SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 333-21411
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ROSE HILLS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3915765
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3888 SOUTH WORKMAN MILL ROAD
WHITTIER, CALIFORNIA 90601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(562) 692-1212
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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Indicate by check [X] 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 [_]
The number of outstanding common shares as of May 11, 2001 was 1,000.
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2001 and December 31, 2000 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended March 31, 2001 and 2000 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three Months Ended March 31, 2001 and 2000 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 5 - 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 8
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION 8
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
INDEX OF EXHIBITS 11
ROSE HILLS COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Rose Hills Holdings Corp.)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND MARCH 31, 2001
(In thousands, except share amounts)
(unaudited)
ASSETS
2000 2001
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Current assets:
Cash and equivalents $ 8,171 $ 11,239
Accounts receivable, net of allowances 12,662 12,218
Inventories 1,042 1,093
Prepaid expenses and other current assets 2,640 2,557
Deferred tax asset 3,550 3,550
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Total current assets 28,065 30,657
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Long-term receivables, net of allowances 14,012 11,306
Cemetery property, at cost 74,551 74,029
Property and equipment, net 59,870 59,993
Goodwill 118,330 117,506
Deferred finance charges 5,777 5,370
Receivables from service trusts 7,323 7,459
Other assets 2,533 2,467
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Total assets $310,461 $308,787
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 9,759 9,877
Current portion of long-term debt 7,842 7,664
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Total current liabilities 17,601 17,541
Retirement plan liabilities 6,876 6,848
Deferred tax liability 3,065 3,065
Subordinated notes payable 80,000 80,000
Bank senior-term loan 61,581 61,581
Other long-term debt 1,658 1,600
Other liabilities 50 50
Deferred revenue 17,995 17,308
Commitment and contingencies
Stockholder's equity:
Common stock, par value $.01; Authorized and
outstanding 1,000 shares -- --
Additional paid in capital 129,554 129,554
Accumulated deficit (7,919) (8,760)
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Total stockholder's equity 121,635 120,794
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Total liabilities and stockholder's equity $310,461 $308,787
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
1
ROSE HILLS COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Rose Hills Holdings Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
Three Months Ended
March 31
-----------------
2000 2001
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Sales and services:
Funeral sales and services $ 9,137 $ 9,165
Cemetery sales and services 10,825 9,050
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Total sales and services 19,962 18,215
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Cost of sales and services:
Funeral sales and services 5,913 6,428
Cemetery sales and services 7,808 7,627
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Total costs of sales and services 13,721 14,055
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Gross profit 6,241 4,160
General and administrative expenses 1,859 1,566
Amortization of purchase price in excess of
net assets acquired and other intangibles 932 924
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Income from operations 3,450 1,670
Other income (expense):
Interest expense (4,088) (3,894)
Finance and interest income 731 749
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Total other expense, net (3,357) (3,145)
Income/(loss) before income tax and cumulative
effect of accounting change 93 (1,475)
Income tax expense/(benefit) 86 (634)
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Net income/(loss) before cumulative effect of
accounting change 7 (841)
Cumulative effect of accounting change (net of
income tax benefit of $4,862) (7,467) --
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Net loss $(7,460) $ (841)
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
2
ROSE HILLS COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Rose Hills Holdings Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Three Months Ended
March 31
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2000 2001
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Cash flow from operating activities:
Net loss $(7,460) $ (841)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,965 1,929
Amortization of deferred finance cost 407 407
Amortization of cemetery property 504 694
Provision for bad debts and sales cancellation 945 209
Changes in assets and liabilities:
Accounts receivable (1,710) 2,768
Inventories (114) (51)
Prepaid expenses and in other current assets 1,026 83
Accounts payable and accrued expenses (4,783) 116
Retirement plan liabilities (81) (28)
Net deferred revenue 20,320 (687)
Other assets and liabilities, net (5,033) (170)
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Net cash provided by operating activities 5,986 4,429
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Cash flows from investing activities:
Capital expenditures (1,118) (1,126)
Proceeds from disposal of property, plant and equipment 1 --
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Net cash used in investing activities (1,117) (1,126)
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Cash flows from financing activities:
Principal payments of capital lease obligations (194) (194)
Increase (decrease) in other long term debt 109 (41)
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Net cash used in financing activities (85) (235)
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Net increase in cash and cash equivalents 4,784 3,068
Cash and cash equivalents at beginning of period 2,150 8,171
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Cash and cash equivalents at end of period $ 6,934 $11,239
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,673 $ 1,704
Taxes 200 --
See accompanying notes to unaudited condensed consolidated financial statements.
3
ROSE HILLS COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Rose Hills Holdings Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying March 31, 2001 condensed consolidated financial statements
of Rose Hills Company and subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial reporting and with the instructions to Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures necessary for complete financial statements in conformity
with accounting principles generally accepted in the United Sates of America. In
the opinion of management, the accompanying interim consolidated financial
statements contain all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation of the financial
condition, results of operations and cash flows for the periods presented. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 2000.
The Company operates 14 funeral homes, 3 funeral home and cemetery
combination properties and 1 cemetery property in the Southern California area.
Services offered at the locations include cemetery interment and professional
mortuary services, both of which include pre-need and at-need sales. In
addition, the Company offers for sale caskets, memorials, vaults, flowers and
the sale of pre-need funeral insurance from which commissions are earned.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and the prevailing
practices within the cemetery and mortuary industry. All significant
intercompany accounts and transactions have been eliminated.
2. CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements" (the "Bulletin"). The
Bulletin provides the Staff's views on the application of existing accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. The Bulletin, which applies to all
companies and was not directed at the death care industry, states that industry
practice would not override these views. The Bulletin among other matters
emphasizes the importance of physical delivery of a product or service to
justify the recognition of revenue. Prior to the effective date of the
Bulletin, the Company had heretofore followed industry practice in recognizing
revenues, including recognizing revenue upon the sale of cemetery merchandise
and services before the time of death.
In response to the issuance of the Bulletin and after consultation with the
SEC Staff, the Company changed the following accounting principles effective
January 1, 2000:
. Revenue recognition of pre-need interment rights are now accounted for in
accordance with Financial Accounting Standards No. 66, Accounting for the
Sales of Real Estate (FAS 66). The direct and acquisition costs for the
deferred sales is deferred and recognized concurrent with the recognition of
the deferred sales. Prior to January 1, 2000, the Company recognized the sale
of pre-need interment rights, and their related costs, at the time of sale.
. Revenue recognition of pre-need cemetery services and merchandise, and their
direct and acquisition costs, are now deferred until time of delivery or
performance of service. Prior to January 1, 2000, the Company recognized the
sale of pre-need service and merchandise, and their related costs, at the
time of sale.
. Earnings realized by the cemetery service and merchandise trust funds are now
deferred until the underlying service and merchandise is delivered. Prior to
January 1, 2000, the Company recognized the earnings as they accrued.
The figures for the three months ended March 31, 2000 in the foregoing
balance sheet, statement of operations and statement of cash flows, and
throughout the remainder of this report (including comparative data), have been
restated from those originally reported to reflect the proforma effects of
applying the accounting change effective January 1, 2000.
During each of the three months ended March 31, 2001 and 2000, the Company
realized Cemetary sales and Services Revenues of approximately $0.3 million and
$0.7 million, respectively. These Revenues had been previously included in the
cumulative effect of accounting change (pre-tax) as of January 1, 2000.
4
3. SUBSEQUENT EVENTS
On April 29, 2001, the International Buddhist Progress Society, an
unrelated organization, exercised its option to build a second columbarium on a
2.7 acre site for $2.0 million in cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Rose Hills Company (the "Company"), a Delaware corporation, is a wholly-
owned subsidiary of Rose Hills Holdings Corp. ("RH Holdings"). The Company was
formed in 1996 for purposes of acquiring Roses, Inc. (the "Mortuary") and
purchasing certain assets and assuming certain liabilities of Rose Hills
Memorial Park Association (the "Association") and Workman Mill Investment
Company , the owners of the real property and other cemetery assets of the Rose
Hills Memorial Park (the "Cemetery"). In connection with the acquisition, The
Loewen Group, Inc., a shareholder of RH Holdings, also caused one of its
subsidiaries to contribute 14 funeral homes and 2 funeral home cemetery
combination properties (the "Satellite Properties"). As a result of these
acquisitions (collectively the "Acquisition Transaction"), the Company is the
successor to the operations, assets and liabilities of the Rose Hills Mortuary
and Cemetery (collectively, "Rose Hills") and the Satellite Properties.
Rose Hills is the largest single location cemetery funeral home combination
in the United States and the Cemetery is the largest single location cemetery in
the United States. Rose Hills is situated less than 14 miles from downtown Los
Angeles on approximately 1,418 acres of permitted cemetery land near Whittier,
California. Rose Hills and the Satellite Properties constitute a strategic
assembly of cemeteries and funeral homes in the greater Los Angeles area.
RESULTS OF OPERATIONS
The following table sets forth details of certain income statement data (in
millions):
THREE MONTHS ENDED
MARCH 31
2000 2001
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Sales and service:
Funeral:
Services and merchandise $ 8.4 $ 8.2
Insurance commissions 0.6 0.9
Other 0.1 0.1
Cemetery:
Before need 5.2 3.6
At-need 4.6 4.5
Endowment care 1.0 1.0
Total sales and services 19.9 18.2
Gross profit:
Funeral sales and services 3.2 2.7
Cemetery sales and services 3.0 1.5
Total gross profit 6.2 4.2
5
The following table sets forth certain income statement data as a
percentage of total sales for the Company.
THREE MONTHS ENDED
MARCH 31
2000 2001
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Sales and services:
Funeral sales and services 45.8% 50.3%
Cemetery sales and services 54.2% 49.7%
Total sales and services 100.0% 100.0%
Gross profit:
Funeral sales and services 35.3% 29.9%
Cemetery sales and services 27.9% 15.7%
Total gross profit 31.3% 22.8%
General and administrative
expenses 9.3% 8.6%
Goodwill amortization 4.7% 5.1%
Interest expense 20.5% 21.4%
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Consolidated revenues for the quarter ended March 31, 2001 decreased 8.8%
to $18.2 million from $19.9 million for the quarter ended March 31, 2000.
Consolidated gross profit for the first quarter of 2001 totaled $4.2 million
compared to $6.2 million for the first quarter of 2000. As a percentage of
revenue, consolidated gross margin percentage for the first quarter decreased to
22.8% in 2001 from 31.3% in the same quarter 2000.
Funeral revenue for the quarter was $9.2 million compared to $9.1 million
in the same quarter for the prior year. At-need funeral revenue for the quarter
totaled $8.1 million and represents a 3.6% decrease over the same period last
year. The Company performed 2,257 funeral service calls during the first quarter
of 2001 compared to 2,403 in the first quarter of 2000. The Company continues to
experience increased price competition from other full service providers and
lower end budget funeral homes. Pre-need funeral revenue for the quarter was
$.9 million compared to $.6 million in the prior year. The operating margin for
the funeral segment was 29.9% for the first quarter of 2001 compared to 35.3%
for the same quarter last year. The decline in operating margin was primarily
attributable to continuing declines in operating margin at the Satellite
Properties. In April 2001, the Company reduced headcount and began a program to
consolidate certain funeral service functions at Rose Hills Mortuary in an
effort to improve operating efficiencies. The Company will incur a charge of
$0.3 million during the second quarter of 2001 for severance payments made and
to be made to the former employees. The Company is also currently evaluating the
future and considering the divestiture of several of these satellite funeral
home locations that do not fit the original "clustering" model anticipated for
the Satellite Properties.
Cemetery revenue for the quarter was $9.1 million, representing a 16.4%
decrease from the same quarter in the prior year. Pre-need cemetery revenue for
the first quarter was $3.6 million compared to $5.2 million for the same quarter
during the prior year. The number of property units sold during the first
quarter of 2001 was 1,161, compared to 2,711 units during the first quarter of
2000. Management believes that the decline in property unit sales was partially
attributable to management and personnel changes that occurred within the sales
department during the first quarter of 2001. Management also believes that pre-
need sales during the quarter may have been adversely affected by increases in
the minimum down payment required by the Company and the recent stock market
decline, particularly with regard to sales of higher-priced properties. Selling
commission expense as a percentage of sales was 28% for the first quarter
compared to 29% for the first quarter last year. At-need cemetery revenue for
the quarter was $4.5 million compared to $4.6 million last year. Total
interments were 2,480 for the quarter, which represented a 7.0% decrease over
the same quarter in the prior year. The operating margin for the cemetery
segment during the quarter decreased from 27.9% last year to 15.7% as a
percentage of sales. The decrease was due principally to the reduction in the
number of property units sold and an increase in the Company's advertising
expense. In March 2001, the Company launched a $1.0 million advertising campaign
in an attempt to increase customer awareness and improve both funeral and
cemetery market share.
Corporate general and administrative expense decreased to $1.6 million for
the quarter ended March 31, 2001 from $1.9 million for the same quarter in 2000.
As a percentage of total sales, general and administrative expenses was 8.6%
compared to 9.3% for the same quarter of 2000.
6
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), decreased
to $5.0 million for the quarter ended March 31, 2001 from $6.6 million for the
quarter ended March 31, 2000. The decrease from 2000 was primarily a result of
decreased pre-need cemetery property sales. EBITDA should not be considered in
isolation, as a substitute for net income or cash flow data prepared in
accordance with accounting principles generally accepted in the United States of
America or as a measure of a company's profitability or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently believes that, based upon current levels of
operations and anticipated growth and the availability of the Bank Revolving
Facility (see description below), it can meet working capital and short-term
liquidity requirements for current operations, satisfy its contingent obligation
and service its indebtedness through December 31, 2002. As of March 31, 2001,
the Company had net working capital of $13.1 million and a current ratio of 1.75
as compared to $10.5 million of net working capital and current ratio of 1.59 at
December 31, 2000.
Net cash provided by operating activities was $4.4 million for the three
months ended March 31, 2001. For the same period last year, net cash provided by
operating activities was $6.0 million. The primary reason for the decline over
prior year is the shortfall of pre-need property sales.
The primary use of cash will be for working capital, principal payments on
outstanding long-term indebtedness and capital expenditures as permitted under
the terms of bank agreements. The Company estimates its current year capital
expenditures of approximately $5.0 million will be used primarily to develop and
improve the existing infrastructure and cemetery grounds, as well as the
addition of rolling stock. In addition to principal payments on outstanding
long-term debt and capital expenditures, cash will be used to finance
installment contracts receivable during the ramp-up of pre-need sales.
Concurrent with the Acquisition Transaction, the Company entered into
senior secured amortization extended term loan facilities (the "Bank Term
Facility") in an aggregate principal amount of $75.0 million, the proceeds of
which were used to finance the Acquisition Transaction and related transaction
costs, to pre-fund certain capital expenditures and to refinance existing
indebtedness of the Company, and a senior secured revolving credit facility
(the "Bank Revolving Facility") in an aggregate principal amount of up to
$25.0 million (as of March 31, 2001), the proceeds of which are available for
general corporate purposes and a portion of which may be extended (as agreed
upon) in the form of swing line loans or letters of credit for the account of
the Company. The Bank Term Facility will mature on November 1, 2003. In addition
the Company has the right, subject to certain conditions and performance tests,
to increase the Bank Term Facility by up to $25.0 million. The Bank Term
Facility is payable, subject to certain conditions, in semi-annual installments
in the amounts of $1.0 million in each of the first three years after the
anniversary of the closing date of the Bank Term Facility (the "Bank Closing");
$3.0 million in the fourth year after the Bank Closing; $7.0 million in 2001;
$9.0 million in 2002 and $53.0 million upon maturity of the Bank Term Facility.
Effective May 2, 2001 the Company entered into an agreement with its senior
lenders reducing the Bank Revolving Facility to $10.0 million and extending its
maturity date to April 1, 2003. Borrowings under the Revolving Credit Facility
must be fully paid for a minimum period of 30 days commencing December 1, 2002.
All obligations under the Bank Credit Facilities entered into with the
lenders or their affiliates in connection therewith are unconditionally
guaranteed (the "Bank Guarantees"), jointly and severally, by Rose Hills
Holdings Corp. and each of the Company's existing and future domestic
subsidiaries (the "Bank Guarantors"). All obligations of the Company and the
Bank Guarantees are secured by first priority security interests in all existing
and future assets (including real property located at Rose Hills but excluding
other real property and vehicles covered by certificates of title) of the
Company and the Bank Guarantors. In addition, the Bank Credit Facilities are
secured by a first priority security interest in 100% of the capital stock of
the Company and each subsidiary thereof and all intercompany receivables.
In connection with the Acquisition Transaction, the Company also issued
$80 million of 9-1/2% Senior Subordinated Notes due 2004, which were exchanged
in September 1997 for $80 million of 9-1/2% Senior Subordinated Notes due 2004
(the "Notes") that were registered under the Securities Act of 1933. The Notes
mature on November 15, 2004. Interest on the Notes is payable semi-annually on
May 15 and November 15 at the annual rate of 9-1/2%. The Notes are redeemable in
cash at the option of the Company, in whole or in part, at any time on or after
November 15, 2000, at prices ranging from 104.75%
7
with annual reductions to 100% in 2003 plus accrued and unpaid interest, if any,
to the redemption date. The proceeds of the Notes were used, in part, to finance
the Acquisition Transaction.
As a result of the Acquisition Transaction and the application of proceeds
therefrom, the Company's total outstanding indebtedness was approximately
$148.5 million as of March 31, 2001. As of May 2, 2001 the Company had the
entire $10.0 million of borrowing capacity available under the Bank Revolving
Facility available. Management currently believes that, based upon current
levels of operations and anticipated growth and the availability under the Bank
Revolving Facility, it can adequately service its indebtedness through
December 31, 2002. If the Company cannot generate sufficient cash flow from
operations or borrow under the Bank Revolving Facility to meet such obligations,
the Company may be required to take certain actions, including reducing capital
expenditures, restructuring its debt, selling assets or seeking additional
equity in order to avoid an Event of Default. There can be no assurance that
such actions could be effected or would be effective in allowing the Company to
meet such obligations. In addition, the Company currently expects that it will
have to obtain new or additional financing to pay some or all of the principal
amount due at maturity under the Bank Term Facility ($53 million by November 1,
2003) and under the Notes ($80 million on November 15, 2004). No assurance can
be given that such financing will be available to the Company or, if available,
that it may be obtained on terms and conditions that are satisfactory to the
Company.
The Company and its Subsidiaries are subject to certain restrictive
covenants contained in the indenture to the Notes, including, but not limited
to, covenants imposing limitations on: the incurrence of additional
indebtedness; certain payments, including dividends and investments; the
creation of liens; sales of assets and preferred stock; transactions with
interested persons; payment restrictions affecting subsidiaries; sale-leaseback
transactions; and mergers and consolidations. In addition, the Bank Credit
Facilities contain certain restrictive covenants that, among other things, limit
the ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness (including the Exchange
Notes), pay dividends or make certain restricted payments, create liens on
assets, engage in mergers or acquisitions or enter into leases or transactions
with affiliates. At March 31, 2001 the Company was in compliance with the terms
of the indenture and the Bank Credit Facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is impacted by changes in interest rates.
Pursuant to the Company's policies, and depending on market conditions, the
Company may utilize derivative financial instruments (such as interest rate
collar agreements) from time to time to reduce the impact of adverse changes in
interest rates. The Company does not use derivative instruments for speculation
or trading purposes, and has no material sensitivity to changes in market rates
and prices on its derivative financial instrument positions. The Company did not
have any such agreements or instruments in place as of March 31, 2001.
PART II
ITEM 5 - OTHER INFORMATION
CONTINGENCIES
The Company is involved in certain matters of threatened and filed
litigation, none of which, in the judgment of the Management, will have a
material impact on the Company's consolidated financial position or results of
operations.
Environmental audits of the Company's various properties were conducted in
connection with the Acquisition Transaction. Management is aware of certain
areas within the Cemetery that have required and may in the future require
remediation, including a solid waste disposal area that previously was used to
dump rubbish, green waste and used motor oil in the 1970's. The Company
believes that Rose Hills Foundation (the "Foundation"), an unaffiliated company
that is the successor to the Association, is obligated to pay for or otherwise
indemnify the Company for the remediation costs associated with this area
pursuant to the terms of an Environmental Compliance Agreement entered into at
the time of the Acquisition Transaction. However, the Foundation has denied
responsibility for certain costs of remediation, including post-closure
monitoring and maintenance, as well as the construction of a leachate collection
system. As a result, the Company has retained an outside technical consultant
to further investigate the solid waste disposal area to determine what risks, if
any, the solid waste disposal area poses for the Company, and to quantify such
risks. The Company's ultimate goal is to resolve future responsibility with
respect to the solid waste disposal area as between the Foundation and the
Company. The Company and the Foundation are currently in discussions regarding
these goals, and the Company is keeping the local regional water quality control
board apprised of the investigation being conducted. However, no assurance can
be given as to the outcome of the Company's discussions with the local water
board agency or as to the outcome of the Company's indemnification claim against
the Foundation.
8
In addition, two of the Company's cemetery properties are located in or
near areas of regional groundwater contamination. The Company submitted
information in connection with contamination at one of these areas and was
informed by the Environmental Protection Agency that the Company will not be
included in the Super Fund cleanup of the basin.
Although there can be no assurance, Management does not believe that the
above or other environmental matters affecting the Company will have a material
adverse effect on the Company's financial condition or results of operations.
During August and September 2000, the Company discovered that there had
been some land movement in a portion of Rose Hills Memorial Park. The affected
area represents approximately 13 acres of the Park's approximately 1,418 total
acres, and consists of approximately 12,000 interment sites. The Company has
hired an outside geo-technical and engineering firm to study the affected area,
to identify the underlying causes and the extent of the land movement, and to
make recommendations with regard to both short-term and long-term remediation
and stabilization measures. The Company had previously expected that the firm
would complete its study and deliver its recommendations to the Company by May
2001. However, the firm has advised the Company that due to certain unforeseen
geologic and other conditions, the firm will require additional time to engage
in further study and investigation of the affected area. The Company currently
expects the geo-technical and engineering study to be completed and delivered to
the Company by the end of June 2001.
Until the Company receives a final report from its outside consultants, the
Company can not determine or give assurances as to the cause or extent of the
land movement, the cost and scope of short-term and long-term remediation and
stabilization measures, or whether the affected area can be restored to a
condition that is suitable for interments. However, the Company believes that
accumulated rainfall and drainage conditions may have contributed to the land
movement. Accordingly, the Company has taken some intermediate remediation
measures, including the installation of additional dewatering wells in the
affected area. The Company currently anticipates that additional measures will
be required to remediate and stabilize the affected area and surrounding areas.
The Company's consultants advised in October 2000 that the affected area
was subject to additional and continued movement, particularly in the event of
heavy rains during the winter months. Accordingly, the Company began to relocate
to other areas of the Park (at the Company's expense) approximately 140 interred
remains that were in the most severely impacted portion of the affected area.
Upon request from family members, the Company has also relocated at the
Company's expense other interred remains that were located within the affected
area. As of April 30, 2001, the Company had relocated or had pending requests to
relocate, at the Company's expense, approximately 400 of the approximately 2,600
interred remains in the affected area to other areas of the Cemetery.
To the extent that funds are available, the Company intends to seek
reimbursement from the improvement reserve in the Company's Endowment Care Fund
(ECF) for the costs of relocating interred remains and for a significant portion
of the site assessment, repair, maintenance and remediation costs associated
with the affected area. Between October 2000 and March 31, 2001, the Company
has incurred and has been reimbursed from the ECF reserve for a total of $0.8
million of direct costs related to the relocation of interred remains and
professional and other services associated with the assessment, remediation and
stabilization of the affected area. As of March 31, 2001 the ECF had $1.7
million remaining in the reserve for cemetery improvements.
In connection with the Acquisition Transaction, the Rose Hills Memorial
Park cemetery land was subject to a significant step-up in assessed value by the
County of Los Angeles. Prior to the Acquisition Transaction, the Cemetery was
operated as a not-for profit corporation and was largely exempt from property
taxes. In connection with the Acquisition Transaction, the Company obtained an
independent appraisal of the fair value of the undeveloped and unsold cemetery
property. In early 1998, the Company also engaged an independent property tax
consultant to prepare an estimate of the fair value of the property to assist in
the process.
In July 2000, the County of Los Angeles completed its property tax
reassessment reflecting its opinion of the fair value of Rose Hills' cemetery
property at the Acquisition Transaction date. The County placed a fair value on
the cemetery property that is approximately 60% higher than the independent
appraisal prepared by the property tax consultant and approximately 50% higher
than the fair market value computed by the independent appraiser at the time of
the Acquisition Transaction. The Company filed an assessment appeal with the
Los Angeles County Assessor, however, the supplemental tax based on the
reassessment must be paid during the appeal process. The total supplemental
property tax assessed by the County for the period November 1996 to March 31,
2001 is approximately $2.5 million greater than the amount accrued by the
Company using the independent property tax appraisal. A large portion of the
supplemental tax bill is payable, interest-free, over four years.
9
The Company believes, based in part on the advice of its property tax
advisors, that it can obtain a significant reduction in assessed value during
the appeal process. However, there is no assurance that the appeal will
succeed. In the event the Company does not prevail upon appeal, the Company
will pursue other administrative procedures, including filing for a reduction in
assessed value under California's Proposition 8, which requires the County to
reduce assessed values when declines deemed other than temporary occur.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q include "forward-
looking statements" as defined in Section 21E of the Securities Exchange Act of
1934. All statements other than statements of historical facts included herein,
including, without limitation, the statements under Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position and its plans to increase revenues
and operating margins, reduce general and administrative expenses, take
advantage of synergies, and make capital expenditures, and the ability to meet
its financial obligations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Important factors that could cause actual results to differ materially
from the Company's expectations include those which have been disclosed herein
and in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. Persons should review the factors identified herein and in
the Company's Form 10-K to understand the risks inherent in such forward-looking
statements.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the qualifications in the preceding paragraph.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit, as shown in the "Index of Exhibits", attached hereto as
page 12, is filed as a part of this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSE HILLS COMPANY
/s/ KENTON C. WOODS
-------------------
Kenton C. Woods
Executive Vice President Finance and Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
May 11, 2001
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INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
10.25* Resignation and General Release Agreement, dated April 30, 2001, by
and between Rose Hills Company and Joseph Schillaci
10.26* First Amendment To Credit Agreement dated January 12, 2001.
10.27* Second Amendment to Credit Agreement dated April 27, 2001.
10.28* Fifth Amendment to Buddhist Memorial Complex Development and Use
Agreement, dated as of April 15, 2001between Rose Hills Memorial Park
Association and International Buddhist Progress Society.
(b) Reports on Form 8-K
None
________________
* Filed Herewith.
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