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, 2000 and 1999, funeral services accounted for
78.9% and 74.4%, 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. The Company offers funeral services to all persons in
Hawaii. Although the Company, historically, has served principally
persons of Japanese ancestry who follow a particular and special
order of worship in accordance with their religious beliefs, the
Company continues to develop markets involving other ethnic groups
and 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-three (33) persons were employed by the Company
for the fiscal year ended May 31, 2000. Seventeen (17) persons
were employed full-time and sixteen (16) 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.
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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
names, positions and offices, terms of office, and business
experience of the directors and executive officers of the Company
uring 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 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.
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. 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.
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Anne T. Tamori has been employed by the Company since
1978. She has been a vice president and director 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.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
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.
Glenn Sutetsugu is a real estate appraiser who is also
engaged in real property sales and management.
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.
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.
During the fiscal year ended May 31, 2000, the Company redeemed
15,255 shares at a redemption price of $4.25.
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There were 1,598 record holders of common stock as of May
31, 2000.
A cash dividend has been declared and paid once a year
since 1969. The dividend for the year ended May 31, 2000, which
was declared on October 19, 2000, was $.045 per share. Dividends
for the year ended May 31, 2000 are payable to shareholders in
January 2001. The dividend for the year ended May 31, 1999, which
was declared on October 21, 1999, was $.06 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 (As
2000 restated)
<S> <C> <C>
Total revenues. . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales and services . . . . . . . . . . . 71.2 74.7
Gross profit. . . . . . . . . . . . . . . . 28.8 25.3
Selling, general and administrative. . . . . . . 27.7 24.0
Operating income. . . . . . . . . . . . . . 1.1 1.3
Other income (expenses). . . . . . . . . . . . . 6.9 6.4
Income before income taxes . . . . . . . . . . . 8.0 7.7
Provision for income taxes . . . . . . . . . . . 2.3 3.3
Income before equity in earnings
of Garden Life Plan, Ltd. (GLP). . . . . . . . . 5.7 4.4
Equity in earnings of GLP, net . . . . . . . . . . - -
Net income. . . . . . . . . . . . . . . . . . 5.7% 4.4%
</TABLE>
RESULTS OF OPERATIONS
TOTAL REVENUES
The Company's revenues decreased by $21,690 in 2000 over 1999.
The decrease of 0.8% is principally attributable to an increase
in the number of pre-need services in 2000 over 1999. Pre-need
services, which generate a lower average price, increased from 410
in 1999 to 451 in 2000 which is an increase of 10%. The decrease
in total revenues resulting from the increase in pre-need services
in 2000 was partially offset by an increase in revenues from
at-need services and additional merchandise sales to pre-need
customers.
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The Company expects increases in the number of pre-need
services from the current level of 40% of total services to
approximately 45% to 50% of total services within the next five
years. The Company expects to mitigate the reduction in revenues
from this expected increase in pre-need services by a combination
of marketing additional merchandise sales to its pre-need
customers, providing cremation services on its premises and
marketing its at-need services to ethnic groups which currently
comprise a minor part of its at-need services revenues.
The continued affiliation with Woolsey Funeral & Cemetery Services,
Inc., described in ITEM 1. DESCRIPTION OF BUSINESS, is a revenue
source from a segment of the community which was not served by the
Company. This affiliation with Woolsey is expected to provide an
additional revenue source from an ethnic group (Polynesian) which
currently contributes only a minor part of the Company's revenues.
The Company's operating expenses in 2000 increased as a percentage
of revenues due to an increase in professional services, salaries
and wages, and educational expenses, which was partially offset by
a decrease in lease rent and real property tax expenses. The
Company's operating expenses is expected to increase as a result
of the Company's continued 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 expected increase
in pre-need services.
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 its
expiration in 2001.
4. Construction of an on-site crematory.
Operating results for fiscal 2001 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 revenues. The
upgrade of the Company's personnel and facilities is expected to
mitigate the effects of the increase in pre-need plan services.
Also if the economic recovery, which Hawaii is experiencing, can be
sustained overall revenues is expected to increase as a result.
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GROSS PROFIT
Gross profit increased to 28.8% of revenue in 2000 from 25.3% in
1999. The 3.5% increase in gross profit in attributable to a
decrease in the lease rent and real property taxes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 27.7%
in 2000 from 24.0% in 1999. The increase is attributable to
increases in professional services, advertising and promotions,
salaries and wages, and educational expenses.
It is expected that advertising and professional services
expenses will increase in the short term as the Company attempts
to attract customers from ethic groups not currently served and
seeks legal and accounting services relating to issues concerning
expansion of its facilities and whether to continue its
relationship with Garden Life Plan, Ltd. or establish its own
pre-need authority. It is the Company's goal to manage operating
expenses, overtime, relative to its revenues and gross margin.
EQUITY IN EARNINGS OF GARDEN LIFE PLAN, LTD.
The financial audit of Garden Life Plan, Ltd. (GLP) for its year
ended May 31, 2000 was not completed by the filing deadline for
Hosoi Garden Mortuary, Inc.'s (HGM) Form 10-KSB. In addition,
HGM's audited financial statements for its year ended May 31, 1999
is in the process of being recalled because of the resignation of
GLP's auditors before the completion of the audit of GLP's
financial for its year ended May 31, 1999.The resignation of the
auditors resulted principally because of a disagreement over the
accounting for the recognition of revenues on the financial
statements of GLP.
A successor auditor has been retained by GLP for the audit of
its financial statements for the year ended May 31, 2000 and the
completion of the audit for its year ended May 31, 1999. It is
expected that the successor auditor will be able to resolve the
issues with respect to the accounting for the recognition of
revenues in GLP's financial statements for its years ended on
May 31, 2000 and 1999.
After the completion of the audit of GLP's financial statements,
HGM's financial statements for 1999 will be restated and an
amended Form 10-KSB will be filed for the year ended May 31, 1999.
After the completion of the audit of GLP's financial statements
for the year ended May 31, 2000, HGM's Form 10-KSB will be
refiled with the required financial statements.
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INCOME TAXES
The Company's effective income tax rate was 29.0% of pre-tax
income in 2000 and 43.3% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Total working capital remained relative unchanged at
$1,954,140 at May 31, 2000 and at $1,950,513 at May 31, 1999.
Working capital ratio was 5.5:1 at May 31, 2000 and 6.0:1 at
May 31, 1999.
SECURITIES AVAILABLE-FOR-SALE increased to $891,482 in 2000 from
$847,718 in 1999 as a result of earnings on the investment.
SECURITIES HELD-TO-MATURITY decreased to $876,950 in 2000 from
$888,931 in 1999 as a result of maturing U.S. Treasury bills
which were not reinvested.
At the end of 2000, the Company did not have any long-term debt.
The Company expects that cash flows from operations, its cash
reserves and earnings on its investments will be adequate to
meet the Company's cash requirements in the foreseeable future.
Dividends paid were $101,024 and $173,488 in 2000 and 1999,
respectively, which was $.06 and $.10 per share in 2000 and 1999,
respectively.
Cash outflows for the acquisition of the Company's shares were
$64,834 in 2000 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
The following summarizes the Company's Year 2000 disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.
STATE OF READINESS
The Company did not have a formal Year 2000 readiness program,
however, the Company's Treasurer has been assigned the task of the
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.
The Company's Year 2000 project focused on two areas: (1)
information technology (IT) systems, such as application software
and PC's; and (2) suppliers.
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The Company identified application software and PC's which
needed to be replaced and have upgraded its PC systems and have
replaced application software which were not Year 2000 compliant.
As expected the Company remediation, validation and testing
efforts were completed by the end of 1999.
RISK/CONTINGENCY PLANS
Prior to the Year 2000 date change, the Company believed that
the most likely worst-case scenarios would have involved the
interruption of crucial suppliers as a result of infrastructure
failures or third party vendor failures. To date, no such
interruptions or failures have occurred. The Company currently
believes that the likelihood of the occurrence of such events due
to the Year 2000 date change is low.
COST
Total cost of the Year 2000 readiness program were not material
to the Company's financial condition or results of operations.
Cost associated with the Company's efforts around Year 2000 issues
were expensed as incurred, unless they related to the purchase of
hardware and software, in which case they were capitalized.
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