SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
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 SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 333-21411
________________________________
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)
__________________
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 November 5, 1998 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:
CONSOLIDATED BALANCE SHEETS
as of September 30, 1998 and December 31, 1997 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three and Nine Months Ended September 30, 1998 and 1997 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1998 and 1997 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Nine Months Ended September 30, 1998 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6 - 11
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
INDEX OF EXHIBITS 12
EXHIBIT 27 13
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
ASSETS
1997 1998
-------- ----------
Current assets: (Unaudited)
Cash and equivalents $ 3,462 $ 3,882
Accounts receivable, net of allowances 5,870 7,995
Inventory 875 979
Prepaid expenses and other current assets 2,299 2,609
Deferred tax asset 4,658 4,658
-------- --------
Total current assets 17,164 20,123
-------- --------
Long-term receivables, net of allowances 10,082 17,357
Cemetery property 76,778 75,143
Property, plant and equipment, net 64,101 66,066
Goodwill 128,200 125,701
Deferred finance charges 10,672 9,443
Other assets 5,101 5,446
-------- --------
Total assets $312,098 $319,279
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,052 $ 2,062
Accrued expenses 8,156 11,005
Accrued interest 1,291 3,111
Other current liabilities 1,459 865
Current portion of long-term debt 2,368 2,265
-------- --------
Total current liabilities 15,326 19,308
Retirement plan liabilities 7,389 7,103
Deferred tax liability 5,122 5,122
Subordinated notes payable 80,000 80,000
Bank senior term loan 72,500 72,000
Other long-term debt 2,415 2,271
Other liabilities 2,088 4,615
-------- --------
Total liabilities 184,840 190,419
-------- --------
Commitment and contingencies
Stockholder's equity:
Common stock par value $.01; 1,000 authorized; 1,000 shares outstanding -- --
Additional paid in capital 129,554 129,554
Accumulated earnings (deficit) (2,296) (694)
Total stockholder's equity 127,258 128,860
-------- --------
Total liabilities and stockholder's equity $312,098 $319,279
======== ========
See accompanying notes to unaudited consolidated financial statements.
(1)
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------- -----------------
September 30 September 30
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
Sales and services:
Funeral sales and services $ 6,904 $ 6,774 $ 22,076 $ 22,520
Cemetery sales and services 7,959 10,444 25,096 33,203
Insurance commissions and other 2,127 1,987 5,914 5,730
------- ------- -------- --------
Total sales and services 16,990 19,205 53,086 61,453
------- ------- -------- --------
Cost of sales and services:
Funeral sales and services 1,258 1,062 4,117 3,442
Cemetery sales and services 1,446 2,097 3,860 6,361
------- ------- -------- --------
Total costs of sales and services 2,704 3,159 7,977 9,803
------- ------- -------- --------
Gross profit 14,286 16,046 45,109 51,650
Selling, general and administrative expenses 10,485 10,943 30,500 33,382
Amortization of purchase price in excess of
net assets acquired and other intangibles 968 931 2,608 2,820
------- ------- -------- --------
Income from operations 2,833 4,172 12,001 15,448
Other expense - Interest expense (4,201) (4,105) (12,211) (12,359)
------- ------- -------- --------
Income before income tax (1,368) 67 (210) 3,089
Provision for income tax (241) 34 310 1,487
------- ------- -------- --------
Net income (1,127) 33 (520) 1,602
======= ======= ======== ========
See accompanying notes to unaudited consolidated financial statements.
(2)
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months
Ended
September 30
1997 1998
------- --------
Cash flow from operating activities:
Net income $ (520) $ 1,602
------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,399 6,371
Amortization of cemetery property 1,972 1,665
Provision for bad debts and sales cancellation 1,167 2,418
Loss on disposal of property, plant and equipment -- 5
Changes in assets and liabilities:
Increase in accounts receivable (4,190) (11,818)
Decrease (increase) in inventories 34 (104)
Increase in prepaid expenses and in other current assets (754) (310)
Increase (decrease) in accounts payable and accrued expenses (3,350) 4,669
Decrease in retirement plan liabilities (332) (286)
Net decrease (increase) in other assets and liabilities (492) 1,578
------- --------
Total adjustments (546) 4,188
------- --------
Net cash provided by (used in) operating activities (1,066) 5,790
------- --------
Cash flows from investing activities:
Capital expenditures (1,750) (3,297)
Proceeds from disposal of PPE 0 31
Additions to goodwill (503) --
------- --------
Net cash used in investing activities (2,253) (3,266)
------- --------
Cash flows from financing activities:
Repayments of borrowings under Bank Credit Agreement (1,000) (1,000)
Additions to deferred finance charges (809) --
Decrease in other long-term debt (497) (415)
Principal payments of capital lease obligations (230) (689)
Net cash used in financing activities (2,536) (2,104)
Net increase (decrease) in cash and cash equivalents (5,855) 420
Cash and cash equivalents at beginning of period 7,900 3,462
------- --------
Cash and cash equivalents at end of period $ 2,045 $ 3,882
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 8,754 $ 9,242
Taxes paid $ 449 $ 859
See accompanying notes to unaudited consolidated financial statements.
(3)
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
ACCUMULATED TOTAL
SHARES ADDITIONAL EARNINGS STOCKHOLDER'S
OUTSTANDING PAID IN CAPITAL (DEFICIT) EQUITY
-------- ------
Balance, December 31, 1997 1,000 129,554 (2,296) 127,258
Net income -- -- 1,602 1,602
------ ------- ------ -------
Balance, September 30, 1998 1,000 129,554 (694) 128,860
===== ======= ===== =======
See accompanying notes to unaudited consolidated financial statements.
(4)
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying September 30, 1998 interim consolidated financial
statements of Rose Hills Company and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles 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 generally
accepted accounting principles. 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, 1997.
Earnings (loss) per share have not been included, as the Company 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" or "Roses") and purchasing certain assets and assuming certain
liabilities of Rose Hills Memorial Park Association and Workman Mill Investment
Company (the "Cemetery" or the "Association"). Also, in connection with the
acquisition, one of RH Holdings' shareholders contributed 14 funeral homes and 2
funeral home cemetery combination properties. As a result of these acquisitions
(collectively "Acquisition Transaction"), the Company is the successor to the
operations of the predecessor Mortuary and Cemetery.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and the prevailing practices within the cemetery
and mortuary industry. All significant intercompany accounts and transactions
have been eliminated.
Reclassification
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation.
2. SETTLEMENT AGREEMENT
In connection with the Acquisition Transaction, Roses entered into a
"Settlement Agreement" dated November 19, 1996 with the Association to resolve
amounts due/owed between Roses and the Association as of November 18, 1996. As
of September 30, 1998, the Company and the Association have not reached a final
agreement with respect to amounts owed under the terms of the Settlement
Agreement. However, in the opinion of management of the Company, amounts accrued
at September 30, 1998 are adequate to satisfy amounts that may be due the
Association under the Settlement Agreement.
(5)
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 and Workman Mill Investment Company (the "Association" and the
assets and liabilities purchased therefrom, the "Cemetery"). Also, in
connection with the acquisition, a subsidiary of The Loewen Group, Inc. (The
Loewen Group, Inc. collectively with its affiliates, "Loewen"), a shareholder of
RH Holdings, contributed 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 of the predecessor Mortuary and Cemetery.
The Cemetery and the Mortuary (collectively, "Rose Hills") are located on the
grounds of the Cemetery, Rose Hills Memorial Park. 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. The Cemetery
and Mortuary have been continuously operating since 1914 and 1956, respectively.
As a result of the Acquisition Transaction, the Company owns a strategic
assembly of cemeteries and funeral homes in the greater Los Angeles area.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of total sales for the Company.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
------ ---- ----- -----
Sales and services:
Funeral sales and services 40.6% 35.3% 41.6% 36.7%
Cemetery sales and services 46.9% 54.4% 47.3% 54.0%
Insurance commissions and other 12.5% 10.3% 11.1% 9.3%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 81.8% 84.3% 81.4% 84.7%
Cemetery sales and services 81.8% 79.9% 84.6% 80.8%
Total gross profit 84.1% 83.6% 85.0% 84.0%
Selling, general and administrative
Expenses 61.7% 57.0% 57.5% 54.3%
Amortization 5.7% 4.8% 4.9% 4.6%
Interest expense 24.7% 21.4% 23.0% 20.1%
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Consolidated revenues for the quarter ended September 30, 1998 increased 12.9%
to $19.2 million from $17.0 million for the quarter ended September 30, 1997.
Consolidated gross profit increased 11.9% to $16.0 million from $14.3 million in
1997. As a percentage of revenue, consolidated gross margin percentage
decreased to 83.6% in 1998 from 84.1% in the same quarter 1997.
Cemetery revenue for the quarter increased $2.5 million or 31.2% to $10.4
million. Pre-need cemetery revenue was $7.3 million compared to $5.8 million
for the prior year. Substantially all of the increase in pre-need cemetery
revenue came from property sales. At-need cemetery revenue for the quarter
increased 24.0% to $3.1 million due primarily to increase sales of merchandise
and services. The lower cemetery gross margin (79.9% this year compared to 81.8%
last year) is a direct result of the increased proportion of pre-need
merchandise and service revenue with its associated lower gross margins. This
sales mix shift is in line with the Company's strategic plan, which calls for
greater emphasis on sales of pre-need cemetery merchandise and services.
(6)
Funeral revenue for the quarter decreased to $6.8 million from $6.9 million in
the same quarter for the prior year, a decrease of 1.4%. The number of total
calls decreased 3.2% from 1997 to 1,987.
Insurance commissions and other revenue decreased to $2.0 million from $2.1
million in the same quarter in 1997. Pre-need insurance commissions decreased
from $0.7 million in 1997 to $0.4 million this year. In April 1998, the Company
changed its pre-need insurance product from Forethought to Mayflower, a
subsidiary of Loewen. The training of the sales force in the new product and
other administrative requirements of this changeover contributed to a reduction
in insurance volume for the quarter and a corresponding drop in commission
revenue.
Selling, general and administrative expenses, which includes variable sales
commission expense, increased to $10.9 million from $10.5 million in 1997. As a
percentage of total sales, selling, general and administrative expenses was
57.0% compared to 61.7% for the third quarter of 1997.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $6.3 million for the quarter ended September 30, 1998 from $5.1 million for
the quarter ended September 30, 1997. The increase was primarily a result of
the increase in pre-need sales and an increase in leverage of existing corporate
overhead. EBITDA should not be considered in isolation, as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or liquidity.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Consolidated revenues for the nine months ended September 30, 1998 increased
15.8% to $61.5 million from $53.1 million for the same period in 1997.
Consolidated gross profit increased 14.6% to $51.7 million from $45.1 million in
1997. As a percentage of revenue, consolidated gross margin percentage
decreased to 84.0% in 1998 from 85.0% in 1997.
Cemetery revenue for the nine months increased $8.1 million to $33.2 million.
Pre-need cemetery property sales at Rose Hills increased by $3.3 million (28.0%)
and pre-need cemetery merchandise and services were $3.6 million greater than in
the first nine months of 1997, a 90% increase. This increase in pre-need sales
was attributable to an increase in the number of products offered on pre-need
contracts and the addition of over 120 new sales counselors compared to 1997.
The number of interments increased by 0.4% over the prior year. The overall
cemetery gross margin percentage decreased due to the sales mix shift to a
higher proportion of pre-need merchandise and services.
Selling, general and administrative expenses increased to $33.4 million from
$30.1 million in 1997. An increase in sales commission expense of approximately
$2.3 million was the primary reason for this increase. As a percentage of total
sales, selling, general and administrative expenses was 54.3% compared to 57.5%
for the first nine months of 1997.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $22.1 million for the nine months ended September 30, 1998 from $18.3 million
for the nine months ended September 30, 1997. The increase was primarily a
result of the increase in pre-need sales and an increase in leverage of existing
corporate overhead. EBITDA should not be considered in isolation, as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 and to service its indebtedness. As of
September 30, 1998 the Company had net working capital of $0.8 million and a
current ratio of 1.04 as compared to $1.8 million of net working capital and
current ratio of 1.12 at December 31, 1997.
Net cash provided by operating activities was $5.8 million for the nine months
ended September 30, 1998. For the same period last year, net cash used in
operating activities was $1.1 million.
The primary uses of cash will be 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 $4.5 million will be used primarily to develop and improve the
existing infrastructure and cemetery grounds, as well as the
(7)
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.
Contemporaneously with the consummation of 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 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 million, 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. 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 and the Bank Revolving Facility will mature on November
1, 2003. The Bank Term Facility is subject to amortization, subject to certain
conditions, in semi-annual installments in the amounts of $1 million in each of
the first three years after the anniversary of the closing date of the Bank Term
Facility (the "Bank Closing"); $3 million in the fourth year after the Bank
Closing; $7 million in the fifth year after the Bank Closing; $9 million in the
sixth year after the Bank Closing and $53 million upon maturity of the Bank Term
Facility. The Revolving Credit Facility is payable in full at maturity, with no
prior amortization.
All obligations under the Bank Credit Facilities and any interest rate hedging
agreements 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% 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 $153.0
million as of September 30, 1998. As of September 30, 1998, the Company also
had $25.0 million of borrowing capacity available under the Bank Revolving
Facility. Management 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. 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.
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
September 30, 1998 the company was in compliance with the terms of the indenture
and the bank audit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". For the three month periods ended September 30, 1998 and
1997 the Company did not have any applicable comprehensive income.
(8)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 uses
a "management approach" concept as the basis for identifying reportable
segments. The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization. Furthermore, the management approach
facilitates consistent descriptions of an enterprise in its annual report and
various other published information. It focuses on financial information that
an enterprise's decision makers use to make decisions about the enterprise's
operating matters.
Statement 131 is effective for financial statements for periods beginning
after December 15, 1997. Earlier application is encouraged. In the initial
year of application, comparative information for earlier years is to be
restated, unless it is impracticable to do so. Statement 131 need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods in the
second year of application. Management has not determined the impact of SFAS
No. 131 on its consolidated financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". The new statement is
effective for fiscal years beginning after December 15, 1997. Statement 132
need not be applied to interim financial statements. Management has not
determined the impact of SFAS No. 132 on its consolidated financial statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5 in April 1998. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Management has not determined the impact of SOP 98-5 on its consolidated
financial statements.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. This statement is effective for all fiscal years
beginning after June 15, 1999. Management has not determined the impact of SFAS
No. 133 on its consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
OVERVIEW
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or other disruption of
operations and impede normal business activities.
THE COMPANY'S STATE OF READINESS
During the past year, the Company has been evaluating and assessing its
existing informational computer systems, as well as non-informational systems,
and determined that it will be necessary to modify or replace certain portions
of its software and hardware so that its systems will function properly beyond
December 31, 1999. In particular, certain of the Company's financial reporting
and information gathering systems, such as general ledger, fixed assets,
payroll, commissions, accounts receivable and payable, etc., required
modification or replacement. Continued accurate and timely information
processing and reporting is critical to the ongoing operations of the Company.
Similarly, non-informational systems, such as communications systems, security
systems, etc., are critical to the safe and uninterrupted performance of the
Company. The evaluation of the non-informational systems determined that all
significant areas are or will be Year 2000 compliant and pose no significant
risks.
(9)
As systems were evaluated and assessed, a detailed work plan was developed to
ensure that each area requiring modification or replacement is adequately and
timely addressed. At this time, the Company's work plan continues to indicate
that most significant areas have been or are scheduled to be remedied by mid-
1999. Such work plan includes adequate time for remediation of the area, as well
as testing to ensure the remediation efforts were complete. Additionally, the
Company has established an Executive Steering Committee to monitor remaining
implementation plans and to determine whether all remaining areas have been
assessed and evaluated, resources identified and remediation completed on a
timely basis.
A summary of the Company's work plan and status is as follows:
EVALUATION YEAR 2000 COMPLETION
FUNCTION COMPLETE COMPLIANT DATE
- ------------------------------------------ --------------------------------------------------------------------
Financial Accounting and Reporting Yes No 2Q 1999
Funeral Home Operations Yes No 2Q 1999
Cemetery Operations Yes No 2Q 1999
In addition, systems improvements and benefits beyond solution of the Year
2000 Issues are expected to be realized as a result of the above initiatives.
The Company has also made formal communications with its significant vendors
to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. The Company is
currently gathering information requested from third parties to complete its
evaluation and assessment of what, if any, material relationships exist and
whether or not such relationships present significant risks to the continued
operations of the Company beyond 1999. This evaluation and assessment is to be
completed at the end of the first quarter of 1999. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on a timely basis, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, management estimates that the total cost (including hardware,
software and services) incurred by the Company to evaluate, assess and remedy
Year 2000 Issues has been less than $0.5 million. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to be less than $1.0 million.
The cost and the date on which the Company plans to complete the Year 2000
Issue modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Company's total Year 2000 Issue project cost and estimates to complete exclude
the estimated costs and time associated with the impact of a third party's Year
2000 Issue, which are not yet determinable.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts are
not completed by either the Company or significant third parties. In such an
event, it is likely that the ability to maintain accurate and complete financial
records of the Company's activities and transactions, and possibly the timely
and cost-effective procurement of merchandise, may be impaired. Such events,
should they occur, would be likely to significantly impair the Company's ability
to operate as it does today, creating business interruption, potential loss of
business, and earnings and liquidity difficulties. The Company presently
believes that with current and planned modifications to existing software and
conversions to new software, the risk of potential loss associated with the Year
2000 Issue can be mitigated.
(10)
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material impact on
the operations of the Company.
THE COMPANY'S CONTINGENCY PLANS
Though the Company's Year 2000 Issue work plan is believed to be adequate to
achieve full system compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company has designed
its work plan to address this potential occurrence. First, the work plan has
been designed to ensure that the most critical systems and areas are addressed
first, and in a manner that provides adequate time to remediate and test
thoroughly. Second, the Company has secured external expert resources to assist
in evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. Third, in the event the Company is unable to
completely remediate a system, the Company has sought to develop, where
necessary, an alternative solution as a back-up plan, such as developing a
"parallel" remediation effort (i.e., modifying an existing system to ensure it
is Year 2000 compliant at the same time such system is being completely
replaced). The Company will continue to monitor and adjust its contingency plan
needs in conjunction with the progress made on the primary work plan.
PART II
ITEM 5 - OTHER INFORMATION
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, plans to increase revenues and
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.
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
Senior Vice President Finance and Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
November 5, 1998
(11)
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
27* __Financial Data Schedule
10.19* __Employment Agreement dated July 10, 1998 by and between Rose Hills
Company and Dillis R. Ward.
10.20* __Employment Agreement dated November 3, 1998 by and between Rose Hills
Company and Kenton C. Woods.
(b) Reports on Form 8-K
None
________________
*Filed Herewith.
(12)