<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 September 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 November 13, 2000 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 September 30, 2000 and December 31, 1999 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months and Nine Months Ended September 30, 2000
and 1999 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 2000 and 1999 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Nine Months Ended September 30, 2000 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 - 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6 - 11
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
INDEX OF EXHIBITS 14
EXHIBIT 27 15
</TABLE>
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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, 1999 AND SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 2,150 $ 9,279
Accounts receivable, net of allowances 11,805 12,500
Inventory 991 1,175
Prepaid expenses and other current assets 5,277 3,618
Deferred tax asset 3,508 3,508
-------- --------
Total current assets 23,731 30,080
-------- --------
Long-term receivables, net of allowances 18,729 15,018
Cemetery property 77,003 75,079
Property, plant and equipment, net 59,292 59,602
Goodwill 121,629 119,155
Deferred finance charges 7,407 6,184
Trust assets 7,329 7,050
Other assets 2,692 2,557
-------- --------
Total assets $317,812 $314,725
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,377 $ 11,667
Current portion of long-term debt 3,832 5,757
-------- --------
Total current liabilities 14,209 17,424
Retirement plan liabilities 6,990 6,847
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 1,185
Other liabilities 5,927 4,717
-------- --------
Total liabilities 185,823 183,457
-------- --------
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 1,714
-------- --------
Total stockholder's equity 131,989 131,268
-------- --------
Total liabilities and stockholder's equity $317,812 $314,725
======== ========
</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 Nine Months Ended
------------------- ---------------------
September 30 September 30
------------------- ---------------------
1999 2000 1999 2000
------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales and services:
Funeral sales and services $ 7,528 $ 7,872 $ 24,524 $ 24,131
Cemetery sales and services 13,177 9,989 39,279 36,869
------- ------- -------- --------
Total sales and services 20,705 17,861 63,803 61,000
------- ------- -------- --------
Cost of sales and services:
Funeral sales and services 5,321 5,874 16,503 17,390
Cemetery sales and services 8,318 6,578 23,786 23,444
------- ------- -------- --------
Total costs of sales and services 13,639 12,452 40,289 40,834
------- ------- -------- --------
Gross profit 7,066 5,409 23,514 20,166
General and administrative expenses 1,745 1,854 5,107 5,669
Amortization of purchase price in excess of
net assets acquired and other intangibles 932 924 2,795 2,780
------- ------- -------- --------
Income from operations 4,389 2,631 15,612 11,717
Other income (expense):
Interest expense, net (3,970) (3,828) (11,840) (11,720)
Settlement Agreement -- -- 2,500 --
------- ------- -------- --------
Total other expense (3,970) (3,828) (9,340) (11,720)
Income (loss) before income tax 419 (1,197) 6,272 (3)
Income tax expense 148 130 2,892 718
------- ------- -------- --------
Net income (loss) $ 271 $(1,327) $ 3,380 $ (721)
======= ======= ======== ========
</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>
Nine Months
------------------
Ended
------------------
September 30
------------------
1999 2000
------- -------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 3,380 $ (721)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of intangibles 5,754 6,116
Amortization of deferred finance costs 1,222 1,222
Amortization of cemetery property 1,992 1,702
Provision for bad debts and sales cancellation 3,753 1,995
Loss on disposal of property, plant and equipment 7 1
Changes in assets and liabilities:
Accounts receivable (7,557) 1,243
Inventories (46) (184)
Prepaid expenses and in other current assets 1,383 1,659
Accounts payable and accrued expenses (3,833) 1,290
Retirement plan liabilities (139) (143)
Other assets and liabilities, net 33 (1,197)
------- -------
Net cash provided by operating activities
5,949 12,983
Cash flows from investing activities:
Capital expenditures (2,900) (3,555)
Proceeds from disposal of property, plant and equipment - 4
------- -------
Net cash used in investing activities (2,900) (3,551)
Cash flows from financing activities:
Repayments of borrowings under Bank Credit Agreement (2,000) 0
Principal payments of long-term debt (497) (1,499)
Change in other long-term debt 152 (384)
Payments of capital lease obligations (383) (420)
------- -------
Net cash used in financing activities (2,728) (2,303)
------- -------
Net increase in cash and cash equivalents 321 7,129
Cash and cash equivalents at beginning of period 1,645 2,150
------- -------
Cash and cash equivalents at end of period $ 1,966 $ 9,279
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,827 $ 8,855
Taxes $ 0 $ 200
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
SHARES ADDITIONAL RETAINED 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 loss -- -- (721) (721)
------- -------- ------ --------
Balance, September 30, 2000 1,000 $129,554 $1,714 $131,268
======= ======== ====== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying September 30, 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. NONRECURRING ITEM
In connection with the acquisition of Rose Hills Memorial Park and Rose Hills
Mortuary in November 1996, the predecessor to the Company entered into a
Settlement Agreement dated November 19, 1996 with Rose Hills Memorial Park
Association (the "Association") to resolve amounts due/owed under an operation
and management agreement between the predecessor company and the Association as
of November 18, 1996. On March 30, 1999, the parties finally determined the
amounts due from the Company to the Association under the Settlement Agreement.
Under the final settlement, the Company paid to the Association's successor the
sum of $3.9 million, including interest of $0.8 million. The Company had accrued
$6.4 million, including interest, for the settlement, which resulted in a gain
to the Company of $2.5 million during the first quarter ended March 31, 1999.
3. CONTINGENCIES
During August and September 2000, the Company discovered that there had been
some land movement in a portion of Rose Hills Memorial Park. The affected area
represents approximately 13 acres of the Park's approximately 1,418 total acres,
and consists of approximately 13,000 interment sites. The Company has hired
outside geo-technical and engineering consultants to study the affected area, to
identify the underlying cause and the extent of the land movement, and to make
recommendations with regard to both short-term and long-term remediation and
stabilization measures. While the Company and its consultants are continuing to
assess the situation, the Company currently believes that accumulated rainfall
and drainage conditions may have contributed to the land movement.
The Company's consultants advised that the affected area could continue to
move, particularly in the event of heavy
5
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rainfall during the winter months. Accordingly, during October 2000, the Company
began to take some intermediate remediation measures, including the installation
of some dewatering wells in the affected area and the relocation to other areas
of the Park (at the Company's expense) of approximately 140 interred remains
that were in the most severely impacted portion of the affected area. The
Company currently estimates that it will incur approximately $.2 million in
expenses associated with the geo-technical study, the relocation and other
remediation measures taken and to be taken during the fourth quarter of fiscal
2000. Such expenses could increase if significant further movement is detected
in the affected area or if additional families request the relocation of
interred remains from the affected area.
The Company expects the geo-technical study to be completed during the first
quarter of 2001. Until it receives a final report from its consultants, the
Company can not determine or give assurances as to the cause or extent of the
land movement, the cost of short-term and long-term remediation and
stabilization measures, or whether the affected area can be restored to a
condition that is suitable for interments. The Company intends to seek
reimbursement from its Endowment Care Fund for a significant portion of the
repair, maintenance and remediation costs associated with the affected area.
In connection with the November 19, 1996 Acquisition Transaction, the Rose
Hills Memorial Park cemetery land was subject to a significant step-up assessed
value by the County of Los Angeles. Prior to the Transaction, the Cemetery was
operated as a not-for profit corporation and was largely exempt from property
taxes. In connection with the Transaction, the Company obtained an independent
appraisal of the fair value of the undeveloped and unsold cemetery property. In
early 1998, the Company also engaged an independent property tax consultant to
prepare an estimate of the fair value of the property to assist in the process.
In July 2000 the County of Los Angeles completed its property tax reassessment
reflecting its opinion of the fair value of Rose Hills' cemetery property at the
Transaction date. The County placed a fair value on the cemetery property that
is approximately 60% higher than the independent appraisal prepared by the
property tax consultant and approximately 50% higher than the fair market value
computed by the independent appraiser at the time of the Transaction. The
Company filed an assessment appeal with the Los Angeles County Assessor,
however, the supplemental tax based on that assessment must be paid during the
appeal process. The total supplemental property tax assessed by the County for
the period November 1996 to September 2000 is approximately $2.5 million greater
than the amount accrued by the Company using the independent property tax
appraisal. A large portion of the supplemental tax bill is payable, interest-
free, over four years.
The Company believes, based in part on the advice of its property tax
advisors, that it can obtain a significant reduction in assessed value during
the appeal process. However, there is no assurance that the appeal will
succeed. In the event the Company does not prevail upon appeal, the Company
will pursue other administrative procedures, including filing for a reduction in
assessed value under California's Proposition 8, which requires the County to
reduce assessed values when temporary declines occur.
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.
6
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RESULTS OF OPERATIONS
The following table sets forth details of certain income statement data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and service:
Funeral:
Services and merchandise $ 6.8 $ 7.0 $22.1 $21.9
Insurance commissions 0.6 0.8 1.7 2.0
Other 0.1 0.1 0.7 0.2
Cemetery:
Before need:
Property 5.9 4.6 17.0 17.0
Merchandise and services 2.2 0.0 6.8 4.4
At-need 3.2 3.5 10.4 10.3
Finance and endowment care 1.9 1.8 5.1 5.2
Total sales and services 20.7 17.8 63.8 61.0
Gross profit:
Funeral sales and services 2.2 2.0 8.0 6.7
Cemetery sales and services 4.9 3.4 15.5 13.4
Total gross profit 7.1 5.4 23.5 20.1
</TABLE>
The following table sets forth certain income statement data as a percentage
of total sales for the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and service:
Funeral sales and services 36.4% 44.0% 38.4% 40.0%
Cemetery sales and services 63.6% 56.0% 61.6% 60.0%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 29.3% 25.4% 32.7% 27.9%
Cemetery sales and services 36.9% 34.2% 39.4% 36.4%
Total gross profit 34.1% 30.3% 36.9% 33.1%
General and administrative expenses 8.4% 10.4% 8.0% 9.3%
Goodwill amortization 4.5% 5.2% 4.4% 4.6%
Interest expense 19.2% 21.4% 18.6% 19.2%
</TABLE>
7
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Effective July 1, 2000, the Company began selling pre-need cemetery services
and merchandise on insurance and trust contracts instead of cemetery contracts.
Accordingly, the Company will no longer report pre-need sales of merchandise and
services as revenue. The primary reason for the Company's change in the method
of selling pre-need cemetery services and merchandise is to improve cash flow by
reducing the need for investments in working capital (receivables) and long-term
trust assets. The Company believes selling pre-need cemetery services and
merchandise on insurance contracts will assist in maintaining market share for
these commodities and maintain future margins when contracts become at-need due
to the accretion of value in the insurance contracts and price protection
offered by the insurer on future purchases of funeral merchandise.
Consolidated revenues for the quarter ended September 30, 2000 decreased 13.7%
to $17.9 million from $20.7 million for the same period ended September 30,
1999. Consolidated gross profit totaled $5.4 million for the quarter ended
September 30, 2000 compared to $7.1 million for the same quarter in 1999. As a
percentage of revenue, consolidated gross margin percentage decreased from 34.1%
in 1999 to 30.3% in 2000.
Funeral revenue for the quarter ended September 30, 2000 increased to $7.9
million from $7.5 million in the prior year, an increase of 4.6%. At-need
funeral revenue for the quarter ended September 30, 2000 totaled $7.0 million
and represented a 2.9% increase over the same period last year. The average
revenue per funeral service for the quarter was $3,718 or 9.6% greater than last
year. The Rose Hills and affiliate mortuary locations performed a total of
1,835 funeral services this quarter compared to 1,896 funeral services same
quarter last year. Insurance commissions were $.8 million for the period
representing a 33.3% increase from prior year. The reason for the significant
increase in pre-need funeral revenue was due to the change effective July 1,
2000 of selling all pre-need cemetery merchandise and service on insurance
contracts. Operating margins declined 9.5% from September 30, 1999 to September
30, 2000 primarily due to higher fixed operating costs per case.
Cemetery revenue for the quarter ended September 30, 2000 decreased 24.2% from
the same quarter last year to $10.0 million due principally to the change in
method of selling pre-need cemetery services and merchandise. Pre-need cemetery
revenue for the quarter ended September 30, 2000 was $4.6 million compared to
$8.1 million for the same quarter during the prior year. Included in 1999 was a
large group property sale of $.6 million. At-need cemetery revenue (primarily
cemetery merchandise and services), for the period was $3.5 million,
representing a 9.4% increase from the same period last year. Total Rose Hill
Memorial Park interments were 2,076 for the quarter ended September 30, 2000,
which represented a 6.5% 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 $1.8 and $1.9 million for the three month
periods ended September 30, 2000 and 1999, respectively. The operating margin
for the cemetery segment was 34.2% of sales compared to 36.9% last year.
General and administrative expenses increased to $1.9 million from $1.7
million in 1999. As a percentage of total sales, general and administrative
expenses was 10.4% compared to 8.4% for the same period in 1999.
EBITDA, earnings before interest expense, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), decreased
to $5.4 million for the quarter ended September 30, 2000 from $7.2 million in
1999, largely due to the discontinuation of pre-need commodity and service
sales.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Consolidated revenues for the nine months ended September 30, 2000 decreased
by 4.4% to $61.0 million from $63.8 million in the same period ended September
30, 1999. Consolidated gross profit totaled $20.2 million compared to $23.5
million in 1999. As a percentage of revenue, consolidated gross margin
decreased to 33.1% in 2000 from 36.9% in 1999.
Funeral revenue for the nine months ended September 30, 2000 decreased to $24.1
million from $24.5 million in prior year, a decrease of 1.6%. The number of
total funeral calls decreased by approximately 4.4% from 6,353 in 1999 to 6,074
in 2000, primarily due to the second quarter comparative results. The average
revenue per funeral service year to date was $3,609 or
8
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4.1% greater than last year. Insurance commissions for the period were $2.0
million compared to $1.7 million in the prior year, representing a 17.6%
increase. In 1999, other funeral sales included a one-time payment from the
insurance provider of $0.5 million. The operating margin for the funeral segment
was 27.9% compared to 32.7% last year. The most significant change in the
current period has been the weaker performance of our affiliate mortuary
locations. Some of our low volume affiliate mortuary locations are experiencing
double digit deficits in case volume and higher fixed operating costs per case
than prior years. No significant improvements are expected for the remainder of
the year.
Cemetery revenue for the nine months ended September 30, 2000 decreased 6.1%
over last year to $36.9 million. Pre-need cemetery revenue was $21.4 million
compared to $23.8 million for the same period last year. The decrease was
driven primarily by changing the business practice of selling pre-need cemetery
merchandise and services on insurance and trust contracts instead of cemetery
contracts. At-need cemetery revenue for the period was $10.3 million compared
to $10.4 million for the same period last year. Total interments for the period
were consistent with last year at 6,942. Included in other cemetery revenues
was income from endowment care funds and finance income totaling approximately
$5.2 million in 2000 and $5.1 in 1999. The operating margin for the cemetery
segment was 36.4% of sales compared to 39.4% last year.
Corporate general and administrative expenses increased to $5.7 million from
$5.1 million in 1999. As a percentage of total sales, general and
administrative expenses was 9.3% compared to 8.0% for the same period in 1999.
The increase was primarily due to increased legal fees and settlement costs with
respect to certain legal proceedings.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), decreased
to $20.0 million for the nine months ended September 30, 2000 from $25.8 million
in 1999. The decrease in EBITDA of $7.8 million is primarily the result of $2.5
million gain recognized in 1999 from finalizing the Settlement Agreement with
the previous owners of Rose Hills' cemetery. In addition, the discontinuation
of pre-need cemetery sales of commodities and services during the third quarter
2000, contributed approximately $3.0 million to the decrease over the prior year
results. 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 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 September 30, 2000,
the Company had net working capital of $12.7 million and a current ratio of 1.73
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 $13.0 million for the nine
months ended September 30, 2000. For the same period last year, net cash
provided by operating activities was $5.9 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 principal and interest 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 and interest 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.
9
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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 September 30, 2000. The Company also has the entire $25.0 million
of borrowing capacity available under the Bank Revolving Facility available as
of November 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. 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 September 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
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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 practices are 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.
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 September
30, 2000 and December 31, 1999, as estimated by a dealer, was a favorable
$32,000 and $85,000, respectively.
The counter party 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
CONTINGENCIES
During August and September 2000, the Company discovered that there had been
some land movement in a portion of Rose Hills Memorial Park. The affected area
represents approximately 13 acres of the Park's approximately 1,418 total acres,
and consists of approximately 13,000 interment sites. The Company has hired
outside geo-technical and engineering consultants to study the affected area, to
identify the underlying cause and the extent of the land movement, and to make
recommendations with regard to both short-term and long-term remediation and
stabilization measures. While the Company and its consultants are continuing to
assess the situation, the Company currently believes that accumulated rainfall
and drainage conditions may have contributed to the land movement.
The Company's consultants advised that the affected area could continue to
move, particularly in the event of heavy rainfall during the winter months.
Accordingly, during October 2000, the Company began to take some intermediate
remediation measures, including the installation of some dewatering wells in the
affected area and the relocation to other areas of the Park (at the Company's
expense) of approximately 140 interred remains that were in the most severely
impacted portion of the affected area. The Company currently estimates that it
will incur approximately $.2 million in expenses associated with the geo-
technical study, the relocation and other remediation measures taken and to be
taken during the fourth quarter of fiscal 2000. Such expenses could increase if
significant further movement is detected in the affected area or if additional
families request the relocation of interred remains from the affected area.
The Company expects the geo-technical study to be completed during the first
quarter of 2001. Until it receives a final report from its consultants, the
Company can not determine or give assurances as to the cause or extent of the
land movement,
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the cost of short-term and long-term remediation and stabilization measures, or
whether the affected area can be restored to a condition that is suitable for
interments. The Company intends to seek reimbursement from its Endowment Care
Fund for a significant portion of the repair, maintenance and remediation costs
associated with the affected area.
In connection with the November 19, 1996 Acquisition Transaction, the Rose
Hills Memorial Park cemetery land was subject to a significant step-up assessed
value by the County of Los Angeles. Prior to the Transaction, the Cemetery was
operated as a not-for profit corporation and was largely exempt from property
taxes. In connection with the Transaction, the Company obtained an independent
appraisal of the fair value of the undeveloped and unsold cemetery property. In
early 1998, the Company also engaged an independent property tax consultant to
prepare an estimate of the fair value of the property to assist in the process.
In July 2000 the County of Los Angeles completed its property tax reassessment
reflecting its opinion of the fair value of Rose Hills' cemetery property at the
Transaction date. The County placed a fair value on the cemetery property that
is approximately 60% higher than an independent appraisal prepared by the
property tax consultant and approximately 50% higher than the fair market value
computed by an independent appraiser at the time of the Transaction. The
Company filed an assessment appeal with the Los Angeles County Assessor,
however, the supplemental tax based on that assessment must be paid during the
appeal process. The total supplemental property tax assessed by the County for
the period November 1996 to September 2000 is approximately $2.5 million greater
than the amount accrued by the Company using the independent property tax
appraisal. A large portion of the supplemental tax bill is payable, interest-
free, over four years.
The Company believes, based in part on the advice of its property tax
advisors, that it can obtain a significant reduction in assessed value during
the appeal process. However, there is no assurance that the appeal will
succeed. In the event the Company does not prevail upon appeal, the Company
will pursue other administrative procedures, including filing for a reduction in
assessed value under California's Proposition 8, which requires the County to
reduce assessed values when temporary declines occur.
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 14,
is filed as a part of this Report.
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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
Executive Vice President Finance
and Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
November 13, 2000
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INDEX OF EXHIBITS
Exhibit
Number Description
------ -----------
(a)
27* Financial Data Schedule
(b) Reports on Form 8-K
None.
________________
*Filed Herewith.
