<PAGE>
SECURITIES EXCHANGE AND 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, 2000
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 7, 2000 was 1,000.
<PAGE>
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 June 30, 2000 and December 31, 1999 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended June 30, 2000 and 1999 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30, 2000 and 1999 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Six Months Ended June 30, 2000 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 10
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 10
INDEX OF EXHIBITS 11
EXHIBIT 27 12
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND JUNE 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 2,150 $ 4,546
Accounts receivable, net of allowances 11,805 10,219
Inventory 991 1,212
Prepaid expenses and other current assets 5,277 5,654
Deferred tax asset 3,508 3,508
--------- ---------
Total current assets 23,731 25,139
--------- ---------
Long-term receivables, net of allowances 18,729 18,477
Cemetery property 77,003 75,538
Property, plant and equipment, net 59,292 59,368
Goodwill 121,629 119,980
Deferred finance charges 7,407 6,592
Trust assets 7,329 8,544
Other assets 2,692 2,655
--------- ---------
Total assets $ 317,812 $ 316,293
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,377 $ 9,631
Current portion of long-term debt 3,832 5,766
--------- ---------
Total current liabilities 14,209 15,397
Retirement plan liabilities 6,990 6,875
Deferred tax liability 8,271 8,271
Subordinated notes payable 80,000 80,000
Bank senior term loan 68,513 65,013
Other long-term debt 1,913 1,799
Other liabilities 5,927 6,336
--------- ---------
Total liabilities 185,823 183,691
--------- ---------
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 2,435 3,048
--------- ---------
Total stockholder's equity 131,989 132,602
--------- ---------
Total liabilities and stockholder's equity $ 317,812 $ 316,293
========= =========
</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
------- -------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and services:
Funeral sales and services $ 8,036 $ 7,115 $ 16,998 $ 16,258
Cemetery sales and services 13,282 12,178 26,107 26,882
-------- -------- -------- --------
Total sales and services 21,318 19,293 43,105 43,140
-------- -------- -------- --------
Cost of sales and services:
Funeral sales and services 5,625 5,584 11,182 11,516
Cemetery sales and services 7,667 7,548 15,468 16,866
-------- -------- -------- --------
Total costs of sales and services 13,292 13,132 26,650 28,382
-------- -------- -------- --------
Gross profit 8,026 6,161 16,455 14,758
General and administrative expenses 1,659 1,968 3,368 3,810
Amortization of purchase price in excess of net
assets acquired and other intangibles 932 925 1,863 1,856
-------- -------- -------- --------
Income from operations 5,435 3,268 11,224 9,092
Other income (expense):
Interest expense, net (4,032) (3,870) (7,871) (7,891)
Settlement Agreement -------- -------- -------- --------
Total other income (expense) (4,032) (3,870) (5,371) (7,891)
Income (loss) before income tax 1,403 (602) 5,853 1,201
Income tax expense (benefit) 672 (271) 2,743 588
-------- -------- -------- --------
Net income $ 731 $ (331) $ 3,110 $ 613
======== ======== ======== ========
</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
-------
1999 2000
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net Income $ 3,110 $ 613
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles 3,808 4,046
Amortization of deferred finance costs 815 815
Amortization of cemetery property 1,056 1,141
Provision for bad debts and sales cancellation 2,348 2,275
Loss on disposal of property, plant and equipment 6 -
Changes in assets and liabilities:
Increase in accounts receivable (4,609) (926)
Decrease (increase ) in inventories 3 (221)
Decrease (increase ) in prepaid expenses and in other current assets 1,777 (377)
Decrease in accounts payable and accrued expenses (5,835) (746)
Decrease in retirement plan liabilities (117) (115)
Net decrease (increase) in other assets and liabilities 117 (225)
-------- --------
Net cash provided by operating activities 2,479 6,280
-------- --------
Cash flows from investing activities:
Capital expenditures
Proceeds from disposal of property, plant and equipment (2,018) (2,204)
Net cash used in investing activities - 1
-------- ---------
Cash flows from financing activities: (2,018) (2,203)
-------- --------
Additions of borrowings under Bank Credit Agreement
Principal payments of long-term debt
Increase (decrease) in other long-term debt 3 0
Principal payments of capital lease obligations - (1,499)
347 (280)
Net cash provided by (used in ) financing activities (242) 98
-------- --------
Net increase in cash and cash equivalents 108 (1,681)
-------- --------
Cash and cash equivalents at beginning of period 569 2,396
Cash and cash equivalents at end of period
1,645 2,150
-------- --------
Supplemental disclosure of cash flow information: $ 2,214 $ 4,546
======== ========
Cash paid during the period for:
Interest paid
Taxes paid $ 7,096 $ 7,106
$ 0 $ 200
</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, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ADDITIONAL RETAINED TOTAL
STOCKHOLDER'S
OUTSTANDING PAID IN CAPITAL EARNINGS EQUITY
----------- --------------- -------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 1,000 $ 129,554 $ 2,435 $ 131,989
Net income -- -- 613 613
----- --------- ------- ---------
Balance, June 30, 2000 1,000 $ 129,554 $ 3,048 $ 132,602
===== ========= ======= =========
</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, 2000 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 of 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, 1999.
The Company operates 14 funeral homes, 3 funeral home and cemetery
combination properties and 1 cemetery property in the Southern California area.
Services offered at the locations include cemetery interment and professional
mortuary services, both of which include pre-need and at-need sales. In
addition, the Company 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 1999 consolidated financial
statements to conform to the 2000 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.
5
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 2000 1999 2000
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Sales and service:
Funeral sales and services 37.7% 36.9% 39.4% 37.7%
Cemetery sales and services 62.3% 63.1% 60.6% 62.3%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 30.0% 21.5% 34.2% 29.2%
Cemetery sales and services 42.3% 38.0% 40.8% 37.3%
Total gross profit 37.6% 31.9% 38.2% 34.2%
General and administrative expenses 7.8% 10.2% 7.8% 8.8%
Goodwill amortization 4.4% 4.8% 4.3% 4.3%
Interest expense 18.9% 20.1% 18.3% 18.3%
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Consolidated revenues for the quarter ended June 30, 2000 decreased 9.5% to
$19.3 million from $21.3 million for the same period ended June 30, 1999.
Consolidated gross profit totaled $6.2 million during the quarter compared to
$8.0 million for the same quarter in 1999. As a percentage of revenue,
consolidated gross margin percentage decreased from 37.6% in 1999 to 31.9% in
2000.
Funeral revenue for the quarter ended June 30, 2000 decreased to $7.1 million
from $8.0 million in the prior year, a decrease of 11.5%. At-need funeral
revenue for the quarter totaled $6.4 million and represented a 12% decrease over
the same period last year. The average revenue per funeral service for the
quarter was $3,391 or 2% greater than last year. The Rose Hills and affiliate
mortuary locations performed a total of 1,836 funeral services this quarter
compared to 2,173 funeral services same quarter last year. Pre-need funeral
revenue was $0.6 million for the period as well as prior year. The primary
reasons for the 36.5% decline in funeral segment operating margin is due to the
15.5% drop in at-need cases and higher fixed operating costs per case. In
addition, start-up costs have been incurred this quarter for the opening of a
new cremation location and two storefronts in Los Angeles. All locations have
been scheduled to open in the third and fourth quarter this year.
6
<PAGE>
Cemetery revenue for the quarter ended June 30, 2000 decreased 8.3% from
the same quarter last year to $12.2 million. Pre-need cemetery revenue for the
second quarter was $ 7.7 million compared to $8.1 million for the same quarter
during the prior year. In June 1999, the Company recorded a large group pre-need
sale for $.8 million. Excluding this large group sale pre-need cemetery revenue
was actually over 5% above same period last year. At-need cemetery revenue for
the period was $2.9 million, representing a 16% decrease from the same period
last year. The Company has experienced a decline in the average property sale
over last year and a decline in cemetery merchandise units sold at-need. Total
interments were 2,142 for the quarter, which represented a 2.0% increase over
the same period in the prior year. Included in other cemetery revenues was
income from endowment care funds and finance income totaling approximately $1.6
million for the three month periods ended June 30, 2000 and 1999, respectively
The operating margin for the cemetery segment was 38.0% of sales compared to
42.3% last year.
General and administrative expenses increased to $2.0 million from $1.7
million in 1999. As a percentage of total sales, general and administrative
expenses were 10.2% compared to 7.8% for the same period in 1999. Included in
this quarter were $.3 million of unusual legal expenses
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), decreased
to $6.1 million for the quarter ended June 30, 2000 from $8.1 million in 1999,
largely due to the decline in funeral case count and a large property sale last
year.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Consolidated revenues for the six months ended June 30, 2000 were $43.1
million and comparable to the same period ended June 30, 1999. Consolidated
gross profit totaled $14.8 million compared to $16.5 million in 1999. As a
percentage of revenue, consolidated gross margin decreased to 34.2% in 2000 from
38.2% in 1999.
Funeral revenue for the six months ended June 30, 2000 decreased to $16.3
million from $17.0 million in prior year, a decrease of 4.3%. The number of
total funeral calls decreased by approximately 5% from 4,457 in 1999 to 4,239 in
2000. Pre-need funeral revenue for the period was $1.2 million compared to $1.1
million in the prior year, representing a 6.5% increase. The operating margin
for the funeral segment was 29.2% compared to 34.2% last year. In April 1999,
the Company received a one-time payment from the insurance provider of $.5
million.
Cemetery revenue for the six months ended June 30, 2000 increased 3.0% over
last year to $26.9 million. Pre-need cemetery revenue was $16.7 million compared
to $15.7 million for the same period last year. The increase was driven
primarily by overall property price increases in early 2000 and increased
interments over prior year. At-need cemetery revenue for the period was $6.8
million compared to $7.2 million for the same period last year. Total interments
for the period were 3.3% ahead of last year at 4,740. Included in other cemetery
revenues was income from endowment care funds and finance income totaling
approximately $3.4 million and $3.2 million in 2000 and 1999, respectively. The
operating margin for the cemetery segment was 37.3% of sales compared to 40.8%
last year.
Corporate general and administrative expenses increased to $3.8 million
from $3.4 million in 1999. As a percentage of total sales, general and
administrative expenses were 8.8% compared to 7.8% for the same period in 1999.
The increase was primarily due to unusual legal fees and settlement costs.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), decreased
to $14.6 million for the six months ended June 30, 2000 from $18.6 million in
1999. The decrease in EBITDA of $4.0 million is primarily the result of $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.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company presently believes that, based upon current levels of
operations and anticipated growth and the availability of the Bank Revolving
Facility (see description below), it can meet working capital and short-term
liquidity requirements for current operations, satisfy its contingent obligation
and service its indebtedness through December 31, 2002. As of June 30, 2000, the
Company had net working capital of $9.7 million and a current ratio of 1.63 as
compared to $9.5 million of net working capital and current ratio of 1.67 at
December 31, 1999.
Net cash provided by operating activities was $6.6 million for the six
months ended June 30, 2000. For the same period last year, net cash provided by
operating activities was $2.5 million. The primary reason for the increase over
the prior year is the $3.9 million settlement payment made by the Company to the
Association during 1999. As a result of the settlement payment, the Company was
required to borrow $3.0 million under its bank line to finance operations, which
was paid down to zero during fiscal 1999.
The primary use of cash will be for working capital, principal payments on
outstanding long-term indebtedness and capital expenditures as permitted under
the terms of bank agreements. The Company estimates its current year capital
expenditures of approximately $4.6 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.
Concurrent with the Acquisition Transaction, the Company entered into
senior secured amortization extended term loan facilities (the "Bank Term
Facility") in an aggregate principal amount of $75 million, the proceeds 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
are available for general corporate purposes and a portion 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 and 2001, respectively. 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.
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 $150.0
million as of June 30, 2000. The Company also has the entire $25.0 million of
borrowing capacity available under the Bank Revolving Facility available as of
August 1, 2000. Management currently believes that, based upon current levels of
operations and anticipated growth and the availability under the Bank Revolving
Facility, it can adequately service its indebtedness through December 31, 2002.
If the Company cannot generate sufficient cash flow from operations or borrow
under the Bank Revolving Facility to meet such obligations, the Company may be
required to take certain actions, including reducing capital expenditures,
restructuring its debt, selling assets or seeking additional equity in order to
avoid an Event of Default.
8
<PAGE>
There can be no assurance that such actions could be effected or would be
effective in allowing the Company to meet such obligations. In addition, the
Company currently expects that it will have to obtain new or additional
financing to pay some or all of the principal amount due at maturity under the
Bank Term Facility ($53 million by November 1, 2003) and under the Notes ($80
million on November 15, 2004). No assurance can be given that such financing
will be available to the Company or, if available, that it may be obtained on
terms and conditions that are satisfactory to the Company.
The Company and its Subsidiaries are subject to certain restrictive
covenants contained in the indenture to the Notes, including, but not limited
to, covenants imposing limitations on the incurrence of additional indebtedness;
certain payments, including dividends and investments; the creation of liens;
sales of assets and preferred stock; transactions with interested persons;
payment restrictions affecting subsidiaries; sale-leaseback transactions; and
mergers and consolidations. In addition, the Bank Credit Facilities contain
certain restrictive covenants that, among other things, limit the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, prepay other indebtedness (including the Exchange Notes), pay
dividends or make certain restricted payments, create liens on assets, engage in
mergers or acquisitions or enter into leases or transactions with affiliates. At
June 30, 2000 the Company was in compliance with the terms of the indenture and
the bank credit facilities. The Company does not believe that the implementation
of SAB 101 (discussed below) will have a negative effect on any existing
indenture and bank credit facility financial covenant in the year 2000. However,
the senior lenders are obligated to re-negotiate in "good faith" all financial
covenants affected by changes in accounting principles.
NEW ACCOUNTING PRONOUNCEMENTS
SAB101
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("Bulletin"). The Bulletin
provides the staff's views on the application of existing generally accepted
accounting principles to revenue recognition in financial statements. The
Bulletin states that industry practice would not override these views. The
Company has followed industry practices in recognizing revenues and is in the
process of determining whether any of the industry practice is outside of the
guidelines contained in this Bulletin. It is likely that changes will be
required which will impact reporting techniques for revenue recognition by
amounts material to the financial statements. The Company, along with other
affected companies in the industry, is currently engaged in discussions with the
SEC over the revenue recognition principles to be applied going forward,
however, no agreement has been reached at this time. Therefore, the impact
cannot be quantified at this time. Any changes must be reflected no later than
the fourth quarter interim financial statements of 2000 pursuant to SAB 101, as
amended. Effective July 1, 2000, pre-need cemetery services and merchandise will
only be sold on insurance and trust contracts.
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 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 June 30,
2000 and December 31, 1999, as estimated by a dealer, was a favorable $133,000
and $85,000, 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.
9
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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, 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, 1999. 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
11, 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 7, 2000
10
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description
------ -----------
(a)
10.20* Employment Agreement, dated March 1, 2000 by and between Rose Hills
Company and Dennis C. Poulsen
27* __Financial Data Schedule
(b) Reports on Form 8-K
None.
___________________
*Filed Herewith.
11
