<PAGE>
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 JUNE 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 August 3, 1999 was 1,000.
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS
as of June 30, 1999 and December 31, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended June 30, 1999 and 1998 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30, 1999 and 1998 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Six Months Ended June 30, 1999 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 5 - 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
</TABLE>
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1998 1999
--------- -----------
Current assets: (unaudited)
<S> <C> <C>
Cash and equivalents $ 1,645 $ 2,214
Accounts receivable, net of allowances 11,601 12,177
Inventory 979 976
Prepaid expenses and other current assets 4,701 2,924
Deferred tax asset 4,085 4,085
-------- --------
Total current assets 23,011 22,376
-------- --------
Long-term receivables, net of allowances 18,501 20,136
Cemetery property 75,318 77,127
Property, plant and equipment, net 65,978 63,245
Goodwill 124,877 123,278
Deferred finance charges 9,036 8,221
Other assets 5,212 5,133
-------- --------
Total assets $321,933 $319,516
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,355 $ 10,521
Short-term borrowings 2,000 2,500
Current portion of long-term debt 2,133 3,232
-------- --------
Total current liabilities 20,488 16,253
Retirement plan liabilities 7,147 7,030
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 2,076
Other liabilities 5,974 6,290
-------- --------
Total liabilities 193,641 188,114
-------- --------
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) 1,848
-------- --------
Total stockholder's equity 128,292 131,402
-------- --------
Total liabilities and stockholder's equity $321,933 $319,516
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(1)
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and services:
Funeral sales and services $ 7,388 $ 8,033 $16,572 $16,996
Cemetery sales and services 12,256 13,277 25,665 26,102
------- ------- ------- -------
Total sales and services 19,644 21,310 42,237 43,098
------- ------- ------- -------
Cost of sales and services:
Funeral sales and services 5,054 5,625 10,236 11,182
Cemetery sales and services 7,713 7,667 15,675 15,468
------- ------- ------- -------
Total costs of sales and services 12,767 13,292 25,911 26,650
------- ------- ------- -------
Gross profit 6,877 8,018 16,326 16,448
General and administrative expenses 1,522 1,652 3,161 3,362
Amortization of purchase price in excess of net
assets acquired and other intangibles 931 932 1,889 1,863
------- ------- ------- -------
Income from operations 4,424 5,434 11,276 11,223
Other income (expense):
Interest expense (4,070) (4,031) (8,254) (7,870)
Settlement Agreement -- -- -- 2,500
------- ------- ------- -------
Total other income (expense) (4,070) (4,031) (8,254) (5,370)
Income before income tax 354 1,403 3,022 5,853
Provision for income tax 168 672 1,453 2,743
------- ------- ------- -------
Net income $ 186 $ 731 $ 1,569 $ 3,110
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(2)
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
----------
Ended
-----
June 30
-------
1998 1999
------ ------
<S> <C> <C>
Cash flow from operating activities:
Net Income $ 1,569 $ 3,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,198 4,623
Amortization of cemetery property 1,204 1,056
Provision for bad debts and sales cancellation 1,680 2,348
Loss on disposal of property, plant and equipment 5 6
Changes in assets and liabilities:
Increase in accounts receivable (8,916) (4,609)
Decrease (increase ) in inventories (71) 3
Decrease in prepaid expenses and in other current assets 326 1,777
Increase (decrease) in accounts payable and accrued expenses 3,863 (5,835)
Decrease in retirement plan liabilities (169) (117)
Net decrease (increase) in other assets and liabilities 1,156 117
------- -------
Total Adjustments 3,276 (631)
------- -------
Net cash provided by operating activities
4,845 2,479
Cash flows from investing activities: ------- -------
Capital expenditures
Net cash used in investing activities (1,586) (2,018)
------- -------
Cash flows from financing activities:
Additions (repayments) of borrowings under Bank Credit Agreement (1,586) (2,018)
Increase (decrease) in other long-term debt ------- -------
Principal payments of capital lease obligations
Net cash provided by (used in ) financing activities (1,000) 3
(396) 347
Net increase in cash and cash equivalents (190) (242)
------- -------
Cash and cash equivalents at beginning of period
(1,586) 108
Cash and cash equivalents at end of period ------- -------
Supplemental disclosure of cash flow information: 1,673 569
Cash paid during the period for:
Interest paid 3,462 1,645
Taxes paid ------- -------
$ 5,135 $ 2,214
======= =======
$ 7,368 $ 7,096
$ 4 $ 0
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(3)
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED TOTAL
SHARES ADDITIONAL EARNINGS STOCKHOLDER'S
OUTSTANDING PAID IN CAPITAL (DEFICIT) EQUITY
----------- --------------- --------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 1,000 129,554 (1,262) 128,292
Net income -- -- 3,110 3,110
----- ------- ------ -------
Balance, June 30, 1999 1,000 129,554 1,848 131,402
===== ======= ====== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(4)
<PAGE>
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 June 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
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.
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
(5)
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1999 1998 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales and service:
Funeral sales and services 37.6% 37.7% 39.2% 39.4%
Cemetery sales and services 62.4% 62.3% 60.8% 60.6%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 31.6% 30.0% 38.2% 34.2%
Cemetery sales and services 37.1% 42.3% 38.9% 40.7%
Total gross profit 35.0% 37.6% 38.7% 38.2%
General and administrative expenses 7.7% 7.8% 7.5% 7.8%
Goodwill amortization 4.7% 4.4% 4.5% 4.3%
Interest expense 20.7% 18.9% 19.5% 18.3%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Consolidated revenues for the quarter ended June 30, 1999 increased 8.7% to
$21.3 million from $19.6 million for the same period ended June 30, 1998.
Consolidated gross profit totaled $8.0 million during the quarter compared to
$6.9 million for the same quarter in 1998. As a percentage of revenue,
consolidated gross margin percentage increased from 35.0% in 1998 to 37.6% in
1999.
Cemetery revenue for the quarter ended June 30, 1999 increased 8.1% over
the same quarter last year to $13.3 million. Pre-need cemetery revenue, which
represents over 60.0% of total segment sales, was 14.0% ahead of the same
quarter last year. In June 1999, the Company recorded a large group pre-need
sale for $.8 million. At-need cemetery revenue for the period was $3.6 million
and equal to last year. Total interments were 2,307 for the period, which
represented a 5.0% increase over the same period in the prior year. The
operating margin for the cemetery segment was 42.3% of sales, which was greater
than last year at 37.1%. In addition, selling commission expense as a percentage
of sales was below last year due to changes in the sales agent commission
structure in January 1999.
Funeral revenue for the quarter ended June 30, 1999 increased to $8.0
million from $7.4 million in the prior year, an increase of 8.1%. At-need
funeral revenue totaled $7.3 million or 91.3% of the total segment business for
the quarter. The average revenue per funeral service for the quarter was $3,165
and comparable to last year. The Rose Hills and affiliate mortuary locations
performed a combined total of 2,173 funerals services in the second quarter
compared to 2,142 funeral services in the same period of 1998. Pre-need funeral
revenue for the period was $0.6 million compared to $0.1 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 1.6% below last year at 30.0%.
(6)
<PAGE>
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 7.8% compared to 7.7% for the same period in 1998.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $8.0 million for the quarter ended June 30, 1999 from $6.5 million in 1998,
largely due to the factors described above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Consolidated revenues for the six months ended June 30, 1999 increased 2.1%
to $43.1 million from $42.2 million for the same period ended June 30, 1998.
Consolidated gross profit totaled $16.4 million compared to $16.3 million in
1998. As a percentage of revenue, consolidated gross margin percentage decreased
to 38.2% in 1999 from 38.7% in 1998.
Cemetery revenue for the six months ended June 30, 1999 increased $0.4
million to $26.1 million. Pre-need cemetery revenue was $15.7 million compared
to $15.4 million for the same period during the prior year. At-need cemetery
revenue for the period was $7.2 million, a slight decrease over last year. Total
interments for the period were 4,720, which represented a 3.2% decrease over
prior year. The operating margin for the cemetery segment was 40.7% of sales,
which was greater than last year at 38.9%. Selling commission expense as a
percentage of sales was below last year due to changes in the sales agent
commission structure in January 1999. Gross margins on cemetery merchandise and
services are also favorable to last year due to a change in the sales mix to
higher margin property. Partially offsetting the favorable margin variance was a
$.4 million increase in media and related advertising expenses.
Funeral revenue for the six months ended June 30, 1999 increased to $17.0
million from $16.6 million in prior year, a increase of 2.4%. The number of
total calls decreased between periods by 6.1%, from 4,745, to 4,457. The
decrease is relative to a case volume record high in January 1998. Pre-need
funeral revenue for the period was $1.6 million compared to $0.6 million in the
prior year due to a one-time payment of $0.5 million paid in February 1999 by
the Company's new pre-need funeral insurance supplier, Forethought. The
operating margin for the funeral segment was 34.2% compared to 38.2% last year.
The primary reason for the unfavorable margin variance is due to a $0.4 million
additional depreciation expense for new fleet vehicles and new computer
hardware. In addition, the unfavorable margin variance is due to higher
commission expense on pre-need funeral sales. A new general agent commission
structure was implemented in May 1999 that is expected to improve margins in the
pre-need funeral segment for the remainder of the year.
General and administrative expenses increased to $3.4 million from $3.2
million in 1998. As a percentage of total sales, general and administrative
expenses was 7.8% compared to 7.5% for the same period in 1998.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $18.6 million for the six months ended June 30, 1999 from $15.7 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 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 June
30, 1999, the Company had net working capital of $6.1 million and a current
ratio of 1.38 as compared to $2.5 million of net working capital and current
ratio of 1.12 at December 31, 1998. The increase over the 1998 year-end figures
is due principally to the $2.5 million gain recognized in June 1999 from the
settlement payment to the Association under the Settlement Agreement.
Net cash provided by operating activities was $2.5 million for the six
months ended June 30, 1999. For the same period last year, net cash provided by
operating activities was $4.8 million. The primary reason for the decrease over
the prior year is the $3.9 million settlement payment made by the Company to the
Association. As a result of the settlement payment, the Company was required to
borrow $3.0 million under its bank line to finance operations.
(7)
<PAGE>
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.
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 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
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 June 30, 1999. As of June 30, 1999, the Company also had $22.5
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
June 30, 1999 the Company was in compliance with the terms of the indenture and
the bank credit facilities.
(8)
<PAGE>
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 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.
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 October
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:
<TABLE>
<CAPTION>
EVALUATION COMPLETION
FUNCTION COMPLETE DATE
- --------------------------------- -----------------------------------
<S> <C> <C>
Financial Accounting and Reporting Yes 3Q 1999
Funeral Home Operations Yes 4Q 1999
Cemetery Operations Yes 4Q 1999
</TABLE>
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' potential 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
has been substantially completed. 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.
(9)
<PAGE>
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 $0.9 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 $.2 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.
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.
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
(note 10), ranging from a floor of 5.5% (the Company would pay 5.5% even if
(10)
<PAGE>
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 June 30,
1999 and December 31, 1998, as estimated by a dealer, was a favorable $128,000
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.
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)
August 2, 1999
(11)
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
27* __Financial Data Schedule
(b) Reports on Form 8-K
On June 2, 1999, the Company filed with the Securities and Exchange
Commission, interim reports on Form 8-K, item 5, describing the filing of a
petition to reorganize under Chapter 11 for the U.S. Bankruptcy Code by the
Loewen Group Inc. (Loewen). Loewen beneficially owns 20.45% of the Common Stock
of Rose Hills Holding Corp., the parent of Rose Hills Company.
________________
*Filed Herewith.
(12)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited interim consolidated financial statements of Rose Hills Company and
subsidiaries, for the six months ended June 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,214
<SECURITIES> 0
<RECEIVABLES> 12,177
<ALLOWANCES> 0
<INVENTORY> 976
<CURRENT-ASSETS> 22,376
<PP&E> 63,245
<DEPRECIATION> 0
<TOTAL-ASSETS> 319,516
<CURRENT-LIABILITIES> 15,253
<BONDS> 80,000
0
0
<COMMON> 0
<OTHER-SE> 131,402
<TOTAL-LIABILITY-AND-EQUITY> 319,516
<SALES> 43,098
<TOTAL-REVENUES> 43,098
<CGS> 26,650
<TOTAL-COSTS> 26,650
<OTHER-EXPENSES> 5,225
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,870
<INCOME-PRETAX> 5,853
<INCOME-TAX> 2,743
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,110
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
