<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 MARCH 31, 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 May 12, 1999 was 1,000.
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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 March 31, 1999 and December 31, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended March 31, 1999 and 1998 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three Months Ended March 31, 1999 and 1998 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Three Months Ended March 31, 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
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ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1998 1999
--------- -----------
Current assets: (Unaudited)
<S> <C> <C>
Cash and equivalents $ 1,645 $ 1,694
Accounts receivable, net of allowances 11,601 12,052
Inventory 979 904
Prepaid expenses and other current assets 4,701 3,567
Deferred tax asset 4,085 4,085
-------- --------
Total current assets 23,011 22,302
-------- --------
Long-term receivables, net of allowances 18,501 19,535
Cemetery property 75,318 77,777
Property, plant and equipment, net 65,978 63,585
Goodwill 124,877 124,102
Deferred finance charges 9,036 8,628
Other assets 5,212 5,220
-------- --------
Total assets $321,933 $321,149
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,355 $ 11,740
Short-term borrowings 2,000 3,000
Current portion of long-term debt 2,133 2,298
-------- --------
Total current liabilities 20,488 17,038
Retirement plan liabilities 7,147 7,068
Deferred tax liability 6,455 6,455
Subordinated notes payable 80,000 80,000
Bank senior term loan 71,507 71,507
Other long-term debt 2,070 2,187
Other liabilities 5,974 6,223
-------- --------
Total liabilities 193,641 190,478
-------- --------
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) 1,117
-------- --------
Total stockholder's equity 128,292 130,671
-------- --------
Total liabilities and stockholder's equity $321,933 $321,149
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(1)
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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
-------------------
March 31
--------
1998 1999
------- -------
<S> <C> <C>
Sales and services:
Funeral sales and services $ 9,184 $ 8,962
Cemetery sales and services 13,409 12,825
------- -------
Total sales and services 22,593 21,787
------- -------
Cost of sales and services:
Funeral sales and services 5,183 5,557
Cemetery sales and services 7,961 7,801
------- -------
Total costs of sales and services 13,144 13,358
------- -------
Gross profit 9,449 8,429
General and administrative expenses 1,639 1,709
Amortization of purchase price in excess of
net assets acquired and other intangibles 958 931
------- -------
Income from operations 6,852 5,789
Other income (expense):
Interest expense (4,184) (3,839)
Settlement Agreement -- 2,500
------- -------
Total other income (expense) (4,184) (1,339)
Income before income tax 2,668 4,450
Provision for income tax 1,285 2,071
------- -------
Net income $ 1,383 $ 2,379
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(2)
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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>
Three Months
Ended
March 31
1998 1999
------- -------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,383 $ 2,379
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,114 2,281
Amortization of cemetery property 756 400
Provision for bad debts and sales cancellation 1,037 882
Loss on disposal of property, plant and equipment 13 --
Changes in assets and liabilities:
Increase in accounts receivable (3,692) (2,417)
Decrease (increase) in inventories (14) 75
Increase (decrease) in prepaid expenses and in other current assets (427) 1,134
Increase (decrease) in accounts payable and accrued expenses 4,072 (4,615)
Decrease in retirement plan liabilities (100) (79)
Net decrease (increase) in other assets and liabilities (334) 102
------- -------
Total adjustments 3,425 (2,237)
------- -------
Net cash provided by operating activities 4,808 142
------- -------
Cash flows from investing activities:
Capital expenditures (532) (1,375)
------- -------
Net cash used in investing activities (532) (1,375)
------- -------
Cash flows from financing activities:
Additions (repayments) of borrowings under Bank Credit Agreement (500) 1,000
Increase in other long-term debt -- 400
Principal payments of capital lease obligations (62) (118)
------- -------
Net cash provided by (used in) financing activities (562) 1,282
------- -------
Net increase in cash and cash equivalents 3,714 49
Cash and cash equivalents at beginning of period 3,462 1,645
------- -------
Cash and cash equivalents at end of period $ 7,176 $ 1,694
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 1,846 $ 1,641
Taxes paid $ 0 $ 0
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(3)
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ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED 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 -- -- 2,379 2,379
----------- --------------- ------ -------
Balance, March 31, 1999 1 ,000 129,554 1,117 130,671
=========== ============== ====== ========
</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 March 31, 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 offers for sale caskets, memorials, vaults, flowers and the sale of pre-
need funeral insurance from which commissions are earned.
The accounting and reporting policies of the Company conform to 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)
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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
MARCH 31
1998 1999
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<S> <C> <C>
Sales and services:
Funeral sales and services 40.7% 41.1%
Cemetery sales and services 59.3% 58.9%
Total sales and services 100.0% 100.0%
Gross profit:
Funeral sales and services 43.6% 38.0%
Cemetery sales and services 40.6% 39.2%
Total gross profit 41.8% 38.7%
General and administrative
expenses 7.3% 7.8%
Goodwill amortization 4.2% 4.3%
Interest expense 18.5% 17.6%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Consolidated revenues for the quarter ended March 31, 1999 decreased 3.5% to
$21.8 million from $22.6 million for the quarter ended March 31, 1998.
Consolidated gross profit decreased 11.6% to $8.4 million from $9.5 million in
1998. As a percentage of revenue, consolidated gross margin percentage
decreased to 38.7% in 1999 from 41.8% in the same quarter 1998.
Cemetery revenue for the quarter decreased $.6 million or 4.5% to $12.8
million. Pre-need cemetery revenue was $7.6 million compared to $8.3 million
for the prior year. Included in the $8.3 million of revenue last year was one
large group sale for approximately $1.0 million. At-need cemetery revenue for
the quarter was $3.6 million, a 2.7% decrease over last year. Total interments
were 2,420 for the quarter, which represented a 9.4% decrease over prior year.
The decline in interments experienced by the Company for the quarter is
consistent with the steep decline in reported deaths in Los Angeles County in
January 1999, compared to the prior year. Interments at Rose Hills Memorial
Park for January 1999 were 28% below the prior year while interments in January
1998 were 17% above 1997. The Company has experienced year over year
fluctuations interment levels in the past, which have generally resulted in
offsetting variances in subsequent months. The operating margin for the cemetery
segment was 39.2% of sales, which was slightly lower than last year at 40.6%.
Selling commission expense as a percentage of sales was below last year due to
changes in the sales agent commission structure. Gross margins on cemetery
merchandise and services are slightly lower than last year due to a change in
the sales mix. Also contributing to the margin variance was a $6.5 million
increase in media and related advertising expenses.
Funeral revenue for the quarter decreased to $9.0 million from $9.2 million in
the same quarter for the prior year, a decrease of 2.2%. The number of total
calls decreased 3.3% from 2,362 to 2,284. Last year, the month of January hit a
record high in case volume. Pre-need funeral revenue for the quarter was $1.0
million compared to $.6 million in the prior year due to a payment of $.5
million paid in February 1999 by the Company's new pre-need funeral insurance
supplier, Forethought. The
(6)
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operating margin for the funeral segment was 38.0% compared to 43.6% last year.
The primary reason for the unfavorable margin variance is due to commission
expense on pre-need funeral sales. A new general agent commission structure
will be implemented in the second quarter of 1999 that is expected to improve
margins in the pre-need funeral segment.
General and administrative expenses increased to $1.7 million from $1.6
million in 1998. As a percentage of total sales, general and administrative
expenses was 7.8% compared to 7.3% for the same quarter of 1998.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $10.6 million for the quarter ended March 31, 1999 from $9.3 million for the
quarter ended March 31, 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. 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 March
31, 1999, the Company had net working capital of $5.6 million and a current
ratio of 1.33 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 March 1999 from the
settlement payment to the Association under the Settlement Agreement.
Net cash provided by operating activities was $0.1 for the three months ended
March 31, 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.
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 is subject to amortization, 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.
(7)
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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 $152.5
million as of March 31, 1999. As of March 31, 1999, the Company also had $22.0
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 March 31, 1999 the company was in compliance with the terms of the indenture
and the bank credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1 in March 1998. SOP 98-1 requires costs of internal use
software and is effective for financial statements for fiscal years beginning
after December 15, 1998. Management has not determined the impact of SOP 98-1
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
(8)
<PAGE>
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 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:
<TABLE>
<CAPTION>
EVALUATION COMPLETION
FUNCTION COMPLETE DATE
- ------------------------------------------ --------------------------------------------------------------------
<S> <C> <C>
Financial Accounting and Reporting Yes 3Q 1999
Funeral Home Operations Yes 3Q 1999
Cemetery Operations Yes 3Q 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' 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 second 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 $0.7 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.
(9)
<PAGE>
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
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 March 31,
1999 and December 31, 1998, as estimated by a dealer, was a favorable $461,000
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.
(10)
<PAGE>
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 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)
May 12, 1999
(11)
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
27* __Financial Data Schedule
(b) Reports on Form 8-K
None
________________
*Filed Herewith.
(12)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF ROSE HILLS COMPANY AND
SUBSIDIARIES, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,694
<SECURITIES> 0
<RECEIVABLES> 12,052
<ALLOWANCES> 0
<INVENTORY> 904
<CURRENT-ASSETS> 22,302
<PP&E> 63,585
<DEPRECIATION> 0
<TOTAL-ASSETS> 321,149
<CURRENT-LIABILITIES> 17,038
<BONDS> 80,000
0
0
<COMMON> 0
<OTHER-SE> 130,671
<TOTAL-LIABILITY-AND-EQUITY> 321,149
<SALES> 21,787
<TOTAL-REVENUES> 21,787
<CGS> 13,358
<TOTAL-COSTS> 13,358
<OTHER-EXPENSES> 2,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,839
<INCOME-PRETAX> 4,450
<INCOME-TAX> 2,071
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,379
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
