray cemetery maintenance costs. The amount
of perpetual care funds trusted at December 31, 1997 was approximately
$2,807,000 and such principal generally cannot be withdrawn by Carriage/ECI
Group.
Continued
-16-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
CEMETERY OPERATIONS, CONTINUED
Earnings recognized on perpetual care trusts for the year ended December
31, 1997 were approximately $155,000. Additionally, pursuant to state law,
a portion of the proceeds from the sale of preneed cemetery merchandise may
also be required to be paid into trust funds. Carriage/ECI Group's preneed
cemetery merchandise trust funds had aggregate balances of approximately
$2,513,000 at December 31, 1997, which approximated fair value.
Carriage/ECI Group recognizes income on these merchandise trusts in current
cemetery net revenues as trust earnings accrue. Earnings recognized on
merchandise trusts for the year ended December 31, 1997 were approximately
$223,000.
CASH AND CASH EQUIVALENTS
Carriage/ECI Group considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories, consisting of funeral merchandise (primarily caskets) and
cemetery merchandise (primarily vaults and crypts) are stated at cost,
which is not in excess of market, determined using the first-in, first-out
(FIFO) method for funeral merchandise and the average cost method for
cemetery merchandise.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment is provided using the
straight-line method over the estimated useful lives of the various classes
of depreciable assets, ranging from five to thirty-nine years. Carriage/ECI
Group periodically reviews its properties for possible impairment whenever
events or changes in circumstance might indicate that the carrying amount
of an asset may not be recoverable. Maintenance and repairs are charged to
expense whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations. Depreciation expense
for the year ended December 31, 1997 was $129,314.
Continued
-17-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
COVENANTS NOT TO COMPETE
Included in "Deferred charges and other assets" are prepaid noncompetition
agreements entered into with former owners and key employees of businesses
acquired. Noncompetition agreements are amortized using the straight-line
method over the period of the agreement. At December 31, 1997, prepaid
covenants not to compete amounted to approximately $383,000.
NAMES AND REPUTATIONS
The excess of the purchase price over the fair value of identifiable net
tangible assets acquired in transactions accounted for as a purchase are
included in "Names and reputations, net" and generally are amortized on a
straight-line basis over 40 years which, in the opinion of management, is
not necessarily the maximum period benefited. Many of Carriage/ECI Group's
acquired funeral homes have provided high quality service to client
families for many decades. The resulting client loyalty often represents a
substantial portion of the value of a funeral business. The recoverability
of Names and reputations is evaluated periodically as events or
circumstances indicate a possible inability to recover its carrying amount.
Recoverability is then determined by comparing the undiscounted net cash
flows of the assets to which the Names and reputations applies to the net
book value (including the Names and reputations) of those assets. The
accumulated amortization of Names and reputations at December 31, 1997 was
approximately $83,800. The amortization charged against income was $45,760
for the year ended December 31, 1997.
Continued
-18-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENT FASB PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that
public enterprises report segment information in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports to shareholders.
These statements are effective for fiscal years beginning after December
15, 1997. Carriage/ECI Group does not believe implementation of SFAS Nos.
130 or 131 will have a material effect on its financial position, results
of operation or cash flows.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
The details of certain balance sheet accounts at December 31, 1997 were as
follows:
Accounts receivable, net:
Trade $ 278,004
Other 25,281
----------
303,285
Less allowance for bad debts (51,499)
----------
$ 251,786
==========
Long-term receivables, net:
Installment contracts $3,347,844
Cemetery merchandise receivables 1,604,861
Less unearned finance charges (685,468)
Less allowance for contract cancellations (246,350)
----------
$4,020,887
==========
Continued
-19-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS, CONTINUED
Inventories:
Caskets $ 89,803
Other 54,502
----------
$ 144,305
==========
Property, plant and equipment, net:
Land $ 969,742
Buildings and improvements 1,468,598
Furniture, fixtures and equipment 932,278
----------
3,370,618
Less accumulated depreciation and
amortization (513,177)
----------
$2,857,441
==========
Accounts payable and accrued liabilities:
Trade $ 161,784
Compensation 74,623
Payroll taxes and other 27,836
----------
$ 264,243
==========
4. PRENEED FUNERAL CONTRACTS AND DEFERRED PRENEED FUNERAL CONTRACTS REVENUES
Carriage/ECI Group sells preneed funeral contracts through various programs
providing for future funeral services at prices prevailing when the
agreement is signed. These contracts are included in the combined balance
sheet as "Preneed funeral contracts". Payments on these contracts are
generally placed in trust (pursuant to state law) or are used to pay
premiums on life insurance policies issued by third party insurers. When
the services are performed, approximately $3,239,000 will be funded by
trusts and approximately $2,270,000 will be funded by insurance policies as
of December 31, 1997. Accumulated earnings from trust funds and increasing
insurance benefits have been included to the extent that they have accrued
through December 31, 1997. The cumulative total has been reduced by
allowable cash withdrawals for trust earning distributions and amounts
retained by Carriage/ECI Group pursuant to various state laws. At December
31, 1997, the amounts collected and held in trusts at cost, which
approximates market, were approximately $2,093,000. The amounts in trusts
and all life insurance policies are generally transferred to the customer
upon contract cancellation.
Continued
-20-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
4. PRENEED FUNERAL CONTRACTS AND DEFERRED PRENEED FUNERAL CONTRACTS REVENUES,
CONTINUED
"Deferred preneed funeral contract revenues" includes the contract amount
of all price guaranteed funeral services and accumulated trust earnings and
increasing insurance benefits earned. Carriage/ECI Group defers recognition
of trust earnings and insurance benefits until performance of the funeral
service. Upon performance of the funeral service, Carriage/ECI Group will
recognize the fixed contract price and related accumulated trust earnings
or increasing insurance benefits as funeral service revenues.
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 consisted of remaining amounts due on
notes payable to certain individuals in connection with the acquisition of
various cemetery properties. These notes bear interest at annual rates
ranging from 6.0% to 6.5% and mature at various dates in 1998. These notes
are collateralized by the guarantee of the Parent.
Total interest expense incurred and paid during the year ended December 31,
1997 was $205,166. Interest expense includes $251,480 of interest allocated
by the Parent based on net intercompany payables. Intercompany payables
have been included in stockholders' equity for purposes of financial
statement presentation of Carriage/ECI Group.
6. COMMITMENTS AND CONTINGENCIES
CLAIMS AND LAWSUITS
The Carriage/ECI Group is subject to certain claims and lawsuits arising in
the normal course of business. The Carriage/ECI Group maintains various
insurance coverages in order to minimize financial risk associated with
claims and, in the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these disputes will not be
material to Carriage/ECI Group's combined financial position or results of
operations.
Continued
-21-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
6. COMMITMENTS AND CONTINGENCIES, CONTINUED
LEASE COMMITMENT
The Carriage/ECI Group leases a funeral home under an operating lease with
the former owner. The original lease term is ten years and the lease
agreement includes provisions for four, five year renewal options. Total
rent expense for the year ended December 31, 1997 was $14,206.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Carriage/ECI Group has entered into various employment, consulting and
non-competition agreements with key employees and former owners of
businesses acquired. These agreements are generally for periods of five
years and provide for payments at the date of the agreement, in future
periodic amounts (monthly or annually), or both.
Future minimum payments under operating leases with initial or remaining
terms of one or more years and the employment, consulting and
non-competition agreements discussed above were as follows at December 31,
1997:
EMPLOYMENT/
YEAR ENDED NON-COMPETE/
DECEMBER 31, CONSULTING LEASES
------------ ---------- ------
1998 $ 320,764 $ 45,000
1999 314,093 45,000
2000 183,439 45,000
2001 140,517 45,000
2002 53,306 45,000
Thereafter - 213,750
---------- ----------
Total minimum obligations $1,012,119 $ 438,750
========== ==========
Continued
-22-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
6. COMMITMENTS AND CONTINGENCIES, CONTINUED
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs and hardware with
embedded date technology using two digits to define the applicable year
rather than four. Any programs or hardware that are time sensitive and have
not been determined to be Year 2000 compliant may recognize a date using
"00" as the year 1900 rather than the year 2000. Such improper date
recognition could, in turn, result in erroneous processing of data, or, in
extreme situations, system failure.
Future processing of data for Carriage/ECI Group will be performed using
Carriage's information systems. Carriage's information system's management
group has implemented a Year 2000 program which encompasses performing an
inventory of information technology and non-information technology systems,
assessing the potential problem areas, testing the systems for Year 2000
readiness, and modifying systems that are not Year 2000 compliant.
To date, inventory and assessment have been completed for all core systems
that are essential for business operations. Carriage believes all of its
core systems are Year 2000 compliant except for a portion of the
record-keeping system for certain cemetery operations, for which the
modifications have been completed, tested and certified as Year 2000
compliant, and will be fully installed by March 1999. Carriage's management
estimates that they have completed more than ninety percent of the work
involved in modifying, replacing and testing noncompliant hardware and
software. Carriage's inventory and assessment phases for newly acquired
businesses such as Carriage/ECI Group is performed during the acquisition
process as part of due diligence analysis.
Although Carriage expects to be ready to continue business activities
without interruption by a Year 2000 problem, Carriage's management
recognizes the general uncertainty inherent in the Year 2000 issue, in part
because of the uncertainty about the Year 2000 readiness of third parties.
Under a "most likely worst case Year 2000 scenario", it may be necessary
for Carriage to replace some suppliers, rearrange some work plans or even
temporarily interrupt some normal business activities or operations.
Carriage believes that such circumstances will be isolated and will not
result in a material adverse impact to its operations or pose a material
financial risk. Carriage has begun, but not yet completed, development of a
contingency plan to deal with the "most likely worst case Year 2000
scenario". The contingency plan is expected to be completed during the
third quarter of 1999.
Continued
-23-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
6. COMMITMENTS AND CONTINGENCIES, CONTINUED
IMPACT OF THE YEAR 2000 ISSUE, CONTINUED
Based on a current assessment, Carriage's total cost of becoming Year 2000
compliant is not expected to be significant to its financial position,
results of operations or cash flows, nor those of the Carriage/ECI Group.
The total cost of addressing the year 2000 issue by Carriage is estimated
to be less than $135,000.
7. INCOME TAXES
Historically, Carriage/ECI Group has been included in the consolidated
United States income tax return of the Parent. Intra-company allocation of
income taxes have been calculated on a separate return basis for purposes
of these financial statements. Deferred taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the Parent's enacted marginal tax rates.
Significant components of Carriage/ECI Group's deferred tax liabilities and
assets at December 31, 1997 were as follows:
Developed and undeveloped land $(1,181,586)
Property, plant and equipment (319,043)
Receivables related to sales of
cemetery interment rights and
related products (792,026)
Other (43,758)
-----------
Total deferred tax liabilities (2,336,413)
-----------
Preneed funeral contracts 62,636
Allowance for bad debts and can-
cellation reserves 200,164
-----------
Total deferred tax assets 262,800
-----------
Net deferred tax liability $(2,073,613)
===========
Continued
-24-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
7. INCOME TAXES, CONTINUED
Significant components of the provision for income taxes for the year ended
December 31, 1997 were as follows:
Current
Federal $ 777,570
State 126,806
----------
Total current 904,376
----------
Deferred
Federal 4,856
State 791
----------
Total deferred 5,647
----------
Total provision for income taxes $ 910,023
==========
The differences in the income taxes provided for and the amounts determined
by applying the Parent's United States federal statutory rate of 35% to
pre-tax earnings of Carriage/ECI Group for the year ended December 31, 1997
are summarized as follows:
AMOUNT PERCENTAGE
------ ----------
Tax at U.S. statutory rate $ 806,349 35.0%
Effect of state income taxes, net
of federal benefit 82,938 3.6
Effect of nondeductible expenses
and other 20,736 0.9
---------- ----
$ 910,023 39.5%
========== =====
All income taxes were paid by the Parent in 1997.
Continued
-25-
<PAGE>
CARRIAGE/ECI GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
8. ACQUISITIONS
During the year ended December 31, 1997, the Carriage/ECI Group acquired
one funeral home and one cemetery. The purchase prices consisted of a
combination of cash and assumption of debt. The excess of purchase price
over the fair value of net assets acquired is included in Names and
reputations. In connection with these acquisitions, Carriage/ECI Group
entered into customary employment, consulting and noncompetition agreements
with certain employees and former owners of the businesses acquired. The
acquisitions have been accounted for as purchases and operating results of
the acquired locations have been included in the accompanying combined
financial statements since their acquisition in September and October 1997,
respectively. The effect of these acquisitions on Carriage/ECI Group's
combined balance sheet at December 31, 1997 was as follows:
Current assets $ 4,272
Preneed funeral contracts 431,236
Cemetery properties 1,724,455
Long-term receivables 239,093
Property, plant and equipment 230,000
Names and reputations 1,346,564
Current liabilities (221,283)
Deferred preneed funeral contract revenues (431,236)
Long-term debt (118,000)
Deferred cemetery costs (351,639)
Noncurrent liabilities (87,779)
----------
Cash used for acquisitions $2,765,683
==========
The following represents the unaudited proforma results of operations as if
the above noted acquisitions had occurred at the beginning of 1997:
Net revenues $9,761,250
Income before income taxes 1,473,797
Net income 892,641
9. SUBSEQUENT EVENTS
Subsequent to December 31, 1997 the Parent acquired two funeral homes and
one cemetery management company that are now included in the Carriage/ECI
Group. The aggregate purchase price of these locations was approximately
$7,500,000.
-26-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Carriage 1998 Group:
We have audited the accompanying combined balance sheet of Carriage 1998 Group
as of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of Carriage 1998 Group's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
At December 31, 1997 and for the year then ended, Carriage 1998 Group was
included in certain operating divisions of Service Corporation International.
Service Corporation International is organized with centralized financial,
managerial, accounting and administrative functions and, accordingly, a portion
of the cost of such centralized functions has been allocated and reported in the
financial statements of Carriage 1998 Group.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Carriage 1998 Group
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Ham, Langston & Brezina L.L.P.
Houston, Texas
January 28, 1999
-27-
<PAGE>
CARRIAGE 1998 GROUP
COMBINED BALANCE SHEET
DECEMBER 31, 1997
----------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 3,954
Accounts receivable, net ............................... 177,690
Inventories ............................................ 125,647
Prepaids and other ..................................... 5,432
-----------
Total current assets ................................. 312,723
Cemetery property, at cost ............................... 7,510,766
Long-term receivables .................................... 6,893,466
Property, plant and equipment, net ....................... 1,752,697
Deferred charges and other assets ........................ 168,877
-----------
Total assets ....................................... $16,638,529
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............... $ 101,078
Current portion of long-term debt ...................... 16,072
-----------
Total current liabilities ............................ 117,150
Deferred cemetery costs .................................. 3,695,681
Deferred income taxes .................................... 1,595,863
-----------
Total liabilities .................................. 5,408,694
Commitments and contingencies
Stockholders' equity ..................................... 11,229,835
-----------
Total liabilities and stockholders'
equity ......................................... $16,638,529
===========
See notes to combined financial statements.
-28-
<PAGE>
CARRIAGE 1998 GROUP
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Revenues, net:
Funeral ................................................ $ 187,409
Cemetery ............................................... 3,565,102
----------
Total revenues, net .................................. 3,752,511
----------
Costs and expenses:
Funeral ................................................ 142,387
Cemetery ............................................... 2,228,188
----------
Total costs and expenses ............................. 2,370,575
----------
Gross profit ............................................. 1,381,936
General and administrative expenses ...................... 760,619
Corporate expense allocations ............................ 50,659
----------
Income from operations ................................... 570,658
Interest expense ......................................... 321,888
----------
Income before provision for income taxes ................. 248,770
Provision for income taxes ............................... 103,737
----------
Net income ............................................... $ 145,033
==========
See notes to combined financial statements.
-29-
<PAGE>
CARRIAGE 1998 GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Balance at January 1, 1997 .......................... $ 11,834,711
Distributions to the Parent ......................... (749,909)
Net income .......................................... 145,033
------------
Balance at December 31, 1997 ........................ $ 11,229,835
============
See notes to combined financial statements.
-30-
<PAGE>
CARRIAGE 1998 GROUP
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
----------
Cash flows from operating activities:
Net income .................................................. $ 145,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ...................................... 156,647
Provision for bad debts ................................... 5,124
Deferred income tax ....................................... (34,283)
Changes in assets and liabilities:
Increase in accounts receivable ......................... (546,187)
Decrease in inventories ................................. 637,715
Decrease in other current assets ........................ (1,497)
Increase in other non-current assets .................... 63,518
Decrease in accounts payable and accrued liabilities .... (31,622)
Increase in deferred cemetery costs ..................... 573,090
---------
Net cash provided by operating activities ............. 967,538
---------
Cash flows from investing activities:
Capital expenditures ........................................ (212,903)
---------
Net cash used in investing activities ................. (212,903)
---------
Cash flows from financing activities:
Payments on long-term debt .................................. (772)
Distributions to the Parent ................................. (749,909)
---------
Net cash provided by financing activities ............. (750,681)
---------
Net increase in cash and cash equivalents ..................... 3,954
Cash and cash equivalents, beginning of
period ...................................................... --
---------
Cash and cash equivalents, end of period ...................... $ 3,954
=========
See notes to combined financial statements.
-31-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
----------
1. ORGANIZATION AND NATURE OF OPERATIONS
In December 1998, Carriage Services, Inc. ("Carriage"), through certain
wholly owned subsidiaries, signed a definitive agreement under which it
ultimately acquired three cemeteries and one funeral home from Service
Corporation International (the "Parent"). The funeral home and cemeteries
purchased in this transactions are located in California, Florida and
Virginia and are, hereinafter, collectively referred to as "Carriage 1998
Group". Carriage 1998 Group performs personal and professional services
related to funerals at its funeral homes. Preneed funerals are marketed in
the geographic markets served by Carriage 1998 Group's funeral service
locations.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared from the separate
records of Carriage 1998 Group. Certain expenses of a general and
administrative nature, either directly attributable to Carriage 1998 Group,
or allocations of actual expenses incurred by the Parent for the benefit of
Carriage 1998 Group, have been allocated based upon net revenue and
included in the accompanying statement of operations. Such allocated costs
include, among others, legal, payroll, employee benefits, insurance and
professional services. In addition, Carriage 1998 Group is charged interest
expense based upon net invested capital (stockholders' equity) by the
Parent. For purposes of these financial statements, intercompany payables
have been included in stockholders' equity. Management of Carriage 1998
Group believes that such expenses have been allocated on a reasonable
basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 periods.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
Continued
-32-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FUNERAL AND CEMETERY OPERATIONS
Carriage 1998 Group records the sale of funeral merchandise and services
upon performance of the funeral service. Carriage 1998 Group 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 Carriage 1998 Group. Accounts receivable,
net consists primarily of funeral receivables. Cemetery receivables at
December 31, 1997 are primarily non-current and have been included in
Long-term receivables in the Combined Balance Sheet.
PRENEED FUNERAL ARRANGEMENTS
Preneed funeral sales are affected by deposits to a trust or purchase of a
third-party insurance product. Since Carriage 1998 Group 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 Combined Balance Sheet. 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 type of instruments that the trusts may invest
in are regulated by state agencies.
CEMETERY MERCHANDISE AND SERVICE TRUST
Carriage 1998 Group is 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 Carriage 1998
Group 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 $3,655,681 at December 31, 1997, and are included in Deferred
cemetery costs in the Combined Balance Sheet.
Continued
-33-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
PERPETUAL AND MEMORIAL CARE TRUST
In accordance with respective state laws, Carriage 1998 Group 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 Carriage 1998 Group and
recognized as revenue upon distribution. The perpetual and memorial care
trust assets were approximately $3,835,771 at December 31, 1997, which, in
the opinion of management, will cover future obligations to provide care
and maintenance for Carriage 1998 Group's cemeteries and mausoleums.
Carriage 1998 Group 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 Combined Balance Sheet.
CASH AND CASH EQUIVALENTS
Carriage 1998 Group considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
INVENTORIES AND CEMETERY PROPERTY
Funeral merchandise and cemetery property and merchandise, are stated at
the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment is provided using the
straight-line method over the estimated useful lives of the various classes
of depreciable assets, ranging from five to thirty-nine years. Carriage
1998 Group periodically reviews its properties for possible impairment
whenever events or changes in circumstance might indicate that the carrying
amount of an asset may not be recoverable. Maintenance and repairs are
charged to expense whereas renewals and major replacements are capitalized.
Depreciation expense for the year ended December 31, 1997 was $156,647.
Continued
-34-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
COVENANTS NOT TO COMPETE
Included in "Deferred charges and other assets" are prepaid noncompetition
agreements entered into with former owners and key employees of businesses
acquired. Noncompetition agreements are amortized using the straight-line
method over the period of the agreement. At December 31, 1997, prepaid
covenants not to compete amounted to approximately $59,452.
RECENT FASB PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that
public enterprises report segment information in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports to shareholders.
These statements are effective for fiscal years beginning after December
15, 1997. Carriage 1998 Group does not believe implementation of SFAS Nos.
130 or 131 will have a material effect on its financial position, results
of operation or cash flows.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
The details of certain balance sheet accounts at December 31, 1997 were as
follows:
Accounts receivable, net:
Trade $ 51,089
Other 131,498
-----------
182,587
Less allowance for bad debts (4,897)
-----------
$ 177,690
===========
Continued
-35-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS, CONTINUED
Inventories:
Caskets $ 9,764
Vaults 24,999
Other 90,884
-----------
$ 125,647
===========
Long-term receivables, net:
Installment contracts $ 3,689,306
Cemetery merchandise receivables 4,377,538
Less unearned finance charges (690,720)
Less allowance for contract cancellations (482,658)
-----------
$ 6,893,466
===========
Property, plant and equipment, net:
Land $ 6,214
Buildings and improvements 994,081
Furniture, fixtures and equipment 436,714
-----------
1,437,009
Less accumulated depreciation and
amortization (758,900)
-----------
678,109
Construction in progress 1,074,588
-----------
$ 1,752,697
===========
Accounts payable and accrued liabilities:
Compensation $ 35,558
Sales taxes and other 65,520
-----------
$ 101,078
===========
Continued
-36-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
4. LONG-TERM DEBT
Long-term debt at December 31, 1997 consists of remaining amounts due on a
note payable to an individual in connection with the acquisition of certain
cemetery properties. This note bears interest at an annual rate of 9.5% and
has been classified as current because it was fully repaid in 1998. This
note is collateralized by a deed of trust and the guarantee of the Parent.
Total interest expense incurred and paid during the year ended December 31,
1997 was $321,888. Substantially all such interest expense was allocated by
the Parent based on net invested capital.
5. COMMITMENTS AND CONTINGENCIES
CLAIMS AND LAWSUITS
The Carriage 1998 Group is subject to certain claims and lawsuits arising
in the normal course of business. The Carriage 1998 Group maintains various
insurance coverages in order to minimize financial risk associated with
claims and, in the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these disputes will not be
material to Carriage 1998 Group's financial position, results of operations
or cash flows.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs and hardware with
embedded date technology using two digits to define the applicable year
rather than four. Any programs or hardware that are time sensitive and have
not been determined to be Year 2000 compliant may recognize a date using
"00" as the year 1900 rather than the year 2000. Such improper date
recognition could, in turn, result in erroneous processing of data, or, in
extreme situations, system failure.
Future processing of data for Carriage 1998 Group will be performed using
Carriage's information systems. Carriage's information systems management
group has implemented a Year 2000 program which encompasses performing an
inventory of information technology and non-information technology systems,
assessing the potential problem areas, testing the systems for Year 2000
readiness, and modifying systems that are not Year 2000 compliant.
Continued
-37-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
5. COMMITMENTS AND CONTINGENCIES, CONTINUED
IMPACT OF THE YEAR 2000 ISSUE, CONTINUED
To date, inventory and assessment have been completed for all core systems
that are essential for business operations. Carriage believes all of its
core systems are Year 2000 compliant except for a portion of the
record-keeping system for certain cemetery operations, for which the
modifications have been completed, tested and certified as Year 2000
compliant, and will be fully installed by March 1999. Carriage's management
estimates that they have completed more than ninety percent of the work
involved in modifying, replacing and testing noncompliant hardware and
software. Carriage's inventory and assessment phases for newly acquired
businesses such as Carriage 1998 Group is performed during the acquisition
process as part of due diligence analysis.
Although Carriage expects to be ready to continue business activities
without interruption by a Year 2000 problem, Carriage's management
recognizes the general uncertainty inherent in the Year 2000 issue, in part
because of the uncertainty about the Year 2000 readiness of third parties.
Under a "most likely worst case Year 2000 scenario", it may be necessary
for Carriage to replace some suppliers, rearrange some work plans or even
temporarily interrupt some normal business activities or operations.
Carriage believes that such circumstances will be isolated and will not
result in a material adverse impact to its operations or pose a material
financial risk. Carriage has begun, but not yet completed, development of a
contingency plan to deal with the "most likely worst case Year 2000
scenario". The contingency plan is expected to be completed during the
third quarter of 1999.
Based on a current assessment, Carriage's total cost of becoming Year 2000
compliant is not expected to be significant to its financial position,
results of operations or cash flows, nor those of the Carriage 1998 Group.
The total cost of addressing the year 2000 issue by Carriage is estimated
to be less than $135,000.
Continued
-38-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
6. INCOME TAXES
Historically, Carriage 1998 Group has been included in the consolidated
United States income tax return of the Parent. Intra-company allocation of
income taxes have been calculated on a separate return basis for purposes
of these financial statements. Deferred taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the Parent's enacted marginal tax rates.
Significant components of Carriage 1998 Group's deferred tax liabilities
and assets at December 31, 1997 were as follows:
Developed and undeveloped land $2,145,744
----------
Total deferred tax liabilities 2,145,744
----------
Allowance for bad debts and can-
cellation reserves 492,047
Property, plant and equipment 57,834
----------
Total deferred tax assets 549,881
----------
Net deferred tax liability $1,595,863
==========
Significant components of the provision for income taxes for the year ended
December 31, 1997 were as follows:
Current
Federal $ 127,445
State 15,871
----------
Total current 143,316
----------
Deferred
Federal (30,487)
State (3,796)
----------
Total deferred (34,283)
----------
Total provision for income taxes $ 109,033
==========
The differences in the income taxes provided for and the amounts determined
by applying the Parent's United States federal statutory rate of 35% to
pre-tax earnings of Carriage 1998 Group for the year ended December 31,
1997 are summarized as follows:
Continued
-39-
<PAGE>
CARRIAGE 1998 GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
----------
6. INCOME TAXES, CONTINUED
AMOUNT PERCENTAGE
------ ----------
Tax at U.S. statutory rate $ 91,383 35.0%
Effect of state income taxes, net
of federal benefit 7,848 3.0
Effect of nondeductible expenses
and other 9,802 3.7
---------- ----
$ 109,033 41.7%
========== =====
All income taxes were paid by the Parent in 1997.
7. EXPENSES ALLOCATED BY THE PARENT
Following is an analysis of expenses allocated by the Parent and included
in the Combined Statement of Operations for the year ended December 31,
1997:
Expenses allocated based on revenues:
Cost and expenses-cemetery $ 575,244
Corporate expense allocations $ 50,659
Expense allocated based on stockholders' equity:
Interest expense $ 321,888
Expense calculated on a separate return
basis and allocated using the Parent's
effective tax rate:
Income tax expense $ 109,033
-40-
