ANNUAL REPORT
HOSOI GARDEN MORTUARY, INC.
DESCRIPTION OF BUSINESS
Hosoi Garden Mortuary, Inc. (the "Company") was
incorporated in 1957 under the laws of the State of
Hawaii as the successor to a business founded in 1900.
Professional funeral services are the principal
services rendered by the Company. The Company is
engaged in the funeral and mortuary business,
including the sale of pre-need funeral services
contracts. During the fiscal years ended May 31, 1999
and 1998, funeral services accounted for 74.4% and
72.1%, respectively, of revenues. The Company owns
50% of Garden Life Plan, Ltd. ("Garden Life") which
sells pre-need funeral service contracts for which the
Company acts as the sole servicing mortuary.
The Company operates a mortuary business in
Honolulu, Hawaii. Although established to offer
funeral services to all persons in Hawaii, the
Company serves principally persons of Japanese
ancestry who follow a particular and special order
of worship in accordance with their religious
beliefs. In addition to handling funeral services
for residents of Honolulu, the Company conducts
services for residents of other counties in Hawaii
and prepares remains for shipment to or receives
them from other counties in Hawaii, other states
in the United States and foreign countries.
On July 7, 1998, the Company entered into an
agreement with Woolsey Funeral & Cemetery Services,
Inc. to form Woolsey-Hosoi Mortuary Services, LLC,
a limited liability company under the laws of the
State of Hawaii. It is expected that the LLC will
conduct funeral services to persons other than
those of Japanese ancestry. Funeral services
arranged by the LLC will generally be conducted at
churches and other locations other than on the
Company's premises.
Thirty-four (34) persons were employed by the
Company for the fiscal year ended May 31, 1999.
Seventeen (17) persons were employed full-time and
seventeen (17) persons were employed part-time.
DIRECTORS AND EXECUTIVE OFFICERS
The Company has a total of nine (9) directors
constituting the entire Board of Directors, divided
into three (3) classes of three (3) directors each.
The Company's Articles of Association provide for
each class of directors to be elected for
three-year terms on a staggered basis.
Directors hold office for the duration of
their terms and thereafter until their successors
are elected. The executive officers serve at the
pleasure of the Board of
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Directors. The names, positions and offices, terms
of office, and business experience of the directors
and executive officers of the Company during the past
five years are set forth below. See the table on
pages 8 and 9 of the Proxy Statement for more
information about the directors and executive
officers of the Company.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Julie S. Shimonishi is a school teacher and
has been employed by the Department of Education,
State of Hawaii, since 1970. She has been a
director since 1979. She is a daughter of Sadako
Hosoi, director, and a sister of Clifford Hosoi,
director and president of the Company, and Anne T.
Tamori, director and vice-president of the Company.
Robert Kuwahara is a Certified Public
Accountant and has his own CPA practice. He has
been a director of the Company since 1995. He is
actively involved in human services organizations
such as the YMCA.
Richard B. Dole is a Vice-President and
Principal of Kuroman Realty, Inc. He resigned as
a director of the Company in 1999, after serving
as director since 1995. The Directors of the
Company nominated and elected Glenn Suetsugu to
serve the remaining term of Richard B. Dole as
director.
Glenn Sutetsugu is a real estate appraiser
who is also engaged in real property sales and
management.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Clifford Hosoi has been a director of the
Company since 1989. He was a vice president
from 1989 until his appointment as president
and chief executive officer of the Company as
of January 1, 1994. He has been a licensed
embalmer since 1979. He has been a Funeral
Director for the Company since 1985. He serves
as a director of Garden Life Plan, Ltd. He is
the son of Sadako Hosoi, director, and a brother
of Julie S. Shimonishi, director, and Anne T.
Tamori, director and vice-president of the
Company.
Rene Mansho is an elected member of the
City Council of the City and County of Honolulu
and has served on the City Council since 1988.
She has been a director of the Company since
1993. She presently serves as chairperson of
the Board of Directors and was elected to that
position in 1994. She has been a school
teacher, Vice-Principal and Administrator with
the Department of Education of the State of
Hawaii between 1971 through 1988. Other
organizations with which she is involved
include the Hawaii State Association of
Counties, the Mililani Hongwanji, Mililani
YMCA, Honolulu Japanese Chamber of Commerce,
Goodwill Industries, Great Aloha Run,
Salvation Army, Wahiawa Lions, Muscular
Dystrophy Association of Hawaii.
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Ricky C. Manayan is currently a Manager -
Prepaid Card Programs with GTE Hawaiian Tel.
He has been a director of the Company since 1995.
His other business affiliations include Rick
Manayan & Associates. He is President of
East-West Real Estate Co., Inc., Ricky Manayan
Associates and Transpacific Empire, Inc.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Sadako Hosoi is the widow of Herman S. Hosoi,
founder of the Company. She has been a director
of the Company since 1957 and is the Chairperson
of the Board Emeritus. At the January 24, 1999,
annual meeting, she was elected to a new
three-year term which will expire in 2002. In
the past, she has served as chairperson of the
Company and treasurer. She serves as a director
of Garden Life Plan, Ltd. She is the mother of
Julie S. Shimonishi, director, Clifford Hosoi,
director and president of the Company, and Anne
T. Tamori, director and vice president of the
Company.
Berton T. Kato is an attorney licensed in the
State of Hawaii and has his own law practice. He
also serves as a director of Garden Life Plan, Ltd.
At the January 24, 1999, annual meeting, he was
elected to serve a three-year term which will
expire in 2002.
Anne T. Tamori has been employed by the
Company since 1978. She has been a vice president
of the Company since 1994. She has served as an
associate secretary of the Company. She is a
daughter of Sadako Hosoi, director, and a sister
of Clifford Hosoi, director and president of the
Company, and Julie S. Shimonishi, director. At
the January 24, 1999, annual meeting, she was
elected to serve a three-year term which will
expire in 2002.
OTHER EXECUTIVE OFFICERS ARE AS FOLLOWS:
David Fujishige has been employed by the
Company since 1989. He has been a funeral
director since 1991. He has been a vice president
of the Company since 1994. Prior to joining the
Company, he was a food production supervisor at
Rehabilitation Hospital of the Pacific.
Keith Numazu has been employed by the Company
since 1992. He has been treasurer of the Company
since 1994. He has been an assistant bookkeeper
and programmer since 1992. Prior to joining the
Company, he was a systems operator/analyst for
Consolidated Amusement, Inc. and a senior systems
analyst/programmer for Holmes and Narver, Inc.
and Raytheon Services Nevada.
Elaine Nakamura has been employed by the
Company since 1963. She is the secretary of
the Company.
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MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The common shares of the Company are neither
traded nor listed on an exchange and has no
established public trading market. One stockbroker
in Honolulu, Hawaii, has quoted the common stock,
but the Company does not know the prices at which
the trades are made. During the fiscal year
ended May 31, 1999, the Company redeemed 70,272
shares as follows:
NO. OF SHARES REDEMPTION PRICE
65,772 $4.25
4,500 3.75
There were 1,473 record holders of common stock
as of May 31, 1999.
A cash dividend has been declared and paid once
a year since 1969. The dividend for the year ended
May 31, 1999, which was declared on October 21, 1999,
was $.06 per share. Dividends for the year ended
May 31, 1999 are payable to shareholders in January
2000. The dividend for the year ended May 31, 1998,
which was declared on October 15, 1998, was $.10 per
share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth items from Hosoi
Garden Mortuary, Inc.'s statement of income as
percentages of net revenues:
Years Ended May 31,
1999 1998
Total revenues 100.0% 100.0%
Cost of sales and services 74.7 78.8
Gross profit 25.3 21.2
Selling, general and administrative 24.0 26.7
Operating income(loss) 1.3 (5.5)
Other income (expenses) 6.4 10.4
Income before income taxes 7.7 4.9
Provision for income taxes 3.3 1.4
Income before equity in earnings
of Garden Life Plan, Ltd. (GLP) 4.4 3.5
Equity in earnings of GLP, net 14.7 28.5
Net income 19.1% 32.0%
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RESULTS OF OPERATIONS
TOTAL REVENUES
The Company's revenues increased by $82,813
in 1999 over 1998. The increase of 3.1% is
attributable to the increase in number of services
performed from 1,050 in 1998 to 1,063 in 1999,
which is an increase of 1.2% and the effects of a
price increase instituted during the 1999 fiscal
year.
The Company expects revenues to remain at the
1999 level, despite the increase in prices for
funeral services, because it is expected that
selection of lower priced funeral services will
continue because of the poor economic conditions
in Hawaii.
In addition, it is expected that pre-need
services which generate lower average revenues will
continue to account for between 30% and 40% of
total revenues.
The continued affiliation with Woolsey Funeral
& Cemetery Services, Inc., described above, is a
revenue source from a segment of the community which
was not served by Company. The Woolsey-Hosoi
Mortuary Services, LLC is not expected to have an
immediate impact on the Company's revenues.
The Company's operating expenses in 1999
decreased as a percentage of revenues due to a
decrease in real property taxes and an increase in
revenues. However, the Company's operating expenses
is expected to increase as a result of the Company's
plans for the upgrade of its personnel and
facilities as follows:
1. Upgrade and train professional staff to meet
the current market demands and the changing
nature of customer preferences. The current
trend indicates that families are having
smaller services with lower priced
merchandise.
2. Upgrade the facilities to provide the
capacity to provide multi-cultural services
and service the increasing numbers of pre-need
plans.
3. Explore the establishment of a pre-need
authority, or consider the purchase of the
interest of its 50% shareholder in Garden Life
Plan, Ltd. or extend the service agreement with
Garden Life Plan, Ltd. beyond the expiration in
2001.
4. Construction of an on-site crematory.
Operating results for fiscal 2000 will be adversely
affected if revenues do not increase in relation to the
increase in costs. The increase in the number of
pre-need services expected in relation to at-need
services will limit the growth of total
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revenues. The upgrade of the Company's personnel
and facilities is expected to mitigate the effects
of the increase in pre-need plan services and the
generally poor economic conditions in Hawaii.
COST OF SALES AND SERVICES
Cost of sales and services decreased to 74.7%
of revenues in 1999 from 78.8% in 1998. The 4.1%
decrease in cost of sales is attributable to a
decrease in the real property taxes, salaries and
wages, and rent in relation to total revenues.
GROSS PROFIT
Gross profit as a percentage of total revenues
increased to 25.3% in 1999 from 21.2% in 1998. The
increase is due to the increase in revenues and the
decrease in cost of sales as mentioned above. The
3.1% increase in revenues is attributable to the
relatively small increase of 1.2% in the number of
services performed in 1999 over 1998 and the price
increase instituted during the fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses
decreased to 24.0% in 1999 from 26.7% in 1998.
The decrease is attributable to a decrease of 1.7%
in professional services, a decrease of .4% in
advertising and promotions and .6% in bad debt
expense.
It is expected that selling, general and
administrative expenses in 2000 will increase
because of expected increases in professional
services and advertising expense.
EARNINGS OF GARDEN LIFE PLAN, LTD.
Revenues from the trust funds of the
Company's subsidiary, Garden Life Plan, Ltd.
(GLP), whose earnings are accounted for on the
equity method of accounting, are included in
the amounts reflected as EQUITY IN EARNINGS OF
GARDEN LIFE PLAN, LTD. of $405,235 and $608,171
for 1999 and 1998 respectively. The EQUITY IN
EARNINGS OF GARDEN LIFE PLAN, LTD., in 1998 was
restated for a misstatement in 1998. Information
relating to the prior period adjustments and the
effects on the Company financial statements are
more fully described in Footnote (18) of the
Company's financial statements, which are
attached hereto and incorporated by reference.
Earnings of the Trust fund of GLP are not
directly affected by decisions of the management
of the Company. Investment decisions are
generally made by the money manager of GLP's Trust
funds. Fluctuations in GLP's trust fund income,
which
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amounted to $1,508,657 and $2,136,577 for the
years ended May 31, 1999 and 1998 respectively
are the result of fluctuations in interest rates,
capital gains and the mix of investment of the
Trust.
Equity in the earnings of GLP continue to
account for a large part of the Company's
earnings, at 77.2% and 86.8% of the Company's
net income in 1999 and 1998, respectively.
INCOME TAXES
The Company's effective income tax rate
was 43.3% of pre-tax income in 1999 and 36.5%
in 1998. Note (9) to the Company's financial
statements presents a reconciliation of the
Company's effective and statutory income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Total working capital decreased by $418,130 to
$1,971,456 in 1999 from $2,389,586 in 1998. The
decrease is attributable to an decrease in current
assets, particularly in income taxes receivable
$226,732 and a decrease in cash required to redeem
the Company's shares. Working capital ratio was
6.0:1 at May 31, 1999 and 6.7:1 at May 31, 1998.
SECURITIES AVAILABLE-FOR-SALE increased to
$847,718 in 1999 from $773,464 in 1998 as a
result of earnings on the investment.
SECURITIES HELD TO MATURITY remained relatively
stable at $888,931 in 1999 and $842,656 in 1998.
At the end of 1999, the Company did not have
any long-term debt. The Company expects that cash
flows from operations, its cash reserves and
investments will be adequate to meet the Company's
cash requirements in the foreseeable future.
Dividends paid were $173,488 and $175,569 in
1999 and 1998, respectively, which was $.10 per
share in both years.
Cash outflows for the acquisition of the
Company's shares were $130,289 in 1998 and $296,407
in 1999. The Company expects that future
acquisitions will be in the range of $100,000 to
$200,000 per year.
YEAR 2000
Footnote (17) to the financial statements
which discusses "Year 2000 Compliance" is
incorporated by reference hereto.
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The following summarizes the Company's Year
2000 disclosure statement pursuant to the Year 2000
Readiness and Disclosure Act.
STATE OF READINESS
Hosoi Garden Mortuary, Inc. (HOSOI) does not
have a formal Year 2000 readiness program, however,
the Company's Treasurer has been assigned the task
of assessment of the Company's exposure to the
Y2K problem, the implementation of any required
remediation and the testing and validation of its
remediation efforts.
Our Year 2000 project focuses on two areas:
(1) information technology (IT) systems, such as
application software and PC's; and (2) suppliers.
We have identified application software and
PC's which needs to be replaced. We are in the
process of upgrading our PC system and have or will
replace application software which are not Year
2000 compliant.
We expect to complete our remediation efforts
by the end of October 1999 and implement validation
and testing before the end of 1999.
RISK/CONTINGENCY PLANS
Our "worst-case scenario" would be a failure of
our suppliers to supply merchandise for a prolonged
period of time that would impair our ability to
provide services to our customers in a timely and
reliable manner. Although the occurrence of this
scenario could affect HOSOI, we do not have a basis
to determine at this time whether such a scenario is
likely to occur. We believe that suppliers present
the area of greatest risk to disruption of our
operations because of our limited ability to
influence action of third parties or to estimate the
level and impact of their noncompliance through the
supply chain.
We have not developed contingency plans for our
IT systems as we believe that our remediation
efforts in this area will be successful because of
the small size of our PC network; five workstations
and one server; the use of accounting software from
one vendor who is Year 2000 ready and the use of
wordprocessor and spreadsheet programs from major
name brand suppliers.
The continency plans for our suppliers include,
where appropriate, (1) booking orders and stocking
products before anticipated disruptions and (2)
finding alternative suppliers.
We will update our assessment for our
significant suppliers as we receive additional
information from them concerning their Y2K
preparedness. However, judgements regarding
contingency plans - such as now to develop them
and to what extent - are subject to many variables
and uncertainties. There can be no assurance
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that HOSOI will correctly anticipate the level,
impact or duration of noncompliance by its
suppliers.
As a result, there is no certainty that our
contingency plans will be sufficient to mitigate
the impact of noncompliance by suppliers and some
material adverse effect to HOSOI may result from
one or more third parties regardless of our
contingency plans. The failure of any
contingency plans could have a material adverse
effect on Hosoi's financial condition, results of
operations or liquidity.
COST
We do not currently expect the total cost
of our Year 2000 readiness program will be
material to our financial condition or results of
operations. Cost associated with our efforts
around Year 2000 issues are expensed as incurred,
unless they relate to the purchase of hardware and
software, in which case they are capitalized.
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