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, 2000 and 1999, 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.
Except as discussed in the following paragraph, 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.
We were unable to obtain audited financial statements supporting
the Company's investment in Garden Life Plan, Ltd. (GLP) stated at
$1,649,721 at May 31, 2000 and 1999, or its equity in earnings of
GLP for its years ended May 31, 2000 and 1999; nor were we able to
satisfy ourselves about the carrying value of the investment or the
equity in its earnings by other auditing procedures.
Since the Company's investment in GLP and the equity in its
earnings materially affect the determination of financial position,
results of operations and cash flows, the scope of our work was not
sufficient to enable us to express, and we do not express, an
opinion on the financial statements referred to in the first
paragraph.
ENDO & COMPANY
Honolulu, Hawaii
August 5, 2000
F-1
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
BALANCE SHEETS
_ _ _ _ _ _ _ _ _ _ _ _
May 31, 2000 and 1999
<CAPTION>
1999 (As
2000 Restated
A S S E T S
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Notes 1 and 4) $ 828,818 $ 928,162
Available-for-sale securities, at market
(Notes 1 and 5) 891,482 847,718
Accounts receivable, less allowance
of $67,110 and $62,710 300,506 321,453
Income tax receivable 50,956 8,074
Inventories (Note 1) 223,674 143,974
Prepaid expenses and others 58,353 58,865
Deferred income taxes (Note 6) 34,782 33,954
TOTAL CURRENT ASSETS 2,388,571 2,342,200
INVESTMENTS
Garden Life Plan, Ltd. (Notes 1, 2 and 18) 1,649,721 1,649,721
Woolsey-Hosoi Mortuary Services, LLC 25,718 22,345
Cemetery plots 1,350 1,350
Held-to-maturity securities, at cost
(Notes 1 and 5) 876,950 888,931
2,553,739 2,562,347
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation (Notes 1 and 7) 1,467,067 1,506,092
OTHER ASSETS 112,987 101,885
TOTAL ASSETS $6,522,364 $6,512,524
L I A B I L I T I E S
CURRENT LIABILITIES
Accounts payable (Note 7) $ 285,651 $ 259,971
Accrued liabilities (Note 9) 148,779 131,716
TOTAL CURRENT LIABILITIES 434,430 391,687
DEFERRED INCOME TAXES (Note 6) 125,966 134,243
S T O C K H O L D E R S ' E Q U I T Y
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 304,069 and 288,814 reacquired shares (61,034) (57,983)
TOTAL CAPITAL CONTRIBUTED 376,394 379,445
RETAINED EARNINGS 5,595,950 5,604,003
ACCUMULATED OTHER COMPREHENSIVE INCOME
net of applicable deferred income taxes
(Notes 1 and 4) 70,906 84,428
TREASURY STOCK, 223,785 shares, at cost (Note 10) (81,282) (81,282)
TOTAL STOCKHOLDERS' EQUITY 5,961,968 5,986,594
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,522,364 $6,512,524
<FN>
The accompanying Notes to Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
F - 2
<PAGE>
<TABLE>
HOSOI GARDEN MORTUARY, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
<CAPTION>
1999 (As
2000 Restated)
<S> <C> <C>
Revenues
Funeral services $2,149,351 $2,043,890
Sale of urns and other items 576,260 703,411
Total revenues 2,725,611 2,747,301
Cost of sales and services 1,941,657 2,053,315
Gross profit 783,954 693,986
Selling, general and administrative expenses
Salaries and wages 276,930 249,249
Professional services 222,567 200,072
Profit sharing and pension fund contributions
(Note 12) 73,845 66,816
Advertising 41,160 24,645
Taxes and licenses 29,672 27,309
Others 110,834 92,035
Total selling, general and
administrative expenses 755,008 660,126
Operating income 28,946 33,860
Other income and (expenses)
Interest, dividends, and others (Note 14) 204,930 178,788
Interest and others (15,869) (1,643)
Total other income and (expenses) 189,061 177,145
Income before income taxes and equity
in earnings of Garden Life Plan, Ltd. 218,007 211,005
Income taxes (Note 10) 63,253 112,497
Income before equity in earnings of
Garden Life Plan, Ltd. 154,754 98,508
Equity in earnings of Garden Life Plan, Ltd.,
net of deferred taxes (Notes 2 and 5) - -
Net income 154,754 98,508
Other comprehensive income, net of taxes
Net unrealized (losses) gains on
available-for-sale securities (13,522) 18,434
Comprehensive income $ 141,232 $ 116,942
Average number of shares common stock outstanding 1,659,286 1,722,441
Earnings per common share (Note 1) $ .09 $ .06
Dividends per common share $ .06 $ .10
<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 STOCKHOLDERS' EQUITY
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
<CAPTION>
Accumulated
Other
Capital Retained Comprehensive Treasury
Contributed Earnings Income Stock Total
<S> <C> <C> <C> <C>
<C>
Balance, May 31, 1998 $ 393,500 $5,961,335 $ 65,994 $
(81,282) $6,339,547
Net income, (as restated) - 98,508 - -
98,508
Reacquired common stock (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 5,604,003 84,428
(81,282) 5,986,594
Net income - 154,754 - -
154,754
Reacquired common stock (3,051) (61,783) - -
(64,834)
Cash dividends paid, $.06 per share - (101,024) - -
(101,024)
Increase in net unrealized (losses) gains on
available-for-sale securities, net of taxes - - (13,522) -
(13,522)
Balance, May 31, 2000 $ 376,394 $5,595,950 $ 70,906 $
(81,282) $5,961,968
<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 CASH FLOWS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
<CAPTION>
1999 (As
2000 Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 154,754 $ 98,508
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Depreciation 65,929 64,053
Realized gain on sale of investment securities, net (13,386) (14,445)
Loss on disposal of equipment 1,250 -
Increase in allowance for doubtful accounts 4,400 (16,030)
Partnership income (20,873) (7,345)
Cash value of life insurance policies (2,669) -
Deferred income taxes (828) (39,655)
(Increase) decrease in certain assets
Accounts receivable 16,547 (30,635)
Income tax receivable (42,882) 247,675
Dividend receivable - 750,000
Inventories (79,700) 5,294
Prepaid expenses and other 512 5,922
(Decrease) increase in certain liabilities
Accounts payable 25,680 (25,474)
Accrued liabilities 17,063 (3,768)
NET CASH PROVIDED BY OPERATING ACTIVITIES 125,797
1,034,100
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,154) (45,585)
Proceeds from sale of investment securities 929,787 1,584,108
Purchase of investment securities (969,983) (1,660,473)
Investment in Woolsey-Hosoi Mortuary Services, LLC -
(15,000)
Distributions from Woolsey-Hosoi Mortuary Services, LLC 17,500 -
(Increase) decrease in cash value of life insurance policies (8,433) 2,036
NET CASH USED IN INVESTING ACTIVITIES (59,283)
(134,914)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reacquired common stock (64,834) (296,407)
Cash dividends paid (101,024) (173,488)
NET CASH USED IN FINANCING ACTIVITIES (165,858)
(469,895)
NET (DECREASE) INCREASE (99,344)
429,291
CASH AND CASH EQUIVALENTS, beginning of year 928,162
498,871
CASH AND CASH EQUIVALENTS, end of year $ 828,818 $
928,162
<FN>
The accompanying Notes to Financial Statements are an integral part
of these statements.
</FN>
</TABLE>
F - 5
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(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 were estimated
based on quotes obtained from brokers for those or similar
instruments. The fair value for long-term investments was
estimated based on quoted market price at year end.
Cash and cash equivalents - For the purpose of the statements of
cash flows, cash equivalents include 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
SECURITIES 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 - 6
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(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.
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 36.7%
and 33.5% of funeral service revenues in 2000 and 1999,
respectively, are accounted for in FUNERAL SERVICES since these
plans are sold inclusive of the merchandise selected.
F - 7
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(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,
deferred income 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.
F - 8
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(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.
The audit of the financial statements of GLP for the year ended
May 31, 1999 was recalled by the auditors of GLP and as a result,
Hosoi's financial statements for 1999 has been restated.
The audit of the financial statements of GLP for the year ended
May 31, 2000 has not been completed and therefore equity in
earnings of GLP is not reflected.
New (successor) auditors have been retained by GLP for the audits
of its financial statements for the years ended May 31, 2000 and
1999.
(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. For the year ended
May 31, 2000, the Company received a distribution of $17,500 from
Woolsey-Hosoi.
F - 9
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(3) RELATED PARTY TRANSACTIONS (continued)
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 $25,751 and $18,236 for the years ended May 31,
2000 and 1999, respectively. Included in accounts receivable is
$4,619 and $5,947 of receivables from Woolsey-Hosoi for
2000 and 1999, respectively.
(4) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash on hand $ 5,654 $ 500
Checking accounts 189,906 153,084
Savings accounts 512,531 673,069
Short-term investments 120,727 101,509
Total cash and cash equivalents $ 828,818 $ 928,162
</TABLE>
F - 10
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(5) INVESTMENT SECURITIES
As of May 31, 2000 and 1999, the Company held investments in
the following types of securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
May 31, 2000
Available-for-sale
Equity securities $ 111,241 $ 17,502 $ 12,035 $ 116,708
Mutual funds 665,925 121,803 12,954 774,774
777,166 139,305 24,989 891,482
Held-to-maturity
U.S. Treasury bills 818,351 21,447 1,262 838 536
Government notes 58,599 - 3,378 55,221
876,950 21,447 4,640 893,757
Totals $ 1,654,116 $ 160,752 $ 29,629 $ 1,785,239
</TABLE>
<TABLE>
<CAPTION>
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 - 11
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(5) INVESTMENT SECURITIES (continued)
The maturities of all debt securities held at May 31, 2000
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 one year $ - $ - $ 787,539 $ 808,968
After one year
through five years - - 55,530 52,681
After five years - - 33,881 32,108
$ - $ - $ 876,950 $ 893,757
</TABLE>
The Company sold SECURITIES AVAILABLE-FOR-SALE for $76,929 and
$94,598 in 2000 and 1999, respectively. Reflected in earnings are
gross realized gains of $22,682 and $25,350 and gross realized
losses of $7,866 and $6,875 for 2000 and 1999, respectively. The
cost of the securities sold was based on cost of all the shares
of each such security held at the time of sale.
The unrealized holding gains on investment securities
AVAILABLE-FOR-SALE during the years ended May 31, 2000 and 1999,
and reported as a separate component of Stockholders' Equity, are
as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Unrealized holding gains, net of losses $ 114,316 $ 136,115
Deferred income tax on the net unrealized
holding gains (43,410) (51,687)
$ 70,906 $ 84,428
</TABLE>
F - 12
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(6) DEFERRED INCOME TAXES
Deferred income 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, 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.
(7) PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Land $ 517,040 $ 517,040
Buildings 1,262,530 1,262,530
Land improvements 94,710 94,710
Equipment and vehicles 371,980 419,463
Total cost 2,246,260 2,293,743
Accumulated depreciation 779,193 787,651
Net property and equipment $ 1,467,067 $ 1,506,092
</TABLE>
F - 13
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(7) PROPERTY AND EQUIPMENT (continued)
Aggregate depreciation charged to operations is as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cost of sales and services $ 59,365 $ 61,232
Selling, general and administrative
expenses 6,564 2,821
$ 65,929 $ 64,053
</TABLE>
(8) FUNERAL SERVICES DEPOSIT
Included in accounts payable is $33,351 of deposits made by ten
individuals that the Company had collected from since 1969 for
future services or purchase of merchandise. The payable of
$33,351, including interest of $25,914 accrued to May 31, 2000,
approximate 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 accrued 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.
As of May 31, 2000, twenty-eight plans have been converted to
GLP pre-need plans or refunded to the original depositor. The
difference between the cost of plans converted and the amount
of the available deposit is reflected as a charge to operations
Ten plans remain to be converted. No provision has been made
for the cost of conversion of the remaining ten 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.
F - 14
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(9) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Accrued bonus $ 21,250 $ 21,250
Accrued wages payable 14,642 -
Payroll and general excise taxes 14,555 16,946
Profit sharing and money-purchase
plan contributions (Note 12) 73,845 66,816
Vacation and sick leave 24,487 26,704
Total accrued liabilities $ 148,779 $ 131,716
</TABLE>
(10) INCOME TAXES
The provisions for income taxes (benefits) consist of the
following:
<TABLE>
<CAPTION>
1999 (As
2000 Restated
<S> <C> <C>
Current:
Federal $ 55,294 $ 84,364
State 8,787 18,499
64,081 102,863
Deferred:
Federal (697) 8,107
State (131) 1,527
(828) 9,634
Total $ 63,253 $ 112,497
</TABLE>
F - 15
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(10) INCOME TAXES (continued)
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 (As
2000 Restated)
<S> <C> <C>
Federal income tax statutory rate 34.0% 34.0%
State income tax, net of tax benefit 3.0 8.7
Others, net (8.0) 10.6
Effective tax rate 29.0% 53.3%
</TABLE>
(11) REACQUIRED SHARES
CAPITAL CONTRIBUTED has been reduced for shares reacquired after
June 30, 1987. Purchases of 15,255 and 70,272 reacquired shares
in 2000 and 1999, respectively, exceeded the balance of additional
paid-in capital and a charge of $61,783 and $282,352 for
2000 and 1999, 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.
F - 16
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(12) RETIREMENT PLANS (continued)
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 of 1,000 hours of service each year.
Amounts charged against income for the retirement benefit plans
are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Profit sharing $ 40,000 $ 40,000
Money-purchase 33,845 26,820
$ 73,845 $ 66,820
</TABLE>
(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 29.42% of the outstanding shares
of the Company.
On October 31, 1999, the Company entered into a fifteen-years
lease which is to expire on May 31, 2024. For the first five
years of the lease agreement, the Company will pay the higher of
$116,875 per year or percentage rent of 25% times 15% of gross
annual revenues including the equity in earnings from Garden
Life Plan, Ltd. For the second five year period, the Company
will pay the higher of $137,499 per year or the percentage rent.
For the third five year period, an appraisal of the property
will be required to set the new base rent but in no event the
base rent will not exceed the greater of $208,332 per year
or the percentage
F - 17
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(13)LEASE (continued)
rent. In addition, the Company is responsible for the payment
of real property taxes on the property owned b the Trust. Total
rental expense was $216,776 and $345,636 in 2000 and 1999,
respectively.
The future minimum lease payments under the lease at May 31, 2000
are as follows:
<TABLE>
<CAPTION>
Amount
<S> <C>
May 31,
2001 $ 116,875
2002 116,875
2003 116,875
2004 116,875
2005 137,499
Thereafter 549,996
$ 1,154,995
(14) OTHER INCOME
Other income consists of the following:
</TABLE>
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Interest $ 98,540 $ 94,536
Capital gains and dividends 21,580 16,902
Net gains from sale of securities 12,135 14,445
Parking 31,312 33,684
Others 20,490 11,876
Partnership income 20,873 7,345
Total other income $ 204,930 $ 178,788
</TABLE>
F - 18
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(15) CASH FLOW SUPPLEMENTARY DISCLOSURE
Cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Interest $ 268 $ 1,643
Income taxes paid, net of refunds $ 116,511 $ (39,073)
</TABLE>
(16) CONCENTRATIONS OF CREDIT RISK OF FINANCIAL INSTRUMENTS
The Company's cash, cash equivalents, short and long term
investments are deposited with five local financial institutions.
For the years ended May 31, 2000 and 1999, the Company had deposits
in a financial institution in excess of the deposit insurance
of $100,000 of $533,152 and $623,402, 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. The Company maintains reserves for
potential credit losses; historically, such losses have been
within management's expectations.
(17) 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:
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
F - 19
<PAGE>
HOSOI GARDEN MORTUARY, INC.
NOTES TO FINANCIAL STATEMENTS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Years Ended May 31, 2000 and 1999
(17) PRIOR PERIOD ADJUSTMENTS AND RESTATEMENT (continued)
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.
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.
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>
Subsequent to the issuance of the Company's 1999 financial
statements, it was determined that the amount of income
taxes provided in the financial statements was understated.
As a result additional income taxes expense of $20,943 has been
charged to retained earnings in the current year.
F - 20
