HOSOI GARDEN MORTUARY, INC.
30 North Kukui Street
(Corner of Nuuanu Avenue and Kukui Street)
Honolulu, Hawaii 96817
December 17, 1999
PROXY STATEMENT
GENERAL INFORMATION
The accompanying proxy is solicited on behalf of
the Board of Directors of Hosoi Garden Mortuary, Inc.
(the "Company") to be used at the Annual Meeting of
Shareholders of the Company to be held at 11:00 A. M.
on Sunday, January 23, 2000, at 30 North Kukui Street
(corner of Nuuanu Avenue and Kukui Street), Honolulu,
Hawaii 96817, and any adjournments thereof.
Attached to this proxy statement is your proxy.
The Board of Directors will vote all proxies it receives
which are properly signed and received in time. If you
send the Board of Directors your proxy, it will be voted
according to how you fill out the proxy. However, if
you send your proxy to the Board, but do not tell the
Board how to vote by filling out the proxy, the Board
will vote your proxy according to its recommendations
explained in this proxy statement.
The Board is seeking to have the proxy, proxy
statement, annual report and other materials sent to the
shareholders between December 17 and 21, 1999.
REVOCABILITY OF PROXY
You may revoke your proxy any time before the proxy
is voted. You can revoke your proxy only if you inform
the secretary of the Company in writing, as provided in
the Company's by-laws. You can also change your proxy
by sending another proxy of later date to the Board.
Your attendance at the Annual Meeting in person
will not revoke the proxy you give to the Board. But
if you attend the Annual Meeting in person, you still
may revoke any proxy you have given and you may vote
your shares in person.
SHAREHOLDERS WHO MAY VOTE
Only shareholders of record at the close of
business on November 15, 1999, may vote at the Annual
Meeting. On November 15, 1999, there were 1,675,275
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shares outstanding, with each share entitled to one
vote. A quorum consists of the holders of a majority
of the outstanding shares, present either in person
or by proxy. There are 511,865 shares in the treasury
which are not included in calculating such number and
shall not be voted.
CUMULATIVE VOTING
Cumulative voting is governed by Hawaii Revised
Statutes Section 415-33. If a request for cumulative
voting is delivered in writing to an officer of the
Company not less than forty-eight (48) hours prior to
the time set for the Annual Meeting of Shareholders,
cumulative voting will be used for the election of
directors. If cumulative voting is used, each
shareholder shall be entitled to as many votes as
shall equal the number of his shares multiplied by
the number of directors to be elected. He may cast
all of such votes for a single director or may
distribute them among any two or more of the number
to be elected as he may see fit. If no request for
cumulative voting is received, each shareholder will
be entitled to one vote per share for each position
on the Board of Directors.
PERSONS MAKING THE SOLICITATION AND COST
The accompanying proxy is solicited by mail on
behalf of the Board of Directors of the Company.
The Company will pay the cost of solicitation of
proxies. Following the mailing of proxy soliciting
material, officers, employees and directors of the
Company may, without additional expense, solicit
proxies by appropriate means, including by mail,
telephone, fax or personal interview.
SECURITIES MARKET AND DIVIDENDS
The common shares of the Company are neither
traded nor listed on an exchange and has no
established public trading market. One stockbroker
in Honolulu has quoted the common shares, but the
Company is not aware of the prices at which sales
have been made. The records of the Company indicate
that very few shares are transferred. During the
fiscal year ended May 31, 1999, the Company redeemed
65,772 shares at $4.25 per share and 4,500 shares at
$3.75 per share, some of which were acquired as payment
for funeral expenses incurred by the shareholders.
Effective November 1, 1999, the Board of Directors
authorized the redemption of shares (for either cash
or services) at $4.25 per share.
There were 1,473 record holders of common shares
as of November 15, 1999.
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A cash dividend has been declared and paid once
a year since 1969. The dividend declared in October,
1999 was $.06 per share and in October, 1998 was $.10
per share.
UPON REQUEST THE COMPANY WILL SEND TO YOU AT NO
CHARGE A COPY OF FORM 10-KSB, THE ANNUAL REPORT
INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENTS SCHEDULES FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION FOR THE MOST RECENT FISCAL YEAR.
TO REQUEST A COPY, YOU MUST WRITE TO:
MS. ELAINE NAKAMURA, SECRETARY
HOSOI GARDEN MORTUARY, INC.
30 NORTH KUKUI STREET
HONOLULU, HAWAII 96817
SOLICITED PROXIES WILL BE VOTED ON THE FOLLOWING MATTERS
The Board of Directors intends to vote solicited
proxies on the following matters:
I. To elect three (3) directors to serve
until the 2003 annual meeting of
shareholders and until their successors
are elected;
II. To elect an auditor; and
III. To vote upon other business properly
before the meeting or any adjournment
thereof.
I. TO ELECT THREE (3) DIRECTORS TO SERVE UNTIL THE
2003 ANNUAL MEETING OF SHAREHOLDERS AND UNTIL
THEIR SUCCESSORS ARE ELECTED.
The Company has a total of nine (9) directors
constituting the entire Board of Directors, divided
into three (3) classes of three (3) directors each. The
Company's Articles of Association provide for each class
of directors to be elected for three-year terms on a
staggered basis. At the 2000 annual meeting of the
shareholders, three directors will be elected to serve
until the 2003 annual meeting of the shareholders and
until their respective successors are elected.
The Board of Directors' three nominees for
directors are Robert Kuwahara, Julie Shimonishi and
Glenn Suetsugu. All three of these nominees are
currently directors of the Company. Each nominee has
consented to serve as a director, if elected.
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Proxies in the accompanying form will (unless a
contrary direction is indicated therein) be voted to
elect the foregoing nominees (who have been nominated
by the present Board of Directors) as directors to
serve, subject to the Articles of Association and
By-Laws of the Company. If any of the nominees listed
is not available for election at the Annual Meeting
(a contingency which the management of the Company does
not now foresee), it is the intention of the Board of
Directors to recommend the election of such other
persons as may be necessary to fill such vacancies.
Proxies in the accompanying form will be voted for the
election of such other persons unless authority to vote
such proxies in the election of directors has been
withheld.
II. TO ELECT AN AUDITOR.
The Board of Directors recommends the election of
Endo & Company, a firm of certified public accountants,
as auditor for the year commencing June 1, 2000. Endo
& Company was elected as auditor for the year
commencing June 1, 1999 at the Annual Meeting held on
January 24, 1999. A representative of Endo & Company
will be present at the Annual Meeting, will make a
statement if the shareholders desire and will respond
to any appropriate questions raised at the meeting.
With respect to the election of the Auditor, each
shareholder is entitled to one vote for each share.
III. TO VOTE UPON OTHER BUSINESS PROPERLY BEFORE
THE MEETING.
Management does not intend to bring any matters
before the meeting other than the election of directors,
election of auditor, and presentation of President's
Report with the financial statements for the fiscal year
ended May 31, 1999. Management does not have any
information that other matters will be brought before
the meeting, or any adjournment or adjournments thereof.
If other matters are introduced, it is the intention of
the persons named in the enclosed form of proxy to vote
said proxy in accordance with their judgment.
INFORMATION ON STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS
A. PRINCIPAL SHAREHOLDERS
The Herman S. Hosoi Trust, whose trustees are
Sadako Hosoi and Julie S. Shimonishi, and the Hosoi
Family Limited Partnership, whose general partner is the
Hosoi Family Voting Trust, by its trustee Julie S.
Shimonishi, are the only persons who own of record or
are known to the Company to own beneficially more than
five percent of the common shares of the Company as of
May 31, 1999. Certain information about the holders is
set forth in the table below.
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<TABLE>
<CAPTION>
Title of Name and Address of Nature of Beneficial No. of Percent of
Class Beneficial Owner Ownership Shares Class
<S> <C> <C> <C> <C>
Common Julie S. Shimonishi Shared as co-trustee 158,250 9.38%
30 N. Kukui Street of the Herman S.
Honolulu, HI 96817 Hosoi Trust
General Partner of 160,250 9.50%
the Hosoi Family
Limited Partnership,
as Trustee of the
Hosoi Family
Voting Trust
Custodian for Chad 8,000 0.47%
Shimonishi and Lane
Shimonishi under
HUGMA
Direct 52,534 3.11%
Total 379,034 22.46%
Common Sadako Hosoi Shared as co-trustee 158,250 9.38%
30 N. Kukui Street of the Herman S.
Honolulu, HI 96817 Hosoi Trust
Settlor of the Hosoi 160,250 9.50%
Family Voting Trust
and limited partner
of the Hosoi Family
Limited Partnership
Total 318,500 18.88%
Common Herman S. Hosoi Trust Direct 158,250 9.38%
Sadako Hosoi and
Julie S. Shimonishi,
Trustees
30 N. Kukui Street
Honolulu, HI 96817
Common Hosoi Family Limited Direct 160,250 9.50%
Partnership (1)
30 N. Kukui Street
Honolulu, HI 96817
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<PAGE>
<FN>
(1) The Sadako Hosoi Trust, by its trustees Sadako
Hosoi and Julie S. Shimonishi, transferred 160,250
shares of the Company to the Hosoi Family Limited
Partnership, whose general partner is the Hosoi
Family Voting Trust, by its trustee Julie S.
Shimonishi, and whose limited partner is Sadako
Hosoi. Julie S. Shimonishi, as trustee, exercises
voting and investment powers over those shares
pursuant to the Hosoi Family Voting Trust Agreement
dated December 30, 1994, between Sadako Hosoi, as
settlor, and Julie S. Shimonishi, as trustee.
</FN>
</TABLE>
B. DIRECTORS AND EXECUTIVE OFFICERS
Certain information with respect to the
holdings of common shares of the directors and executive
officers of the Company as of November 15, 1999, is set
forth in the table below.
<TABLE>
<CAPTION>
Title of Name of Amount and Nature of Percent of
Class Beneficial Owner(1) Beneficial Ownership Class
<S> <C> <C> <C>
Common Julie S. Shimonishi 379,034 (2) 22.46%
Common Sadako Hosoi 318,500 (3) 18.88%
Common Clifford Hosoi 52,532 (4) 3.11%
Common Anne T. Tamori 56,534 (5) 3.35%
All directors and officers 489,100 28.92%
as a group (12 persons) (6)
<FN>
(1) The address of each person is 30 N. Kukui Street,
Honolulu, Hawaii 96817.
(2) Includes:
52,534 shares (3.11%) as to which Ms. Shimonishi exercises
sole voting and investment powers;
8,000 shares (0.47%) as to which Ms. Shimonishi exercises
sole voting and investment powers as
Custodian for Chad Shimonishi and
Lane Shimonishi under HUGMA;
158,250 shares (9.38%) as to which Ms. Shimonishi and Sadako
Hosoi share voting and investment
powers as trustees of the Herman S.
Hosoi Trust; and
160,250 shares (9.50%) as to which Ms. Shimonishi, as trustee
of the Hosoi Family Voting Trust, has
voting and investment powers over the
shares owned by the Hosoi Family Limited
Partnership.
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<PAGE>
(3) Voting and investment powers over 158,250 shares of the
Company are shared by Sadako Hosoi and Julie S. Shimonishi,
as Trustees of the Herman S. Hosoi Trust, which owns 158,250
shares of the Company.
Voting and investment power over 160,250 shares of the
Company are exercised by Julie S. Shimonishi, as trustee
under the Hosoi Family Voting Trust. See the preceding
table for more information about the Hosoi Family Limited
Partnership and the Hosoi Family Voting Trust.
(4) Voting and investment powers exercised solely.
(5) Includes:
52,534 shares (3.11%) as to which Mrs. Tamori exercises
sole voting and investment powers; and
4,000 shares (0.24%) as to which Mrs. Tamori exercises
sole voting and investment powers
for Ryan Tamori under HUGMA.
(6) Rene Mansho, Ricky C. Manayan, Berton T. Kato, Robert
Kuwahara and Glenn Suetsugu, who are currently serving
as directors, and Elaine Nakamura, David Fujishige and
Keith Numazu, who are currently serving as officers, do
not own any shares of the Company.
</FN>
</TABLE>
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The Board of Directors is comprised of nine members
who serve staggered three-year terms. One-third of the
directors will be elected each year for a
three-year term. Directors hold office for the duration
of their terms and thereafter until their successors are
elected. The executive officers serve at the pleasure
of the Board of Directors.
The Board of Directors of the Company has no audit or
compensation committees or committees performing similar
functions.
A. The following table sets forth the directors'
and executive officers' names, ages, position and year
of appointment or election, relationship, and business
experience.
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<PAGE>
<TABLE>
<CAPTION>
Name Age Office Business Experience and Family Relationship
NOMINEES FOR ELECTION AS DIRECTORS - TERMS TO EXPIRE IN 2002
<S> <C> <C> <C>
Sadako Hosoi 82 Director Widow of Herman Hosoi, founder of the
(since 1957) Company; in the past, served as Treasurer
and Chairperson of the Board of the
Company; Director of Garden Life Plan,
Ltd.; mother of Julie Shimonishi, Director,
Clifford Hosoi, Director and President, and
Anne Tamori, Director and Vice President
Berton T. 51 Director Attorney (admitted to the Bar of the State
Kato (since 1996) of Hawaii in 1973); Director Garden Life
Plan, Ltd.
Anne T. 52 Director Employed by the Company since 1978; Vice
Tamori (since 1994); President since 1994; daughter of Sadako
Vice President Hosoi; sister of Clifford Hosoi, Director
(since 1994) and President, and Julie S. Shimonishi,
Director
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE IN 2001
<S> <C> <C> <C>
Rene Mansho 50 Director City Council member, City and County of
(since 1993); Honolulu, Hawaii (since 1988); School
Chairperson of teacher, Vice-Principal and Administrator,
the Board Department of Education, State of Hawaii
(since 1994) (1971-1988); other organizations include
Hawaii State Association of Counties,
Mililani Hongwanji, Mililani YMCA, Honolulu
Japanese Chamber of Commerce, Goodwill
Industries, Great Aloha Run, Salvation
Army, Wahiawa Lions, Muscular Dystrophy
Association of Hawaii
Clifford Hosoi 50 Director Licensed embalmer since 1979; Funeral
(since 1989); Director since 1985; Vice President of the
President and Company from 1989 - 1994; Director Garden
Chief Executive Life Plan, Ltd.; son of Sadako Hosoi,
Officer Director, brother of Julie S. Shimonishi,
(since 1994) Director, and Anne Tamori, Director and
Vice President
Ricky C. 40 Director Manager - Prepaid Card Programs, GTE
Manayan (since 1995) Hawaiian Tel; President of Rick Manayan
Associates; President of East-West Real
Estate Co., Inc.; President of Transpacific
Empire, Inc.
<PAGE>
<CAPTION>
Name Age Office Business Experience and Family Relationship
NOMINEES FOR ELECTION AS DIRECTORS - TERMS TO EXPIRE IN 2000
<S> <C> <C> <C>
Julie S. 53 Director School teacher, Department of Education,
Shimonishi (since 1979) State of Hawaii since 1970; daughter of
Sadako Hosoi, Director; sister of Clifford
Hosoi, Director and President, and sister
of Anne Tamori, Director and Vice President
Robert K. 51 Director Certified Public Accountant since 1975;
Kuwahara (since 1995) actively involved in human services
organizations such as the YMCA
Richard B. 54 Director Vice-President and Principal of Kuroman
Dole (1) (since 1995) Realty, Inc.
Glenn 51 Director Real estate appraiser; real property sales
Suetsugu (1) (since 1999) and management; volunteer work for the Boy
Scouts of America
<CAPTION>
OTHER EXECUTIVE OFFICERS
<S> <C> <C> <C>
David 51 Vice President Employed by the Company since 1989; Funeral
Fujishige (since 1994) Director since 1991; Food Production
Supervisor, Rehabilitation Hospital of the
Pacific (1980-1991)
Keith Numazu 37 Treasurer Employed by the Company as assistant
(since 1994) bookkeeper and programmer since 1992;
Systems Operator/Analyst, Consolidated
Amusement, Inc. (1991-1992); Senior Systems
Analyst/Programmer, Holmes and Narver,
Inc., and Raytheon Services Nevada (1987-
1991)
Elaine 61 Secretary Employed by the Company since 1963
Nakamura (since 1972)
<FN>
(1) Richard B. Dole resigned as a director in 1999.
The Board of Directors nominated and elected Glenn
Suetsugu to serve the remaining term of Richard B.
Dole, which will expire in 2000.
(2) None of the current directors of the Company is a
director of an investment company registered under
the Securities Exchange Act of 1934. All officers
serve at the pleasure of the Board of Directors.
</FN>
</TABLE>
<PAGE>
B. Shareholders, Board, Committees, Number of
Meetings - fiscal year ended May 31, 1999.
The shareholders of the Company last met on
January 24, 1999. 1,160,272 shares representing 66.885%
of shares issued and outstanding were present in person
or by proxy. All members of the Board of Directors were
elected by holders of at least 63.93% of the shares
outstanding.
A nominating committee was formed with Sadako
Hosoi, Berton Kato and Anne Tamori as members at the
October 21, 1999 Board meeting to designate nominees for
election at the annual meeting. Shareholders may suggest
nominees by contacting Sadako Hosoi, Berton Kato and
Anne Tamori at the Company's address. No specific format
or information is required to nominate a person as a
director. Nominations must be received by the close of
nominations during the course of the Annual Meeting on
January 23, 2000, to be acted upon at that Annual Meeting.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the information, on an
accrual basis, with respect to the compensation of the
chief executive officer of the Company for the three
fiscal years ended May 31, 1999.
<TABLE>
<CAPTION>
Name and Year ended Annual Other
Position May 31 Compensation Compensation
<S> <C> <C> <C>
Clifford Hosoi 1997 $54,759 $ 7,955 (1)
President/Chief 1998 $46,731 $ 7,420 (2)
Executive Officer 1999 $52,961 $ 8,098 (3)
<FN>
(1) Amount shown includes $2,738 contributed to the
Company's Money Purchase Pension Plan, $3,817
contributed to the Company's Profit Sharing Plan
and $1,400 fees paid as a director.
(2) Amount shown includes $2,337 contributed to the
Company's Money Purchase Pension Plan, $3,583
contributed to the Company's Profit Sharing Plan
and $1,500 fees paid as a director.
(3) Amount shown includes $2,355 contributed to the
Company's Money Purchase Pension Plan, $3,668
contributed to the Company's Profit Sharing Plan
and $2,075 fees paid as a director.
</FN>
</TABLE>
The total annual salary and bonus for any other
executive officer does not exceed $100,000.
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The standard fees paid to directors are $100 for
each Board of Directors meeting attended and $25 for
each committee meeting attended.
COMPENSATION PURSUANT TO PLANS
(a) PROFIT-SHARING PLAN. The Company has established a
profit-sharing plan for the Company's employees. Every
employee, who has completed one year of service with the
Company, becomes eligible to participate in the
profit-sharing plan. An employee who has completed
1,000 hours of service commencing from the date of
employment or an anniversary date is considered to have
one year of service.
The Company's contribution to the profit-sharing plan
is discretionary and may be up to 15% of the
participant's eligible compensation. The Company's total
contributions shall not exceed the amount allowable by
income tax regulations. The amounts charged against
income for the profit-sharing plan in 1999 and 1998 were
$40,000 and $40,000, respectively. The Company's
allocation of contributions among eligible members is
based on their respective compensation and is allocated
proportionately.
The investment decision for the profit-sharing plan
is formulated by a registered investment advisor
through Hawaiian Trust Company, Ltd.
(b) MONEY PURCHASE PENSION PLAN. The Company has
established a money purchase pension plan, which became
effective as of June 1, 1990, for the Company's
employees. Every employee, who has completed one year
of service with the Company, becomes eligible to
participate in the money purchase plan. An employee
who has completed 1,000 hours of service commencing
from the date of employment or an anniversary date is
considered to have one year of service.
The Company is required to contribute 5% of each
participant's eligible compensation to the money
purchase plan. The Company's total contributions
cannot exceed the amount allowable by income tax
regulations. The amounts charged against income for
the money purchase pension plan in 1999 and 1998 were
$26,820 and $26,560, respectively.
The investment decision for the money purchase plan
is formulated by a registered investment advisor
through Smith Barney, Inc.
TRANSACTION WITH DIRECTORS AND OFFICERS
The Company operates its business at 30 North
Kukui Street, Honolulu, Hawaii, 96817, on the northwest
corner of Nuuanu Avenue and Kukui Street in Honolulu
Hawaii. The business site consists of 92,773 square feet,
of which the Company owns a 78/104th interest. The Herman
S. Hosoi Trust owns a 13.65/104th interest and the
Hosoi-Tamori-Shimonishi Trust owns the remaining
12.35/104th interest. The trustees and beneficiaries of
both trusts include directors, officers and shareholders
of the Company.
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The portion owned by the Company is owned in
fee simple. The Company leases the portion owned by the
Herman S. Hosoi Trust and Hosoi-Tamori-Shimonishi Trust
("Trusts"). The Directors of the Company recently
completed negotiations of a fifteen-year lease effective
November 1, 1999 through October 31, 2014. The lease
provides for an annual base rent of $112,000 for the
period from November 1, 1999 to and including October
31, 2004, $132,000 for the period from November 1, 2004
to and including October 31, 2009, and a to-be-determined
amount which is no less than $132,000 nor more than
$200,000 for the period from November 1, 2009 to and
including October 31, 2014. In addition to the base rent,
the lease provides for a percentage rent equal to the
amount by which the product of 25% multiplied by 15% of
the Company's annual Gross Revenues exceeds the annual
base rent. In addition, the Company is responsible for
the payment of real property taxes on the portion of the
land owned by the Trusts. Total rental expense was
$345,636 and $356,469 in 1999 and 1998, respectively.
For more information on the lease between the Company
and the Trusts, see Footnote (13) on page F-19 of the
Company's Financial Statements, which are attached
hereto and incorporated by reference.
SECTION 16(a) REPORTS
Section 16(a) of the Securities Exchange Act of
1934 requires the Company's directors and officers, and
persons who own more than 10% of a registered class of
the Company's equity securities, to file, on forms 3, 4
and 5, reports of ownership and changes in ownership of
such securities with the Securities and Exchange
Commission. No such reports were required to be filed
for 1999 and 1998.
ACTION WITH RESPECT TO REPORTS
Minutes of the last annual meeting of the
shareholders held on January 24, 1999, will be read and
the shareholders will be requested to approve or
disapprove the minutes. Approval or disapproval of the
minutes will not constitute approval or disapproval of
the matters referred to in such reports or minutes.
The President will give a report at the meeting.
All records of the Company, including the minutes of the
meetings of the Board of Directors and the shareholders
held during the preceding year are available for review
by the shareholders at the office of the Company.
VOTE REQUIRED FOR APPROVAL
A majority vote of shareholders present, in person
or by proxy, shall be required in matters other than
the election of directors.
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<PAGE>
ANNUAL REPORT TO SHAREHOLDERS
The annual report to shareholders, consisting of
the President's and Chief Executive Officer's letter and
the comparative financial statements for the years ended
May 31, 1999 and May 31, 1998, is included with this
Proxy Statement.
RETURN OF PROXY
If you do not plan to attend the Annual Meeting in
person, we urge you to execute the proxy and return it
promptly in the enclosed business reply envelope.
SHAREHOLDER PROPOSALS FOR 2001
Proposals of shareholders intended to be presented
at the annual meeting of the Company in January or
February 2001 must be received by the Company on or
before September 15, 2000.
BY ORDER OF THE BOARD OF DIRECTORS
By /s/
Elaine Nakamura, Secretary
December 17, 1999
WHETHER YOU PLAN TO ATTEND OR NOT, YOU ARE URGED TO MARK,
DATE, SIGN AND RETURN THE ENCLOSED PROXY. A PROMPT
RESPONSE IS HELPFUL, AND YOUR COOPERATION WILL BE
APPRECIATED.
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<PAGE>
ANNUAL REPORT
HOSOI GARDEN MORTUARY, INC.
DESCRIPTION OF BUSINESS
Hosoi Garden Mortuary, Inc. (the "Company") was
incorporated in 1957 under the laws of the State of
Hawaii as the successor to a business founded in 1900.
Professional funeral services are the principal
services rendered by the Company. The Company is
engaged in the funeral and mortuary business,
including the sale of pre-need funeral services
contracts. During the fiscal years ended May 31, 1999
and 1998, funeral services accounted for 74.4% and
72.1%, respectively, of revenues. The Company owns
50% of Garden Life Plan, Ltd. ("Garden Life") which
sells pre-need funeral service contracts for which the
Company acts as the sole servicing mortuary.
The Company operates a mortuary business in
Honolulu, Hawaii. Although established to offer
funeral services to all persons in Hawaii, the
Company serves principally persons of Japanese
ancestry who follow a particular and special order
of worship in accordance with their religious
beliefs. In addition to handling funeral services
for residents of Honolulu, the Company conducts
services for residents of other counties in Hawaii
and prepares remains for shipment to or receives
them from other counties in Hawaii, other states
in the United States and foreign countries.
On July 7, 1998, the Company entered into an
agreement with Woolsey Funeral & Cemetery Services,
Inc. to form Woolsey-Hosoi Mortuary Services, LLC,
a limited liability company under the laws of the
State of Hawaii. It is expected that the LLC will
conduct funeral services to persons other than
those of Japanese ancestry. Funeral services
arranged by the LLC will generally be conducted at
churches and other locations other than on the
Company's premises.
Thirty-four (34) persons were employed by the
Company for the fiscal year ended May 31, 1999.
Seventeen (17) persons were employed full-time and
seventeen (17) persons were employed part-time.
DIRECTORS AND EXECUTIVE OFFICERS
The Company has a total of nine (9) directors
constituting the entire Board of Directors, divided
into three (3) classes of three (3) directors each.
The Company's Articles of Association provide for
each class of directors to be elected for
three-year terms on a staggered basis.
Directors hold office for the duration of
their terms and thereafter until their successors
are elected. The executive officers serve at the
pleasure of the Board of
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<PAGE>
Directors. The names, positions and offices, terms
of office, and business experience of the directors
and executive officers of the Company during the past
five years are set forth below. See the table on
pages 8 and 9 of the Proxy Statement for more
information about the directors and executive
officers of the Company.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Julie S. Shimonishi is a school teacher and
has been employed by the Department of Education,
State of Hawaii, since 1970. She has been a
director since 1979. She is a daughter of Sadako
Hosoi, director, and a sister of Clifford Hosoi,
director and president of the Company, and Anne T.
Tamori, director and vice-president of the Company.
Robert Kuwahara is a Certified Public
Accountant and has his own CPA practice. He has
been a director of the Company since 1995. He is
actively involved in human services organizations
such as the YMCA.
Richard B. Dole is a Vice-President and
Principal of Kuroman Realty, Inc. He resigned as
a director of the Company in 1999, after serving
as director since 1995. The Directors of the
Company nominated and elected Glenn Suetsugu to
serve the remaining term of Richard B. Dole as
director.
Glenn Sutetsugu is a real estate appraiser
who is also engaged in real property sales and
management.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Clifford Hosoi has been a director of the
Company since 1989. He was a vice president
from 1989 until his appointment as president
and chief executive officer of the Company as
of January 1, 1994. He has been a licensed
embalmer since 1979. He has been a Funeral
Director for the Company since 1985. He serves
as a director of Garden Life Plan, Ltd. He is
the son of Sadako Hosoi, director, and a brother
of Julie S. Shimonishi, director, and Anne T.
Tamori, director and vice-president of the
Company.
Rene Mansho is an elected member of the
City Council of the City and County of Honolulu
and has served on the City Council since 1988.
She has been a director of the Company since
1993. She presently serves as chairperson of
the Board of Directors and was elected to that
position in 1994. She has been a school
teacher, Vice-Principal and Administrator with
the Department of Education of the State of
Hawaii between 1971 through 1988. Other
organizations with which she is involved
include the Hawaii State Association of
Counties, the Mililani Hongwanji, Mililani
YMCA, Honolulu Japanese Chamber of Commerce,
Goodwill Industries, Great Aloha Run,
Salvation Army, Wahiawa Lions, Muscular
Dystrophy Association of Hawaii.
-2-
<PAGE>
Ricky C. Manayan is currently a Manager -
Prepaid Card Programs with GTE Hawaiian Tel.
He has been a director of the Company since 1995.
His other business affiliations include Rick
Manayan & Associates. He is President of
East-West Real Estate Co., Inc., Ricky Manayan
Associates and Transpacific Empire, Inc.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Sadako Hosoi is the widow of Herman S. Hosoi,
founder of the Company. She has been a director
of the Company since 1957 and is the Chairperson
of the Board Emeritus. At the January 24, 1999,
annual meeting, she was elected to a new
three-year term which will expire in 2002. In
the past, she has served as chairperson of the
Company and treasurer. She serves as a director
of Garden Life Plan, Ltd. She is the mother of
Julie S. Shimonishi, director, Clifford Hosoi,
director and president of the Company, and Anne
T. Tamori, director and vice president of the
Company.
Berton T. Kato is an attorney licensed in the
State of Hawaii and has his own law practice. He
also serves as a director of Garden Life Plan, Ltd.
At the January 24, 1999, annual meeting, he was
elected to serve a three-year term which will
expire in 2002.
Anne T. Tamori has been employed by the
Company since 1978. She has been a vice president
of the Company since 1994. She has served as an
associate secretary of the Company. She is a
daughter of Sadako Hosoi, director, and a sister
of Clifford Hosoi, director and president of the
Company, and Julie S. Shimonishi, director. At
the January 24, 1999, annual meeting, she was
elected to serve a three-year term which will
expire in 2002.
OTHER EXECUTIVE OFFICERS ARE AS FOLLOWS:
David Fujishige has been employed by the
Company since 1989. He has been a funeral
director since 1991. He has been a vice president
of the Company since 1994. Prior to joining the
Company, he was a food production supervisor at
Rehabilitation Hospital of the Pacific.
Keith Numazu has been employed by the Company
since 1992. He has been treasurer of the Company
since 1994. He has been an assistant bookkeeper
and programmer since 1992. Prior to joining the
Company, he was a systems operator/analyst for
Consolidated Amusement, Inc. and a senior systems
analyst/programmer for Holmes and Narver, Inc.
and Raytheon Services Nevada.
Elaine Nakamura has been employed by the
Company since 1963. She is the secretary of
the Company.
-3-
<PAGE>
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The common shares of the Company are neither
traded nor listed on an exchange and has no
established public trading market. One stockbroker
in Honolulu, Hawaii, has quoted the common stock,
but the Company does not know the prices at which
the trades are made. During the fiscal year
ended May 31, 1999, the Company redeemed 70,272
shares as follows:
<TABLE>
<CAPTION>
NO. OF SHARES REDEMPTION PRICE
<S> <C>
65,772 $4.25
4,500 3.75
</TABLE>
There were 1,473 record holders of common stock
as of May 31, 1999.
A cash dividend has been declared and paid once
a year since 1969. The dividend for the year ended
May 31, 1999, which was declared on October 21, 1999,
was $.06 per share. Dividends for the year ended
May 31, 1999 are payable to shareholders in January
2000. The dividend for the year ended May 31, 1998,
which was declared on October 15, 1998, was $.10 per
share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth items from Hosoi
Garden Mortuary, Inc.'s statement of income as
percentages of net revenues:
<TABLE>
<CAPTION>
Years Ended May 31,
1999 1998
<S> <C> <C>
Total revenues 100.0% 100.0%
Cost of sales and services 74.7 78.8
Gross profit 25.3 21.2
Selling, general and administrative 24.0 26.7
Operating income(loss) 1.3 (5.5)
Other income (expenses) 6.4 10.4
Income before income taxes 7.7 4.9
Provision for income taxes 3.3 1.4
Income before equity in earnings
of Garden Life Plan, Ltd. (GLP) 4.4 3.5
Equity in earnings of GLP, net 14.7 28.5
Net income 19.1% 32.0%
</TABLE>
-4-
<PAGE>
RESULTS OF OPERATIONS
TOTAL REVENUES
The Company's revenues increased by $82,813
in 1999 over 1998. The increase of 3.1% is
attributable to the increase in number of services
performed from 1,050 in 1998 to 1,063 in 1999,
which is an increase of 1.2% and the effects of a
price increase instituted during the 1999 fiscal
year.
The Company expects revenues to remain at the
1999 level, despite the increase in prices for
funeral services, because it is expected that
selection of lower priced funeral services will
continue because of the poor economic conditions
in Hawaii.
In addition, it is expected that pre-need
services which generate lower average revenues will
continue to account for between 30% and 40% of
total revenues.
The continued affiliation with Woolsey Funeral
& Cemetery Services, Inc., described above, is a
revenue source from a segment of the community which
was not served by Company. The Woolsey-Hosoi
Mortuary Services, LLC is not expected to have an
immediate impact on the Company's revenues.
The Company's operating expenses in 1999
decreased as a percentage of revenues due to a
decrease in real property taxes and an increase in
revenues. However, the Company's operating expenses
is expected to increase as a result of the Company's
plans for the upgrade of its personnel and
facilities as follows:
1. Upgrade and train professional staff to meet
the current market demands and the changing
nature of customer preferences. The current
trend indicates that families are having
smaller services with lower priced
merchandise.
2. Upgrade the facilities to provide the
capacity to provide multi-cultural services
and service the increasing numbers of pre-need
plans.
3. Explore the establishment of a pre-need
authority, or consider the purchase of the
interest of its 50% shareholder in Garden Life
Plan, Ltd. or extend the service agreement with
Garden Life Plan, Ltd. beyond the expiration in
2001.
4. Construction of an on-site crematory.
Operating results for fiscal 2000 will be adversely
affected if revenues do not increase in relation to the
increase in costs. The increase in the number of
pre-need services expected in relation to at-need
services will limit the growth of total
-5-
<PAGE>
revenues. The upgrade of the Company's personnel
and facilities is expected to mitigate the effects
of the increase in pre-need plan services and the
generally poor economic conditions in Hawaii.
COST OF SALES AND SERVICES
Cost of sales and services decreased to 74.7%
of revenues in 1999 from 78.8% in 1998. The 4.1%
decrease in cost of sales is attributable to a
decrease in the real property taxes, salaries and
wages, and rent in relation to total revenues.
GROSS PROFIT
Gross profit as a percentage of total revenues
increased to 25.3% in 1999 from 21.2% in 1998. The
increase is due to the increase in revenues and the
decrease in cost of sales as mentioned above. The
3.1% increase in revenues is attributable to the
relatively small increase of 1.2% in the number of
services performed in 1999 over 1998 and the price
increase instituted during the fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses
decreased to 24.0% in 1999 from 26.7% in 1998.
The decrease is attributable to a decrease of 1.7%
in professional services, a decrease of .4% in
advertising and promotions and .6% in bad debt
expense.
It is expected that selling, general and
administrative expenses in 2000 will increase
because of expected increases in professional
services and advertising expense.
EARNINGS OF GARDEN LIFE PLAN, LTD.
Revenues from the trust funds of the
Company's subsidiary, Garden Life Plan, Ltd.
(GLP), whose earnings are accounted for on the
equity method of accounting, are included in
the amounts reflected as EQUITY IN EARNINGS OF
GARDEN LIFE PLAN, LTD. of $405,235 and $608,171
for 1999 and 1998 respectively. The EQUITY IN
EARNINGS OF GARDEN LIFE PLAN, LTD., in 1998 was
restated for a misstatement in 1998. Information
relating to the prior period adjustments and the
effects on the Company financial statements are
more fully described in Footnote (18) of the
Company's financial statements, which are
attached hereto and incorporated by reference.
Earnings of the Trust fund of GLP are not
directly affected by decisions of the management
of the Company. Investment decisions are
generally made by the money manager of GLP's Trust
funds. Fluctuations in GLP's trust fund income,
which
-6-
<PAGE>
amounted to $1,508,657 and $2,136,577 for the
years ended May 31, 1999 and 1998 respectively
are the result of fluctuations in interest rates,
capital gains and the mix of investment of the
Trust.
Equity in the earnings of GLP continue to
account for a large part of the Company's
earnings, at 77.2% and 86.8% of the Company's
net income in 1999 and 1998, respectively.
INCOME TAXES
The Company's effective income tax rate
was 43.3% of pre-tax income in 1999 and 36.5%
in 1998. Note (9) to the Company's financial
statements presents a reconciliation of the
Company's effective and statutory income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Total working capital decreased by $418,130 to
$1,971,456 in 1999 from $2,389,586 in 1998. The
decrease is attributable to an decrease in current
assets, particularly in income taxes receivable
$226,732 and a decrease in cash required to redeem
the Company's shares. Working capital ratio was
6.0:1 at May 31, 1999 and 6.7:1 at May 31, 1998.
SECURITIES AVAILABLE-FOR-SALE increased to
$847,718 in 1999 from $773,464 in 1998 as a
result of earnings on the investment.
SECURITIES HELD TO MATURITY remained relatively
stable at $888,931 in 1999 and $842,656 in 1998.
At the end of 1999, the Company did not have
any long-term debt. The Company expects that cash
flows from operations, its cash reserves and
investments will be adequate to meet the Company's
cash requirements in the foreseeable future.
Dividends paid were $173,488 and $175,569 in
1999 and 1998, respectively, which was $.10 per
share in both years.
Cash outflows for the acquisition of the
Company's shares were $130,289 in 1998 and $296,407
in 1999. The Company expects that future
acquisitions will be in the range of $100,000 to
$200,000 per year.
YEAR 2000
Footnote (17) to the financial statements
which discusses "Year 2000 Compliance" is
incorporated by reference hereto.
-7-
<PAGE>
The following summarizes the Company's Year
2000 disclosure statement pursuant to the Year 2000
Readiness and Disclosure Act.
STATE OF READINESS
Hosoi Garden Mortuary, Inc. (HOSOI) does not
have a formal Year 2000 readiness program, however,
the Company's Treasurer has been assigned the task
of assessment of the Company's exposure to the
Y2K problem, the implementation of any required
remediation and the testing and validation of its
remediation efforts.
Our Year 2000 project focuses on two areas:
(1) information technology (IT) systems, such as
application software and PC's; and (2) suppliers.
We have identified application software and
PC's which needs to be replaced. We are in the
process of upgrading our PC system and have or will
replace application software which are not Year
2000 compliant.
We expect to complete our remediation efforts
by the end of October 1999 and implement validation
and testing before the end of 1999.
RISK/CONTINGENCY PLANS
Our "worst-case scenario" would be a failure of
our suppliers to supply merchandise for a prolonged
period of time that would impair our ability to
provide services to our customers in a timely and
reliable manner. Although the occurrence of this
scenario could affect HOSOI, we do not have a basis
to determine at this time whether such a scenario is
likely to occur. We believe that suppliers present
the area of greatest risk to disruption of our
operations because of our limited ability to
influence action of third parties or to estimate the
level and impact of their noncompliance through the
supply chain.
We have not developed contingency plans for our
IT systems as we believe that our remediation
efforts in this area will be successful because of
the small size of our PC network; five workstations
and one server; the use of accounting software from
one vendor who is Year 2000 ready and the use of
wordprocessor and spreadsheet programs from major
name brand suppliers.
The continency plans for our suppliers include,
where appropriate, (1) booking orders and stocking
products before anticipated disruptions and (2)
finding alternative suppliers.
We will update our assessment for our
significant suppliers as we receive additional
information from them concerning their Y2K
preparedness. However, judgements regarding
contingency plans - such as now to develop them
and to what extent - are subject to many variables
and uncertainties. There can be no assurance
-8-
that HOSOI will correctly anticipate the level,
impact or duration of noncompliance by its
suppliers.
As a result, there is no certainty that our
contingency plans will be sufficient to mitigate
the impact of noncompliance by suppliers and some
material adverse effect to HOSOI may result from
one or more third parties regardless of our
contingency plans. The failure of any
contingency plans could have a material adverse
effect on Hosoi's financial condition, results of
operations or liquidity.
COST
We do not currently expect the total cost
of our Year 2000 readiness program will be
material to our financial condition or results of
operations. Cost associated with our efforts
around Year 2000 issues are expensed as incurred,
unless they relate to the purchase of hardware and
software, in which case they are capitalized.
-9-
REPORT OF CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Hosoi Garden Mortuary, Inc.
We have audited the accompanying balance sheets of
HOSOI GARDEN MORTUARY, INC.
as of May 31, 1999 and 1998, and the related
statements of income and comprehensive income,
stockholders' equity and cash flows for the years
then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits. We did
not audit the financial statements of Garden Life
Plan, Ltd., (a 50% owned subsidiary accounted for by
the equity method of accounting) for its years ended
May 31, 1999 and 1998, which accounts 30.0% and 23.8%
of total assets and 77.2% and 86.8% of net income in
1999 and 1998, respectively. Those financial
statements were audited by other auditors whose
reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included in the
Company's equity in the underlying net assets and its
equity in the earnings of the subsidiary is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits and the
reports of other auditors provide a reasonable basis
for our opinion.
F-1
<PAGE>
In our opinion, based upon our audits and the report
of other auditors, the financial statements referred
to above present fairly, in all material respects,
the financial position of Hosoi Garden Mortuary, Inc.
as of May 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then
ended in conformity with generally accepted
accounting principles.
ENDO & COMPANY
Honolulu, Hawaii
August 5, 1999
F - 2
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
BALANCE SHEETS
_ _ _ _ _ _ _ _ _ _ _ _
May 31, 1999 and 1998
<CAPTION>
1998
As restated
1999 (See Note 18)
<S> <C> <C>
A S S E T S
CURRENT ASSETS
Cash and cash equivalents (Notes 1 and 4) $ 928,162 $ 498,871
Available-for-sale securities, at market
(Notes 1 and 5) 847,718 773,464
Accounts receivable, less allowance
of $62,710 and $78,740 321,453 274,788
Income tax receivable 29,017 255,749
Dividend receivable (Note 2) - 750,000
Inventories (Note 1) 143,974 149,268
Prepaid expenses and others 58,865 64,787
Deferred income taxes (Note 6) 33,954 43,588
TOTAL CURRENT ASSETS 2,363,143 2,810,515
INVESTMENTS
Garden Life Plan, Ltd. (Notes 1, 2 and 18) 2,090,156 1,649,722
Woolsey-Hosoi Mortuary Services, LLC 22,345 -
Cemetery plots 1,350 1,350
Held-to-maturity securities, at cost
(Notes 1 and 5) 888,931 842,656
3,002,782 2,493,728
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation (Notes 1 and 7) 1,506,092 1,524,560
OTHER ASSETS 101,885 103,921
TOTAL ASSETS $ 6,973,902 $ 6,932,724
<CAPTION>
L I A B I L I T I E S
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable (Note 7) $ 259,971 $ 285,445
Accrued liabilities (Note 9) 131,716 135,484
TOTAL CURRENT LIABILITIES 391,687 420,929
DEFERRED INCOME TAXES (Note 6) 169,443 172,248
<CAPTION>
S T O C K H O L D E R S ' E Q U I T Y
<S> <C> <C>
CAPITAL CONTRIBUTED (Note 11)
Common stock, par value $.20 per share;
authorized 3,625,000 shares, issued
2,187,140 shares 437,428 437,428
Less 288,814 and 218,542 reacquired shares (57,983) (43,928)
TOTAL CAPITAL CONTRIBUTED 379,445 393,500
RETAINED EARNINGS 6,030,181 5,961,335
ACCUMULATED OTHER COMPREHENSIVE INCOME
net of applicable deferred income taxes
(Notes 1 and 4) 84,428 65,994
TREASURY STOCK, 223,785 shares, at cost
(Note 10) (81,282) (81,282)
TOTAL STOCKHOLDERS' EQUITY 6,412,772 6,339,547
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,973,902 $ 6,932,724
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
F - 3
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
<CAPTION>
1998
As restated
1999 (See Note 18)
<S> <C> <C>
Revenues
Sale of urns and other items $ 703,411 $ 742,913
Funeral services 2,043,890 1,921,575
Total revenues 2,747,301 2,664,488
Cost of sales and services 2,053,315 2,100,550
Gross profit 693,986 563,938
Selling, general and administrative expenses
Salaries and wages 249,249 241,684
Profit sharing and pension fund
contributions (Note 12) 66,816 66,560
Professional services 200,072 241,057
Taxes and licenses 27,309 26,513
Advertising 24,645 37,071
Others 92,035 98,038
Total selling, general and
administrative expenses 660,126 710,923
Operating income (loss) 33,860 (146,985)
Other income and (expenses)
Interest, dividends, and others (Note 14) 178,788 278,881
Interest and others (1,643) (502)
Total other income and (expenses) 177,145 278,379
Income before income taxes and equity in
earnings of Garden Life Plan, Ltd. 211,005 131,394
Income taxes (Note 10) 91,554 38,781
Income before equity in earnings
of Garden Life Plan, Ltd. 119,451 92,613
Equity in earnings of Garden Life Plan, Ltd.,
net of deferred taxes of $35,199 and
$33,553 (Notes 2 and 5) 405,235 608,171
Net income 524,686 700,784
Other comprehensive income, net of taxes
Net unrealized gains on available-for-sale
securities 18,434 18,996
Comprehensive income $ 543,120 $ 719,780
Average number of shares common stock
outstanding 1,722,441 1,753,998
Earnings per common share (Note 1) $ .30 $ .40
Dividends per common share $ .10 $ .10
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
F - 4
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
<CAPTION>
Accumulated
Capital Other Com-
Contri- Retained prehensive Treasury
buted Earnings Income Stock Total
<S> <C> <C> <C> <C> <C>
Balance, May 31,
1997, as previously
reported $399,989 $5,366,712 $46,998 $(81,282) $5,732,417
Adjustment for
Earnings in
Equity of Garden
Life Plan, Ltd,
net of taxes
(Note 18) - 193,208 - - 193,208
Balance, May 31,
1997, as restated 399,989 5,559,920 46,998 (81,282) 5,925,625
Net income - 700,784 - - 700,784
Common stock
reacquired (6,489) (123,800) - - (130,289)
Cash dividends
paid, $.10 per
share - (175,569) - - (175,569)
Increase in net
unrealized gains
on available-for-
sale securities,
net of taxes - - 18,996 - 18,996
Balance, May 31,
1998 393,500 5,961,335 65,994 (81,282) 6,339,547
Net income 524,686 - - 524,686
Common stock
reacquired (14,055) (282,352) - - (296,407)
Cash dividends
paid, $.10 per
share - (173,488) - - (173,488)
Increase in net
unrealized gains
on available-for-
sale securities,
net of taxes - - 18,434 - 18,434
Balance, May 31,
1999 $379,445 $6,030,181 $84,428 $(81,282) $6,412,772
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
F - 5
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
STATEMENTS OF CASH FLOWS
_ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
<CAPTION>
1998
As restated
1999 (See Note 18)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 524,686 $ 700,784
Adjustments to reconcile net income to
net cash and cash equivalents provided
by (used in) operating activities:
Depreciation 64,053 67,340
Realized gain on sale of investment
securities, net (14,445) (104,819)
Increase in allowance for doubtful
accounts (16,030) 9,016
Undistributed earnings of affiliate (440,434) 108,276
Partnership income (7,345) -
Cash value of life insurance policies - (3,210)
Deferred income taxes (4,456) 122,096
(Increase) decrease in certain assets
Accounts receivable (30,635) 19,298
Income tax receivable 226,732 (255,749)
Dividend receivable 750,000 (750,000)
Inventories 5,294 (12,322)
Prepaid expenses and other 5,922 (334)
(Decrease) increase in certain liabilities
Accounts payable (25,474) (67,244)
Accrued liabilities (3,768) (233,715)
Income taxes payable - (76,716)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,034,100 (477,299)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (45,585) (39,952)
Redemption of life insurance policy - 27,284
Proceeds from sale of investment securities 1,584,108 4,363,649
Increase in investment securities (1,660,473) (3,842,237)
Investment in Woolsey-Hosoi Mortuary
Services, LLC (15,000) -
Increase in cash value of life insurance
policies 2,036 (2,811)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (134,914) 505,933
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares reacquired (296,407) (130,289)
Cash dividends paid (173,488) (175,569)
NET CASH USED IN FINANCING
ACTIVITIES (469,895) (305,858)
NET INCREASE (DECREASE) 429,291 (277,224)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 498,871 776,095
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 928,162 $ 498,871
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
F - 6
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(1) Summary of significant accounting policies
Line of business - The Company is engaged in one line
of business that consists principally of providing
mortuary services in the State of Hawaii on the island
of Oahu.
The significant accounting policies followed by the
Company are summarized below.
Fair value of financial instruments - The carrying
amount of cash and cash equivalents approximates fair
value due to the short-term maturities of these
instruments. The fair value of current and
non-current marketable securities and long-term debt
were estimated based on quotes obtained from brokers
for those or similar instruments. The fair value for
long-term investments were estimated based on quoted
market price at year end.
Cash and cash equivalents - For purpose of the
statements of cash flows, cash equivalents includes
certificates of deposit, money market accounts and
highly liquid debt instruments with maturities of
three months or less at the date of acquisition.
Investment securities - Management determines the
appropriate classification of securities at the time
of purchase. These investments are classified in
three categories and accounted for as follows:
.Debt securities that the company intends to
hold to maturity are classified as SECURITIES
HELD TO MATURITY and reported at cost.
.Debt and equity securities that are purchased
and held for the purpose of selling in the near
term are classified as TRADING SECURITIES and
reported at fair value, with unrealized gains
and losses included in income.
.Debt and equity securities not classified as
SECURITIES HELD TO MATURITY or TRADING
SECURITIES are classified as SECURIITES
AVAILABLE FOR SALE and reported at fair value,
with unrealized gains and losses included in
other comprehensive income. SECURITIES
AVAILABLE FOR SALE will be used as part of
the Company's asset management strategy and may
be sold in response to changes in market values
or the need for capital.
F - 7
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(1) Summary of significant accounting policies
(continued)
Investment in Garden Life Plan, Ltd. - The Company
accounts for its investment in Garden Life Plan, Ltd.
(a 50% owned Company) by the equity method of
accounting. The equity in earnings of Garden Life
Plan, Ltd., reflected on the statements of income,
includes the pro rata share of the earnings of
Garden Life Plan, Ltd., net of income taxes
applicable to such earnings, for its years ended May
31, 1999 and 1998.
Inventories - Inventories of caskets and urns are
stated at the lower of cost or market. Cost is
determined substantially by the first-in, first-out
method and market is based on replacement cost or
realizable value.
Property and equipment - Land, buildings and equipment
are carried at cost. Depreciation is computed using
the declining-balance and straight-line methods.
Maintenance and repairs are charged to income as
incurred. Major renewals and betterments are
capitalized. Upon sale or other disposition of
assets, the cost and related accumulated depreciation
are removed from the accounts, the proceeds applied
thereto, and any resulting gain or loss is reflected
in income.
Compensated absences - Full-time employees of the
Company are entitled to paid vacations and sick
days. Unused vacation and sick leave are reflected
in accrued liabilities.
Earnings per common share - Earnings per common share
has been computed by dividing net income by the
weighted average number of common shares outstanding.
Revenue and cost recognition - Revenues from at-need
funeral services and pre-need funeral plan services
are recognized upon completion of the final funeral
ceremony. Revenues from at-need funeral services
include professional service revenues which are
included in FUNERAL SERVICES and sales of caskets,
urns and other items which are included in SALE OF
URNS AND OTHER ITEMS. Revenues from pre-need
services, which accounted for approximately 33.5% and
27.7% of funeral service revenues in 1999 and 1998,
respectively, are accounted for in FUNERAL SERVICES
since these plans are sold inclusive of the
merchandise selected.
F - 8
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(1) Summary of significant accounting policies
(continued)
Cost of sales and services includes all direct cost,
including merchandise, labor and other related cost
and indirect cost such as insurance, depreciation,
supplies and indirect labor costs, related to the
performance and completion of at-need and pre-need
funeral services.
Advertising - The Company follows the policy of
charging the costs of advertising to operations as
incurred.
Income taxes - Income tax expense is based on
reported earnings before income taxes. Deferred
income taxes reflect the effects of temporary
differences between assets and liabilities
recognized for financial reporting purposes and
such amounts recognized for tax purposes. In
accordance with Statement of Financial Accounting
Standards (SFAS) 109, ACCOUNTING FOR INCOME TAXES,
these deferred taxes are measured by applying
currently enacted tax laws.
Comprehensive income - In the year ended May 31,
1999, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, which requires that unrealized
gains and losses on available-for-sale securities be
included in other comprehensive income.
Use of estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Reclassification - Certain amounts in 1998 have been
reclassified to conform with the 1999 presentation.
F - 9
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(2) Garden Life Plan, Ltd.
Investment in Garden Life Plan, Ltd. (GLP) represents
the Company's 50% share in the underlying equity in
the net assets, accounted for under the equity method
of accounting for investments in common stock, of
Garden Life Plan, Ltd., a Hawaii corporation engaged
in the sales of pre-need funeral plans which are
serviced solely by the Company.
All payments received from the sale of pre-need
funeral plans up to an amount equal to 30% of the
total price plus any sales tax or other charges are
retained by GLP as its compensation. The balance is
deposited with Hawaiian Trust Company, Limited
(Trust) to be held in trust. GLP is entitled to all
earnings from funds held in trust which earnings
amounted to $1,508,657 and $2,136,577 for the years
ended May 31, 1999 and 1998, respectively. The
assets of the Trust are not included in the financial
statements of the Company nor GLP.
Audited financial statements of this subsidiary as of
May 31, 1999 and 1998 showed the following summarized
financial position and results of operations.
<TABLE>
<CAPTION>
1998 (As
1999 restated)
<S> <C> <C>
Total assets $ 6,129,660 $ 6,981,992
Total liabilities 1,179,107 2,959,262
Total stockholders' equity $ 4,950,553 $ 4,022,730
Total revenue $ 439,573 $ 617,214
Operating loss $ (131,566) $ (84,329)
Other income-trust fund income $ 1,508,657 $ 2,136,577
Net income $ 880,869 $ 1,283,447
</TABLE>
F - 10
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(2) Garden Life Plan, Ltd. (continued)
INVESTMENT IN GARDEN LIFE PLAN, LTD. as of May 31,
1999 and 1998 is accounted for as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Stockholders' equity of Garden
Life Plan, Ltd. $ 4,950,553 $ 4,022,730
Less: Accumulated other
comprehensive income (770,246) (723,292)
4,180,307 3,299,438
Equity ownership 50% 50%
2,090,154 1,649,719
Rounding 2 3
Total investment in Garden Life
Plan, Ltd. $ 2,090,156 $ 1,649,722
<FN>
Cash dividend declared and paid subsequent to May 31,
1998, by Garden Life Plan, Ltd., is recorded as
dividend receivable in the amount of $750,000 as of
May 31, 1998.
</FN>
</TABLE>
(3)Related party transactions
On July 7, 1998, the Company in partnership with
Woolsey Funeral & Cemetery Services, Inc. formed
Woolsey-Hosoi Mortuary Services, LLC (Woolsey-Hosoi),
a limited liability company, to provide funeral
services to market sectors not previously serviced by
the Company. The Company's initial capital
contribution in Woolsey-Hosoi was $15,000.
The Company provides Woolsey-Hosoi with embalming
services, assistance with funeral arrangements, use
of its facilities and related charges. Revenues
from services provided to Woolsey-Hosoi is reflected
in net sales and services which amounted to $18,236
for the year ended May 31, 1999.
F - 11
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(4) Cash and cash equivalents
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash on hand $ 500 $ 500
Checking accounts 153,084 76,480
Savings accounts 673,069 316,313
Short-term investments 101,509 105,578
Total cash and cash equivalents $ 928,162 $ 498,871
</TABLE>
(5) Investment securities
As of May 31, 1999 and 1998, the Company held
investments in the following types of securities:
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
May 31, 1999
Available-for-sale
Equity securities $ 87,975 $ 30,962 $ 3,841 $ 115,096
Mutual funds 623,628 109,996 1,002 732,622
711,603 140,958 4,843 847,718
Held-to-maturity
U.S. Treasury bills 888,931 504 3,711 885,724
Totals $1,600,534 $ 141,462 $ 8,554 $1,733,442
</TABLE>
F - 12
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(5) Investment securities (continued)
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
May 31, 1998
Available-for-sale
Equity securities $ 74,346 $ 41,132 $ 1,760 $ 113,718
Mutual funds 592,721 67,128 103 659,746
667,067 108,260 1,863 773,464
Held-to-maturity
U.S. Treasury bills 842,656 850 5,148 838,358
Totals $1,509,723 $ 109,110 $ 7,011 $1,611,822
</TABLE>
The maturities of all debt securities held at May 31,
1999 were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Within 1 year $ - $ - $ 779,601 $ 778,332
After 1 year
through 5 years - - 61,229 60,161
After 5 years - - 48,101 47,231
$ - $ - $ 888,931 $ 885,724
</TABLE>
During the year ended May 31, 1999, the Company sold
SECURITIES AVAILABLE-FOR-SALE for $1,584,108. The
net gross realized gain of $14,445 is reflected in
earnings. The cost of the securities sold was based
on cost of all the shares of each such security held
at the time of sale.
During the year ended May 31, 1998, the Company sold
SECURITIES AVAILABLE-FOR-SALE for $4,363,649. The
net gross realized gain of $104,819 is reflected in
earnings. The cost of the securities sold was based
on cost of all the shares of each such security held
at the time of sale.
F - 13
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(5) Investment securities (continued)
The unrealized holding gains on investment securities
AVAILABLE-FOR-SALE during the years ended May 31,
1999 and 1998, and reported as a separate component
of Stockholders' Equity, are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Unrealized holding gains, net of losses $ 136,115 $ 106,396
Deferred income tax on the net
unrealized holding gains (51,687) (40,402)
$ 84,428 $ 65,994
</TABLE>
(6) Deferred income taxes
Deferred taxes are recognized for differences between
the basis of assets and liabilities for financial
statement and income tax purposes. The deferred
assets and liabilities represent the future tax
consequences of those differences, which will be
either taxable or deductible when the assets and
liabilities are recovered or settled. The deferred
tax liability results from the recognition of
unrealized gains or losses on securities for
financial statements and the recognition of gains or
losses when securities are sold for income tax
purposes, the inclusion of deferred earnings on an
annuity for financial statements and the recognition
of the earnings when received for tax purposes and
the equity method of accounting for the investment
in subsidiary as explained under Garden Life Plan,
Ltd. above. Under the equity method the Company's
share of earnings of the subsidiary is reported for
tax purposes only when distributions of earnings are
received as dividends.
The deferred tax asset results from the use of the
reserve method in accounting for uncollectible
accounts receivable in the financial statements and
the use of the direct write off method for income tax
purpose, and the accrual of vacation and sick leave
when earned for the financial statements and the
recognition for income tax purposes when paid.
F - 14
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(7) Property and equipment
Property and equipment consist of:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 517,040 $ 517,040
Buildings 1,262,530 1,262,530
Land improvements 94,710 94,710
Equipment and vehicles 419,463 373,877
Total cost 2,293,743 2,248,157
Accumulated depreciation 787,651 723,597
Net property and equipment $ 1,506,092 $ 1,524,560
</TABLE>
Aggregate depreciation charged to operations are as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cost of sales and services $ 61,232 $ 64,001
Selling, general and administrative
expenses 2,821 3,339
$ 64,053 $ 67,340
</TABLE>
(8) Funeral service deposits
Included in accounts payable is $33,066 of deposits
made by eleven individuals that the Company has been
collecting from since 1969 for future services or
purchase of merchandise. The payable of $33,066,
including interest of $25,041 accrued to May 31,
1999, approximates fair value.
In an agreement with the Professional and Vocational
Licensing Division of the State of Hawaii, Department
of Commerce and Consumer Affairs (DCCA), the Company
consented to a plan to either convert these funeral
service deposits to a Garden Life Plan, Ltd.'s (GLP)
pre-need funeral plan identical to the services
and/or merchandise that the depositor originally
contracted for or refund the deposit plus
interest. The agreement with the DCCA provides that
the Company will provide the funds for any
difference between the cost of a comparable GLP
pre-need plan and the amount deposited with the
Company.
F - 15
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(8) Funeral service deposits (continued)
As of May 31, 1999 twenty-seven plans have been
converted to GLP pre-need plans. The difference
between the cost of plans converted and the amount of
the available deposit is reflected as a charge to
operations. Eleven plans remain to be converted. No
provision has been made for the cost of conversion of
the remaining eleven plans because of the uncertainty
of whether the holders of the deposits will elect to
convert to a GLP pre-need plan or elect to receive a
refund.
(9) Accrued liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Bonus accrued $ 21,250 $ 7,000
Payroll and general excise taxes 16,946 25,876
Profit sharing and money-purchase
plan contributions (Note 12) 66,816 66,560
Vacation and sick leave 26,704 36,048
Total accrued liabilities $ 131,716 $ 135,484
</TABLE>
F - 16
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(10) Income taxes
The provisions for income taxes (benefits) consist of
the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Federal $ 65,195 $ (60,760)
State 16,725 (14,907)
81,920 (75,667)
Deferred:
Federal 8,107 99,715
State 1,527 14,733
9,634 114,448
Total $ 91,554 $ 38,781
</TABLE>
A reconciliation of income taxes at the United States
statutory rate, as a percentage of pretax income, to
the effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Federal income tax statutory rate 34.0% 34.0%
State income tax, net of tax benefit 8.7 (7.7)
Others, net .6 3.2
Effective tax rate 43.3% 29.5%
</TABLE>
F - 17
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(11) Reacquired shares
CAPITAL CONTRIBUTED has been reduced for shares
reacquired after June 30, 1987. Purchases of 70,272
and 32,447 reacquired shares in 1999 and 1998,
respectively, exceeded the balance of additional
paid-in capital and a charge of $282,352 and
$123,800 for 1999 and 1998, respectively, were made
to RETAINED EARNINGS for the excess of reacquired
shares in excess of their par value.
The 223,785 shares reflected as TREASURY STOCK as of
May 31, 1999 reflects the shares acquired before
July 1, 1987.
(12) Retirement plans
The Company provides benefits to substantially all
full-time employees with a defined contribution
profit sharing plan and a money-purchase pension
plan. Both plans are non-contributory plans.
The money-purchase pension plan was adopted on June
1, 1990 and provides benefits to employees after one
year of service and upon completion of 1,000 hours
of service each year. The required contribution
under this plan is five-percent of compensation of
all employees who qualify.
Contribution to the defined contribution profit
sharing plan is discretionary up to a maximum of
fifteen-percent of compensation of eligible employees
after one year of service and upon completion
1,000 hours of service each year.
Amounts charged against income for the retirement
benefit plans are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Profit sharing $ 40,000 $ 40,000
Money-purchase 26,820 26,560
$ 66,820 $ 66,560
</TABLE>
F - 18
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(13) Lease
The Company leases a portion of the land on which
the mortuary is situated from the Herman S. Hosoi
Trust and the Hosoi-Tamori-Shimonishi Trust (Trusts)
which respectively owns a 13% and 12% interest in
the land. As a group, members of the Hosoi family
own approximately 28.14% of the outstanding shares
of the Company. The lease, which expired on May 31,
1999, is being negotiated. An extension of the
lease, to September 30, 1999, was granted at $23,000,
plus general excise tax, per month. The Company is
responsible for the payment of real property taxes
on the share of the property owned by the Trusts.
Total rental expense was $345,636 and $356,469 in
1999 and 1998, respectively.
On April 24, 1992, the Company entered into an
operating lease for a hearse.
The term of the lease is 60 months which expired on
August 21, 1997. The noncancellable operating lease
required monthly payments of $1,151. The lease
agreement also required that the Company pays all
costs of operating the vehicle. Lease rent expense
was $2,302 for 1998.
(14) Other income
Other income consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest $ 94,536 $ 104,092
Capital gains and dividends 16,902 17,589
Net gains from sale of securities 14,445 104,819
Parking 33,684 32,004
Others 11,876 20,377
Partnership income 7,345 -
Total other income $ 178,788 $ 278,881
</TABLE>
F - 19
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(15) Cash flow supplementary disclosure
Cash payments for interest and income taxes were as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest $ 1,643 $ -
Income taxes (refund) $ (39,073) $ 205,629
</TABLE>
(16) Concentrations of credit risk of financial
instruments
The Company's cash and cash equivalents are deposited
with five local financial institutions. For the year
ended May 31, 1999, the Company had deposits in a
financial institution in excess of the deposit
insurance of $100,000. At May 31, 1999 and 1998, the
Company's uninsured cash balances were $623,402
$184,051, respectively.
The Company performs funeral services for deaths
occurring principally on the island of Oahu located
in the State of Hawaii. In the normal course of
business the Company extends unsecured credit to its
customers.
(17) Year 2000 compliance
The Year 2000 Issue arises because most computer
software programs allocate only two digits to the
data field for year on the assumption that the first
two digits will be 19. Such programs, absent
reprogramming, will thus interpret the year 2000 as
the year 1900 and 2001 as 1901 and so on. The Year
2000 Issue affects both computer hardware (i.e. the
embedded logic computer chips) and computer software
and could impact both the ability to enter data
into computer programs and the ability of such
programs to process data correctly.
F - 20
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(17) Year 2000 compliance (continued)
The Company's operations, like those of many business
entities, including infrastructure providers, vendors
and others whose performance can affect the
operations of the Company, may be impacted by the
YEAR 2000 ISSUE with microprocessors and programs.
Unless such microprocessors or programs are modified
or replaced, they may not function properly after
December 31, 1999, causing system failure or
miscalculations.
Based on recent assessments, the Company has
determined that it will be required to modify or
replace significant portions of its software and
hardware so that these systems will properly utilize
dates beyond December 31, 1999. The Company
presently believes that with modifications or
replacement of existing software and certain
hardware, the YEAR 2000 ISSUE can be mitigated.
However, if such modifications and replacements are
not made, or are not completed timely, the YEAR 2000
Issue could have a material impact on the operations
of the Company.
The Company has identified the system in the matrix
below as mission-critical which may be affected by
the YEAR 2000 ISSUE. This system was subject to the
following four stages of work: awareness,
assessment, remediation and validation/testing.
The following matrix summarizes the Company's Year
2000 remediation work for its mission-critical
system. The remediation is either COMPLETE, IN
PROGRESS or YET TO BE ADDRESSED.
<TABLE>
<CAPTION>
System Awareness Assessment Remediation Validation/
Description Testing
<S> <C> <C> <C> <C>
General Office Complete Complete In Progress In Progress
Desktop Systems
(Windows based
spreadsheet and
word processing)
</TABLE>
F-21
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(17) Year 2000 compliance (continued)
The Company has solicited information from vendors
and others, whose Year 2000 compliance could affect
the Company, regarding the status of assessment,
testing and remediation of their computer
applications. The Company, is continuing its
efforts to determine the status of Year 2000
compliance of entities whose systems could impact
the operations of the Company. In general, those who
have responded to the Company have indicated that
they too are working on the YEAR 2000 ISSUE. There
can be no guarantee, however, that all such persons
or others who have not been identified or solicited
or who has responded, as the case may be, but on
whose operations the Company directly or indirectly
depends, will be in compliance in a timely manner.
Any failure by some or all of these persons to be in
compliance could adversely affect the operations of
the Company.
The Company will utilize both internal and external
resources to reprogram, replace, test and implement
software and equipment for Year 2000 modifications.
The Company has spent approximately $3,500 to
replace general office desktop systems. At the
present time, the Company believes that the amount
of money needed to complete the Year 2000 remediation
will not be material and is estimated not to exceed
$25,000.
The Company does not have any substantial contingency
plans because it believes that its remediation
efforts will be successful. The Company has, however,
identified specific procedures required to keep its
operations functioning in the event of delays or
machine failures.
Because of the unprecedented nature of the YEAR 2000
ISSUE, its effects and the success of remediation
efforts will not be fully determinable until the Year
2000 and thereafter. There is no assurance that the
Company will be Year 2000 ready, that the Company's
remediation efforts will be successful in whole or
in part, or that parties with whom the Company does
business will be Year 2000 compliant.
F - 22
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(17) Year 2000 compliance (continued)
If the steps taken by the Company and its third
parties are not successful, the Company could
experience operational difficulties. In addition,
the preceding information, including the nature,
timing, extent and costs of the Company's
remediation efforts are subject to change, and
such changes could be material.
(18) Prior period adjustments and restatement
Subsequent to the issuance of the Company's 1998
financial statements, the Company's 50% owned
subsidiary, Garden Life Plan, Ltd. (GLP),
determined that its financial statements required
restatement as a result of misstatements of the
following:
1. Deferred income taxes - GLP's management
determined that the amount of deferred income
taxes provided in fiscal 1996 related to the
Trust's recording of its investment assets at
fair value (instead of cost) was inaccurate.
As a result GLP's retained earnings as of June 1,
1997 has been restated from the amount previously
reported to correct the deferred tax liability as
of that date. The effect of GLP's restatement on
the Company was an increase in its investment in
Garden Life Plan by $407,500, an increase in its
deferred income tax liability by $32,567, and an
increase in its retained earnings by $374,933.
2. Unrealized gains and losses of the Trust's
available-for-sale securities - GLP's management
determined that unrealized gains or losses on
the Trust's available-for-sale securities should
have been reported as a separate component of
stockholders' equity and not as trust fund income
on its Statement of Income. As a result, GLP's
retained earnings as of June 1, 1997 has been
restated from the amount previously reported to
correct the unrealized gain on investments as of
that date. The effects of the restatement on the
Company's financial statements was a decrease in
its investment in GLP by $197,510, a decrease in
deferred income taxes by $15,785, and a decrease
in retained earnings by $181,725.
F - 23
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 1999 and 1998
(18) Prior period adjustments and restatement
(continued)
The following summarizes the effects of the above
restatements on the Company's 1998 financial
statements:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
<S> <C> <C>
At May 31:
Investment in Garden Life
Plan, Ltd. $ 1,603,868 $ 1,649,722
Deferred income taxes (liability) 168,583 172,248
Retained earnings 5,919,146 5,961,335
For the year ended May 31:
Equity in earnings of Garden Life
Plan, Ltd., net of deferred taxes 759,190 608,171
</TABLE>
F - 24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the balance sheets and the
statements of income filed as part of the annual report
on Form 10-KSB and is qualified in its entirety by
reference to such annual report on Form 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
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<PP&E> 1,506,092
<DEPRECIATION> 64,053
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0
0
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<CGS> 2,053,315
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<OTHER-EXPENSES> 660,126
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<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
