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, 1999
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 10, 1999 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, 1999 and December 31, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three and Nine Month Periods Ended September 30, 1999 and 1998 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1999 and 1998 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Nine Months Ended September 30, 1999 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6 - 10
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, 1998 AND SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
ASSETS
1998 1999
--------- -----------
(unaudited)
Current assets:
Cash and equivalents $ 1,645 $ 1,966
Accounts receivable, net of allowances 11,601 12,099
Inventory 979 1,025
Prepaid expenses and other current assets 4,701 3,319
Deferred tax asset 4,085 4,085
-------- --------
Total current assets 23,011 22,494
-------- --------
Long-term receivables, net of allowances 18,501 21,757
Cemetery property 75,318 76,221
Property, plant and equipment, net 65,978 63,116
Goodwill 124,877 122,453
Deferred finance charges 9,036 7,814
Other assets 5,212 4,330
-------- --------
Total assets 321,933 318,185
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings 2,000 -
Accounts payable and accrued liabilities 16,355 12,526
Current portion of long-term debt 2,133 2,948
-------- --------
Total current liabilities 20,488 15,474
Retirement plan liabilities 7,147 7,008
Deferred tax liability 6,455 6,455
Subordinated notes payable 80,000 80,000
Bank senior term loan 71,507 70,010
Other long-term debt 2,070 2,024
Other liabilities 5,974 5,542
-------- --------
Total liabilities 193,641 186,513
-------- --------
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
Retained earnings (accumulated deficit) (1,262) 2,118
--------
Total stockholder's equity 128,292 131,672
-------- --------
Total liabilities and stockholder's equity $321,933 $318,185
======== ========
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
------------ ------------
1998 1999 1998 1999
---- ---- ---- ----
Sales and services:
Funeral sales and services $ 7,274 $ 7,528 $ 23,846 $ 24,524
Cemetery sales and services 11,925 13,177 37,590 39,279
------- ------- -------- --------
Total sales and services 19,199 20,705 61,436 63,803
------- ------- -------- --------
Cost of sales and services:
Funeral sales and services 5,003 5,321 15,240 16,503
Cemetery sales and services 7,555 8,318 23,229 23,786
------- ------- -------- --------
Total costs of sales and services 12,558 13,639 38,469 40,289
------- ------- -------- --------
Gross profit 6,641 7,066 22,967 23,514
General and administrative expenses 1,538 1,745 4,699 5,107
Amortization of purchase price in excess of net
assets acquired and other intangibles 931 932 2,820 2,795
------- ------- -------- --------
Income from operations 4,172 4,389 15,448 15,612
Other income (expense):
Interest expense (4,105) (3,970) (12,359) (11,840
Settlement Agreement -- -- -- 2,500
------- ------- -------- --------
Total other income (expense) (4,105) (3,970) (12,359) (9,340
Income before income tax 67 419 3,089 6,272
Provision for income tax 34 148 1,487 2,892
------- ------- -------- --------
Net income $ 33 $ 271 $ 1,602 $ 3,380
======= ======= ======== ========
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
------------
1998 1999
---- ----
Cash flow from operating activities:
Net Income $ 1,602 $ 3,380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,371 6,976
Amortization of cemetery property 1,665 1,992
Provision for bad debts and sales cancellation 2,418 3,753
Loss on disposal of property, plant and equipment 5 7
Changes in assets and liabilities:
Increase in accounts receivable (11,818) (7,557)
Increase in inventories (104) (46)
Decrease (increase) in prepaid expenses and in other current assets (392) 1,383
Increase (decrease) in accounts payable and accrued expenses 4,526 (3,833)
Decrease in retirement plan liabilities (286) (139)
Net decrease in other assets and liabilities 1,803 33
-------- -------
Total Adjustments 4,188 2,569
-------- -------
Net cash provided by operating activities 5,790 5,949
-------- -------
Cash flows from investing activities:
Capital expenditures (3,266) (2,900)
-------- -------
Net cash used in investing activities (3,266) (2,900)
-------- -------
Cash flows from financing activities:
Repayments of short term borrowings (500) (2,000)
Principal payments of bank long-term debt (500) (497)
Increase (decrease) in other long-term debt (415) 152
Principal payments of capital lease obligations (689) (383)
-------- -------
Net cash used in financing activities (2,104) (2,728)
-------- -------
Net increase in cash and cash equivalents
420 321
Cash and cash equivalents at beginning of period 3,462 1,645
-------- -------
Cash and cash equivalents at end of period $ 3,882 $ 1,966
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 9,242 $ 8,827
Taxes paid $ 859 $ 0
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, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
RETAINED TOTAL
SHARES ADDITIONAL EARNINGS STOCKHOLDER'S
OUTSTANDING PAID IN CAPITAL (DEFICIT) EQUITY
----------- --------------- --------- -------------
Balance, December 31, 1998 1,000 129,554 (1,262) 128,292
Net income -- -- 3,380 3,380
------- -------- ------ -------
Balance, September 30, 1999 1,000 129,554 2,118 131,672
======= ======== ====== =======
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, 1999 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 as
of the dates and 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, 1998.
The Company operates 14 funeral homes, 3 funeral home and cemetery combination
properties and 1 cemetery property in 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 sells caskets, memorials, vaults and flowers and the sale of pre-need
funeral insurance from which commissions are earned.
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 1998 consolidated financial
statements to conform to the 1999 presentation.
2. SETTLEMENT AGREEMENT
In connection with the acquisition of Rose Hills Memorial Park and Rose Hills
Mortuary in November 1996, the predecessor to the Company entered into a
Settlement Agreement dated November 19, 1996 with Rose Hills Memorial Park
Association (the "Association") to resolve amounts due/owed under an operation
and management agreement between the predecessor company and the Association as
of November 18, 1996. On March 30, 1999, the parties finally determined the
amounts due from the Company to the Association under the Settlement Agreement.
Under the final settlement, the Company paid to the Association's successor the
sum of $3.9 million, including interest of $0.8 million. The Company had accrued
$6.4 million, including interest, for the settlement, which resulted in a gain
to the Company of $2.5 million during the first quarter ended March 31, 1999.
3. SUBSEQUENT EVENT
In conjunction with the Acquisition Transaction in 1996, the Loewen Group Inc.
(a 20% shareholder of the Rose Hills Holdings Corp.) contributed twelve funeral
homes and two funeral home and cemetery combination properties. One of the
contributed funeral homes operations also owned a vacant lot, which was
purchased to develop a stand-alone funeral home. In 1997, Rose Hills determined
not to develop the funeral home, and instead offered the property for sale.
In December 1998, escrow was opened with a prospective purchaser. During the
escrow process, it was determined that the title was not transferred to Rose
Hills, as required, in connection with the Acquisition Transaction. Loewen
verbally agreed to correct the error in January 1999. In June 1999, Loewen
declared bankruptcy and the bankruptcy court is scheduled to hear the ownership
issue prior to December 31, 1999.
(5)
On October 1, 1999, the property escrow closed for approximately $1.0 million.
The Company believes it is the legal owner of the property, that it has the
right to receive the proceeds from the sale, and that it will prevail in the
upcoming hearing. However, there can be no assurance that the court will rule in
the Company's favor. In the event of an unfavorable ruling, the Company will
incur a $1.0 million loss on disposal of the property.
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
1998 1999 1998 1999
---- ---- ---- ----
Sales and service:
Funeral sales and services 37.9% 36.4% 38.8% 38.4%
Cemetery sales and services 62.1% 63.6% 61.2% 61.6%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 31.2% 29.3% 36.1% 32.7%
Cemetery sales and services 36.7% 36.9% 38.2% 39.4%
Total gross profit 34.6% 34.1% 37.4% 36.9%
General and administrative expenses 8.0% 8.4% 7.7% 8.0%
Goodwill amortization 4.9% 4.5% 4.6% 4.4%
Interest expense 21.4% 19.2% 20.1% 18.6%
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Consolidated revenues for the quarter ended September 30, 1999 increased 7.8%
to $20.7 million from $19.2 million for the same period ended September 30,
1998. Consolidated gross profit totaled $7.1 million during the quarter compared
to $6.6 million for the same quarter in 1998. As a percentage of revenue,
consolidated gross margin percentage decreased from 34.6% in 1998 to 34.1% in
1999.
Cemetery revenue for the quarter ended September 30, 1999 increased 10.5% over
the same quarter last year from $12.0
(6)
million to $13.2 million. Pre-need cemetery revenue, which represents over
70.0% of total segment sales, was 11.0% higher than during the same quarter last
year. The pre-need sales emphasis this year has shifted to sales of higher
priced property lots over merchandise and service products. For the quarter
ended September 30, 1999, the average pre-need cemetery lot increased to $2,256
resulting in a 16% increase over last year. This average price increase is
partly due to a price increase of approximately 10% in January 1999 and a
product mix change to sell more upscale properties within certain ethnic
communities. At-need cemetery revenue for the period was $3.2 million and
approximates last year's results. Total interments were 2,205 for the period,
which represented a 4.8% increase over the same period in the prior year. The
operating margin for the cemetery segment was at 36.9% of sales, which is
comparable to last year. Cemetery sales commission expense as a percentage of
sales for the quarter ended September 30, 1999, was 2% greater than last year
offset by improved merchandise and service product margins.
Funeral revenue for the quarter ended September 30, 1999 increased to $7.5
million from $7.3 million in the prior year, an increase of 2.7%. At-need
funeral revenue totaled $6.9 million or 92% of the total segment business for
the quarter. The average revenue per funeral service for the quarter was
$3,392, an increase of 8% over the same period during the prior year. The Rose
Hills and affiliate mortuary locations performed a combined total of 1,896
funeral services in the third quarter compared to 2,026 funeral services in the
same period of 1998. This third quarter decline in funeral services is
consistent with the U.S. Government statistics indicating a fewer number of
deaths compared to the same period in 1998. Approximately 4% more cremation
services were performed in the third quarter of 1999 compared to the third
quarter 1998. Cremation services represented approximately 20% of all funeral
services performed in the third quarter of 1999 and 1998.
Pre-need funeral revenue for the period was $0.6 million compared to $0.3
million in the prior year, largely due to a change in pre-need insurance
providers in May, 1999. The operating margin for the funeral segment was 1.9%
below last year at 29.3%.
General and administrative expenses increased to $1.7 million from $1.5
million in 1998. As a percentage of total sales, general and administrative
expenses was 8.4% compared to 8.0% for the same period in 1998. During the
quarter ended September 30, 1999, the Company incurred an expense related to its
Y2K project totaling $0.1 million.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $7.2 million for the quarter ended September 30, 1999 from $6.3 million in
1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Consolidated revenues for the nine months ended September 30, 1999 increased
3.9% to $63.8 million from $61.4 million for the same period ended September 30,
1998. Consolidated gross profit totaled $23.5 million compared to $23.0 million
in 1998. As a percentage of revenue, consolidated gross margin percentage
decreased to 36.9% in 1999 from 37.4% in 1998. 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.
Cemetery revenue for the nine months ended September 30, 1999 increased 4.5%
over last year to $39.6 million. Pre-need cemetery revenue was $23.8 million
compared to $22.7 million for the same period during the prior year. At-need
cemetery revenue for the period was comparable to last year at $10.4 million.
Total interments for the period were 6,927, which was also comparable to prior
year. The operating margin for the cemetery segment was 39.4% of sales, which
was greater than last year at 38.2%. Lower selling commission expense as a
percentage of sales, product sales mix to higher margin cemetery property
contributed to the higher margins over prior year.
Funeral revenue for the nine months ended September 30, 1999 increased to
$24.5 million from $23.8 million in prior year, an increase of 2.9%. Year to
date the Company performed 6,356 funeral service calls, resulting in a 5.6%
decline over last year. The decrease is relative to what has been experienced
throughout the death care industry as a result of the declining death statistics
in the United States. Pre-need funeral revenue for the period was $2.2 million
compared to $1.0 million in the prior year. The significant increase over prior
year is due partly to a one-time payment of $0.5 million paid in February 1999
by the Company's new pre-need funeral insurance supplier, Forethought, and
improved agent commission fees. The operating margin for the funeral segment
was 32.7% compared to 36.1% last year. The primary reason for the unfavorable
margin variance is due to additional depreciation expense for new fleet vehicles
and new computer hardware and higher commission expense on pre-need funeral
sales.
(7)
General and administrative expenses increased to $5.1 million from $4.7
million in 1998. As a percentage of total sales, general and administrative
expenses was 8.0% compared to 7.7% for the same period in 1998. Year to date,
the Company has incurred over $0.1 million in expenses related to settlement of
the environmental issues with the previous owners of Rose Hills' cemetery and
$0.2 million in Y2K incremental expenses.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $25.8 million for the nine months ended September 30, 1999 from $22.1 million
in 1998. The increase was primarily a result of the $2.5 million gain
recognized on finalizing the Settlement Agreement with the previous owners of
Rose Hills' cemetery which is a non-recurring item. 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 service its indebtedness. As of
September 30, 1999, the Company had net working capital of $7.0 million and a
current ratio of 1.45 as compared to $2.5 million of net working capital and
current ratio of 1.12 at December 31, 1998. The increase over 1998 is due
principally to the $2.5 million gain recognized in June 1999 from the settlement
payment to the Association under the Settlement Agreement. In addition, the
implementation of the deferred commission program and monthly customer
statements at the beginning of the year resulted in higher down payments and
early loan payoffs. Net cash provided by operating activities was $5.9
million for the nine months ended September 30, 1999. For the same period last
year, net cash provided by operating activities was $5.8 million.
The primary use 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 $4.0 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, however, the Company does not expect a significant increase in
borrowing under its revolver to finance these activities.
In connection with the Acquisition Transaction, the Company entered into an
option agreement with the Association, pursuant to which the Company has the
right to purchase for $18.2 million (subject to adjustment) approximately 70.5
gross acres of undeveloped land located adjacent to the Cemetery. The Company
presently intends to exercise such option on or before November 19, 1999 (the
option expiration date) and to subsequently sell the property. The Company is
currently in negotiations to sell the property to a third party substantially
contemporaneous with the exercise and closing of the option. However, if the
Company is unable to reach agreement with such third party on a sale
transaction, or if such a sale transaction is delayed, the Company nevertheless
intends to exercise the option, and under such circumstances, will borrow under
its revolving credit facility up to the $18.2 million necessary to pay the
option price to the Association.
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 $75.0 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, 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 requires payment 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 the fifth year after the Bank Closing; $9.0
million in the sixth year after the Bank Closing and $53.0 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
(8)
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 $152.0
million as of September 30, 1999. As of September 30, 1999, 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, 1999 the Company was in compliance with the terms of the
indenture and the bank credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
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. The FASB issued SFAS No. 137 deferring the effective
date of SFAS no. 133 until June 15, 2000. 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 evaluated and assessed its existing
informational computer systems, as well as non-informational systems, and
determined that it was necessary to modify or replace certain portions of its
software and hardware
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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. The
evaluation of the non-informational systems determined that all significant
areas are or will be Year 2000 compliant and pose no significant risks. At this
time, the Company's work plan is complete and all significant areas have been
remedied and tested.
The Company has completed the formal communications with its significant
vendors to determine the extent to which the Company is vulnerable to those
third parties' potential failure to remediate their own Year 2000 Issue.
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 approximately $1.1 million. The expected future cost
to complete remaining evaluation, assessment and remediation of Year 2000
Issues, including replacement if necessary, is expected to be immaterial. 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 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 remediation efforts made by
either the Company or significant third parties are not successful. In such an
event, the Company has developed a contingency plan that includes a hierarchy of
critical functions, acceptable delay times, alternative critical suppliers and
defines the core team for managing this recovery process. The Company presently
believes that with current modifications to the existing software and new
software purchased and in place, the risk of potential loss associated with the
Year 2000 Issue has been mitigated.
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, derivative financial instruments may be utilized 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 has market risk in interest rate
exposure, but manages the exposure through its interest rate collar agreements,
which effectively set maximum and minimum interest rates on the $75.0 million of
senior debt.
The Company has entered into interest rate collar agreements, which
effectively set maximum and minimum interest rates on the principal amount of
Senior Debt, ranging from a floor of 5.5% (the Company would pay 5.5% even if
rates fall below that level) to a maximum or cap of 6.5% for the period
commencing January 2, 1997 through December 1, 2000. The collar agreement is
based on three-month LIBOR. The fair value of the collar agreement at September
30, 1999 and December 31, 1998, as estimated by a dealer, was a favorable
$20,000 and $808,000, respectively.
The counterparty to these contractual relationships is a major financial
institution with which the Company has other financial relationships. The
Company is exposed to credit losses in the event of nonperformance by the other
parties to the interest rate collar agreements. However, the Company does not
anticipate nonperformance by the other party, and no material loss would be
expected from nonperformance of such counterparty.
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PART II
ITEM 5 - OTHER INFORMATION
None
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, make capital expenditures, address Y2K issues, 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 10K for the fiscal year ended December 31, 1998. Persons should review the
factors identified herein and in the Company's Form 10K 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
Senior Vice President Finance and Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
November 10, 1999
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INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
27* Financial Data Schedule
(b) None
_______________
*Filed Herewith.
(12)