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

                                       1

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:

FUNERAL YEAR(3) CONSIDERATION HOMES(1) CEMETERIES(2) - - ------------------------------------- ---------------------- --------- -------------- (DOLLARS IN THOUSANDS) 1992................................. $ 11,832 14 2 1993................................. 13,843 11 1 1994................................. 9,153 9 1 1995................................. 12,191 8 0 1996................................. 68,181 38 7 1997................................. 118,260 44 10 1998................................. 158,661 48 7 -- ---------------------- --- $392,121 172 28 ====================== === ==
- - ------------ (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 5 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. 6 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 7 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:
NUMBER OF FUNERAL HOMES ---------------------- STATE OWNED LEASED(1) CEMETERIES - - ------------------------------------- ------ ---------- ----------- 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 CONTINUED ON FOLLOWING PAGE) 8
NUMBER OF FUNERAL HOMES ---------------------- STATE OWNED LEASED(1) CEMETERIES - - ------------------------------------- ------ ---------- ----------- Nevada............................... 2 0 2 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 ====== == ==
- - ------------ (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 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.
1997 HIGH LOW ------ ------ ------ First Quarter........................ $26.00 $18.25 Second Quarter....................... $22.75 $17.00 Third Quarter........................ $22.75 $16.25 Fourth Quarter....................... $19.625 $16.50 1998 ------ First Quarter........................ $23.75 $16.00 Second Quarter....................... $26.00 $21.00 Third Quarter........................ $27.25 $19.50 Fourth Quarter....................... $28.75 $19.8125
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 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 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
11 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 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:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1997 1998 --------- --------- --------- 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
The following table sets forth the number of funeral homes and cemeteries owned and operated by Carriage for the periods presented:
YEAR ENDED DECEMBER 31, --------------------------- 1996 1997 1998 ---- ---- ---- 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 ==== === ===
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 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:
YEAR ENDED DECEMBER 31, CHANGE -------------------- --------------------- 1997 1998 AMOUNT PERCENT --------- --------- --------- -------- (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% ========= ========= =========
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:
YEAR ENDED DECEMBER 31, CHANGE -------------------- -------------------- 1997 1998 AMOUNT PERCENT --------- --------- ------- -------- (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% ========= ========= =======
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 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:
YEAR ENDED DECEMBER 31, CHANGE -------------------- -------------------- 1996 1997 AMOUNT PERCENT --------- --------- ------- -------- (DOLLARS IN THOUSANDS) Net revenues: Existing operations............. $ 25,042 $ 24,627 $ (415) (1.7)% Acquired operations............. 12,403 40,261 27,858 * --------- --------- ------- Total net revenues......... $ 37,445 $ 64,888 $27,443 73.3% ========= ========= ======= Gross profit: Existing operations............. $ 4,396 $ 5,675 $ 1,279 29.1% Acquired operations............. 2,408 10,809 8,401 * --------- --------- ------- Total gross profit......... $ 6,804 $ 16,484 $ 9,680 142.3% ========= ========= =======
- - ------------ * Not meaningful. 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 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.
YEAR ENDED DECEMBER 31, CHANGE -------------------- -------------------- 1996 1997 AMOUNT PERCENT --------- --------- ------- -------- (DOLLARS IN THOUSANDS) Total net revenues................... $ 2,903 $ 12,533 $9,630 331.7% ========= ========= ======= Total gross profit................... $ 362 $ 2,899 $2,537 700.8% ========= ========= =======
Due to 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 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 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 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 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.
EXHIBIT NO. DESCRIPTION - - ------------------------ ------------------------------------------------------------------------------------------ 3.1 -- Amended and Restated Certificate of Incorporation, as amended, of the Company. Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1996. 3.2 -- Certificate of Amendment dated May 9, 1996. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. 3.3 -- Certificate of Decrease, reducing the authorized Series D Preferred Stock. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. 3.4 -- Certificate of Decrease, reducing the authorized Series F Preferred Stock. Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. 3.5 -- Amended and Restated Bylaws of the Company. Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-05545). 10.1 -- Loan Agreement between the Company and NationsBank of Texas, N.A. dated September 9, 1997. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. +10.2 -- 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).
20
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). +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
- - ------------ (*) 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
22 CARRIAGE SERVICES, INC. INDEX TO FINANCIAL STATEMENTS PAGE ----- AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Public Accountants............................ 24 Consolidated Balance Sheets as of December 31, 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 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 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 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 CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
NET RETAINED NO. OF PREFERRED NO. OF COMMON CONTRIBUTED UNREALIZED EARNINGS SHARES STOCK SHARES STOCK CAPITAL GAIN(LOSS) (DEFICIT) --------- --------- --------- ------ ----------- ----------- --------- 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 ========= ========= ========= ====== =========== =========== =========
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 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 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 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 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 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 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 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 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 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 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 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 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:
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 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
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 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:
1996 1997 1998 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ========= ========= =========
40 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.
(IN THOUSANDS, EXCEPT NUMBER OF OPERATING LOCATIONS) FUNERAL CEMETERY CORPORATE CONSOLIDATED - - -------------------------------------------------------------------------------------------------- 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
41 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:
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- (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 --------- --------- --------- ---------
- - ------------ (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 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 CARRIAGE SERVICES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ================================================================================
BALANCE CHARGED TO BALANCE BEGINNING ACQUISITION COSTS AND END OF DESCRIPTION OF YEAR RESERVES EXPENSES DEDUCTION YEAR - - -------------------------------------------------------------------------------------------------------- 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
44 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 ========= ========= ========= 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
 

5 1,000 12-MOS DEC-31-1998 DEC-31-1998 2,892 0 24,966 3,435 7,457 31,880 142,507 11,363 466,144 20,316 216,181 0 1,673 158 200,236 466,144 92,965 92,965 82,517 82,517 7,581 0 9,720 17,023 7,490 9,533 0 0 0 9,533 .67 .65