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, 1998
[ ] 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1300 POST OAK BLVD., SUITE 1500, 77056
HOUSTON, TX
(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:
Class A Common Stock, $.01 Par Value
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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. [X]
The aggregate market value of the voting stock held by non-affiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of Carriage's Class A Common Stock) of the Registrant as
of March 15, 1999 was approximately $131,000,000.
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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
March 15, 1999 was 12,058,250 and 3,772,520 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1999 annual meeting of shareholders,
incorporated in Part III of this Report.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include Carriage's inability to sustain its
rapid acquisition rate, to manage its growth, or to obtain adequate performance
from acquired businesses; adverse changes in economic and financial market
conditions, including declining stock prices, increasing interest rates, and
restricted credit availability; lower death rates; competition in our markets;
and changes in government regulation of the death care industry. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision of these
forward-looking statements. Readers should carefully review the risk factors
described in other documents we file from time to time with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K to be filed by Carriage during 1999.
PART I
ITEM 1. BUSINESS
THE COMPANY
Carriage is a leading provider of death care services and products in the
United States. As of December 31, 1998, we operated 166 funeral homes and 27
cemeteries in 30 states. Carriage provides a complete range of services relating
to funerals, burials and cremations, including the use of funeral homes and
motor vehicles, the performance of cemetery interment services and the
management and maintenance of cemetery grounds. We also sell related products
and merchandise including caskets, burial vaults, garments, cemetery interment
rights, stone and bronze memorials, as well as other items. Over the past five
years, Carriage's revenues, earnings and profit margins have increased
significantly. From 1994 to 1998, revenues increased from $18.4 million to
$116.8 million, operating income increased from $1.7 million to $26.7 million
and diluted earnings per common share from continuing operations increased from
a loss of $0.38 to a profit of $0.65.
Since Carriage's formation in 1991, we have focused on distinguishing
ourselves from our competitors by developing an employee driven organization
that emphasizes: (i) providing the highest level of personalized service to
client families, (ii) comprehensive employee training, (iii) a decentralized
management structure, and (iv) incentive compensation and broad-based employee
stock ownership. Our success in developing our operating philosophy, as well as
the increasing awareness of Carriage in the death care industry, has resulted in
an increasing number of highly attractive acquisition opportunities. We acquired
44 funeral homes and 10 cemeteries for consideration of $118 million in 1997 and
48 funeral homes and 7 cemeteries for consideration of $159 million in 1998. In
addition, through March 15, 1999, we have either acquired or executed
non-binding letters of intent to acquire nine funeral homes and 12 cemeteries
for consideration of approximately $23 million.
Carriage was incorporated in Delaware on December 29, 1993, and became a
public reporting company in August, 1996. Our principal executive office is
located at 1300 Post Oak Blvd., Suite 1500, Houston, Texas 77056, and our
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 25% of the 1998
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United States death care industry revenues are represented by Carriage and the
three 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 provide 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 relatively stable. The
number of deaths in the United States has increased at a compounded rate of
approximately 1% since 1980. While the death rate decreased approximately 1% in
1997 and 1998, industry studies show that the average age of the population is
increasing. Because of the relative stability, individual funeral home 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 independent death care operations
with a few 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. While the consolidation trend has
accelerated in recent years, the number of public companies actively pursuing
acquisitions has recently declined. This has created opportunities for us as the
competition for individual acquisitions has declined.
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 that 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. We believe sales of preneed products and services,
including cemetery and internment rights and prearranged funeral services, are
purchased primarily by people between the ages of 50 and 70. We believe the
increasing number of people in this age group provides additional opportunities
for growth in preneed sales and services.
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 24% of the United States burial market in
1997, 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
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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
Our business strategy is to build upon our reputation as a premier
operating company in order to create attractive acquisition opportunities. We
seek to achieve a balance between the need for superior overall corporate
financial performance and the desire to promote higher levels of personalized
service to client families. The commitment of local management and employees to
our decentralized, entrepreneurial service culture has been a major factor in
our ability to deliver increasing levels of profitability and to attract premier
funeral home and cemetery owners to Carriage.
OPERATING STRATEGY. Our operating strategy is focused on increasing the revenues
and profitability of each operating location through a combination of
personalized service and operating efficiencies. Key elements of our operating
strategy include the following:
PERSONALIZED SERVICE. We believe that providing personalized service
results in increased customer satisfaction, increased market share, more
motivated employees and consistently higher levels of profitability. We have
placed a great deal of emphasis on communicating to our employees the linkage
between personalized service, customer satisfaction, market share increases and
profitability throughout the organization.
EMPLOYEE TRAINING. Beginning in late 1997, we made a significant commitment
of financial and human resources to a company-wide training effort. The training
is designed to improve the management of and communication among employees and
to develop personalized service that will be of value to clients. In training
employees to deliver personalized service, we emphasize employee listening and
communication skills towards the goal of uniquely memorializing the life of an
individual. We have completed the initial phase of this program and are now
focusing on integrating the concepts and practices of our training program into
our operations. In November 1998, we acquired the Sessions Consulting Group,
Inc., which is the service training firm we previously employed to implement our
training initiatives. Consistent with our Mission Statement and Guiding
Principles, the Sessions Group will be devoted to our growing executive
development and services training needs by serving as a permanent platform for
ongoing training of employees. We believe that this long-term investment in our
employees will, over time, lead to increased market share, resulting in higher
profitability.
DECENTRALIZED MANAGEMENT STRUCTURE. Our decentralized operating style
provides a high level of autonomy and flexibility to local management. Local
operators have significant responsibility for daily operating decisions and are
accountable for operating results. Individual funeral home and cemetery service
and financial goals are jointly developed with corporate management as part of a
rigorous, company-wide planning process. The corporate office utilizes an
integrated computer system linked to all of our funeral homes to monitor and
access critical operating and financial data in order to analyze the performance
of individual locations on a timely basis and institute corrective action if
necessary.
HIGH STANDARDS OF PERFORMANCE. We continuously establish targets to
emphasize and enhance customer service and operational and financial
performance. These standards are designed to identify management's expectations
for high achievement in these three key performance areas and are communicated
to employees through our extensive training programs.
QUALITY REVIEW MANAGEMENT SYSTEMS. We have developed quality based
management systems which operate within our decentralized management structure.
These systems involve quantifiable customer survey input in addition to
operational and financial measurement of performance. With the assistance of the
Sessions Group, these systems are being implemented at the local level under the
direction of our area Leader-Managers. Our Leader-Managers provide an additional
level of operational support and feed-back to our local managers.
INCENTIVE COMPENSATION. We have established a compensation structure that
is designed to create and maintain an ownership mentality to align overall
compensation to our performance objectives. Local management is awarded
meaningful cash bonuses and stock options for achieving specified service,
operational and financial performance objectives. We have also implemented a
stock option program which awards options
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to full-time employees based upon the performance of their local businesses
during a two-year period. As a result, all management and full-time employees
have the opportunity to increase their personal net worth through strong local
and corporate performance.
COST SAVINGS AND OPERATING EFFICIENCIES. Our larger size, as compared to
local operators, 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
responsibility are retained at the local level, centralizing certain financial,
accounting, legal, administrative and employee benefit functions allow for more
efficient and cost-effective operations.
ACQUISITION STRATEGY. We believe that significant acquisition opportunities
currently exist in the death care industry that we intend to aggressively
pursue. In evaluating specific acquisition candidates, we consider 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. We 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 our existing businesses. In addition, although Carriage, in the
early years, focused on acquiring funeral home operations, we aggressively
pursue cemetery acquisitions in markets where we operate, or plan to operate,
funeral homes to take advantage of cross-marketing opportunities. We are also
pursuing larger acquisition transactions which provide significant strategic
benefits to Carriage, such as new market penetration.
In purchasing the premier location in a particular market, management
believes that Carriage 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 our management
techniques. In addition, we generally retain the former owners and other key
personnel of acquired funeral homes and provide 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, we view experienced management of certain
acquired operations as potential corporate management candidates. We believe
that this potential for advancement with Carriage, combined with our
decentralized operating structure and incentive-based compensation system, makes
Carriage a particularly attractive acquirer to some independent owners. We
target additional funeral homes in present markets so that personnel and
vehicles can be shared and profit margins enhanced.
We follow a disciplined approach to acquisitions utilizing specific
operating and financial criteria. Carriage personnel develop pro forma financial
statements for acquisition targets, reflecting estimates of revenue and costs
under Carriage ownership, and then utilize such information to determine a
purchase price that we believe is reasonable. We anticipate that the
consideration for future acquisitions will consist of a combination of cash,
deferred purchase price and preferred and common equity. We also typically enter
into management, consulting and non-competition agreements with former owners
and key executive personnel of acquired businesses.
Although we did not initially focus on acquiring cemetery operations, as a
result of the increased access to capital and Carriage's enhanced profile in the
industry, we are encountering significant cemetery acquisition opportunities. We
will continue to pursue cemetery acquisitions in markets where we operate
funeral homes to take advantage of cross-marketing opportunities and in markets
where a funeral home acquisition strategy is viable.
While we focus our efforts on identifying individual acquisition candidates
with the potential for a negotiated, non-competitive acquisition process, we
also compete for more broadly marketed acquisition opportunities. In many cases,
we have been successful in acquiring operations where we have not been the
highest bidder because of Carriage's reputation, operating strategy and
corporate culture. We believe that the issuance of equity securities to fund
certain funeral home and cemetery acquisitions has been, and will continue to
be, attractive to select acquisition candidates.
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We have successfully executed this acquisition strategy since its
inception, as demonstrated in the table set forth below:
<TABLE>
<CAPTION>
FUNERAL
YEAR(3) CONSIDERATION HOMES(1) CEMETERIES(2)
- - ------------------------------------- ---------------------- --------- --------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1992................................. $ 11,832 14 2
1993................................. 13,843 11 1
1994................................. 9,153 9 1
1995................................. 12,191 8 0
1996................................. 68,181 38 7
1997................................. 118,260 44 10
1998................................. 158,661 48 7
--
---------------------- ---
$392,121 172 28
====================== === ==
</TABLE>
- - ------------
(1) Carriage subsequently sold six of these funeral homes.
(2) Carriage subsequently sold one of these cemeteries.
(3) From January 1, 1999 through March 15, 1999, we acquired two funeral homes
for aggregate consideration of $5.3 million.
OPERATIONS
Our funeral home operations, cemetery operations and preneed programs are
managed by individuals with extensive death care industry experience. 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. We believe that this strategy permits each local firm
to maintain its unique style of operation and to capitalize on its reputation
and heritage while Carriage maintains centralized supervisory controls and
provides specialized services at the corporate level. We have a commitment to
strong information systems. Systems are linked to all of the funeral homes to
monitor and assess critical operating and financial data in order to analyze the
performance of individual funeral homes on a timely basis. Management is able to
access customer transaction data and other operating information from the
Houston support center to ensure the quality of operating performance and to
implement any necessary corrective actions.
FUNERAL HOME OPERATIONS. As of December 31, 1998, Carriage operated 166
funeral homes in 30 states. Funeral home revenues accounted for approximately
84% and 80% of our net revenues for each of the years ended December 31, 1997
and 1998, respectively. Carriage's funeral home operations are managed by a team
of experienced death care industry professionals.
Our funeral homes offer a complete range of services to meet families'
funeral needs, including consultation, the removal and preparation of cremains,
the sale of caskets and related funeral merchandise, the use of funeral home
facilities for visitation and religious services and transportation services.
Most of our funeral homes have a non-denominational chapel on the premises,
which permits family visitation and religious services to take place at one
location, reducing transportation costs for Carriage and inconvenience to the
family.
CEMETERY OPERATIONS. As of December 31, 1998, we operated 27 cemeteries in
12 states. Cemetery revenues accounted for approximately 16% and 20% of our net
revenues for each of the years ended December 31, 1997 and 1998, respectively.
Carriage's cemetery products and services include interment services, the
rights to interment in cemetery sites (including grave sites, mausoleum crypts
and niches) and related cemetery merchandise such as memorials and vaults.
Cemetery operations generate revenues through sales of interment rights,
memorials and installation, fees for interment and cremation services, finance
charges from installment sales contracts and investment income from preneed
cemetery merchandise and perpetual care trusts.
PRENEED PROGRAMS. In addition to sales of funeral merchandise and
services, cemetery interment rights, cemetery merchandise and services at the
time of need, we also market funeral and cemetery services and
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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 Carriage to establish a portion of its future market share. Proceeds
from the sale of preneed funeral contracts are not recognized as revenue until
the time the funeral service is performed.
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, we also offer "preplanned"
funeral arrangements whereby a client determines in advance substantially all of
the details of a funeral service without any financial commitment or other
obligation on the part of the client until the actual time of need. Preplanned
funeral arrangements permit families to avoid the emotional strain of making
death care plans at the time of need and enable a funeral home to establish
relationships with clients that eventually lead to at-need sales.
Beginning in the fourth quarter of 1996, experienced preneed marketing
professionals were added at the national and regional levels. This investment in
additional preneed marketing management allowed us to increase preneed sales at
existing cemetery properties and positioned Carriage to more effectively
integrate future cemetery acquisitions. As of December 31, 1998, we employed a
staff of 297 advance planning representatives for the sale of preneed products
and services, which represents an increase of 120% since December 31, 1996.
Carriage sold 4,020 and 6,481 preneed funeral contracts in the years ended
December 31, 1997 and 1998, respectively. At December 31, 1998, we had a backlog
of 57,185 preneed funeral contracts to be delivered in the future. Preneed
cemetery sales are usually financed through installment sales contracts,
generally with terms of five years. Preneed sales of cemetery interment rights
and other related services and merchandise are recorded as revenue when the
contract is signed, with concurrent recognition of related costs. We always
receive 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 65% and 73% of Carriage's
net cemetery revenues for the years ended December 31, 1997 and 1998,
respectively.
COMPETITION
The acquisition environment in the death care industry has been highly
competitive. Our primary competitors have been Service Corporation
International, The Loewen Group, Inc., Stewart Enterprises, Inc. and Equity
Corporation International. 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 higher than the prices
offered by Carriage. Recently, however, two of the primary competitors are
effectively out of the buying mode. Equity Corporation International was
acquired by Service Corporation International in January, 1999, and the Loewen
Group put its acquisition activity on hold. This recent change enhances our
ability to gain the attention of the most desirable companies at attractive
valuations. However, no assurance can be given that we will be successful in
expanding our operations through acquisitions or that funeral homes and
cemeteries will be available at reasonable prices or on reasonable terms.
Our 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.
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TRUST FUNDS
GENERAL. We have established a variety of trusts in connection with our
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
Carriage. We also use independent professional managers to advise us on
investment matters.
PRENEED FUNERAL TRUSTS. Preneed funeral sales are facilitated by deposits
to a trust or purchase of a third-party insurance product. All preneed funeral
sales are deferred until the service is performed. The trust fund income earned
and any increase in insurance benefits are also deferred until the service is
performed, in order to offset possible inflation in cost when providing the
service in the future. Although direct marketing costs and commissions incurred
for the sale of preneed funeral contracts are a current use of cash, such costs
are also deferred and amortized over the expected timing of the performance of
the services related to the preneed funeral sales. Since we do not have access
to the trust fund principal or earnings, the related assets and liabilities are
not reflected on Carriage's balance sheet. In most states, we are not permitted
to withdraw principal or investment income from such trusts until the funeral
service is performed. Some states, however, allow for the retention of a
percentage (generally 10%) of the receipts to offset any administrative and
selling expenses, which we defer until the service is provided. The aggregate
balance of our preneed funeral contracts held in trust and insurance contracts
was approximately $106.2 million and $179.6 million as of December 31, 1997 and
1998, respectively.
PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. We are generally required
under applicable state laws to deposit a specified amount (which varies from
state to state, generally 50% to 100% of selling price) into a merchandise and
service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income earned is recognized in current revenues as
trust earnings. These earnings are offset by any current period inflation costs
accrued related to the merchandise and services that have not yet been provided.
Liabilities for undelivered cemetery merchandise and services, including
accruals for inflation increases, are reflected in the balance sheet net of the
merchandise and service trust balance. We are permitted to withdraw the trust
principal and the accrued income when the merchandise is purchased, when service
is provided by us or when the contract is cancelled. The merchandise and service
trust fund balances, in the aggregate, were approximately $9.6 million and $18.6
million as of December 31, 1997 and 1998, respectively.
PERPETUAL CARE TRUSTS. In certain states, regulations require a portion
(generally 10%) of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income earned is recognized in current revenues as trust earnings. While we are
entitled to withdraw the income from our perpetual care trust to provide for the
maintenance of the cemetery property and memorials, we are not entitled to
withdraw any of the principal balance of the trust fund and therefore, none of
the principal balances is reflected in Carriage's balance sheet. The perpetual
care trust balances were approximately $8.4 million and $21.7 million as of
December 31, 1997 and 1998, respectively.
For additional information with respect to Carriage's trusts, see Note 1 of
the Consolidated Financial Statements.
REGULATION
Our 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.
We are 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 us to organize
information about hazardous materials used or produced in our operations.
Certain of this information must be provided to employees, state and local
governmental authorities and local citizens. We are also subject to the Federal
Americans with Disabilities Act
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and similar laws which, among other things, may require that we modify our
facilities to comply with minimum accessibility requirements for disabled
persons.
Our operations, including our 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."
We believe that we are 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 Carriage's results of operations. We cannot predict
the outcome of any proposed legislation or regulations or the effect that any
such legislation or regulations might have on Carriage.
EMPLOYEES
As of December 31, 1998, Carriage and its subsidiaries employed 940
full-time employees, 767 part-time employees and 297 advance planning
representatives. All of our funeral directors and embalmers possess licenses
required by applicable regulatory agencies. We believe that our relationship
with our employees is good. No employees of Carriage or its subsidiaries are
members of a collective bargaining unit.
ITEM 2. PROPERTIES
At December 31, 1998, we operated 166 funeral homes and 27 cemeteries in 30
states. Carriage owns the real estate and buildings of 77% of its funeral homes
and all of its cemeteries and leases facilities in connection with 23% of its
funeral homes. The 27 cemeteries operated by Carriage cover a total of
approximately 1079 acres. Our inventory of unsold developed lots totaled
approximately 80,000 and 106,000 at December 31, 1997 and 1998, respectively. In
addition, approximately 522 acres, or approximately 48% of the total acreage, is
available for future development. We do not anticipate any shortage of available
space in any of our current cemeteries for the foreseeable future.
The following table sets forth certain information as of December 31, 1998,
regarding Carriage's funeral homes and cemeteries by state:
<TABLE>
<CAPTION>
NUMBER OF
FUNERAL HOMES
----------------------
STATE OWNED LEASED(1) CEMETERIES
- - ------------------------------------- ------ ---------- -----------
<S> <C> <C> <C>
Ohio................................. 13 3 0
California........................... 17 2 3
Texas................................ 11(2) 1 3
Kentucky............................. 10 4 1
Florida.............................. 5 4 5
South Carolina....................... 5 0 4
Idaho................................ 5(3) 2 3
Kansas............................... 8 0 0
Connecticut.......................... 5 2 0
Georgia.............................. 3 4 0
Massachusetts........................ 7 0 0
Michigan............................. 4 2 0
Virginia............................. 4 1 0
Illinois............................. 0 6 1
New Jersey........................... 3 2 0
Oklahoma............................. 1 0 1
Tennessee............................ 3 1 1
Indiana.............................. 3 2 2
Iowa................................. 4 0 0
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
8
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
FUNERAL HOMES
----------------------
STATE OWNED LEASED(1) CEMETERIES
- - ------------------------------------- ------ ---------- -----------
Nevada............................... 2 0 2
<S> <C> <C> <C>
North Carolina....................... 1 1 1
Alabama.............................. 2 0 0
New York............................. 3 0 0
Washington........................... 2 0 0
Maryland............................. 0 1 0
Montana.............................. 1 0 0
Missouri............................. 0 1 0
Rhode Island......................... 3 0 0
New Mexico........................... 1 0 0
West Virginia........................ 1 0 0
-- --
------
Total(4)........................ 127 39 27
====== == ==
</TABLE>
- - ------------
(1) The leases, with respect to these funeral homes, have remaining terms
ranging from two to fifteen years, and, generally, we have a right of first
refusal on any proposed sale of the property where these funeral homes are
located.
(2) One funeral home is located on property contiguous to and operated in
combination with a Carriage cemetery.
(3) Two funeral homes are located on property contiguous to and operated in
combination with our cemeteries.
(4) From January 1, 1999 through March 15, 1999, we have acquired one funeral
home in Idaho and one funeral home in Tennessee for an aggregate
consideration of $5.3 million.
Carriage's corporate headquarters occupy approximately 24,500 square feet
of leased office space in Houston, Texas.
At December 31, 1998, we operated 664 vehicles, of which 651 we owned and
13 we leased.
The specialized nature of our business requires that our facilities be
well-maintained. Management believes that this standard is met.
ITEM 3. LEGAL PROCEEDINGS
Suzanne T. Hoeffner, et al. v. Estate of Allan Kenneth Vieira, et al.
Certain of the funeral homes located in California that we acquired in early
1997, along with other death care providers, are defendants in litigation, filed
in August 1997 in the Superior Court of Sacramento County, California. The
plaintiffs in the litigation are alleging that a flight service contracted to
dispose of cremains failed to properly carry out its duties, and are seeking
injunctive relief regarding disposition of the cremains and monetary damages.
Management, with advice of legal counsel, believes that there are adequate
insurance coverages, indemnities and reserves such that the results of the
litigation will not have a material effect on our consolidated financial
position or result of operations.
Additionally, Carriage and our 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 us.
We carry insurance with coverages and coverage limits that we believe to be
customary in the funeral home and cemetery industries. Although there can be no
assurance that such insurance will be sufficient to protect us against all
contingencies, we believe that our insurance protection is reasonable in view of
the nature and scope of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Carriage's Class A Common Stock is traded on the New York Stock Exchange
under the symbol "CSV". From August 9, 1996 to May 8, 1998, the Class A Common
Stock was 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 New York Stock Exchange
and the NASDAQ National Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
------ ------ ------
<S> <C> <C>
First Quarter........................ $26.00 $18.25
Second Quarter....................... $22.75 $17.00
Third Quarter........................ $22.75 $16.25
Fourth Quarter....................... $19.625 $16.50
<CAPTION>
1998
------
<S> <C> <C>
First Quarter........................ $23.75 $16.00
Second Quarter....................... $26.00 $21.00
Third Quarter........................ $27.25 $19.50
Fourth Quarter....................... $28.75 $19.8125
</TABLE>
As of March 15, 1999, there were 12,058,250 shares of Carriage's Class A
Common Stock and 3,772,520 shares of the 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 205 stockholders of record. We believe
there are approximately 3,500 beneficial owners of the Class A Common Stock.
We have never paid a cash dividend on our Class A or Class B Common Stock.
Carriage currently intends to retain earnings to finance the growth and
development of our business and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Any future change in our dividend
policy will be made at the discretion of our Board of Directors in light of the
financial condition, capital requirements, earnings and prospects of Carriage
and any restrictions under credit agreements, as well as other factors the Board
of Directors may deem relevant.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue, net:
Funeral.............................. $ 17,368 $ 22,661 $ 37,445 $ 64,888 $ 92,965
Cemetery............................. 1,036 1,576 2,903 12,533 23,876
--------- --------- --------- --------- ---------
Total net revenues................... 18,404 24,237 40,348 77,421 116,841
--------- --------- --------- --------- ---------
Gross profit:
Funeral.............................. 2,856 3,740 6,804 16,484 28,036
Cemetery............................. 158 250 362 2,899 6,288
--------- --------- --------- --------- ---------
Total gross profit................... 3,014 3,990 7,166 19,383 34,324
General and administrative expense... 1,266 2,106 2,474 5,277 7,581
--------- --------- --------- --------- ---------
Operating income..................... 1,748 1,884 4,692 14,106 26,743
Interest expense, net................ 2,671 3,684 4,347 5,889 9,720
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... (923) (1,800) 345 8,217 17,023
Provision for income taxes........... 40 694 138 3,726 7,490
--------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item................. (963) (2,494) 207 4,491 9,533
Extraordinary item, net.............. -- -- (498) (195) --
--------- --------- --------- --------- ---------
Income (loss) after extraordinary
item............................... (963) (2,494) (291) 4,296 9,533
Preferred stock dividends............ -- -- 622 890 606
--------- --------- --------- --------- ---------
Net income (loss) available to common
stockholders....................... $ (963) $ (2,494) $ (913) $ 3,406 $ 8,927
========= ========= ========= ========= =========
Earnings (loss) per share Basic:
Continuing operations................ $ (.38) $ (.99) $ (.09) $ .35 $ .67
Extraordinary item................... -- -- (.10) (.02) --
--------- --------- --------- --------- ---------
Basic earnings (loss) per share...... $ (.38) $ (.99) $ (.19) $ .33 $ .67
========= ========= ========= ========= =========
Diluted:
Continuing operations................ $ (.38) $ (.99) $ (.09) $ .34 $ .65
Extraordinary item................... -- -- (.10) (.02) --
--------- --------- --------- --------- ---------
Diluted earnings (loss) per share.... $ (.38) $ (.99) $ (.19) $ .32 $ .65
========= ========= ========= ========= =========
Weighted average number of common and common equivalent shares outstanding:
Basic................................ 2,520 2,520 4,869 10,226 13,315
========= ========= ========= ========= =========
Diluted.............................. 2,520 2,520 4,869 10,485 13,808
========= ========= ========= ========= =========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period....... 34 41 76 120 166
Cemeteries at end of period.......... 3 3 10 20 27
Funeral services performed during
period............................. 3,529 4,414 7,181 12,131 16,881
Preneed funeral contracts sold....... 762 2,610 3,760 4,020 6,481
Backlog of preneed funeral
contracts.......................... 6,855 8,676 22,925 34,797 57,185
Depreciation and amortization........ $ 1,476 $ 1,948 $ 3,629 $ 7,809 $ 11,444
BALANCE SHEET DATA:
Working capital...................... $ 4,271 $ 6,472 $ 5,089 $ 5,823 $ 11,564
Total assets......................... 44,165 61,746 131,308 277,940 466,144
Long-term debt, net of current
maturities......................... 32,622 42,057 42,733 121,553 212,972
Redeemable preferred stock........... -- -- 17,251 13,951 1,673
Shareholders' equity................. $ 3,429 $ 9,151 $ 57,043 $ 98,565 $ 200,394
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Carriage is a leading provider of death care services and products in the
United States. Our focus is on growth through acquisitions and enhancements at
facilities currently owned to increase revenues and gross profit. We entered
1998 with the goals (among others) of implementing company-wide training,
increasing margins in our funeral home and cemetery operations while continuing
to grow rapidly, substantially increasing the preneed sales and marketing
activities, and increasing employee incentive and ownership programs.
The objective of these goals was to expand our infrastructure and stability
as we continued to pursue consolidation opportunities in the death care
industry.
Income from operations, which we define as earnings before interest and
income taxes, increased, as a percentage of net revenues, from 11.6% for 1996 to
18.2% for 1997 and to 22.9% in 1998. Income from operations for the year ended
December 31, 1998, increased 89.6% compared to the same period in 1997. This
improvement was largely due to the increased gross profits at individual
locations. Gross margins for funeral homes increased from 18.2% in 1996 to 25.4%
in 1997 and to 30.2% in 1998, as a result of margin management training for the
managers and directors related to merchandising and memorialization, and
benefits from cost containment and clustering, where realizable. Improvements in
cemetery gross profit margins have been dramatic since 1996. Cemetery gross
profit from 1996 to 1998 increased 1,637% while cemetery revenues increased 722%
for the same period. During 1997, we doubled the number of cemeteries we owned
and beginning in late 1996 we restructured the preneed sales function. As a
percentage of cemetery net revenues, cemetery gross profit increased from 12.5%
in 1996 to 23.1% in 1997 and to 26.3% in 1998. Increased preneed sales and
marketing efforts have had a significant impact beginning in the fourth quarter
of 1997, as revenues and gross profits from cemeteries owned at least one year
increased 90.5% and 116.9%, respectively, for the year ended December 31, 1998
compared to 1997.
We have experienced significant growth since the end of 1995 when we owned
44 facilities. We acquired 45 facilities in 1996, 54 facilities in 1997 and 55
facilities in 1998. In a deliberate and managed process, we increased personnel
and related infrastructure as a function of the increase in our revenue
run-rate. As a consequence, general and administrative expenses increased from
$2.1 million in 1995, to $2.5 million in 1996, to $5.3 million in 1997 and to
$7.6 million in 1998. However, general and administrative expenses, as a
percentage of revenues over these periods, were 8.7% in 1995, 6.1% in 1996, 6.8%
in 1997 and 6.5% in 1998. The additional personnel filled critical roles in
expanding the geographic coverage of both corporate development and preneed
sales and marketing activities, as well as the financial, data processing and
administrative functions needed to support the growing number of locations
operating in a decentralized management fashion with timely financial and
management information. Additionally, near the end of 1996, we restructured and
expanded the prearranged funeral and cemetery sales organization significantly.
During 1996, we acquired 38 funeral homes and seven cemeteries for an
aggregate consideration of approximately $68 million. We acquired 44 funeral
homes and ten cemeteries during 1997 for approximately $118 million. During
1998, we acquired 48 funeral homes and seven cemeteries for an aggregate
consideration of approximately $159 million. We funded these acquisitions
through cash flow from operations, additional borrowings under our credit
facilities and issuance of preferred and common stock. In addition, as of March
9, 1999, we had either closed acquisitions or had letters of intent or
definitive agreements to acquire nine funeral homes and 12 cemeteries for an
aggregate consideration of approximately $23.3 million. We believe our increased
recognition in the death care industry as an established operator and purchaser
of funeral homes and cemeteries, as well as favorable conditions in the
acquisition marketplace, has improved our ability to attract potential
acquisitions that are larger, strategic and accretive, as well as our ability to
finance our acquisitions with debt and equity.
One consequence of our rapid growth through acquisitions in recent years is
a relatively high level of non-cash depreciation and amortization expense. For
the years ended December 31, 1997 and 1998, depreciation and amortization
expense as a percentage of net revenues was approximately 10%. We believe that
this percentage
12
<PAGE>
was higher than others in the industry as most of our acquisitions have occurred
during the past two years and have been primarily comprised of funeral homes (as
compared to cemeteries which have a large nondepreciable land component).
Because all of our properties have been acquired in these types of transactions
in the past few years, the non-cash charges related to purchase price
allocations resulting from these acquisitions have had a significant impact on
our reported net income.
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: Carriage's ability to sustain its rapid
acquisition rate, to manage our growth and to obtain adequate performance from
acquired businesses; the economy and financial market conditions, including
stock prices, interest rates and credit availability; and death rates and
competition in the our markets.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for Carriage
expressed as a percentage of net revenues for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Total revenues, net.................. 100.0% 100.0% 100.0%
Total gross profit................... 17.8 25.0 29.4
General and administrative
expenses........................... 6.1 6.8 6.5
Operating income..................... 11.6 18.2 22.9
Interest expense, net................ 10.8 7.6 8.3
Net income before extraordinary
item............................... 0.5 5.8 8.2
</TABLE>
The following table sets forth the number of funeral homes and cemeteries
owned and operated by Carriage for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Funeral homes at beginning of
period............................. 41 76 120
Acquisitions......................... 38 44 48
Divestitures......................... 3 -- 2
---- --- ---
Funeral homes at end of period....... 76 120 166
==== === ===
Cemeteries at beginning of period.... 3 10 20
Acquisitions......................... 7 10 7
Divestitures......................... -- -- --
---- --- ---
Cemeteries at end of period.......... 10 20 27
==== === ===
</TABLE>
The following is a discussion of Carriage's results of operations for 1996,
1997 and 1998. 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".
13
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Funeral Home Segment. The following table sets forth certain information
regarding Carriage's net revenues and gross profit from our funeral home
operations during the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ---------------------
1997 1998 AMOUNT PERCENT
--------- --------- --------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations............. $ 47,082 $ 48,092 $ 1,010 2.1%
Acquired operations............. 17,806 44,873 27,067 152.0%
--------- --------- ---------
Total net revenues......... $ 64,888 $ 92,965 $ 28,077 43.3%
========= ========= =========
Gross profit:
Existing operations............. $ 10,881 $ 13,752 $ 2,871 26.4%
Acquired operations............. 5,603 14,284 8,681 154.9%
--------- --------- ---------
Total gross profit......... $ 16,484 $ 28,036 $ 11,552 70.1%
========= ========= =========
</TABLE>
Due to the Carriage's rapid growth, existing operations represented only
52% of the total funeral revenues and only 49% of the total funeral gross profit
for the year ended December 31, 1998. Total funeral net revenues for the year
ended December 31, 1998, increased $28.1 million or 43.3% over 1997. The higher
net revenues reflect an increase of $27.1 million in net revenues from acquired
operations and an increase in net revenues of $1.0 million or 2.1% from existing
operations. While there was a 3.9% increase in the average revenue per funeral
service for existing operations, this was offset by a 1.7% decrease in the
number of funeral services being performed. Fewer services were performed in
1998, primarily due to lower than usual seasonal death rates in certain of our
markets, especially in the South Atlantic region of the country where we have a
large number of existing operations.
Total funeral gross profit for the year ended December 31, 1998 increased
$11.6 million or 70.1% over 1997. The higher total gross profit reflected an
increase of $8.7 million from acquired operations and an increase of $2.9
million or 26.4% from existing operations. Gross profit for existing operations
increased due to the efficiencies gained by consolidation, cost savings,
improved collections experience and the increasing effectiveness of our
merchandising strategy. Total gross profit increased from 25.4% for 1997 to
30.2% for 1998 due to these factors.
Cemetery Segment. The following table sets forth certain information
regarding Carriage's net revenues and gross profit from cemetery operations for
the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- --------------------
1997 1998 AMOUNT PERCENT
--------- --------- ------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total net revenues................... $ 12,533 $ 23,876 $11,343 90.5%
========= ========= =======
Total gross profit................... $ 2,899 $ 6,288 $ 3,389 116.9%
========= ========= =======
</TABLE>
Due to Carriage's rapid growth, existing operations represented
approximately 29% of cemetery revenues and approximately 20% of cemetery gross
profit for the year ended December 31, 1998. As a result, we do not believe it
is meaningful to present the results for existing and acquired operations
separately.
Total cemetery net revenues for the years ended December 31, 1998
increased $11.3 million or 90.5% over 1997 and total cemetery gross profit
increased $3.4 million or 116.9% over 1997. Total gross margin increased from
23.1% for the year ended December 31, 1997, to 26.3% for the year ended December
31, 1998. These increases were due primarily to our acquisition of 17 cemeteries
during 1997 and 1998, and increased preneed marketing efforts.
14
<PAGE>
General and administrative expenses for the year ended December 31, 1998
increased $2.3 million or 43.7% over 1997 due primarily to the increased
personnel expense necessary to support a higher rate of growth and acquisition
activity. However, as a percentage of net revenues, general and administrative
expenses decreased as the expenses were spread over a larger volume of revenue.
Interest expense for the year ended December 31, 1998 increased $3.8
million over 1997 principally due to increased borrowings for acquisitions.
During 1997, Carriage issued approximately $20 million of Series F
redeemable preferred stock to fund a portion of our acquisition program. All of
the Series F redeemable preferred stock were converted to Class A common stock
by December 31, 1998. Dividends on this preferred stock are four percent per
annum. Preferred dividends of $890,000 and $606,000 were subtracted from net
income in computing earnings for 1997 and 1998, attributable to common
stockholders for purposes of computing basic and diluted earnings per common
share.
Carriage provided for income taxes on income before income taxes and
extraordinary item at a combined state and federal tax rate of 45.3% and 44% for
the years ended December 31, 1997 and 1998, respectively. The provision for
income taxes for 1997 includes a one-time charge in the amount of $390,000 to
revalue the historical deferred tax liability accounts because our taxable
income had grown to the point at which the federal corporate tax rate increases
from 34% to 35%. Amortization of names and reputations related to certain
acquisitions, which is nondeductible, is the primary cause of our effective rate
exceeding the combined federal and state statutory income tax rates.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Funeral Home Segment. The following table sets forth certain information
regarding Carriage's net revenues and gross profit from funeral home operations
during the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- --------------------
1996 1997 AMOUNT PERCENT
--------- --------- ------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations............. $ 25,042 $ 24,627 $ (415) (1.7)%
Acquired operations............. 12,403 40,261 27,858 *
--------- --------- -------
Total net revenues......... $ 37,445 $ 64,888 $27,443 73.3%
========= ========= =======
Gross profit:
Existing operations............. $ 4,396 $ 5,675 $ 1,279 29.1%
Acquired operations............. 2,408 10,809 8,401 *
--------- --------- -------
Total gross profit......... $ 6,804 $ 16,484 $ 9,680 142.3%
========= ========= =======
</TABLE>
- - ------------
* Not meaningful.
Due to Carriage's rapid growth, existing operations represented only 38% of
the total funeral revenues and only 34% of the total funeral gross profit for
the year ended December 31, 1997. Total funeral net revenues for the year ended
December 31, 1997 increased $27.4 million or 73.3% over 1996. The higher net
revenues reflected an increase of $27.9 million in net revenues from acquired
operations and a decrease in net revenues of $415,000 or 1.7% from existing
operations. The decrease in revenues for the existing operations primarily
resulted from fewer funeral services being performed, which was partially offset
by a 2.6% increase in the average revenue per funeral service. Fewer services
were performed in 1997 primarily due to lower than usual seasonal death rates in
certain of our markets, especially in the East North Central region of the
country where we have a large number of existing operations.
Total funeral gross profit for the year ended December 31, 1997 increased
$9.7 million or 142.3% over 1996. The higher total gross profit reflected an
increase of $8.4 million from acquired operations and an increase of $1.3
million or 29.1% from existing operations. Gross profit for existing operations
increased due to the
15
<PAGE>
efficiencies gained by consolidation, cost savings, improved collections
experience and the increasing effectiveness of our merchandising strategy, which
was partially offset by lower revenues. Total gross profit increased from 18.2%
for 1996 to 25.4% for 1997 due to these factors.
Cemetery Segment. The following table sets forth certain information
regarding the net revenues and gross profit of Carriage from our cemetery
operations for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- --------------------
1996 1997 AMOUNT PERCENT
--------- --------- ------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total net revenues................... $ 2,903 $ 12,533 $9,630 331.7%
========= ========= =======
Total gross profit................... $ 362 $ 2,899 $2,537 700.8%
========= ========= =======
</TABLE>
Due to our rapid growth, existing operations represented approximately 15%
of cemetery revenues and approximately 9% of cemetery gross profit for the year
ended December 31, 1997. As a result, we do not believe it is meaningful to
present the results for existing and acquired operations separately.
Total cemetery net revenues for the year ended December 31, 1997, increased
$9.6 million or 331.7% over 1996 and total cemetery gross profit increased $2.5
million or 700.8% over 1996. Total gross margin increased from 12.5% for the
year ended December 31, 1996, to 23.1% for the year ended December 31, 1997.
These increases were due primarily to our acquisition of ten cemeteries during
1997 and increased preneed marketing efforts.
As a result of the acceleration of our acquisition program in 1996, 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 corporate operations group's
management focus during the year. During the fourth quarter of 1996, significant
additional management resources were added to this group to provide assistance
in increasing revenue and profit margins from existing ongoing operations and to
more rapidly achieve targeted margins for acquired businesses.
General and administrative expenses for the year ended December 31, 1997,
increased $2.8 million or 113.3% over 1996, due primarily to the increased
personnel expense necessary to support a higher rate of growth and acquisition
activity. However, the increase in general and administrative expenses as a
percentage of net revenues was less than one percentage point, as the expenses
were spread over a larger volume of revenue.
Interest expense for the year ended December 31, 1997, increased $1.5
million over 1996 principally due to increased borrowings for acquisitions. In
August 1996, we utilized the net proceeds from the initial public offering and
borrowings under a credit facility to repay the majority of our outstanding
debts. In September 1997, we entered into a new credit facility for an increased
line of credit. In connection with repayment of debt in both years, we
recognized an extraordinary loss of approximately $498,000 and $195,000, net of
income tax benefits of approximately $332,000 and $159,000, for the write-off of
the deferred loan costs associated with the early retirement of debts for the
years ended December 31, 1996 and 1997, respectively.
During 1997, Carriage issued approximately $20 million of redeemable
preferred stock to fund a portion of our acquisition program. Dividends on this
preferred stock are four percent per annum. Preferred dividends of $890,000 were
subtracted from the $4.5 million of net income before extraordinary item in
computing earnings attributable to common stockholders resulting in a net income
before extraordinary item of $3.6 million for purposes of computing basic and
diluted earnings per common share.
During 1996, we issued approximately $18 million of redeemable preferred
stock to fund a portion of our acquisition program. Dividends on the majority of
this preferred stock range from 6-7 percent per annum. Preferred dividends of
$622,000 were subtracted from the $207,000 of net income before extraordinary
item in computing earnings attributable to common stockholders resulting in a
net loss of $415,000 for purposes of computing earnings per common share.
For 1996, Carriage provided for income taxes (benefits) at a combined state
and federal tax rate of 40%.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2.9 million at December 31, 1998,
representing a decrease of $3.2 million from December 31, 1997. For the year
ended December 31, 1998, cash provided by operations was $6.6 million as
compared to $9.7 million for the year ended December 31, 1997. The decrease in
cash provided by operations was principally due to increases in accounts
receivable and other deferred charges, which were partially offset by the
increase in income from operations. Cash used in investing activities was $153
million for the year ended December 31, 1998, compared to $75 million in 1997,
due primarily to the increases in amounts paid in connection with acquisitions
and capital expenditures. In 1998, cash flow provided by financing activities
amounted to approximately $144 million, primarily due to the net proceeds
generated from an equity offering in the second quarter of 1998 and proceeds
from long-term debt which were used to fund acquisitions.
On May 28, 1998, Carriage completed the sale of 3,000,000 shares of Class A
Common Stock and on June 10, 1998, the underwriters in that equity offering
exercised their option to sell an additional 450,000 shares of Class A Common
Stock, raising the total number of shares to 3,450,000. This resulted in
approximately $69 million in net proceeds, of which $45 million was used to
repay outstanding indebtedness under the credit facility, with the remaining $24
million used for acquisitions and general corporate purposes. In 1997, cash flow
provided by financing activities amounted to $70 million, primarily due to the
proceeds from long-term debt.
Historically, we have financed our acquisitions with proceeds from debt and
the issuance of common and preferred stock. As of December 31, 1997 and 1998, we
had 1,682,500 shares of Series D Preferred Stock issued and outstanding. The
Series D Preferred Stock is 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 August 8, 1998, Carriage may, at its option, redeem all or any
portion of the shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends. Such redemption is subject to the right of each holder of Series D
Preferred Stock to convert such holder's shares into shares of Class B Common
Stock. On December 31, 2001, we 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 December 31, 1997, we had 12,278,285 shares of Series F Preferred
Stock issued and outstanding. The Series F Preferred Stock paid cash dividends
at the annual rate of $.042 per share. On December 31, 1998, all of the Series F
Preferred Stock was converted into an aggregate of 722,250 shares of Class A
Common Stock at the exercise price of $17 per share.
Capital resources during 1996 were provided primarily by a $75 million
revolving line of credit (the "Former Credit Facility") and proceeds from the
issuance of its Class A Common Stock in connection with our initial public
offering. During September 1997, we entered into a new credit facility (the "New
Credit Facility") for a $150 million revolving line of credit. The New Credit
Facility has a five-year term, is unsecured and contains customary restrictive
covenants, including a restriction on the payment of dividends on common stock
and requires us to maintain certain financial ratios. Interest under the New
Credit Facility is provided at both LIBOR and prime rate options. During
September 1998, we increased the bank credit facility from $150 million to $225
million, with three additional banks participating in the agreement. At December
31, 1998, approximately $192.4 million was outstanding under the New Credit
Facility.
Carriage 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. We believe that cash flow from operations,
borrowings under the New Credit Facility and its ability to issue additional
debt and equity securities should be sufficient to fund acquisitions and its
anticipated capital expenditures and other operating requirements for 1999. In
March 1997, we filed a shelf registration statement relating to 2,000,000 shares
of Class A Common Stock to be issued to fund acquisitions. As of December 31,
1998, approximately 1,057,000 shares remained. Because future cash flows and the
availability of financing are subject to a number of variables, such as the
number and size of acquisitions we made, there can be no assurance that our
capital resources will be sufficient to fund its capital needs. Additional debt
and equity financing may be required to maintain our acquisition program. The
availability and terms of
17
<PAGE>
these capital sources will depend on prevailing market conditions and interest
rates and the then existing financial condition of Carriage.
SEASONALITY
Although the death care business is relatively stable and fairly
predictable, our business can be affected by seasonal fluctuations in the death
rate. Generally, death rates are higher during the winter months. In addition,
our quarterly results may fluctuate depending on the magnitude and timing of
acquisitions.
INFLATION
Inflation has not had a significant impact on the results of Carriage's
operations during the last three years.
YEAR 2000
Our information systems management group is continually reviewing the
management and accounting software packages for internal accounting and
information requirements to keep pace with our continued growth and to achieve
Year 2000 compliance. To address the Year 2000 issue, our information management
group and outside professional consultants have implemented a Year 2000 program
which encompasses performing an inventory of our 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 ready.
To date, inventory and assessment have been completed for all of our core
systems that are essential for business operations. All of these core systems
are believed to be 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 installed by March 1999. As of December 31, 1998, management
estimated that we had completed more than ninety percent of the work involved in
modifying, replacing and testing the non-compliant hardware and software. The
inventory and assessment phases for newly acquired businesses is performed
during the acquisition process as part of our due diligence analysis.
We are also communicating with vendors, trustees and other third parties
with whom we conduct business to determine the extent to which those companies
are addressing their Year 2000 compliance. To date, no significant third parties
have informed us that any Year 2000 issue exists which will have a material
effect on us.
Although we expect to be ready to continue our business activities without
interruption by a Year 2000 problem, we recognize 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 us to replace some suppliers, rearrange some
work plans or even temporarily interrupt some normal business activities or
operations. We believe that such circumstances would be isolated and would not
result in a material adverse impact to our operations or pose a material
financial risk to us. We have begun, but not yet completed, developing 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 the current assessment, our total costs of becoming Year 2000
compliant are not expected to be significant to our financial position, results
of operations or cash flows. As of December 31, 1998, we spent approximately
$33,000 related to Year 2000 compliance. The total remaining costs for
addressing the Year 2000 issue are presently estimated to be less than $100,000.
The estimated costs of the projects and the dates on which we plan to
complete the Year 2000 program are forward-looking statements based on our best
estimates, which were derived utilizing numerous assumptions of future events.
While we believe all necessary work will be completed in a timely fashion, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated. Some of the factors that might
cause such material differences include failure by third parties to adequately
solve Year 2000 problems, the cooperation of third parties and the ability to
identify and correct potential problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
Carriage is currently exposed to market risk from changes in interest
rates. Our long-term borrowings primarily consist of the $225 million floating
rate line of credit maturing in 2002. Any change in the floating rate
18
<PAGE>
will cause a change in interest expense. We seek to minimize the risk that
interest rates will increase by entering into interest rate swap transactions.
As of December 31, 1998, we were engaged in three interest rate swaps in which
we exchange the floating rate payments for fixed rate payments at 90 day
intervals. The interest rate swaps have a combined notional amount of $50
million, mature in 2003, and have a weighted average fixed rate of 5.57% and a
fair value of $505,000 at December 31, 1998. Any decrease in market interest
rates, assuming all other things being equal, causes the fair value of our
interest rate swaps to decrease. The remainder of Carriage's long-term debt and
the leases consist of non-interest bearing notes and fixed rate instruments. Any
increase in market interest rates causes the fair value of those liabilities to
decrease.
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 1999 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 1999 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 1999 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 1999 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.
19
<PAGE>
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, 1997 and 1998............. 25
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998......................................... 26
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996, 1997 and 1998......................... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998......................................... 28
Notes to Consolidated Financial Statements............................... 29
(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..... 43
Financial Statement Schedule II -- Valuation and Qualifying Accounts........ 44
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 Carriage
Services, Inc. and payment of a reasonable fee.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation, as amended, of the Company.
Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1996.
3.2 -- Certificate of Amendment dated May 9, 1996. Incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30,
1997.
3.3 -- Certificate of Decrease, reducing the authorized Series D Preferred Stock. Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1997.
3.4 -- Certificate of Decrease, reducing the authorized Series F Preferred Stock. Incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1997.
3.5 -- Amended and Restated Bylaws of the Company.
Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.1 -- Loan Agreement between the Company and NationsBank of Texas, N.A. dated September 9, 1997.
Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for its fiscal quarter ended September 30, 1997.
+10.2 -- 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).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ------------------------ ------------------------------------------------------------------------------------------
+10.3 -- 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).
<C> <S>
+10.4 -- 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).
+10.5 -- Employment Agreement with Gary O'Sullivan.
Incorporated herein by reference to Exhibit 10.26 to
the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1996.
+10.6 -- Employment Agreement with Thomas C. Livengood. Incorporated herein by reference to Exhibit
10.27 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.7 -- Amended and Restated 1995 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1996.
+10.8 -- Amended and Restated 1996 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 10.24 to
the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1996.
+10.9 -- Amended and Restated 1996 Directors' Stock Option
Plan. Incorporated herein by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for
its fiscal year ended December 31, 1996.
*11.1 -- Statement regarding computation of earnings per share.
*21.1 -- Subsidiaries of the Company
*27.1 -- Financial Data Schedule
</TABLE>
- - ------------
(*) Filed herewith.
(+) Management contract or compensation plan.
(B) REPORTS ON FORM 8-K
Carriage filed a Current Report on Form 8-K on November 6, 1998, with
respect to its acquisition of all of the outstanding shares of Forastiere
Funeral Home, Inc. on October 23, 1998, and its acquisition of substantially all
of the operating assets at Braun-Everiss-Wagley Funeral Home, Inc. on November
6, 1998.
21
<PAGE>
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 30, 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/MELVIN C. PAYNE Chairman of the Board, Chief Executive March 30, 1999
MELVIN C. PAYNE Officer and Director (Principal
Financial Officer)
/s/MARK W. DUFFEY President and Director March 30, 1999
MARK W. DUFFEY
/s/THOMAS C. LIVENGOOD Executive Vice President, Chief March 30, 1999
THOMAS C. LIVENGOOD Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
/s/C. BYRON SNYDER Director March 30, 1999
C. BYRON SNYDER
/s/ROBERT D. LARRABEE Director March 30, 1999
ROBERT D. LARRABEE
/s/BARRY K. FINGERHUT Director March 30, 1999
BARRY K. FINGERHUT
/s/STUART W. STEDMAN Director March 30, 1999
STUART W. STEDMAN
/s/RONALD A. ERICKSON Director March 30, 1999
RONALD A. ERICKSON
/s/MARK F. WILSON Director March 30, 1999
MARK F. WILSON
/s/GREG M. BRUDNICKI Director March 30, 1999
GREG M. BRUDNICKI
</TABLE>
22
<PAGE>
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, 1997 and 1998........ 25
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998................................... 26
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998............... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998................................... 28
Notes to Consolidated Financial Statements.......................... 29
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Stockholders and Board of Directors of Carriage Services, Inc.
We have audited the accompanying consolidated balance sheets of Carriage
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, 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, 1998. These financial statements are the responsibility of
our 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, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 1, 1999
24
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 6,126 $ 2,892
Accounts receivable --
Trade, net of allowance for doubtful accounts of $1,291 in
1997 and $3,435 in 1998........................... 11,617 17,835
Other........................................... 1,295 3,696
---------- ----------
12,912 21,531
Inventories and other current assets................. 5,691 7,457
---------- ----------
Total current assets......................... 24,729 31,880
---------- ----------
Property, plant and equipment, at cost:
Land................................................. 21,789 30,952
Buildings and improvements........................... 56,153 89,567
Furniture and equipment.............................. 15,046 21,988
---------- ----------
92,988 142,507
Less-accumulated depreciation........................ (7,123) (11,363)
---------- ----------
85,865 131,144
Cemetery property, at cost............................. 32,154 63,409
Names and reputations, net of accumulated amortization
of $4,480 in 1997 and $8,428 in 1998................... 118,099 211,183
Deferred charges and other non-current assets.......... 17,093 28,528
---------- ----------
Total assets................................. $ 277,940 $ 466,144
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 9,022 $ 4,754
Accrued liabilities.................................. 7,545 9,168
Current portion of long-term debt and obligations
under capital leases................................. 2,339 6,394
---------- ----------
Total current liabilities.................... 18,906 20,316
Preneed liabilities, net............................... 7,403 11,106
Long-term debt, net of current portion................. 121,553 212,972
Obligations under capital leases, net of
current portion...................................... 4,449 3,209
Deferred income taxes.................................. 13,113 16,474
---------- ----------
Total liabilities............................ 165,424 264,077
---------- ----------
Commitments and contingencies
Redeemable preferred stock............................. 13,951 1,673
Stockholders' equity:
Class A Common Stock, $.01 par value; 40,000,000 shares
authorized; 6,454,000 and 12,028,000 issued and
outstanding in 1997 and 1998, respectively......... 64 120
Class B Common Stock; $.01 par value; 10,000,000 shares
authorized; 4,691,000 and 3,779,000 issued and outstanding
in 1997 and 1998, respectively.................... 47 38
Contributed capital.................................. 102,056 194,911
Retained earnings (deficit).......................... (3,602) 5,325
---------- ----------
Total stockholders' equity................... 98,565 200,394
---------- ----------
Total liabilities and stockholders' equity... $ 277,940 $ 466,144
========== ==========
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
Revenues, net
Funeral............................ $ 37,445 $ 64,888 $ 92,965
Cemetery........................... 2,903 12,533 23,876
--------- --------- ----------
40,348 77,421 116,841
Costs and expenses
Funeral............................ 30,641 48,404 64,929
Cemetery........................... 2,541 9,634 17,588
--------- --------- ----------
33,182 58,038 82,517
--------- --------- ----------
Gross profit....................... 7,166 19,383 34,324
General and administrative
expenses........................... 2,474 5,277 7,581
--------- --------- ----------
Operating income................... 4,692 14,106 26,743
Interest expense, net................ 4,347 5,889 9,720
--------- --------- ----------
Income before income taxes and
extraordinary item.............. 345 8,217 17,023
Provision for income taxes......... 138 3,726 7,490
--------- --------- ----------
Net income before extraordinary
item............................ 207 4,491 9,533
Extraordinary item -- loss on early
extinguishment of debt, net of
income tax benefit of $332 in 1996
and $159 in 1997.................... (498) (195) --
--------- --------- ----------
Net income (loss).................. (291) 4,296 9,533
Preferred stock dividend
requirements....................... 622 890 606
--------- --------- ----------
Net income (loss) available to
common stockholders............. $ (913) $ 3,406 $ 8,927
========= ========= ==========
Basic earnings (loss) per share:
Net income (loss) before
extraordinary item.............. $ (.09) $ .35 $ .67
Extraordinary item................. (.10) (.02) --
--------- --------- ----------
Net Income (loss).................. $ (.19) $ .33 $ .67
========= ========= ==========
Diluted earnings (loss) per share:
Net income (loss) before
extraordinary item.............. $ (.09) $ .34 $ .65
Extraordinary item................. (.10) (.02) --
--------- --------- ----------
Net Income (loss).................. $ (.19) $ .32 $ .65
========= ========= ==========
Weighted average number of common and
common equivalent shares outstanding
Basic.............................. 4,869 10,226 13,315
========= ========= ==========
Diluted............................ 4,869 10,485 13,808
========= ========= ==========
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET RETAINED
NO. OF PREFERRED NO. OF COMMON CONTRIBUTED UNREALIZED EARNINGS
SHARES STOCK SHARES STOCK CAPITAL GAIN(LOSS) (DEFICIT)
--------- --------- --------- ------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1995......... 15,660 $ 157 2,520 $ 25 $ 15,100 $ (36) $(6,095)
Net loss -- 1996..................... -- -- -- -- -- -- (291)
Issuance of preferred stock.......... 555 5 -- -- 540 -- --
Issuance of common stock............. -- -- 3,947 40 47,942 -- --
Conversion of preferred stock to
common stock....................... (16,045) (160) 1,980 20 140 -- --
Conversion of redeemable preferred
stock to common stock.............. -- -- 39 -- 522 -- --
Unrealized net gain -- available for
sale securities.................... -- -- -- -- -- 36 --
Purchase of treasury stock........... (170) (2) -- -- (339) -- --
Preferred stock dividends............ -- -- -- -- -- -- (622)
Exercise of stock options............ -- -- 6 -- 61 -- --
--------- --------- --------- ------ ----------- ----------- ---------
BALANCE -- DECEMBER 31, 1996......... -- -- 8,492 85 63,966 -- (7,008)
Net income -- 1997................... -- -- -- -- -- -- 4,296
Issuance of common stock............. -- -- 978 10 14,714 -- --
Conversion of redeemable preferred
stock to common stock.............. -- -- 1,658 16 23,276 -- --
Purchase of treasury stock........... -- -- (3) -- (60) -- --
Exercise of stock options............ -- -- 20 -- 160 -- --
Preferred stock dividends............ -- -- -- -- -- -- (890)
--------- --------- --------- ------ ----------- ----------- ---------
BALANCE -- DECEMBER 31, 1997......... -- -- 11,145 111 102,056 -- (3,602)
Net Income -- 1998................... -- -- -- -- -- -- 9,533
Issuance of Common Stock............. -- -- 3,943 40 81,339 -- --
Conversion of redeemable preferred
stock to common stock.............. -- -- 722 7 12,271 -- --
Purchase of treasury stock........... -- -- (78) (1) (1,822) -- --
Exercise of stock options............ -- -- 75 1 1,067 -- --
Preferred stock dividends............ -- -- -- -- -- -- (606)
--------- --------- --------- ------ ----------- ----------- ---------
BALANCE -- DECEMBER 31, 1998......... -- $ -- 15,807 $158 $ 194,911 $ -- $ 5,325
========= ========= ========= ====== =========== =========== =========
</TABLE>
TOTAL
---------
BALANCE -- DECEMBER 31, 1995......... $ 9,151
Net loss -- 1996..................... (291)
Issuance of preferred stock.......... 545
Issuance of common stock............. 47,982
Conversion of preferred stock to
common stock....................... --
Conversion of redeemable preferred
stock to common stock.............. 522
Unrealized net gain -- available for
sale securities.................... 36
Purchase of treasury stock........... (341)
Preferred stock dividends............ (622)
Exercise of stock options............ 61
---------
BALANCE -- DECEMBER 31, 1996......... 57,043
Net income -- 1997................... 4,296
Issuance of common stock............. 14,724
Conversion of redeemable preferred
stock to common stock.............. 23,292
Purchase of treasury stock........... (60)
Exercise of stock options............ 160
Preferred stock dividends............ (890)
---------
BALANCE -- DECEMBER 31, 1997......... 98,565
Net Income -- 1998................... 9,533
Issuance of Common Stock............. 81,379
Conversion of redeemable preferred
stock to common stock.............. 12,278
Purchase of treasury stock........... (1,823)
Exercise of stock options............ 1,068
Preferred stock dividends............ (606)
---------
BALANCE -- DECEMBER 31, 1998......... $ 200,394
=========
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)....................... $ (291) $ 4,296 $ 9,533
Adjustments to reconcile net income
(loss) to net cash provided by
Operating activities --
Depreciation and amortization......... 3,629 7,809 11,444
Provision for losses on accounts
receivable.......................... 683 1,025 1,670
Loss on early extinguishment of
debt, net of income taxes........... 498 195 --
Deferred income taxes................. 54 2,230 1,732
--------- --------- ---------
Cash flows from operating activities
before changes in working capital
accounts................................. 4,573 15,555 24,379
Changes in assets and liabilities,
net of effects from acquisitions:
Increase in accounts
receivable.......................... (3,440) (4,747) (10,959)
Increase in inventories and other
current assets...................... (465) (1,223) (726)
Increase in other deferred
charges............................. (1,146) (1,884) (5,901)
Increase in accounts payable.......... 1,151 1,168 1,869
Increase (decrease) in accrued
liabilities......................... (403) 422 (528)
Increase (decrease) in preneed
liabilities......................... 44 370 (1,509)
--------- --------- ---------
Net cash provided by operating
activities....................... 314 9,661 6,625
Cash flows from investing activities:
Acquisitions, net of cash
acquired.............................. (42,707) (65,607) (136,389)
Purchase of cemetery property........... -- (518) (797)
Disposal of marketable securities
available for sale.................... 976 -- --
Purchase of property, plant and
equipment............................. (4,237) (8,645) (16,301)
--------- --------- ---------
Net cash used in investing
activities....................... (45,968) (74,770) (153,487)
Cash flows from financing activities:
Proceeds from long-term debt............ 59,849 79,300 129,330
Payments on long-term debt and
obligations under capital
leases................................ (65,925) (9,196) (52,942)
Proceeds from issuance of common
stock................................. 47,694 566 68,922
Preferred stock dividends............... (622) (890) (606)
Exercise of stock options............... 61 160 1,068
Purchase of treasury stock.............. (341) (60) (1,771)
Payment of deferred debt charges
and other............................. (923) (357) (373)
--------- --------- ---------
Net cash provided by financing
activities....................... 39,793 69,523 143,628
Net increase (decrease) in cash and
cash equivalents........................ (5,861) 4,414 (3,234)
Cash and cash equivalents at
beginning of year....................... 7,573 1,712 6,126
--------- --------- ---------
Cash and cash equivalents at end of
year.................................... $ 1,712 $ 6,126 $ 2,892
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................. $ 4,466 $ 5,477 $ 9,879
========= ========= =========
Cash paid for income taxes.............. $ -- $ 1,385 $ 5,641
========= ========= =========
Retirement of debt through
disposition of business............... $ 2,642 $ -- $ --
========= ========= =========
Non-cash consideration for
acquisitions.......................... $ 25,474 $ 52,653 $ 3,810
========= ========= =========
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Carriage Services, Inc. was organized under the laws of the State of
Delaware on December 29, 1993. We own and operate funeral homes and cemeteries
throughout the United States. We provide 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 Carriage's locations.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The financial statements include the consolidated financial statements of
Carriage Services, Inc. and its subsidiaries. In consolidation, all significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform with current year presentation.
FUNERAL AND CEMETERY OPERATIONS
We record the sales of funeral merchandise and services upon performance of
the funeral service. All sales of cemetery interment rights, together with
associated merchandise and services, are recorded at the time contracts are
signed. Costs related to the sales of interment rights include property and
other costs related to cemetery development activities which are charged to
operations using the specific identification method. 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. Accounts receivable -- trade, net
consists of approximately $7,245,000 and $10,016,000 of funeral receivables and
approximately $4,372,000 and $7,819,000 of current cemetery receivables at
December 31, 1997 and 1998, respectively. Non-current cemetery receivables,
those payable after one year, are included in Deferred Charges and Other
Non-current Assets on the Consolidated Balance Sheets.
PRENEED FUNERAL ARRANGEMENTS
Preneed funeral sales are affected by deposits to a trust or purchase of a
third-party insurance product. Since we do 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 insurance
products totaled approximately $53,262,000 and $95,637,000 at December 31, 1997
and 1998. The preneed funeral trust assets were approximately $52,931,000 and
$83,952,000 at December 31, 1997 and 1998, respectively, which in the opinion of
management, exceed the future obligations under such arrangements. The type of
instruments that the trusts may invest in are regulated by state agencies.
29
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summary reflects the composition of the assets held in trust
to satisfy Carriage's future obligations under preneed funeral arrangements:
HISTORICAL UNREALIZED
COST BASIS GAIN (LOSS) FAIR VALUE
----------- ------------ ----------
(IN THOUSANDS)
As of December 31, 1997:
Cash and cash equivalents....... $23,891 $ -- $ 23,891
Fixed income investment
contracts..................... 10,638 -- 10,638
Mutual funds, corporate bonds
and stocks.................... 17,960 442 18,402
----------- ------------ ----------
Total...................... $52,489 $442 $ 52,931
----------- ------------ ----------
As of December 31, 1998:
Cash and cash equivalents....... $38,777 $ -- $ 38,777
Fixed income investment
contracts..................... 16,531 -- 16,531
Mutual funds, corporate bonds
and stocks.................... 27,782 862 28,644
----------- ------------ ----------
Total...................... $83,090 $862 $ 83,952
----------- ------------ ----------
CEMETERY MERCHANDISE AND SERVICE TRUST
Carriage 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 us 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 $9,567,000 and $18,578,000 at
December 31, 1997 and 1998, 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, we are 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 and recognized as revenue upon
distribution. The perpetual and memorial care trust assets were approximately
$8,408,000 and $21,659,000 at December 31, 1997 and 1998, respectively, which,
in the opinion of management, will cover future obligations to provide care and
maintenance for our cemeteries and mausoleums. We do not have the right to
withdraw any of the principal balances of these funds and, accordingly, these
trust fund balances are not reflected in the accompanying Consolidated Balance
Sheets.
DEFERRED OBTAINING COSTS
Deferred obtaining costs consist of sales commissions and other direct
marketing costs applicable to preneed funeral sales, net of insurance
commissions received. These costs are deferred and amortized in funeral costs
and expenses over the expected timing of the performance of the services covered
by the preneed funeral contracts.
CASH AND CASH EQUIVALENTS
Carriage considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
DERIVATIVE FINANCIAL SECURITIES
We enter into interest rate swap agreements to reduce the impact of changes
in interest rates on its floating rate debt. The swap agreements are agreements
to exchange floating rates for fixed interest payments periodically
30
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
over the life of the agreements without the exchange of the underlying notional
amounts. Our current accounting practice does not provide that interest rate
swaps are recognized on the consolidated balance sheets. The differential paid
or received is recognized as an adjustment to interest expense. We do not hold
or issue financial instruments for trading purposes.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, effective for years beginning after June 15, 1999,
requires derivatives to be recorded in the balance sheet as an asset or
liability measured at its fair value, with changes in the derivatives fair value
recognized currently in earnings unless specific hedge accounting criteria are
met. We expect to adopt SFAS No. 133 on January 1, 2000 and are currently
evaluating the impact of such adoption on its consolidated financial statements.
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 our 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. We review 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 might be impaired or that the amortization period needs to
be modified. If indicators are present which indicate impairment is probable, we
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, 1998, no impairment was deemed to have occurred.
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 $264,000 and $498,000
in 1997 and 1998, respectively. Depreciation of property, plant and equipment is
computed based on the straight-line method over the following estimated useful
lives of the assets:
YEARS
--------
Buildings and improvements........... 15 to 40
Furniture and fixtures............... 7 to 10
Machinery and equipment.............. 5 to 10
Automobiles.......................... 5 to 7
INCOME TAXES
Carriage files a consolidated U.S. federal income tax return. We record
deferred taxes for temporary differences between the tax basis and financial
reporting basis of assets and liabilities.
EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE, which replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings
31
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
per share. All earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that carrying value approximates fair value for cash
and cash equivalents. Additionally, the floating rate credit facility
approximates its fair value. Management also believes that the redeemable
preferred stock is stated at fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130, effective
for years beginning after December 15, 1997, requires reporting comprehensive
income and its components in financial statements. Carriage has no comprehensive
income to report at December 31, 1998.
BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 131, effective for years beginning after December 15,
1997, requires segment information to be reported on a basis consistent with
that used internally for evaluating segment performance and deciding how to
allocate resources to segments. We adopted SFAS No. 131 in 1998 and restated
segment data for 1996 and 1997 on a basis consistent with that in 1998.
2. ACQUISITIONS
During 1998, Carriage acquired 48 funeral homes and seven cemeteries
through the purchase of stock and assets. In 1997, we acquired 44 funeral homes
and 10 cemeteries through the purchase of stock and assets. These transactions
have been accounted for utilizing the purchase method of accounting and the
results of operations of the acquired businesses have been included in our
results from the respective dates of acquisition.
In accordance with APB Opinion 16, purchase prices were allocated to the
net assets acquired based on our estimate of the fair value of the acquired
assets and liabilities at the date of acquisition. Many of our 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.
32
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The effect of the above acquisitions on the Consolidated Balance Sheets at
December 31, 1997 and 1998 was as follows:
1997 1998
---------- ----------
(IN THOUSANDS)
Current Assets....................... $ 11,909 $ 8,225
Cemetery Property.................... 28,276 29,899
Property, Plant and Equipment........ 34,830 34,299
Deferred Charges and Other
Non-current Assets................. 1,597 1,928
Names and Reputations................ 55,013 92,504
Current Liabilities.................. (1,631) (1,219)
Debt................................. (1,072) (1,166)
Other Liabilities.................... (10,662) (3,468)
---------- ----------
118,260 161,002
Consideration:
Redeemable preferred stock issued.... (20,000) --
Debt................................. (18,210) (10,965)
Cash acquired in acquisitions........ (556) (803)
Common stock issued.................. (13,887) (12,845)
---------- ----------
Cash used for acquisitions...... $ 65,607 $ 136,389
========== ==========
The following table reflects, on an unaudited pro forma basis, the combined
operations of Carriage and the businesses acquired during 1997 and 1998 as if
such acquisitions had taken place at the beginning of 1997. 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.
1997 1998
---------- ----------
(UNAUDITED AND IN
THOUSANDS)
Revenues, net........................ $ 141,095 $ 146,573
Income before income taxes and
extraordinary item................. 8,591 15,885
Net income available to common
stockholders....................... 3,614 8,290
Earnings per share
Basic........................... .35 .62
Diluted......................... .34 .60
As a part of the purchase price consideration in the acquisition of certain
funeral homes and cemeteries, Carriage issued Class A Common Stock and
guaranteed the stock would trade at certain agreed-upon levels during defined
future periods. Should the stock not trade at these levels, then Carriage would
makeup the difference by issuing additional shares or paying the seller
additional cash. The present value of these price guarantees have been recorded
as part of the purchase price of these acquisitions.
33
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS
Deferred charges and other non-current assets at December 31, 1997 and 1998
were as follows (in thousands):
1997 1998
--------- ---------
Agreements not to compete, net of
accumulated amortization of $2,233
and $2,798, respectively........... $ 4,034 $ 4,888
Non-current cemetery and notes
receivable......................... 9,807 15,084
Deferred obtaining costs, net of
accumulated amortization of $253
and $787, respectively............. 2,928 7,633
Other................................ 324 923
--------- ---------
$ 17,093 $ 28,528
========= =========
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 ten years. Deferred debt expense is being amortized over the term of the
related debt. Non-current cemetery receivables result from the multi-year
payment terms in the underlying contracts. These cemetery receivables are
recorded net of allowances for customer cancellations, refunds and bad debts.
4. LONG-TERM DEBT AND RELATED DERIVATIVES
LONG-TERM DEBT
Carriage's long-term debt consisted of the following at December 31 (in
thousands):
1997 1998
---------- ----------
Credit Facility,unsecured floating rate $225 million
line, interest is due on a quarterly basis for prime
borrowings and on the maturity dates of the LIBOR
borrowings at the LIBOR rate plus 0.5% to 1.25%
(weighted average interest rate was 6.45% for the
quarter ended December 31, 1998), matures in
September, 2002...................................... $ 107,500 $ 192,375
Acquisition debt....................................... 10,817 18,034
Other.................................................. 5,219 6,563
Less-current portion................................... (1,983) (4,000)
---------- ----------
$ 121,553 $ 212,972
========== ==========
In conjunction with the closing of the initial public offering (the "IPO")
in August 1996, Carriage entered into a credit facility (the "Former Credit
Facility") which provided for a $75 million revolving line of credit with both
LIBOR and base rate interest options. The Former Credit Facility was unsecured
and was for a term of three years. During September 1997, we entered into a new
credit facility (the "New Credit Facility") for a $150 million revolving line of
credit. The New Credit Facility has a five-year term, is unsecured and contains
customary restrictive covenants, including a restriction on the payment of
dividends on common stock and requires us to maintain certain financial ratios.
During September 1998, we increased the New Credit Facility from $150 million to
$225 million. Carriage was in compliance with all covenants at December 31,
1998. Interest under the New Credit Facility is provided at both LIBOR and prime
rate options. In August 1996, we paid all of our outstanding indebtedness with
the proceeds from the issuance of its Class A Common Stock in connection with
our IPO (see Note 7) and utilization of the Former Credit Facility. In
connection with repayment of debt in August 1996 and the retirement of debt
issued by the Former Credit Facility in September 1997, we recognized an
extraordinary loss of approximately $498,000 and $195,000, net of income tax
benefit of approximately
34
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$332,000 and $159,000 for the write-off of the deferred loan costs associated
with the early retirement of debt, for the years ended December 31, 1996 and
1997, respectively.
Acquisition debt consists of deferred purchase prices, payable to sellers.
The deferred purchase price notes bearing interest at 0%, discounted at imputed
interest rates ranging from 6% to 8%, with maturities from three to 15 years.
The aggregate maturities of long-term debt for the year ended December 31,
1999 and for the subsequent four years are approximately $4,000,000, $2,191,000,
$2,148,000, $194,550,000 and $2,281,000, respectively and $11,802,000
thereafter.
OFF BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
During 1998, Carriage entered into three interest rate swap agreements to
manage interest costs. Interest on our debt is primarily floating. To manage the
risk that interest rates will rise, we agree to exchange the floating rate
payments for fixed rate payments, at 90-day intervals, calculated by reference
to agreed-upon notional principal amounts. The following presents information
for the interest rate swaps at December 31, 1998 (In thousands):
Notional amount........................................... $ 50,000
Weighted average fixed rate............................... 5.57%
Maturity.................................................. 2003
Fair value................................................ $ 505
5. COMMITMENTS AND CONTINGENCIES
LEASES
Carriage leases certain office facilities, vehicles and equipment under
operating leases for terms ranging from one to 15 years. Certain of these leases
provide for an annual adjustment. Rent expense was approximately $924,000 and
$1,886,000 and $2,161,000 for 1996, 1997 and 1998, respectively.
Assets acquired under capital leases are included in property, plant and
equipment on the accompanying Consolidated Balance Sheets.
At December 31, 1998 minimum lease payments were as follows:
MINIMUM LEASE PAYMENTS
-----------------------
OPERATING CAPITAL
LEASES LEASES
--------- --------
(IN THOUSANDS)
Years ended December 31,
1999......................................... $ 2,007 $ 2,746
2000......................................... 1,413 294
2001......................................... 1,000 295
2002......................................... 1,646 284
2003......................................... 806 276
Thereafter........................................ 2,053 4,588
--------- --------
Total minimum lease payments...................... $ 8,925 $ 8,483
=========
Less -- amount representing interest.............. 2,880
Less -- current portion of obligations under
capital leases.................................. 2,394
--------
Long-term obligations under capital leases........ $ 3,209
========
35
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AGREEMENTS AND EMPLOYEE BENEFITS
Carriage has entered into various employment agreements and agreements not
to compete with key employees and former owners of businesses acquired. Payments
for such agreements are not made in advance. These agreements are generally for
one to 10 years and provide for future payments annually, quarterly or monthly.
The aggregate payments due under these agreements for the subsequent five years,
are approximately $1,872,000, $1,647,000, $1,285,000, $1,252,000 and $1,226,000,
respectively and $2,849,000 thereafter. In conformity with industry practice,
these agreements are not included in the accompanying Consolidated Balance
Sheets.
We sponsor one defined contribution plan for the benefit of our employees.
The expense for this plan has not been significant for the periods presented. In
addition, we do not offer any other post-retirement or post-employment benefits.
LITIGATION
Certain of the funeral homes located in California that were acquired by
Carriage in early 1997, along with other death care providers, are defendants in
litigation in the state of California alleging that a flight service contracted
to dispose of cremains failed to properly carry out its duties. Management, with
the advice of legal counsel, believes that there are adequate insurance
coverages, indemnities and reserves such that the results of this litigation
will not have a material effect on our consolidated financial position or result
of operations. Additionally, we are, from time to time, subject to routine
litigation arising in the normal course of our business. Management, with the
advice of legal counsel, similarly believes that the results of any such routine
litigation or other pending legal proceedings will not have a material effect on
our consolidated financial position or results of operations.
6. INCOME TAXES
The provision for income taxes for 1996, 1997 and 1998 consisted of:
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
Current:
U. S. Federal................... $ -- $ 1,275 $ 4,801
State........................... 84 759 957
--------- --------- ---------
Total current provision.... 84 2,034 5,758
--------- --------- ---------
Deferred:
U. S. Federal................... 48 1,564 1,197
State........................... 6 128 535
Total deferred provision... 54 1,692 1,732
--------- --------- ---------
Total income tax
provision................ $ 138 $ 3,726 $ 7,490
========= ========= =========
A reconciliation of taxes to the U.S. federal statutory rate to those
reflected in the Consolidated Statements of Operations for 1996, 1997 and 1998
is as follows:
1996 1997 1998
--------- --------- ---------
Federal statutory rate............... 34.0% 34.0% 35.0%
Effect of state income taxes, net of
federal benefit.................... 4.0 5.3 4.8
Effect of non-deductible expenses and
other, net......................... 57.3 15.9 4.8
Effect of valuation allowance........ (55.3) (14.5) (0.6)
Effect of change in statutory rate... -- 4.6 --
--------- --------- ---------
40.0% 45.3% 44.0%
========= ========= =========
36
<PAGE>
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, 1997 and 1998 were as
follows:
1997 1998
---------- ----------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.................. $ 510 $ 389
Reserves not currently deductible................. 509 350
Accrued liabilities and other..................... 701 684
Amortization of non-compete agreements............ 816 1,112
---------- ----------
2,536 2,535
Valuation allowance (268) (174)
---------- ----------
Total deferred tax assets......................... $ 2,268 $ 2,361
========== ==========
Deferred tax liability:
Amortization and depreciation..................... $ (12,814) $ (16,044)
Preneed assets, net............................... (1,670) (2,011)
---------- ----------
Total deferred tax
liabilities................................ $ (14,484) $ (18,055)
========== ==========
Net deferred tax liability............................. $ (12,216) $ (15,694)
========== ==========
Current net deferred asset............................. $ 897 $ 780
Non-current net deferred liability..................... (13,113) (16,474)
---------- ----------
$ (12,216) $ (15,694)
========== ==========
Carriage has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets for which realization is uncertain. We review the
valuation allowance at the end of each quarter and make adjustments if it is
determined that it is more likely than not that the NOLs will be realized. At
December 31, 1998, we had approximately $5,327,000 of state NOL carryforwards
that will expire between the years 2000 and 2013, if not utilized. Deferred tax
liabilities were recorded with respect to purchase accounting transactions
during the year ended December 31, 1998 in the approximate amount of $1,746,000.
7. STOCKHOLDERS' EQUITY
COMMON STOCK VOTING CLASSES
In connection with the initial public offering on August 8, 1996, we
performed a recapitalization of our 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.
TREASURY STOCK TRANSACTIONS
Carriage purchased 11,375 shares of Class A and 63,733 shares of Class B
Common Stock for $1,755,000 from company officers during 1998. Such shares have
been canceled.
STOCK OPTION PLANS
Carriage has four 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"), the 1996 Non-employee Director Stock Option
Plan (the "Directors' Plan") and the 1998 Stock Option Plan for Consultants (the
"Consultants' Plan").
37
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Options granted under the 1995 Plan have a ten-year term. All options
granted under the 1995 Plan prior to the IPO vest immediately, while
substantially all of those issued in conjunction with and after the IPO vest
over a four-year period at 25% per year. Options issued under this plan, prior
to Carriage'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 950,000 shares are reserved for issuance under the 1995 Plan
of which 692,000 shares were outstanding at December 31, 1998.
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 16.67% per year on the fifth through eighth anniversary dates
of the grant date; provided, however, the options scheduled to vest in years
five to eight from the grant date (i.e., 66.67% 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 800,000 shares of Class A Common Stock
are reserved for issuance under the 1996 Plan and 200,000 shares of Class A
Common Stock are reserved for issuance under the Directors' Plan. A total of
690,000 and 260,000 shares were outstanding under the 1996 Plan and Directors'
Plan, respectively. A total of 72,000 of the shares outstanding in the
Directors' Plan are subject to shareholder approval at the 1999 shareholders'
meeting.
Options granted under the Consultants' Plan have ten-year terms and have
vesting provisions that vary with the services to be performed by outside
consultants. A total of 100,000 shares of Class A Common Stock are reserved
under the Consultants' Plan, of which 50,000 shares were outstanding at December
31, 1998.
We account for stock options issued to employees 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, our net loss and loss
per share would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) available to common
stockholders
As reported........................ $ (913) $ 3,406 $ 8,927
Pro forma.......................... (1,274) 2,528 7,034
Net income (loss) per share available
to common stockholders:
Basic
As reported........................ (.19) .33 .67
Pro forma.......................... (.26) .25 .53
Diluted
As reported........................ (.19) .32 .65
Pro forma.......................... (.26) .24 .51
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, 1998 only
non-qualified options and incentive stock options have been issued. The options
are granted with an exercise price equal to the then fair market value of
Carriage's Common Stock as determined by the Board of Directors.
38
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the plans at December 31, 1997 and 1998 and
changes during the year ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998
--------------------- ---------------------
SHARES WTD AVG. SHARES WTD. AVG.
(000) EX PRICE (000) EX PRICE
------ ---------- ------ ----------
Outstanding at beginning of period... 850 $13.74 1,100 $15.40
<S> <C> <C> <C> <C>
Granted.............................. 338 20.18 742 19.39
Exercised............................ (23) 11.35 (75) 14.55
Canceled............................. (65) 16.80 (71) 19.90
------ ------
Outstanding at end of year........... 1,100 15.40 1,696 16.73
------ ------
Exercisable at end of year........... 146 12.41 511 16.76
------ ------
Weighted average fair value of
options granted.................... $ 8.52 $ 8.05
</TABLE>
All of the options outstanding at December 31, 1998 have exercise prices
between $8.00 and $26.06, with a weighted average exercise price of $16.73 and a
weighted average remaining contractual life of 8.3 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 1997 and 1998, respectively: risk-free interest
rates of 6.45% and 5.25%; expected dividend yields of 0% and 0%; expected lives
of five years; expected volatility of 35.9% and 35.0%.
EMPLOYEE STOCK PURCHASE PLAN
Beginning in 1998, Carriage provided all employees the opportunity to
purchase Class A Common Stock through payroll deductions. Purchases are made
quarterly, the price is 85% of the lower of the price on the grant date or the
purchase date. During 1998, employees purchased a total of 47,060 shares at a
weighted average price of $16.68 per share.
8. REDEEMABLE PREFERRED STOCK
Carriage has 20,000,000 authorized shares of Series D Preferred Stock with
a par value of $.01 per share, of which approximately 1,682,500 shares were
issued and outstanding at December 31, 1997 and 1998. As of December 31, 1998,
these shares can be converted into Class A Common Stock at a conversion price
equal to the average market price for the ten days preceding the date of
delivery of notice of conversion. At December 31, 1998, the conversion price was
$25.86, yielding a total of 65,055 shares of Class B Common Stock that would be
issuable upon conversion of the 1,682,500 shares. 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 Carriage, at any time during
the period commencing with the second anniversary of our 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.
During the first quarter of 1997, Carriage issued approximately 20,000,000
shares of Series F Preferred Stock with a par value of $.01 per share to fund a
portion of the acquisitions, of which 12,278,285 were outstanding at December
31, 1997. These shares were converted into 722,250 shares of Class A Common
Stock on December 31, 1998. The holders of the Series F Preferred Sock received
preferential dividends in the amount of $.04 per share, payable quarterly during
1997 and $.042 during 1998.
39
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted
earnings (loss) per share for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss) before
extraordinary item.............. $ 207 $ 4,491 $ 9,533
Extraordinary item................. (498) (195) --
--------- --------- ---------
Net income (loss).................. (291) 4,296 9,533
Preferred stock dividends.......... 622 890 606
--------- --------- ---------
Numerator for basic earnings per
share -- net income (loss)
available to common
stockholders.................... $ (913) $ 3,406 $ 8,927
--------- --------- ---------
Effect of dilutive securities:
Preferred stock dividends....... -- -- --
--------- --------- ---------
Numerator for diluted earnings per
share -- net income (loss)
available to common stockholders
after assumed conversions....... $ (913) $ 3,406 $ 8,927
--------- --------- ---------
Denominator:
Denominator for basic earnings per
share -- weighted average
shares.......................... 4,869 10,226 13,315
Effect of dilutive securities:
Stock options................... -- 259 493
--------- --------- ---------
Denominator for diluted earnings
per share -- adjusted weighted
average shares and assumed
conversions..................... 4,869 10,485 13,808
--------- --------- ---------
Basic earnings per share:
Net income (loss) before
extraordinary item.............. $ (.09) $ .35 $ .67
Extraordinary item................. (.10) (.02) --
--------- --------- ---------
Net income (loss).................. $ (.19) $ .33 $ .67
========= ========= =========
Diluted earnings per share:
Net income (loss) before
extraordinary item.............. $ (.09) $ .34 $ .65
Extraordinary item................. (.10) (.02) --
--------- --------- ---------
Net income (loss).................. $ (.19) $ .32 $ .65
========= ========= =========
</TABLE>
40
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United
States.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT NUMBER OF
OPERATING LOCATIONS) FUNERAL CEMETERY CORPORATE CONSOLIDATED
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------
External revenues:
1998............................ $ 92,965 $ 23,876 $ -- $ 116,841
1997............................ 64,888 12,533 -- 77,421
1996............................ 37,445 2,903 -- 40,348
- - --------------------------------------------------------------------------------------------------
Profit and Loss:
1998............................ $ 26,541 $ 6,218 $(23,226) $ 9,533
1997............................ 8,690 1,565 (5,959) 4,296
1996............................ 3,980 203 (4,474) (291)
- - --------------------------------------------------------------------------------------------------
Total assets:
1998............................ $351,996 $ 107,973 $ 6,175 $ 466,144
1997............................ 212,284 54,320 11,336 277,940
1996............................ 117,176 9,285 4,847 131,308
- - --------------------------------------------------------------------------------------------------
Depreciation and amortization:
1998............................ $ 8,750 $ 2,157 $ 537 $ 11,444
1997............................ 5,450 1,455 904 7,809
1996............................ 2,917 138 574 3,629
- - --------------------------------------------------------------------------------------------------
Capital expenditures:
1998............................ $ 43,921 $ 4,793 $ 2,026 $ 50,740
1997............................ 34,858 34,653 2,758 72,269
1996............................ 24,737 5,073 1,004 30,814
- - --------------------------------------------------------------------------------------------------
Number of operating locations at year end:
1998............................ 166 27 2 195
1997............................ 120 20 1 141
1996............................ 76 10 1 87
- - --------------------------------------------------------------------------------------------------
Interest revenue:
1998............................ $ 44 $ 0 $ 81 $ 125
1997............................ 35 1 12 48
1996............................ 12 0 12 24
- - --------------------------------------------------------------------------------------------------
Interest expense:
1998............................ $ 1,388 $ 69 $ 8,263 $ 9,720
1997............................ 596 37 5,256 5,889
1996............................ 171 24 4,152 4,347
- - --------------------------------------------------------------------------------------------------
Income tax expense (benefits):
1998............................ $ 11,678 $ 2,736 $ (6,924) $ 7,490
1997............................ 7,198 1,297 (4,769) 3,726
1996............................ 2,653 135 (2,650) 138
</TABLE>
41
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1997(A)
Revenues, net........................ $ 17,989 $ 19,061 $ 18,245 $ 22,126
Gross profit......................... 5,143 5,003 3,557 5,680
Net income before extraordinary
item............................... 1,825 1,489 347 830(b)
Extraordinary item................... -- -- (195) --
Preferred stock dividend
requirements....................... 363 174 176 177
Net income........................... 1,462 1,315 (24) 653(b)
Basic earnings per common share:
Continuing operations.............. $ .16 $ .13 $ 0.02 $ .06(b)
Extraordinary item................. -- -- (0.02) --
--------- --------- --------- ---------
Net income......................... $ .16 $ .13 $ -- $ .06(b)
--------- --------- --------- ---------
Diluted earnings per common share:
Continuing operations.............. $ .16 $ .12 $ 0.02 $ .06(b)
Extraordinary item................. -- -- (0.02) --
--------- --------- --------- ---------
Net income......................... $ .16 $ .12 $ -- $ .06(b)
--------- --------- ---------
1998(A)
Revenues, net........................ $ 28,118 $ 25,214 $ 28,620 $ 34,889
Gross profit......................... 8,787 6,998 7,313 11,226
Net income before extraordinary
item............................... 2,646 1,803 1,643 3,441
Extraordinary item................... -- -- -- --
Preferred stock dividend
requirements....................... 150 151 153 152
Net income........................... 2,496 1,652 1,490 3,289
Basic earnings per common share:
Continuing operations.............. $ .22 $ .13 $ .10 $ .22
Extraordinary item................. -- -- -- --
--------- --------- --------- ---------
Net income......................... $ .22 $ .13 $ .10 $ .22
--------- --------- --------- ---------
Diluted earnings per common share:
Continuing operations.............. $ .22 $ .13 $ .10 $ .21
Extraordinary item................. -- -- -- --
--------- --------- --------- ---------
Net income......................... $ .22 $ .13 $ .10 $ .21
--------- --------- --------- ---------
</TABLE>
- - ------------
(a) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total computed for the year due to stock transactions which
occurred during the periods presented.
(b) Includes a one-time charge of $390,000 (equivalent to $.04 per share) to
revalue historical deferred tax accounts from 34% to 35%.
42
<PAGE>
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 1,
1999. Our audit was 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 audit 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 1, 1999
43
<PAGE>
CARRIAGE SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
================================================================================
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
BEGINNING ACQUISITION COSTS AND END OF
DESCRIPTION OF YEAR RESERVES EXPENSES DEDUCTION YEAR
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Allowance for bad debts and
contract cancellations.......... $ 305 $ 683 $ 458 $ 530
Year ended December 31, 1997:
Allowance for bad debts and
contract cancellations.......... $ 530 $1,025 $ 264 $1,291
Litigation Reserves................ $ 2,700 $2,700
Year ended December 31, 1998:
Allowance for bad debts and
contract cancellations.......... $1,291 $ 2,818 $1,670 $ 2,344 $3,435
Litigation Reserves................ $2,700 $ 270 $2,430
Environmental remediation
reserves........................ $ 450 $ 450
</TABLE>
44
<PAGE>
EXHIBIT 11.1
CARRIAGE SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Earnings (loss) per share for 1996, 1997 and 1998 is calculated based on
the weighted average number of common and common equivalent shares outstanding
during each year as proscribed by SFAS 128. The following table sets forth the
computation of the basic and diluted earnings (loss) per share for 1996, 1997
and 1998:
1996 1997 1998
--------- --------- ---------
Net income (loss) before
extraordinary item................. $ 207 $ 4,491 $ 9,533
Extraordinary item................... (498) (195) --
--------- --------- ---------
Net income (loss).................... (291) 4,296 9,533
Preferred stock dividends............ (622) (890) (606)
--------- --------- ---------
Net income (loss) available to common
stockholders for basic EPS
computation........................ (913) 3,406 8,927
Effect of dilutive securities........ -- -- --
--------- --------- ---------
Net income (loss) available to common
stockholders for diluted EPS
computation........................ $ (913) $ 3,406 $ 8,927
========= ========= =========
Weighted average number of common
shares outstanding for basic EPS
computation........................ 4,869 10,226 13,315
Effect of dilutive securities:
Stock options...................... -- 259 493
--------- --------- ---------
Weighted average number of common and
common equivalent shares
outstanding for diluted EPS
computation........................ 4,869 10,485 13,808
========= ========= =========
Basic earnings per share
Net income (loss) before
extraordinary item.............. $ (.09) $ .35 $ .67
Extraordinary item................. (.10) (.02) --
--------- --------- ---------
Net income (loss).................. $ (.19) $ .33 $ .67
========= ========= =========
Diluted earnings per share
Net income (loss) before
extraordinary item.............. $ (.09) $ .34 $ .65
Extraordinary item................. (.10) (.02) --
--------- --------- ---------
Net income (loss).................. $ (.19) $ .32 $ .65
========= ========= =========
<PAGE>
EXHIBIT 21.1
CARRIAGE SERVICES, INC.
SUBSIDIARIES AS OF MARCH 15, 1999
NAME INCORPORATION
- - ------------------------------------- ------------------------
Carriage Funeral Holdings, Inc. ................................ Delaware
CFS Funeral Services, Inc. ..................................... Delaware
Carriage Holding Company, Inc. ................................. Delaware
Carriage Funeral Services of Michigan, Inc. .................... Michigan
Carriage Funeral Services of Idaho, Inc. ....................... Idaho
Carriage Funeral Services of Kentucky, Inc. .................... Kentucky
Carriage Funeral Services of Connecticut, Inc. ................. Connecticut
Carriage Funeral Services of Indiana, Inc. ..................... Indiana
Carriage Funeral Services of California, Inc. .................. California
Carriage Cemetery Services of Idaho, Inc. ...................... Idaho
Richmond County Memorial Park, Inc. ............................ North Carolina
Wilson & Kratzer Mortuaries..................................... California
Rolling Hills Memorial Park..................................... California
Grandview Memorial Gardens, Inc. ............................... Indiana
Carriage Funeral Services of Kansas, Inc. ...................... Kansas
CFS Funeral Services of Kansas, Inc. ........................... Kansas
CFS Services of Kentucky, Inc. ................................. Kentucky
Carriage Services of Illinois, Inc. ............................ Illinois
Carriage Services of New York, Inc. ............................ New York
Pioneer Funeral Plans, Inc. .................................... Texas
Carriage Services of Connecticut, Inc. ......................... Connecticut
Hamilton County Burial Services, Inc. .......................... Tennessee
CFS Services of Illinois, Inc. ................................. Illinois
Carriage Services of Florida, Inc. ............................. Florida
Feeney Funeral Home, Inc. ...................................... New Jersey
CSI Funeral Services of Massachusetts, Inc. .................... Massachusetts
Oak View Memorial Park Cemetery................................. California
Lakeland Memorial Gardens, Inc. ................................ Florida
CHC Insurance Agency of Ohio, Inc. .............................. Ohio
Barnett, Demrow & Ernst, Inc. ................................... Kentucky
Carriage Services of Kansas, Inc. ............................... Kansas
Carriage Services of New Mexico, Inc. ........................... New Mexico
Forastiere Family Funeral Service, Inc. ......................... Massachusetts
Beard Mortuary, Inc. ............................................ West Virginia
Carriage Cemetery Services, Inc. ................................ Texas
Carriage Services of Oklahoma, L.L.C. ........................... Oklahoma
Carriage Services of Massachusetts, Inc. ........................ Massachusetts
Carriage Services of Nevada, Inc. ............................... Nevada
Hubbard Funeral Home, Inc. ...................................... Maryland
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,892
<SECURITIES> 0
<RECEIVABLES> 24,966
<ALLOWANCES> 3,435
<INVENTORY> 7,457
<CURRENT-ASSETS> 31,880
<PP&E> 142,507
<DEPRECIATION> 11,363
<TOTAL-ASSETS> 466,144
<CURRENT-LIABILITIES> 20,316
<BONDS> 216,181
0
1,673
<COMMON> 158
<OTHER-SE> 200,236
<TOTAL-LIABILITY-AND-EQUITY> 466,144
<SALES> 92,965
<TOTAL-REVENUES> 92,965
<CGS> 82,517
<TOTAL-COSTS> 82,517
<OTHER-EXPENSES> 7,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,720
<INCOME-PRETAX> 17,023
<INCOME-TAX> 7,490
<INCOME-CONTINUING> 9,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,533
<EPS-PRIMARY> .67
<EPS-DILUTED> .65
</TABLE>
