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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-21411
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ROSE HILLS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3915765
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3888 SOUTH WORKMAN MILL ROAD
WHITTIER, CALIFORNIA 90601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(562) 692-1212
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of outstanding Common shares as of March 26, 1998, was 1,000
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TABLE OF CONTENTS
PART I
ITEM
NUMBER PAGE
------ ----
1. BUSINESS........................................................ 1
2. PROPERTIES...................................................... 5
3. LEGAL PROCEEDINGS............................................... 6
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............. 6
PART II
5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS......... 7
6. SELECTED FINANCIAL DATA......................................... 7
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 8
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 12
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 12
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 12
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 13
11. EXECUTIVE COMPENSATION.......................................... 14
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 15
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 16
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-
K.............................................................. 18
PART I
ITEM 1. BUSINESS.
OVERVIEW
Rose Hills Company (the "Company"), a Delaware corporation, is a wholly-
owned subsidiary of Rose Hills Holdings Corp. ("RH Holdings"). The Company was
formed in 1996 for purposes of acquiring Roses, Inc. (the "Mortuary") and
purchasing certain assets and assuming certain liabilities of Rose Hills
Memorial Park Association and Workman Mill Company (the "Association" and the
assets and liabilities purchased therefrom, the "Cemetery"). Also, in
connection with the acquisition, a subsidiary of The Loewen Group Inc. (The
Loewen Group Inc. collectively with its affiliates, "Loewen"), a shareholder
of RH Holdings, contributed 14 funeral homes and 2 funeral home cemetery
combination properties (the "Satellite Properties"). As a result of these
acquisitions (collectively "Acquisition Transaction"), the Company is the
successor to the operations of the predecessor Mortuary and Cemetery.
The Cemetery and the Mortuary (collectively, "Rose Hills") are located on
the grounds of the Cemetery, Rose Hills Memorial Park. Rose Hills is the
largest single location cemetery funeral home combination in the United States
and the Cemetery is the largest single location cemetery in the United States.
Rose Hills is situated less than 14 miles from downtown Los Angeles on
approximately 1,418 acres of permitted cemetery land near Whittier,
California. The Cemetery and Mortuary have been continuously operating since
1914 and 1956, respectively. As a result of the Acquisition Transaction the
Company owns a strategic assembly of cemeteries and funeral homes in the
greater Los Angeles area.
In 1997, the integration of the Satellite Properties with Rose Hills
effected through the Acquisition Transaction enabled the Company to begin to
take advantage of the benefits of "hub and spoke clustering,' including
opportunities to share personnel, vehicles and other key resources, and
implement revenue enhancing cross-marketing programs. In addition, the Company
intends to leverage Rose Hills' outstanding reputation in the region by using
the Rose Hills name at many of the Satellite Properties.
ACQUISITION TRANSACTION
On September 19, 1996, the Company entered into an Agreement and Plan of
Merger with Roses, Inc. (the "Merger Agreement") providing for the acquisition
of the Mortuary through the merger of the Company with and into Roses, Inc.,
with Roses, Inc. (renamed RH Mortuary Corporation) being the surviving
corporation in the merger. On November 19, 1996 ("Acquisition Closing Date"),
the Company assigned all of its rights and obligations under the Merger
Agreement to a newly-created subsidiary of the Company, so that following the
merger, the Mortuary became a wholly-owned subsidiary of the Company.
On September 19, 1996, the Company and the Association also entered into an
Asset Purchase Agreement (the "Asset Purchase Agreement") pursuant to which
the Company agreed to purchase from the Association the assets and assume the
liabilities constituting the Cemetery. At the Acquisition Closing Date, the
Company's rights under such Agreement were assigned to a newly created wholly-
owned subsidiary of the Company (RH Cemetery Corporation), and, accordingly,
on the Acquisition Closing Date, the Cemetery became a wholly-owned subsidiary
of the Company.
In connection with the Acquisition, RH Holdings, Blackstone Capital Partners
II Merchant Banking Fund L.P and its affiliates (collectively, "Blackstone"),
a subsidiary of Loewen ("LN Sub"), Loewen Group International Inc. ("LGII")
and The Loewen Group Inc. ("LWN") entered into a subscription agreement (the
"Subscription Agreement") pursuant to which: (i) Blackstone subscribed for
common stock of RH Holdings in exchange for a cash contribution to RH
Holdings, (ii) LGII subscribed for common stock and preferred stock of RH
Holdings in exchange for a cash contribution to RH Holdings and (iii) LN Sub
subscribed for shares of preferred stock of RH Holdings in exchange for the
contribution by LN Sub of the Satellite Properties.
1
In connection with the Acquisition Transaction, (i) Blackstone and Loewen
contributed to RH Holdings and RH Holdings contributed to the Company $106.6
million ($107.0 million less $0.4 million to be advanced by the Company to
RHIMD to finance its purchase of common stock of RH Holdings) in cash; (ii)
the Company acquired the Mortuary in consideration of the payment of $59.9
million in cash (subject to downward adjustment under certain circumstances)
after giving effect to the repayment of outstanding debt of the Mortuary;
(iii) the Company paid a cash purchase price for the Cemetery in the amount of
$166.3 million in cash (subject to downward adjustment under certain
circumstances); (iv) LN Sub contributed the Satellite Properties to
RH Holdings which contributed such properties to the Company; (v) the Bank
Credit Agreement was entered into; and (vi) the sale of the Notes was
consummated. (See Item 7, "Liquidity and Capital Resources.")
THE FUNERAL SERVICE AND CEMETERY INDUSTRY AND LOCAL CHARACTERISTICS
The funeral service and cemetery industry historically has been
characterized by low business risk compared with most other businesses.
According to preliminary figures from The Dun & Bradstreet Corporation, the
average business failure rate in the United States in 1997 was 88 per 10,000.
The preliminary 1997 failure rate of the funeral service and crematoria
industry was only 19 per 10,000, 78% lower than the average rate and among the
lowest of all industries. This low failure rate can be attributed to a number
of factors, including stable demand in the industry, positive demographic
trends and the low rate of new market entrants due to the length of time
required to establish community acceptance.
In the last 15 years, demand has grown steadily at a 1% compound annual
growth rate while the aggregate number of funeral homes has remained
relatively constant. Future demographic trends are expected to contribute to
the continued stability of the funeral service industry. The Census Bureau
projects that the segment of the United States population over 65 years old,
which presently totals 34 million, will more than double in size to over 73
million by 2035. Over the next 15 years, the aging of this population is
expected to outweigh the effects of increased life expectancies. The Census
Bureau projects that the number of deaths in the United States will grow at
approximately 1% annually through 2010.
The Company attracts customers from a geographic region encompassing
substantially all of Los Angeles County and the northern portion of Orange
County. According to statistics compiled by the State of California Department
of Health Services and the Census Bureau, the estimated population of Los
Angeles County was approximately 9.4 million people (3.1 million households)
in 1996. Approximately 16.5% of this population was age 55 or older. The death
rate in Los Angeles County has demonstrated stability from year to year over
the last decade and the number of deaths is expected to increase in step with
the 1% annual projected population growth in Los Angeles County over the next
five years.
Mortuary Operations
In 1997, the Mortuary performed approximately 5,200 funeral calls and has a
current capacity to provide over 30 funeral services per day. The Mortuary
provides a complete range of funeral services, including collection of
remains, certification of death, embalming, sale of caskets and related
merchandise, sale of flowers, visitation facilities and transportation to
place of services and to burial site. All funeral arrangements provided to
each of the Mortuary's customers are provided by an experienced counselor with
the assistance of a centralized computer system.
The Mortuary began operations in 1956, when the Association recognized that
additional revenue opportunities existed in funeral operations. As the
division's success continued, the Mortuary was spun off in 1976 as a taxable,
for profit, wholly-owned subsidiary of Rose Hills Memorial Park Association
("the Association"). In 1990, the Association sold the Mortuary business to
senior management in a leveraged buyout transaction. During the period from
October 1989 through November 19, 1996, pursuant to a Management Agreement,
the Mortuary also operated the Cemetery.
2
The Mortuary provides funeral services on both an at-need and a pre-need
basis. Since 1987, all pre-need funeral services have been funded through the
sale by the Mortuary to its customers of a life insurance product called
ForeThought. Under the ForeThought Plan, the Mortuary is named the beneficiary
of the insurance policy but does not recognize funeral service revenue related
to the contracted services until such services are provided, although it does
recognize commission income upon the sale of such policies. On the date of
performance of the prearranged funeral service, the Mortuary recognizes
funeral service income and the proceeds received under the policy are applied
against the contract. Prior to 1987, the Mortuary also offered trust-backed
and debenture-backed pre-need products.
The Satellite Properties consist of 14 funeral homes and two combination
properties located in Los Angeles, San Bernardino and northern Orange Counties
which provide a wide variety of funeral services to various communities in
such counties. While the demographics of the population served by the
Satellite Properties, taken as a whole, are generally similar to that of Rose
Hills' clients, the smaller size and long-standing local reputations of the
various Satellite Properties have led each of such properties to develop a
demographically unique client base within its particular community. Therefore,
as a result of this extended cluster of funeral service providers as well as
the ability of particular Satellite Properties to meet special needs of local
communities, Management believes that the acquisition of the Satellite
Properties will permit the Company to access a base of mortuary clients that
it was previously unable to develop solely from its location near Whittier.
Cemetery Operations
The Cemetery is the largest single location cemetery in the United States.
The Cemetery consists of approximately 1,418 acres, 401 of which have been
developed and sold, 297 of which are developed unsold cemetery property and
the remaining 720 of which have been permitted as cemetery property. Since its
founding in 1914, the Cemetery has performed over 300,000 interments, of which
approximately 8,700 occurred in 1997. The Cemetery provides a complete line of
cemetery products (including a selection of burial spaces, vaults, crypts,
memorials and niches) and burial and cremation services on both an at-need and
pre-need basis. The sale of pre-need property arrangements accounted for
approximately 46% of the Cemetery's total revenues during 1997.
Although the Cemetery is non-sectarian, in order to better serve an
increasingly diverse customer base, the Cemetery has developed and offers many
lawn areas for use by particular ethnic, religious and fraternal organizations
as well as its nine non-denominational chapels including the newly constructed
SkyRose Chapel, a 350 seat chapel and mausoleum designed by architect Fay
Jones, eight additional mausoleums and a crematory. In addition the Company
has commenced construction pursuant to a development agreement with the
International Buddhist Progress Society ("IBPS") under which the Company:
.(i) granted IBPS the interment rights with respect to 4.5 acres of
Cemetery property and agreed to contribute to IBPS's development of a
16,000 square foot columbarium and surrounding stupa gardens; and
.(ii) granted IBPS a seven-year option to build a second columbarium on an
adjacent 2.7 acre site.
In exchange for these rights, IBPS agreed to pay the Company approximately
$1.4 million. IBPS paid $160,000 upon execution of the development agreement
and will pay 10% of the gross revenues received by IBPS from the sale of
niches for seven years, and any remaining balance will be paid on January 1,
2003. In addition, IBPS will pay the Company $75 per lot on the first 5,000
cemetery lots sold and $50 per lot thereafter. Completion of the first
columbarium and stupa gardens is scheduled for the last half of 1998.
COMPETITION
The Company competes with a number of sectarian and nonsectarian mortuaries
and cemeteries in the greater Los Angeles area. Mortuary competition is
primarily from small, local mortuaries that attract customers through the
personal reputation of the funeral director and their ability to tailor their
services to their local ethnic, religious or fraternal communities. Cemetery
competition comes primarily from Forest Lawn, Inglewood,
3
Oakdale, Live Oak and Memory Gardens cemeteries, as well as a number of
cemeteries owned by the Catholic Church. The Company's primary methods of
competition in both its mortuary and cemetery operations consist of building
goodwill in the community by continually strengthening and leveraging its
heritage and name recognition and developing its infrastructure to further
improve its ability to serve the diverse population of the greater Los Angeles
area. The Company also faces competition from large "consolidators' in the
industry which seek to reap profits from an acquisition and consolidation
strategy. Such competitors include several large, publicly-traded funeral
services companies, including Service Corporation International, Stewart
Enterprises, Inc. and Equity Corporation International.
REGULATION
The Company's funeral home operations are regulated by the Federal Trade
Commission which administers the Trade Regulation Rule on Funeral Industry
Practices (the "Funeral Rule"), which became effective on April 30, 1984, and
was revised as of July 19, 1994. The Funeral Rule defines certain acts and
practices in connection with the provision of funeral goods or services as
unfair or deceptive and sets forth various requirements intended to prevent
such unfair or deceptive acts and practices. The Company also must comply with
other federal legislation, including the Americans with Disabilities Act and
regulations administered by the Occupational Safety and Health Administration.
The Company's operations are also regulated by the State of California,
which regulates the sale of pre-need cemetery and funeral services. California
state regulations require, among other things, that a portion of the funds
received by the Company in connection with all cemetery sales be deposited in
an endowment care fund. The principal of such endowment care fund must be
invested and the income from such investment may be used only for the
development, improvement, embellishment and maintenance of the cemetery.
California state regulations also require that money received from the sale of
pre-need funeral service contracts be held in trust until the services are
delivered, that such contracts may be cancelled by the customer at any time
prior to the delivery of such services and that upon any such cancellation the
principal and interest of such trust (less, in certain cases, a revocation
fee) be repaid to the customer.
The Company believes that it is currently in substantial compliance with the
Funeral Rule and all other applicable federal, state and local laws and
regulations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
environmental laws and regulations, including those pertaining to remediation
of hazardous substances and protection of endangered or threatened species.
These laws and regulations may require the Company to incur compliance,
remediation and other costs from time to time or restrict development in
certain environmentally sensitive areas.
Environmental audits of the Company's various properties were conducted in
connection with the Acquisition Transaction. In connection with the Cemetery
and Mortuary, Management is aware of certain areas, including certain solid
waste disposal areas used to dump used motor oil, solvents and gasoline in the
1970's, that will require remediation. However, pursuant to an Environmental
Compliance Agreement entered into between the Association and the Company, the
Association has agreed to pay or indemnify the Company for certain costs
relating to such remediation at some of these areas. In connection with the
Satellite Properties, Management is also aware of certain areas which may have
been contaminated from former or adjacent underground storage tanks.
In addition, two of the Company's properties are located in or near areas of
regional groundwater contamination. The Company submitted information in
connection with contamination at one of these areas and recently was informed
by the Environmental Protection Agency that the Company will not be included
in the Super Fund cleanup of the basin.
4
Although there can be no assurance, Management does not believe that the
above or other environmental matters affecting the Company will have a
material adverse effect on the Company's financial condition or results of
operations.
EMPLOYEES
As of March 26, 1998 the Company employed approximately 750 people.
Management believes that the Company's relationship with employees is good.
In December 1993 the National Labor Relations Board ("NLRB") certified the
Teamsters Union as the collective bargaining representative of 57 employees in
the Company's Park Department. In December 1994, certain of these employees
petitioned the NLRB to hold an election regarding decertifying the union.
During the same period the Teamsters filed numerous unfair labor practice
charges against the Company with the NLRB. On April 29, 1996, the NLRB General
Counsel issued a Consolidated Amended Complaint and Notice of Hearing on
certain of the union's charges. In April 1997 the Administrative Law Judge
issued an unfavorable decision regarding the unlawful termination of the two
employees and a favorable decision in the alleged failure to recognize and
bargain in good faith with the union.
In reviewing the decision of the Administrative Law Judge, counsel advised
the Company that an error with respect to certain interpretations of law may
have been made. Based upon this advice, counsel in May 1997 filed on behalf of
the Company an exception brief to the NLRB seeking a complete reversal of the
former decision. In June 1997 the NLRB counsel submitted an answering brief to
the exceptions in the brief filed on behalf of the Company.
In September 1997 the NLRB upheld the former decision. On October 3, 1997
the Company filed an appeal with the United States 9th Circuit Court of
Appeals.
In accordance with its normal practice, the NLRB has not acted on the
employees' petition for a decertification election because of the pending
unfair labor practice charges. The Company believes that these charges are
without merit and intends to contest them vigorously.
Although there can be no assurances, the Company does not believe that the
outcome of the proceeding with regard to these charges will have a material
adverse effect on the Company's financial condition.
ITEM 2. PROPERTIES.
The property on which the Cemetery is located consists of approximately
1,418 acres, 401 of which have been developed and sold as cemetery property,
297 of which are developed unsold cemetery property and the remaining 720 of
which have been permitted as cemetery property. Also located on the grounds of
Rose Hills are eight chapels that seat over 1,100 people in the aggregate,
eight mausoleums, 39 visitation rooms, a crematory and a 43,460 square foot
administrative building. In addition to the above facilities the Company has
recently completed the construction of the SkyRose Chapel, a 26,490 square
foot chapel and mausoleum facility.
In connection with the Acquisition Transaction, the Company was granted an
option, exercisable for a period of three years after the Acquisition Closing
Date, to purchase from the Association an additional 75 acres of permitted
cemetery property located in Los Angeles County, for an aggregate price of
$18.2 million.
The Mortuary's facilities consist of 6.2 acres of land, a two-story, 74,000
(inclusive of relevant properties above) square foot mortuary and
administrative building, an adjacent flower shop and storage facilities.
5
The Satellite Properties, which were conveyed by Loewen to the Company in
the Acquisition Transaction consist of the funeral homes and combination
properties located in the cities listed below:
NAME LOCATION
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Custer Christiansen (five funeral homes).... West Covina, Covina, Glendora, La
Puente (two locations)
White's Funeral Home........................ Bellflower
Neels-Brea Funeral Home..................... Brea
Dimond & Sons-Mettler Chapel................ Garden Grove
Shannon-Donegan Chapel...................... Orange
San Fernando Mortuary....................... San Fernando
R. L. Malinow-Glasband-Weinstein
Mortuaries(1).............................. West Hollywood
Colton Funeral Chapel....................... Colton
Grove Colonial Mortuary..................... San Bernardino
Richardson-Peterson Mortuary................ Ontario
Harbor Lawn(2).............................. Costa Mesa
Melrose Abbey (including Angels Lawn
Cemetery)(3)............................... Anaheim
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(1) 95% owned by the Company.
(2) Combination property located on 28 acres; includes a funeral home and a
cemetery (and crematory).
(3) Combination property located on 20 acres; includes a funeral home and a
cemetery.
The facilities of ten of the Satellite property locations are owned by the
Company and the facilities of the remaining six Satellite property locations
are leased by the Company.
The obligations of RH Holdings, the Company, and each of the Company's
existing and future domestic subsidiaries under the Bank Credit Facilities (as
defined below) are secured by a first priority security interest in all
existing and future assets (including the real property located at Rose Hills
but excluding other real property and vehicles covered by certificates of
title) of each such entity. See Item 6.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to certain legal proceedings in the ordinary course of
its business. Management does not expect that the outcome of any such
proceedings will have a material adverse effect on the Company's financial
condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
6
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
In connection with the Acquisition Transaction, the Company issued 1,000
shares of Common Stock to RH Holdings. This represents all of the outstanding
Common Stock of the Company.
There is no established public trading market for the Common Stock of the
Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data
for the Company (and its predecessors, as the case may be) as of December 31,
1997 and for each of the five years in the five-year period ending December
31, 1997. The pro forma combined information as of and for the year ended
December 31, 1996 is a combination of the Company (for the period from
November 19, 1996 to December 31, 1996) and its predecessor companies the
Mortuary and Cemetery (for the period from January 1, 1996 to November 18,
1996). Comparative financial information as of and for the period ended
November 18, 1996 and the years ended December 31, 1993, 1994 and 1995 have
been included on a historical basis for the predecessor Mortuary and Cemetery
and are not comparable. Such combined financial data for the predecessor
operations has been included solely to facilitate a discussion of the
operations from period to period. Such presentation of the 1996, 1995, 1994
and 1993 data is pro forma in that generally accepted accounting principles
would not allow such combination due to the lack of common ownership of the
predecessor operations. The operations of the Satellite Properties for 1996,
1995, 1994 and 1993 have been omitted from the presentation on the basis of
immateriality.
The selected financial data under the captions "Income Statement Data",
"Other Financial Data" and "Balance Sheet Data" for the year ended December
31, 1997 and the period from November 19, 1996 through December 31, 1996 were
derived from the Company's financial statements which have been audited by
KPMG Peat Marwick LLP ("KPMG").
The selected financial data under the captions "Income Statement Data",
"Other Financial Data" and "Balance Sheet Data" for the three years ended
December 31, 1995 and the period from January 1, 1996 through November 18,
1996 were derived from the financial statements of Roses, Inc., and of Rose
Hills Memorial Park Association and Workman Mill Investment Company.
The Roses, Inc. statements were audited by Arthur Andersen LLP for the two
years ended December 31, 1995. They were audited by KPMG for the period from
January 1, 1996 through November 18, 1996.
The statements of Rose Hills Memorial Park Association and Workman Mill
Investment Company for the two years ended December 31, 1995 and for the
period from January 1, 1996 through November 18, 1996 were audited by KPMG.
7
The selected financial data for the year ended December 31, 1993 is
unaudited.
PREDECESSOR FOR THE YEARS
FOR THE COMPANY ENDED DECEMBER 31,
YEAR ENDED PROFORMA COMPANY PREDECESSOR (PROFORMA)
DECEMBER 31, 1/1/96- 11/19/96- PROFORMA -------------------------
1997 11/18/96 12/31/96 1996 1995 1994 1993
------------ ----------- --------- -------- ------- ------- -------
(IN MILLIONS)
INCOME STATEMENT DATA
Total Revenue........... 70.7 42.9 7.1 50.0 47.4 45.1 42.7
Operating Income........ 14.8 5.1 1.3 6.4 7.2 3.1 2.1
Net Income (Loss)....... (1.8) 1.1 (0.5) 0.6 3.4 2.4 0.7
OTHER FINANCIAL DATA
EBITDA (1).............. 23.4 6.2 2.4 8.6 11.0 9.1 6.1
Cash flows from:
Operating Activities... 1.6 7.4 5.1 12.5 2.2 5.6 7.1
Investing Activities... (2.7) (2.7) (246.6) (249.3) (4.5) (5.4) (2.4)
Financing Activities... (3.4) (3.7) 249.4 245.7 (2.2) 1.3 (5.6)
BALANCE SHEET DATA
Total Assets............ 312.1 N/A 317.8 317.8 77.1 72.9 75.7
Total Debt (2).......... 73.5 N/A 75.0 75.0 19.5 22.0 11.0
- --------
(1) EBITDA is defined as income (loss) before income taxes plus interest
expense, depreciation and amortization.
EBITDA is presented because (i) Management believes that EBITDA provides
relevant and useful information, (ii) it is a widely accepted financial
indicator of a company's ability to incur and service debt and (iii) it is
the basis on which compliance with the financial covenants under the
Company's debt agreements is determined. However, EBITDA, as adjusted,
should not be considered in isolation, as a substitute for net income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. Also,
this measure of EBITDA, as adjusted may not be comparable to similar
measures reported by other companies.
(2) Total Debt is defined as funded debt comprising bank borrowings.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE COMPANY
As a result of the Acquisition Transaction, the Company is the successor to
the operations of the predecessor Mortuary, Cemetery and the Satellite
Properties. As of November 19, 1996, the Company's assets and liabilities were
adjusted to their estimated fair values under purchase accounting. In
addition, the Company entered into new financing arrangements and changed its
capital structure. Accordingly, financial position and results of operations
subsequent to November 18, 1996 are not comparable to prior periods.
Operations of the Company since November 18, 1996 reflect increased
depreciation, amortization, and interest expense. Accordingly, comparative
financial information for the period from January 1, 1996 to November 18, 1996
and as of and for the year ended December 31, 1995 has been included on a
historical basis for the predecessor Mortuary and Cemetery and is not
comparable. Such combined financial data for the predecessor operations has
been included solely to facilitate a discussion of the operations from period
to period. Such presentation of the 1996 and 1995 data is pro forma in that
generally accepted accounting principles would not allow such combination due
to the lack of common ownership of the predecessor operations. The operations
of the Satellite Properties for 1996 and 1995 have been omitted from the
presentation on the basis of immateriality.
8
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of sales for the Company and its predecessor operations.
YEARS ENDED DECEMBER 31,
-------------------------------
PROFORMA PROFORMA
COMBINED COMBINED
1997 1996 1995
-------- --------- ---------
Sales and services
Funeral sales and services............... 40.3% 41.7% 39.5%
Cemetery sales and services.............. 48.4% 44.5% 46.8%
Insurance commissions and other.......... 11.3% 13.8% 13.7%
Total sales and services................ 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services............... 75.2% 69.8% 67.9%
Cemetery sales and services.............. 76.7% 78.7% 80.3%
Total gross profit...................... 78.7% 77.9% 78.1%
Selling, general and administrative ex-
penses................................... 52.4% 64.2% 62.4%
Amortization.............................. 5.3% 0.9% 0.5%
Interest expense.......................... 23.3% 7.1% 5.6%
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Consolidated revenues increased 41.4% to $70.7 million for the year ended
December 31, 1997 compared to $50.0 million for the year ended December 31,
1996. Approximately 47.9% of the increase was attributed to the Satellite
Properties, whose consolidated revenue was $11.2 million in 1997. Funeral
service revenues increased 36.6% to $28.5 million, and cemetery revenues
increased 54.0% to $34.2 million. The increase in funeral service revenue was
largely due to the acquisition of the Satellite Properties. Revenue from total
calls for Rose Hills is down 4% from last year. Cemetery sales increased due
to an increase in pre-need property sales which benefited from the expansion
of products offered on pre-need contracts, and the addition of over 120 new
sales counselors and telemarketing support.
Selling, general, and administrative expense increased $5.0 million to $37.1
million for 1997 from $32.1 million for 1996. The largest component of the
increase, $3.2 million, is associated with the acquisition of the Satellite
Properties. The remainder of the increase was driven by an increase in
variable commission expenses for pre-need cemetery sales. As a percentage of
consolidated revenue, selling, general and administrative expense decreased to
52.4% for the year ended December 31, 1997 compared to 64.2% for 1996. The
decline is attributed to the absorption of the Satellite Property operations
within the existing Company corporate infrastructure and additional leverage
realized from the increase in pre-need property sales.
Other revenues, which include financing, commission, Endowment Care Fund
("ECF") and management fee income increased from $6.9 million in 1996 to $8.0
million in 1997. In August 1996 the Rose Hills ECF changed its investment
strategy by increasing the percentage of fund assets invested in fixed income
securities, increasing earnings available to the Cemetery. ECF earnings
increased by $1.4 million and commission and finance income increased $0.3
million.
Amortization and interest expense increased $3.3 million and $12.8 million,
respectively, for 1997 compared to 1996. Amortization, which includes
amortization of goodwill and covenants not to compete, and interest expense
increased as a result of the Acquisition Transaction.
Income from operations increased to $14.8 million for the year ended
December 31, 1997 from $6.4 million for the year ended December 31, 1996.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales),
increased to $23.4 million for 1997 from $8.6 million for 1996. Both the
increase in income from operations of $8.4 million and EBITDA of $14.8 million
were primarily a result of (i) an increase in pre-need contract sales (ii) an
increase in leverage of existing
9
corporate overhead and (iii) the addition of the Satellite Properties. EBITDA
should not be considered in isolation, as a substitute for net income or cash
flow data prepared in accordance with generally accepted accounting principles
or as a measure of a company's profitability or liquidity.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Combined revenue increased from $47.4 million in 1995 to $50.0 million in
1996, an increase of 5.5%. Funeral sales and services revenue which accounted
for approximately 85% of the increase, increased to $20.9 million in 1996 from
$18.7 million in 1995. Cemetery sales and services revenue was $22.2 million
in 1996 and $22.1 million in 1995. Insurance commissions and other revenue
increased $0.4 million to $6.9 million in 1996.
Selling, general and administrative expense increased $2.5 million to $32.1
million. Contributing to this increase were a $2.1 million increase in
professional services related to the Acquisition Transaction and a
$0.4 million charge relating to the curtailment of a pension plan. Operating
income was $6.4 million in 1996, a decrease of $0.8 million from 1995.
Interest expense increased to $3.6 million in 1996 from $2.6 million in 1995
as a result of the Acquisition Transaction in November, 1996. The 1996 net
income was $0.6 million compared to $3.4 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that, based upon current levels of operations and
anticipated growth and the availability of the Bank Revolving Facility (see
description below), it can meet working capital and short-term liquidity
requirements for current operations and to service its indebtedness. As of
December 31, 1997 the Company had net working capital of $1.3 million and a
current ratio of 1.08 compared to net working capital of $5.8 million and
current ratio of 1.37 at December 31, 1996.
Net cash provided by operating activities was $1.6 million for the year
ended December 31, 1997, compared to $12.5 million for the same period in
1996. The net decrease of $10.9 million was due primarily to a $12.5 million
increase in cash interest expense.
Concurrent with the Acquisition Transaction, the Company entered into senior
secured amortization extended term loan facilities (the "Bank Term Facility")
in an aggregate principal amount of $75 million, the proceeds of which were
used to finance the Acquisition Transaction and related transaction costs, to
pre-fund certain capital expenditures and to refinance existing indebtedness
of the Company, and a senior secured revolving credit facility (the "Bank
Revolving Facility" collectively with the Bank Term Facility, the "Bank Credit
Facilities") in an aggregate principal amount of up to $25 million, the
proceeds of which are available for general corporate purposes and a portion
of which may be extended (as agreed upon) in the form of swing line loans or
letters of credit for the account of the Company. In addition, the Company has
the right, subject to certain conditions to performance tests, to increase the
Bank Term Facility by up to $25 million. Each of the Bank Term Facility and
the Bank Revolving Facility will mature on November 1, 2003. The Bank Term
Facility is payable, subject to certain conditions, in semi-annual
installments in the amounts of $1 million in each of the first three years
after the anniversary of the closing date of the Bank Term Facility (the "Bank
Closing"); $3 million in the fourth year after the Bank Closing; $7 million in
the fifth year after the Bank Closing; $9 million in the ninth year after the
Bank Closing and $53 million upon maturity of the Bank Term Facility. The
Revolving Credit Facility is payable in full at maturity, with no prior
amortization.
All obligations under the Bank Credit Facilities and any interest rate
hedging agreements entered into with the lenders or their affiliates in
connection therewith are unconditionally guaranteed (the "Bank Guarantees")
jointly and severally, by RH Holdings and each of the Company's existing and
future domestic subsidiaries (the "Bank Guarantors"). All obligations of the
Company and the Bank Guarantors are secured by first priority security
interests in all existing and future assets (including real property located
at Rose Hills but excluding other real property and vehicles covered by
certificates of title) of the Company and the Bank Guarantors. In addition,
the Bank Credit Facilities are secured by a first priority security interest
in 100% of the capital stock of the Company and each subsidiary thereof and
all intercompany receivables.
10
In connection with the Acquisition Transaction, the Company also issued $80
million of 9-1/2% Senior Subordinated Notes due 2004, which were exchanged in
September 1997 for $80 million of 9-1/2% Senior Subordinated Notes due 2004
(the "Notes") that were registered under the Securities Act of 1933. The Notes
mature on November 15, 2004. Interest on the Notes is payable semi-annually on
May 15 and November 15 at the annual rate of 9-1/2%. The Notes are redeemable
in cash at the option of the Company, in whole or in part, at any time on or
after November 15, 2000, at prices ranging from 104.75% with annual reductions
to 100% in 2003 plus accrued and unpaid interest, if any, to the redemption
date. The proceeds of the Notes were used, in part, to finance the Acquisition
Transaction.
As a result of the Acquisition Transaction and the application of proceeds
therefrom, the Company's total outstanding indebtedness was approximately
$153.5 million as of December 31, 1997 and $155.0 million as of December 31,
1996. The Company also has $25.0 million of borrowing capacity under the Bank
Revolving Facility. As of December 31, 1997 and 1996, the Company had $24.5
million and $25.0 million respectively available under the Bank Revolving
Facility. Management believes that, based upon current levels of operations
and anticipated growth and the availability under the Bank Revolving Facility,
it can adequately service its indebtedness. If the Company cannot generate
sufficient cash flow from operations or borrow under the Bank Revolving
Facility to meet such obligations, the company may be required to take certain
actions, including reducing capital expenditures, restructuring its debt,
selling assets or seeking additional equity in order to avoid an event of
default under the Bank Credit Facilities. There can be no assurance that such
actions could be effected or would be effective in allowing the Company to
meet such obligations.
The Company and its Subsidiaries are subject to certain restrictive
covenants contained in the indenture to the Notes (the "Indenture"),
including, but not limited to, covenants imposing limitations on the
incurrence of additional indebtedness; certain payments, including dividends
and investments; the creation of liens; sales of assets and preferred stock;
transactions with interested persons; payment restrictions affecting
subsidiaries; sale-leaseback transactions; and mergers and consolidations. In
addition, the Bank Credit Facilities contain certain restrictive covenants
that, among other things, limit the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes), pay dividends or make certain restricted
payments, create liens on assets, engage in mergers or acquisitions or enter
into leases or transactions with affiliates. As of December 31, 1997 the
Company was in compliance with the terms of the Indenture and the Bank Credit
Facilities.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K include "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical facts included herein, including, without
limitation, the statements under Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" regarding the Company's
financial position, plans to increase revenues, reduce general and
administrative expense and take advantage of synergies, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Important factors that could cause
actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed herein, including, without limitation,
in conjunction with the forward-looking statements included herein.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The new statement is effective for fiscal years
beginning after December 15, 1997. When adopted, SFAS No. 130 will require
restatement of prior years' statements to report any applicable comprehensive
income. Management has not determined the impact of SFAS 130 on its
consolidated financial statements.
11
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Statement 131 uses a "management approach" concept as the basis for
identifying reportable segments.
The management approach is based on the way that management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization. Furthermore, the management approach
facilitates consistent descriptions of an enterprise in its annual report and
various other published information. It focuses on financial information that
an enterprise's decision makers use to make decisions about the enterprise's
operating matters.
Statement 131 is effective for financial statements for periods beginning
after December 15, 1997. Earlier application is encouraged. In the initial
year of application, comparative information for earlier years is to be
restated, unless it is impracticable to do so. Statement 131 need not be
applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application shall be reported in financial statements for interim
periods in the second year of application. Management has not determined the
impact of SFAS 131 on its consolidated financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The new statement is
effective for fiscal years beginning after December 15, 1997. When adopted,
SFAS No. 132 will require restatement of disclosures regarding pensions and
other postretirement benefits for each year that is reported.
YEAR 2000
The Year 2000 issue is the result of some computer programs being written
using two digits rather than four to represent calendar years. Such computer
programs may recognize a value of "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations.
The Company has committed personnel and resources to resolve potential Year
2000 issues. The Company is in the process of identifying and assessing its
mission-critical systems related to the issue. The Company plans to address
Year 2000 issues in sufficient time prior to the century rollover.
The Company is currently assessing the cost to remediate its Year 2000
issues. Although the actual cost to remediate these issues is not yet fully
known, based upon information available to date, it is not expected that the
remediation will have a material impact on the Company's financial condition
or operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's current executive officers and directors, and their ages as of
March 26, 1998, are as follows:
NAME AGE POSITION
---- --- --------
Gary P. Baker.................... 50 Senior Vice President, Operations
Chinh E. Chu..................... 31 Director
Kimberley K. Cleaver............. 33 Executive Vice President, Sales
David I. Foley................... 30 Director
Howard A. Lipson............... . 34 Director
Lawrence Miller.................. 48 Chief Executive Officer, Vice Chairman,
Director
Dennis C. Poulsen................ 55 Chairman of the Board, Director
Dillis R. Ward................... 61 President and Chief Operating Officer,
Director
Kenton C. Woods.................. 43 Senior Vice President of Finance and
Chief Financial Officer, Secretary and
Treasurer
The business experience of each of the executive officers and directors is
set forth below.
Gary P. Baker is the Senior Vice President, Operations for Rose Hills
Company. Mr. Baker has over 30 years of service to Rose Hills in all aspects
of funeral service.
Chinh E. Chu is a Managing Director of The Blackstone Group L.P., which he
joined in 1990. Prior to joining Blackstone, Mr. Chu was a member of the
Mergers and Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990. He
currently serves on the Board of Directors of Prime Succession Inc.
Kimberley K. Cleaver joined the Company as Executive Vice President, Sales
in November of 1997. Prior to that, Ms. Cleaver served in senior management
positions with Stewart Enterprises, Inc. in Texas.
David I. Foley is an Associate at The Blackstone Group L.P., which he joined
in 1995. Prior to joining Blackstone, Mr. Foley was a member of AEA Investors,
Inc. and The Monitor Company.
Howard A. Lipson is Senior Managing Director of The Blackstone Group L.P.,
which he joined in 1988. Prior to joining Blackstone, Mr. Lipson was a member
of the Mergers and Acquisitions Group of Salomon Brothers Inc. He currently
serves on the Board of Directors of UCAR International Inc., Volume Services,
Inc., AMF Group Inc., Ritvik Holdings, Inc., and Prime Succession Inc.
Lawrence Miller is Executive Vice President, Operations for Loewen. Mr.
Miller was President of Osiris Holding Corporation from 1988 to 1995 when
Osiris joined Loewen. From 1972 to 1988 Mr. Miller was President of Morlan
International, a cemetery and funeral service company. Mr. Miller was
appointed Chief Executive Officer after the resignation of Mr. Nungesser (see
below).
Dennis C. Poulsen became the Chairman of the Company November 19, 1996. Mr.
Poulsen joined Rose Hills in 1981 and became President in 1984. Prior to
joining the Company, Mr. Poulsen was employed by INA Corporation and
Transamerica Corporation, and is a past director of the American Cemetery
Association. Mr. Poulsen is a member of the American, California and Los
Angeles Bar Associations. His community activities include serving as a
director and Chairman of the Los Angeles Chamber of Commerce in 1997.
Dillis R. Ward became the President and Chief Operating Officer of the
Company effective October 1, 1997. Mr. Ward was a Regional President, West
Region of Loewen effective August 1, 1996 and served previously as Vice-
President, Operations, Western division of Loewen.
13
Kenton C. Woods became Senior Vice President and Chief Financial Officer in
May 1997. Prior to that, Mr. Woods served in senior financial positions at
Baskin-Robbins including Vice President-Finance. Mr. Woods also spent 10 years
with KPMG Peat Marwick LLP.
Kendall E. Nungesser was President and Chief Executive Officer of the
Company until September 10, 1997 when his employment terminated.
Douglas McKinnon resigned as a director in November 1997. He had served as
Executive Vice President of The Loewen Group, Inc.
Under the Shareholders' Agreement described in Item #13 below, Blackstone
and Loewen have the right to designate five and three nominees, respectively,
to the Board of Directors of RH Holdings. Blackstone designated Messrs. Chu,
Foley, Lipson and Ward and Loewen designated Messrs. Miller and Poulsen. Both
Blackstone and Loewen have the right to designate one additional director.
Each of Blackstone's and Loewen's nominees to the RH Holdings Board is also a
member of the Company's Board of Directors.
Directors of the Company will receive no compensation for their service as
Directors or for service on committees of the Board except for the
reimbursement of expenses.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth for the fiscal year ended December 31, 1997
the compensation paid by the Company to its Chief Executive Officer and each
of the other most highly compensated executive officers of the Company (c):
(b)
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- ------- ------ -------------
Lawrence Miller(a)...... 0 0 0
Chief Executive Offi-
cer, Director
Dennis C. Poulsen....... 425,422 0 12,326
Chairman of the Board
Gary P. Baker........... 100,000 15,000 9,538
Senior Vice President--
Operations
G. Dan Barefoot......... 139,337 12,500 288
Senior Vice President--
MIS
Mark L. Helmintoller.... 360,996 0 13,445
Former Executive Vice
President, Sales
Kendall E. Nungesser.... 204,808 0 10,182
Former President &
Chief Executive Officer
- --------
(a) Mr. Miller receives no compensation from the Company.
(b) These amounts consist primarily of excess life insurance premiums and auto
allowance. Mr. Helmintoller's also includes a taxable relocation
allowance.
(c) Ms. Cleaver joined the Company in October 1997 with an annualized base
salary of $250,000. Her total compensation was $60,390 for the year ended
December 31, 1997. Mr. Woods joined the Company in May 1997 with an
annualized base salary of $150,000. His total compensation was $89,108 for
the year ended December 31, 1997. Mr. Ward joined the Company November 1,
1997 with an annualized base salary of $250,000. Mr. Ward's compensation
was $15,348 for the year ended December 31, 1997.
14
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Ward, Ms.
Cleaver and Mr. Woods. Mr. Ward's agreement calls for an annual salary of
$250,000, with annual increases at the discretion of the Board, plus an annual
cash bonus based on company performance. Mr. Woods' agreement provides for an
annual salary of $150,000 and bonus of up to 25% of the annual salary based on
Company and individual performance. Ms. Cleaver's agreement provides that Ms.
Cleaver be paid an annual salary of $250,000, a monthly override based on
gross sales, and temporary relocation and housing allowances.
Effective January 1, 1998 the Board extended Mr. Poulsen's term as Chairman
through December 31, 1998. Concurrent with his extension the Company entered
into a consulting agreement which calls for the payment of up to $100,000
during 1998, including certain expenses.
In connection with the Acquisition, Messrs. Poulsen and Nungesser and one
other shareholder of Roses, Inc. entered into noncompetition agreements. Under
the terms of the agreement the shareholders received $511,000 during 1997 and
will receive $561,000 in 1998 and $448,000 in 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company is a direct, wholly-owned subsidiary of RH Holdings. The
following table sets for the certain information as of March 26, 1998
regarding the beneficial ownership of the common stock of RH Holdings(6):
PERCENTAGE OF
NUMBER OF OWNER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES COMMON STOCK
------------------------------------ --------- -------------
Blackstone entities(1)............................... 795.455 79.55%
Loewen Group International, Inc.(2).................. 204.545 20.45%
Chinh E. Chu(3)...................................... -- --
David I. Foley(3).................................... -- --
Howard A. Lipson(3).................................. -- --
Lawrence Miller(4)................................... -- --
Dennis C. Poulsen(5)................................. -- --
Dillis R. Ward(5).................................... -- --
- --------
(1) The 795.455 shares are held collectively by Blackstone Capital Partners II
Merchant Banking Fund L.P., Blackstone Rose Hills Offshore Capital
Partners L.P., and Blackstone Family Investment Partnership II L.P. The
address for the Blackstone entities is c/o Blackstone Group L.P., 345 Park
Avenue, New York, N.Y. 10154.
(2) The address for LGII is 50 River Center Boulevard, Covington, Kentucky
41011. LGII is a directly and indirectly wholly-owned subsidiary of LWN.
(3) Messrs. Chu, Foley and Lipson are affiliated with Blackstone in the
capacities described under Item 10 above. Each such person's business
address is c/o The Blackstone Group L.P., 345 Park Avenue, New York, N.Y.
10154.
(4) Mr. Miller is affiliated with Loewen in the capacity described under Item
10 above. Mr. Miller's business address is c/o The Loewen Group Inc., 3190
Tremont Avenue, Trevose, PA 19053.
(5) Mr. Poulsen's and Mr. Ward's business address is c/o Rose Hills Company,
3888 South Workman Mill Road, Whittier, CA 90601.
(6) Certain officers of the Issuer will hold a limited partnership interest in
RHI Management Direct L.P. ("RHIMD"), which will be the holder of 10.2273
shares (approximately 1.02%) of RH Holdings common stock; however, such
officers will not have voting or dispositive power with respect to such
shares.
In the event that Management is permitted and elects to invest in shares of
RH Holdings common stock as described in the "Formation of RHIMD; loans to
management" section of Item 13 below, the number and percentage set forth
above for the Blackstone entities will be proportionately reduced.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The summaries of the Shareholders' Agreement, the Put/Call Arrangement and
the Administrative Services Agreement set forth below do not purport to be
complete and are qualified in their entirety by reference to all the
provisions of the Stock Purchase Agreement, the Stockholders' Agreement, the
Put/Call Agreement and the Administrative Services Agreement, respectively.
Copies of the Stock Purchase Agreement, the Stockholders' Agreement, the
Put/Call Agreement and the Administrative Services Agreement are filed as
exhibits to this Annual Report on Form 10-K.
SHAREHOLDERS' AGREEMENT
In connection with the Acquisition Transaction, Blackstone, LGII and LN Sub
entered into an agreement (the "Shareholders' Agreement") setting forth
certain of their rights and obligations as shareholders of RH Holdings.
The Shareholders' Agreement provides that, subject to the Put/Call Agreement
referred to below, none of the shareholders is permitted to transfer any of
its respective shares of common or preferred stock of RH Holdings ("RH
Holdings Common Stock") without the others' prior written consent, subject to
certain exceptions.
Under the terms of the Shareholders' Agreement, Blackstone and LGII have the
right to designate five and three nominees as directors, respectively, to the
Board of Directors of RH Holdings (the "Board'). Each of Blackstone and LGII
further agreed (i) to vote all of its shares of RH Holdings Common Stock to
ratify and adopt any and all actions adopted or approved by the Board and (ii)
subject to certain exceptions related to the election and removal of
directors, not to vote any of its shares of RH Holdings Common Stock in favor
of any resolution, give any consent with respect to any matter or take any
other action as a stockholder of RH Holdings unless such resolution, matter or
other action first shall have been adopted or approved by the Board and
recommended by it for adoption, approval or consent by the shareholders. In
addition, the By-Laws of RH Holdings provide that certain actions by or with
respect to RH Holdings will require the unanimous consent of the Board. See
"--Certain Matters Subject to Supermajority Vote.'
In addition, in the event that Loewen owns, operates or controls any funeral
home or cemetery within 20 miles of any other funeral home or cemetery owned
by the Company, Loewen has an option, exercisable for the succeeding 12
months, to either sell such properties to a third party or transfer such
properties to the Company (free of indebtedness for borrowed money) in
exchange for additional equity in RH Holdings.
The Shareholders' Agreement will terminate following the exercise by either
Blackstone or LGII of its option pursuant to the Put/Call Agreement or on such
other date as the parties may agree.
PUT/CALL ARRANGEMENT
Pursuant to a separate agreement among Blackstone, LWN, LGII and LN Sub (the
"Put/Call Agreement"), (i) LGII has a call option, exercisable from and after
the fourth anniversary of the Acquisition Closing Date until but excluding the
sixth anniversary of the Acquisition Closing Date, to purchase all of
Blackstone's shares of RH Holdings Common Stock (the "Call Option") and (ii)
Blackstone has a put option, exercisable from and after the sixth anniversary
of the Acquisition Closing Date until but excluding the eighth anniversary of
the Acquisition Closing Date, to require LGII to purchase Blackstone's shares
of RH Holdings Common Stock (the "Put Option"). The option price in either
case is derived from a formula based on EBITDA. The performance by LGII of its
obligations under the Put/Call Agreement is guaranteed by LWN.
By virtue of the Put/Call Agreement, it is likely that the Company will
eventually become a wholly-owned subsidiary of Loewen. There can be no
assurance, however, that either the Call Option or the Put Option will be
exercised.
The exercise of either the Call Option or the Put Option will not give rise
to a Change of Control under the Indenture.
16
CERTAIN MATTERS SUBJECT TO SUPERMAJORITY VOTE
The By-Laws of RH Holdings provide that the following matters require the
unanimous approval of the Board of Directors: (1) amendments to the
Certificate of Incorporation or By-Laws of RH Holdings; (2) transactions
involving the merger, consolidation or sale of substantially all of the assets
of RH Holdings; (3) the declaration or payment of any cash dividend or other
distribution to the shareholders of RH Holdings (other than payments pursuant
to the Administrative Services Agreement or payment of the monitoring fee to
Blackstone described below under "--Payment of Certain Fees and Expenses;');
and (4) issuances of additional shares of capital stock, except for issuances
to third parties and issuances of additional shares of capital stock to the
extent they are required to be issued to cure or prevent an event of default
or failure of any financial covenants under the Bank Credit Agreement.
ADMINISTRATIVE SERVICES AGREEMENT
In connection with the Acquisition, the Company engaged Loewen to provide
certain administrative services and share certain resources (Loewen, in such
capacity, being the "Administrative Services Provider") pursuant to the
Administrative Services Agreement. Pursuant to the Administrative Services
Agreement, Loewen has undertaken some of the Company's administrative
functions, including: accounting services, computer, telecommunications,
general operations support, legal services, environmental compliance,
regulatory compliance, employee training and corporate development. In
addition, Loewen currently provides management expertise in planning MIS,
sales, tax, and fund management strategy. The Company also benefits under the
Administrative Services Agreement from access to some of Loewen's vendor
agreements.
As compensation for services provided under the Administrative Services
Agreement, the Administrative Services Provider is entitled to receive from
the Company, a fee (the "Administrative Services Fee") payable monthly in
arrears and in an aggregate annual amount equal to $334,000 for the first year
following the Acquisition Closing Date and $250,000 for the second year
following the Acquisition Closing Date, to be increased by 2.5% for each year
thereafter until the termination of the Administration Services Agreement. The
Company is also generally required to reimburse the Administrative Services
Provider for all out-of-pocket costs and expenses incurred by it from third
parties in connection with performing the administrative services described in
the Administrative Services Agreement.
The Administrative Services Agreement is subject to termination
automatically upon closing following the exercise of the Call Option or the
Put Option and at the option of the Company under certain other circumstances,
including the failure of Loewen to fully exercise the options set forth in the
fourth paragraph under "Shareholders' Agreement' above.
PAYMENT OF CERTAIN FEES AND EXPENSES
From the Acquisition Closing Date until the date on which Loewen or
Blackstone exercises the Call Option or the Put Option, respectively, pursuant
to the Put/Call Agreement, an affiliate of Blackstone will receive a
monitoring fee equal to $250,000 per annum (as such fee may be increased to
account for inflation) from the Company.
FORMATION OF RHIMD; LOANS TO MANAGEMENT
In connection with the Acquisition, on the Acquisition Closing Date, RHIMD
purchased approximately 1.02% of the RH Holdings common stock (the "RHIMD-
Owned Stock"). Limited partnership interests in RHIMD will subsequently be
allocated to certain officers of the Company (and "RHIMD Limited Partners").
In order to effect such purchase, on the Acquisition Closing Date, the
Company made a loan to RHIMD which is evidenced by a note bearing interest at
an annual rate of 9% and secured by the RHIMD-Owned Stock. RHIMD is deemed to
have made loans to each of the RHIMD Limited Partners in connection with their
subscription for limited partnership interests in RHIMD. The loan to certain
officers of the Company is evidenced by a note bearing interest at an annual
rate of 9% and secured by their limited partnership interest in RHIMD.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ROSE HILLS COMPANY CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. 22
Consolidated Balance Sheets as of December 31, 1997 and 1996............. 23
Consolidated Statements of Operations for the Year ended December 31,
1997 and Period from November 19, 1996 to December 31, 1996............. 24
Consolidated Statements of Cash Flows for the Year ended December 31,
1997 and the Period from November 19, 1996 to December 31, 1996......... 25
Consolidated Statements of Stockholder's Equity for the Year ended
December 31, 1997 and the Period from November 19, 1996 to December 31,
1996.................................................................... 26
Notes to Consolidated Financial Statements............................... 27
ROSES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report--KPMG Peat Marwick LLP...................... 43
Report of Independent Public Accountants--Arthur Andersen LLP............ 44
Consolidated Balance Sheets as of December 31, 1995 and November 18,
1996.................................................................... 45
Consolidated Statements of Income for the Years ended December 31, 1994
and 1995 and the Period from January 1, 1996 to November 18, 1996....... 46
Consolidated Statements of Cash Flows for the Years ended December 31,
1994 and 1995 and the Period from January 1, 1996 to November 18, 1996.. 47
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
ended December 31, 1994 and 1995 and the Period from January 1, 1996 to
November 18, 1996....................................................... 48
Notes to Consolidated Financial Statements............................... 49
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
COMBINED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. 60
Combined Statements of Financial position as of December 31, 1995 and
November 18, 1996....................................................... 61
Combined Statements of Activities for the Years ended December 31, 1994
and 1995 and the Period from January 1, 1996 to November 18, 1996....... 62
Combined Statements of Changes in Net Assets for the Years ended December
31, 1994 and 1995 and the Period from January 1, 1996 to November 16,
1996.................................................................... 63
Combined Statements of Cash Flows for the Years ended December 31, 1994
and 1995 and the Period from January 1, 1996 to November 18, 1996....... 64
Notes to Combined Financial Statements................................... 65
COMBINED FINANCIAL STATEMENTS OF CERTAIN SUBSIDIARIES OF LOEWEN GROUP
INTERNATIONAL, INC.
Auditors' Report......................................................... 78
Combined Balance Sheet as at December 31, 1995 and November 18, 1996..... 79
Combined Statement of Operations for the Year ended December 31, 1995 and
the Period from January 1, 1996 to November 18, 1996.................... 80
Combined Statement of Cash Flows for the year ended December 31, 1995 and
the Period from January 1, 1996 to November 18, 1996.................... 81
Notes to Combined Financial Statements................................... 82
2. FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS--ARTHUR ANDERSEN LLP.............. 90
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS............................. 91
18
(b) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* --Asset Purchase Agreement, dated as of September 19, 1996, by
and between and between Rose Hills Memorial Park Association
and Tudor Acquisition Corp. (now known as the Rose Hills
Company).
2.2* --Agreement and Plan of Merger, dated as of September 19, 1996,
by and among the stockholders of Roses, Inc. And Tudor
Acquisition Corp. (now known as the Rose Hills Company).
2.3* --Amendment to the Agreement and Plan of Merger dated as of
November 18, 1996 by and among Rose Hills Acquisition Corp.
(now known as Rose Hills Company), Roses Inc., the Stockholders
of Roses Inc., and RH Mortuary Corporation.
3.1* --Restated Certificate of Incorporation of Tudor Acquisition
Corp. changing its name to Rose Hills Acquisition Corp.
3.2* --Certificate of Amendment of Certificate of Incorporation of
Rose Hills Acquisition Corp. changing its name to Rose Hills
Company.
3.3* --Amended and Restated By-Laws of Rose Hills Company.
4.1* --Indenture dated as of November 15, 1996 between Rose Hills
Acquisition Corp. and United States Trust Company of New York,
as Trustee.
4.2* --Form of 9 1/2% Senior Subordinated Note due 2004 (included in
Exhibit 4.1).
10.1* --Stockholders' Agreement dated as of November 19, 1996 among
Rose Hills Holdings Corp., Blackstone Capital Partners II
Merchant Banking Fund L.P., Blackstone Rose Hills Offshore
Capital Partners L.P., Blackstone Family Investment Partnership
II L.P., Roses Delaware, Inc., Loewen Group International,
Inc., and RHI Management Direct L.P.
10.2* --Administrative Services Agreement dated as of November 19,
1996 between Rose Hills Acquisition Corp. (now known as Rose
Hills Company), The Loewen Group, Inc., and Loewen Group
International Inc.
10.3* --Credit Agreement dated as of November 19, 1996 among Rose
Hills Company, Rose Hills Holdings Corp., Goldman, Sachs & Co.,
as syndication agent and arranging agent, the financial
institutions from time to time parties thereto as lenders and
The Bank of Nova Scotia, as administrative agent for such
lenders.
10.4* --Put/Call Agreement, dated as of November 19, 1996 among
Blackstone Capital Partners II Merchant Banking Fund L.P.,
Blackstone Rose Hills Offshore Capital Partners L.P.,
Blackstone Family Investment Partnership II L.P., Roses
Delaware, Inc., Loewen Group International, Inc., The Loewen
Group Inc., and RHI Management Direct L.P.
10.5** --Buddhist Memorial Complex Development and Use Agreement dated
as of March 1, 1994 between Rose Hills Memorial Park
Association and International Buddhist Progress Society.
10.6** --First Amendment to Buddhist Memorial Complex Development and
Use Agreement, dated as of September 1, 1994 between Rose Hills
Memorial Park Association and International Buddhist Progress
Society.
10.7** --Second Amendment to Buddhist Memorial Complex Development and
Use Agreement, dated as of March 15, 1995 between Rose Hills
Memorial Park Association and International Buddhist Progress
Society.
19
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.8** --Third Amendment to Buddhist Memorial Complex Development and
Use Agreement, dated as of May 15, 1995 between Rose Hills
Memorial Park Association and International Buddhist Progress
Society.
10.9** --Fourth Amendment to Buddhist Memorial Complex Development and
Use Agreement, dated as of October 15, 1995 between Rose Hills
Memorial Park Association and International Buddhist Progress
Society.
10.10** --Memorandum of Understanding, dated as of March 22, 1996
between Rose Hills Memorial Park Association and International
Buddhist Progress Society.
10.11** --Amended and Restated Employment Agreement, 1996 by and dated
December between Rose Hills Company and Kendall E. Nungesser.
10.12** --Employment Agreement dated November 19, 1996 by and between RH
Mortuary Corporation and Dennis C. Poulsen.
10.13* --Employment Confirmation dated November 18, 1996 by and between
Rose Hills Company and Mark Helmintoller.
10.14** --Employment Letter Agreement, dated April 22, 1997 by and
between Rose Hills Company and Kenton C. Woods.
10.15** --Addendum to Employment Letter Agreement, dated April 28, 1997
by and between Rose Hills Company and Kenton C. Woods.
10.16** --Non-Competition Agreement dated as of November 19, 1996,
between RH Mortuary Corporation and Kendall E. Nungesser.
10.17** --Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Dennis C. Poulsen.
10.18** --Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Sandy V. Durko.
12*** --Computation of Ratio of Earnings to Fixed Charges.
21* --Subsidiaries of Rose Hills Company (formerly known as Rose
Hills Acquisition Corp.).
23.1*** --Consent of Arthur Andersen LLP.
23.2*** --Consent of KPMG
27*** --Financial Data Schedule
(c) REPORTS ON FORM 8K
None
- --------
* Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-4 (Registration No. 333-21411).
** Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-4 (Registration No. 333-21411 Amendment No. 1).
*** Filed Herewith.
20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Rose Hills Company
/s/ Kenton C. Woods
_____________________________________
KENTON C. WOODS
SENIOR VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Lawrence Miller CEO and Director March 26, 1998
- ------------------------------------- (Principal Executive
LAWRENCE MILLER Officer)
/s/ Dillis R. Ward President, Chief March 26, 1998
- ------------------------------------- Operating Officer
DILLIS R. WARD and Director
(Principal
Executive Officer)
/s/ Kenton C. Woods Senior Vice March 26, 1998
- ------------------------------------- President, Chief
KENTON C. WOODS Financial Officer,
Secretary and
Treasurer
(Principal
Financial Officer;
Principal
Accounting Officer)
/s/ Dennis C. Poulsen Chairman and March 26, 1998
- ------------------------------------- Director
DENNIS C. POULSEN
/s/ Howard A. Lipson Director March 26, 1998
- -------------------------------------
HOWARD A. LIPSON
/s/ Chinh E. Chu Director March 26, 1998
- -------------------------------------
CHINH E. CHU
/s/ David I. Foley Director March 26, 1998
- -------------------------------------
DAVID I. FOLEY
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rose Hills Company:
We have audited the consolidated financial statements of Rose Hills Company
and subsidiaries (a wholly owned subsidiary of Rose Hills Holding Corp.) as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Rose Hills Company and subsidiaries as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the year ended
December 31, 1997 and period from November 19, 1996 to December 31, 1996 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Los Angeles, California
February 23, 1998
22
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,462 $ 7,900
Accounts receivable, net of allowances.................... 5,870 8,344
Inventories............................................... 875 1,186
Prepaid expenses and other current assets................. 2,252 2,666
Deferred tax asset........................................ 4,658 1,176
-------- --------
Total current assets................................... 17,117 21,272
Long-term receivables, net of allowances................... 10,082 5,153
Cemetery property, at cost................................. 76,778 78,912
Property and equipment, net................................ 64,101 65,760
Goodwill................................................... 128,200 129,294
Deferred finance charges................................... 11,182 11,891
Other assets............................................... 4,591 5,552
-------- --------
Total assets........................................... $312,051 $317,834
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,052 $ 2,383
Accrued expenses.......................................... 8,157 7,857
Accrued interest.......................................... 1,291 1,815
Other current liabilities................................. 1,912 1,487
Current portion of long-term debt......................... 2,368 1,968
-------- --------
Total current liabilities.............................. 15,780 15,510
Retirement plan liabilities................................ 7,389 7,616
Deferred tax liability..................................... 5,122 4,373
Subordinated notes payable................................. 80,000 80,000
Bank senior-term loan...................................... 72,500 74,000
Other long-term debt....................................... 2,415 3,764
Other liabilities.......................................... 1,587 3,545
-------- --------
Total liabilities...................................... 184,793 188,808
-------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, par value of $.01. Authorized and
outstanding 1,000 shares................................. -- --
Additional paid-in capital................................ 129,554 129,554
Accumulated deficit....................................... (2,296) (528)
-------- --------
Total stockholder's equity............................. 127,258 129,026
-------- --------
Total liabilities and stockholder's equity............. $312,051 $317,834
======== ========
See accompanying notes to consolidated financial statements.
23
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31,
1996
(IN THOUSANDS)
1997 1996
-------- ------
Sales and services:
Funeral sales and services................................. $ 28,502 3,131
Cemetery sales and services................................ 34,235 3,001
Insurance commissions and other income..................... 8,005 965
-------- ------
Total sales and services................................ 70,742 7,097
-------- ------
Cost of sales and services:
Funeral sales and services................................. 7,082 802
Cemetery sales and services................................ 7,989 823
-------- ------
Total cost of sales and services........................ 15,071 1,625
-------- ------
Gross profit............................................ 55,671 5,472
Selling, general and administrative expenses................ 37,061 3,757
Amortization of purchase price in excess of net assets
acquired and other intangibles............................. 3,776 372
-------- ------
Income from operations.................................. 14,834 1,343
Other expense--interest expense............................. (16,507) (2,031)
-------- ------
Loss before income taxes................................ (1,673) (688)
Income tax expense (benefit)................................ 95 (160)
-------- ------
Net loss................................................ $ (1,768) (528)
======== ======
See accompanying notes to consolidated financial statements.
24
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31,
1996
(IN THOUSANDS)
1997 1996
-------- --------
Cash flows from operating activities:
Net loss.................................................. $ (1,768) (528)
-------- --------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................ 7,712 1,013
Amortization of cemetery property........................ 2,451 366
Provision for bad debts and sales cancelation............ 1,959 62
Provision for deferred taxes............................. 81 (161)
Changes in assets and liabilities, net of effects of
Acquisition Transaction:
Increase in accounts receivable......................... (4,537) (96)
Increase in inventories................................. (6) (110)
Decrease (increase) in prepaid expenses and other
current assets......................................... 414 (1,927)
(Decrease) increase in accounts payable and accrued
expenses............................................... (3,570) 8,303
Decrease in retirement plan liabilities................. (227) (992)
Decrease in other assets and liabilities................ (904) (792)
-------- --------
Total adjustments..................................... 3,373 5,666
-------- --------
Net cash provided by operating activities............. 1,605 5,138
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (2,138) (279)
Cash paid for acquisitions, net of cash received.......... -- (246,345)
Additions to goodwill..................................... (522) --
-------- --------
Net cash used in investing activities................. (2,660) (246,624)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock to Parent.......... -- 106,554
(Repayments of) proceeds from borrowings under Bank Credit
Agreement................................................ (1,500) 75,000
Proceeds from subordinated notes payable.................. -- 80,000
Decrease in other long-term debt.......................... (597) --
Addition to deferred finance charges...................... (934) (12,074)
Principal payments of capital lease obligations........... (352) (94)
-------- --------
Net cash (used in) provided by financing activities... (3,383) 249,386
-------- --------
Net (decrease) increase in cash and cash equivalents.. (4,438) 7,900
Cash and cash equivalents at beginning of period........... 7,900 --
-------- --------
Cash and cash equivalents at end of period................. $ 3,462 7,900
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................. $ 15,217 35
Income taxes............................................. 1,219 --
======== ========
Noncash financing activities:
Equipment, capital leases................................. $ -- --
Acquisition of affiliate properties, contributed capital.. -- 23,000
======== ========
Acquisition of businesses:
Cash paid for acquisitions................................ -- 247,968
Cash acquired from acquisitions........................... -- (1,623)
-------- --------
Cash paid for acquisitions, net of cash received...... -- 246,345
======== ========
See accompanying notes to consolidated financial statements.
25
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31,
1996
(IN THOUSANDS)
TOTAL
SHARES ADDITIONAL ACCUMULATED STOCKHOLDER'S
OUTSTANDING PAID-IN CAPITAL DEFICIT EQUITY
----------- --------------- ----------- -------------
Balance, November 19,
1996................... -- $ -- -- --
Issuance of common
stock.................. 1,000 106,554 -- 106,554
Capital contributions... -- 23,000 -- 23,000
Net loss................ -- -- (528) (528)
----- -------- ------ -------
Balance, December 31,
1996................... 1,000 129,554 (528) 129,026
Net loss................ -- -- (1,768) (1,768)
----- -------- ------ -------
Balance, December 31,
1997................... 1,000 $129,554 (2,296) 127,258
===== ======== ====== =======
See accompanying notes to consolidated financial statements.
26
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The December 31, 1997 consolidated financial statements of Rose Hills
Company and subsidiaries (collectively the Company) (a wholly owned subsidiary
of Rose Hills Holding Corp.) (RH Holdings) include the accounts of RH Mortuary
Corporation (the Mortuary), RH Satellite Properties Corporation (the Satellite
Properties) and RH Cemetery Corporation (the Cemetery). The Company is the
successor to the operations of Roses, the Association and the Satellite
Properties, as described below under Acquisition Transaction. The Company had
no prior operations. RH Holdings was formed by Blackstone Capital Partners II
Merchant Banking Fund L.P. and affiliates (Blackstone), RHI Management Direct
L.P. (RHIMD) and the Loewen Group Inc. and affiliates (Loewen) (collectively
the Buyers), in order to purchase certain mortuary and cemetery operations
(the Acquisition Transaction) as discussed below.
The Company operates 3 cemetery and funeral home combinations as well as 14
funeral home properties in the Southern California area. Services offered at
the locations include cemetery interment and professional mortuary services,
both of which include pre-need and at-need sales. In addition, the Company
offers for sale caskets, memorials, vaults, flowers and the sale of pre-need
funeral insurance from which commissions are earned.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and the prevailing practices within the
cemetery and mortuary industry. All significant intercompany accounts and
transactions have been eliminated.
Acquisition Transaction
In connection with the Acquisition Transaction, Blackstone, RHIMD and Loewen
contributed to RH Holdings and RH Holdings contributed to the Company $106.6
million in cash ($107 million less $.4 million to be advanced by the Company
to RHIMD to finance its purchase of common stock of RH Holdings).
Additionally, effective November 19, 1996, to finalize the capitalization
and structure of the Company, Loewen contributed to RH Holdings 14 funeral
homes and 2 combination funeral home and cemetery properties located in the
Southern California area (the Satellite Properties) which were valued at the
date of the Acquisition Transaction at $23.0 million. RH Holdings in turn
contributed these properties to the Company effective November 19, 1996.
Finally, the Company entered into the Bank Credit Agreement (see note 10) and
the sale of the senior subordinated notes was consummated (see note 10).
Effective November 19, 1996, per terms of the merger agreement (the Merger
Agreement), the Company, through its subsidiary RH Mortuary Corporation,
acquired the common stock of Roses, Inc. (Roses), the predecessor mortuary, in
consideration of the payment of $59.9 million in cash (subject to downward
adjustment under certain circumstances) after giving effect to the repayment
of outstanding indebtedness of Roses, Inc. Upon consummation of the Merger
Agreement, RH Mortuary Corporation was merged with and into Roses.
The Company also paid a cash purchase price for certain assets, net of
certain liabilities, (the Asset Purchase Agreement) of Rose Hills Memorial
Park Association, the predecessor cemetery (the Association), in the amount of
$166.3 million (subject to downward adjustment under certain circumstances).
In connection with the Acquisition Transaction described above, Roses
entered into a "Settlement Agreement" dated November 19, 1996 with the
Association to resolve amounts due/owed between Roses and the Association as
of November 18, 1996. As of December 31, 1997, the Company and the Association
have not
27
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reached a final agreement with respect to amounts owed under the terms of the
Settlement Agreement. However, in the opinion of management of the Company,
amounts accrued at December 31, 1997 are adequate to satisfy amounts that may
be due the Association.
The assets acquired by the Company have been recorded at cost and, in the
case of the Satellite Properties, at fair value at the date of contribution.
RECLASSIFICATION
Certain reclassifications have been made to the 1996 Financial Statements to
conform to the 1997 presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and revenues and expenses and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and short-term certificates
of deposit, with original maturities of three months or less.
Cemetery Operations
Pre-need sales of cemetery interment rights and other related products and
services are recorded as revenue when the customer contracts are signed with
concurrent recognition of related costs. Allowances for anticipated customer
cancelations and refunds are provided at the date of sale based on
management's estimate of expected cancelations using historical trends. Actual
cancelation rates in the future may change that estimate. A portion of the
proceeds from the sale of interment rights is required by state law to be paid
into the Endowment Care Fund to provide for the perpetual care of the
associated properties. Cemetery revenue is recorded net of these amounts.
Earnings of the Endowment Care Fund are used to defray the maintenance costs
of cemeteries. Additionally, pursuant to state law, a portion of the proceeds
from the sale of pre-need merchandise and services may also be required to be
paid into trust funds which are not included in the accompanying consolidated
financial statements.
Prearranged Funeral Services
Prearranged funeral services provide for future funeral services and are
generally determined by prices prevailing at the time the contract is signed.
The payments made under the contract are either placed in trust or are used to
pay the premiums of life insurance policies under which the Company will be
designated as beneficiary. The pre-need funeral insurance policies sold by the
Company are whole-life policies sold on a pre-need basis to pay for the cost
of funeral services. Commissions earned are based on a combination of factors,
such as the amount of funeral cost coverage sold, the age of the insured and
the volume of monthly sales activity. In addition, an annual profit sharing
commission is received based upon the number of policies written. Insurance
commissions earned on individual policies, as well as commissions based on
monthly volume activity and annual
28
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
profit sharing arrangements, are recognized as income when the policies are
accepted by the insurance company. Except for insurance commissions and
amounts not required to be trusted which are used to defray the initial costs
of administration, no income is recognized until the performance of a specific
funeral.
Trust fund principal amounts and insurance contract amounts, together with
trust fund investment earnings retained in trust and annual insurance
benefits, are deferred until the service is performed. The Company estimates
that trust fund investment earnings and annual insurance benefits exceed the
increase in cost over time of providing the related services. Upon performance
of the specific funeral service, the Company will recognize the trust fund
principal amount or insurance contract amount together with the accumulated
trust earnings and annual insurance benefits as funeral revenues. Indirect
costs relating to the sale of prearranged funeral services are expensed in the
period incurred.
Receivables
Receivables due from customers for cemetery property sold in advance of need
are generally collected over one to seven years and bear interest at the rate
of 11.75% per annum. An allowance for sales cancelations has been established
to recognize that cemetery property sold in advance of need, for which a
minimum down payment is received, may be subsequently canceled. Accordingly,
as of December 31, 1997 and December 31, 1996, allowance for sales
cancelations totaled $2,234,000 and $1,043,000, respectively. A provision of
$1,747,000 and $52,000 was charged to cemetery sales to provide for estimated
future cancelations for the year ended December 31, 1997 and period from
November 19, 1996 to December 31, 1996, respectively.
In addition to the receivables due from customers for cemetery property,
receivables from customers for cemetery goods and services sold and provided
in funeral arrangements as well as mortuary services and merchandise are
generally collected over a period of one to five years bearing interest at the
rate of 12% per annum. An allowance for doubtful accounts has been established
to recognize that a portion of these types of receivables may not ultimately
be collectible. As of December 31, 1997 and 1996, the allowance for doubtful
accounts totaled $613,000 and $1,127,000, respectively.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
Cemetery Property
Cemetery property consists of developed and undeveloped cemetery property
and is valued at average cost, which is not in excess of market value. Amounts
are expensed to costs and expenses as sales of cemetery plots occur.
Property, Plant and Equipment
Property, plant and equipment are valued at fair market value at the
acquisition date, with additions subsequent to the acquisition date recorded
at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets as follows:
Building and improvements....................... 10 to 40 years
Automobiles..................................... 4 to 6 years
Furniture, fixtures and equipment............... 10 years
Computer hardware and software.................. 3 to 6 years
Leasehold improvements.......................... Over the term of the lease
29
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and betterment are capitalized.
Goodwill
The excess of purchase price over the fair value of identifiable net assets
acquired (goodwill) is being amortized by use of the straight-line method over
a 40-year period. As of December 31, 1997 and 1996, accumulated amortization
was $3,683,000 and $333,000, respectively.
Covenants Not to Compete
Covenants not to compete on the consolidated balance sheets represent
amounts prepaid or the present value of future payments under noncompetition
agreements with certain key management personnel of acquired operations.
Amortization of such covenants not to compete is provided by use of the
straight-line method over the terms of the relevant agreements, typically ten
years. As of December 31, 1997 and 1996, accumulated amortization of covenants
not to compete was $464,000 and $38,000, respectively.
Deferred Financing Cost
Deferred financing costs relating to the bank senior-term loan and the
senior subordinated notes are being amortized over the life of the loan and
the notes based on the effective interest method. As of December 31, 1997 and
1996, accumulated amortization of these costs was $1,826,000 and $182,000,
respectively.
Derivative Instruments
The Company enters into derivative transactions with financial institutions
only as hedges of other financial transactions and not for speculative
purposes. The Company's policies do not allow leveraged transactions and are
designed to minimize credit and concentration risk with counterparties.
Income Taxes
The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109 (SFAS
No. 109). Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Fair Value of Financial Instruments
The carrying value of the Company's debt instruments approximates fair value
which is based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities.
The fair value of the Company's accounts and notes receivable in excess of
one year approximates carrying values and is determined as the present value
of expected future cash flows discounted at the interest rate
30
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
currently offered by the Company, which approximates rates currently offered
for loans with similar terms and collateral to borrowers with comparable
credit risk.
The carrying amounts of the remaining current assets and liabilities
approximate fair value because of the short-term nature of those accounts.
Impairment of Long-Lived Assets
The Company follows SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
which requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
operating cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount.
Earnings (Loss) per Share
Earnings (loss) per share have not been included as the Company is a wholly
owned subsidiary.
Year 2000 Issues
The Company is currently assessing the cost to remediate its Year 2000
issues. Although the actual cost to remediate is not fully known, based upon
information to date, it is not expected that the remediation will have a
material impact on the Company's financial condition or operating results.
(3) ACQUISITIONS
The acquisitions of the Satellite Properties, Roses, Inc. and the
Association have been recorded under the purchase method of accounting, and
accordingly, the results of operations of the companies have been included in
the accompanying consolidated financial statements from the date of
acquisition, November 19, 1996 through December 31, 1996. The purchase price
has been allocated to assets acquired and liabilities assumed based on fair
market value at the dates of acquisition.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 1997
and 1996 (in thousands):
1997 1996
------- ------
Land.......................................................... $ 9,036 9,054
Buildings and improvements.................................... 40,658 30,653
Furniture, fixtures and equipment............................. 4,887 3,748
Vehicles...................................................... 634 431
Computers and computer software............................... 3,826 5,074
Construction in progress...................................... 7,617 17,076
------- ------
Total property, plant and equipment......................... 66,658 66,036
Less accumulated depreciation................................. 2,557 276
------- ------
Property, plant and equipment, net.......................... $64,101 65,760
======= ======
31
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company's policy is not to use derivative instruments for speculation.
The Company does not trade in financial instruments and is not a party to
leveraged derivatives.
The notational amounts of derivatives do not represent amounts exchanged by
the parties and, thus, are not a measure of the exposure of the Company
through the use of derivatives. The amounts exchanged during the term of the
derivatives are calculated on the basis of the notational amounts and the
other contractual conditions of the derivatives.
The Company has entered into interest rate collar agreements, which
effectively set maximum and minimum interest rates on the $75.0 million
notional principal amount of Senior Debt (note 10), ranging from a floor of
5.5% (the Company would pay 5.5% even if rates fall below that level) to a
maximum or cap of 6.5% for the period commencing January 2, 1997 through
December 1, 2000. The collar agreement is based on three-month LIBOR. The fair
value of the collar agreement at December 31, 1997, as estimated by a dealer,
was a favorable $7,000.
The counterparty to these contractual relationships is a major financial
institution with which the Company has other financial relationships. The
Company is exposed to credit losses in the event of nonperformance by the
other parties to the interest rate collar agreements. However, the Company
does not anticipate nonperformance by the other party, and no material loss
would be expected from nonperformance of such counterparty.
(6) ENDOWMENT CARE FUND
The Company, pursuant to state law, has placed the cemeteries under
endowment care. Therefore, when cemetery property is sold, an endowment care
charge is made for which a minimum amount is statutory. Charges are payable to
the Endowment Care Fund (the Fund), a separate 501(c)(13) organization, when
the total sales contract amount has been collected. Since a substantial
portion of pre-need cemetery property sales is made on an installment basis,
many of the charges are not due currently. Generally, the installment
receivables, including late charges, are collectible within one to seven
years. As of December 31, 1997 and 1996, amounts owed to the Fund, but not yet
due or collected from customers, amounted to $1,761,000 and $1,789,000,
respectively. The Fund's assets are invested under the direction of the
Trustees of the Fund. The change in net assets of the Fund, net of amounts
required to be withheld under state law, is paid by the Fund to the Company
and is used for the care, maintenance and embellishment of the cemetery. As
allowable by state law, a portion of the undistributed capital gains of the
Fund has been reserved and is available to the Company at the discretion of
the Trustees for future maintenance, repair or restoration of property or
embellishment. The amounts earned by the Fund and transferred to the Company
are reported in the consolidated statements of operations and amounted to
$3,549,000 and $353,000 for the year ended December 31, 1997 and period from
November 19, 1996 to December 31, 1996, respectively.
Total assets of the Fund are $60,382,000 and $58,132,000 at December 31,
1997 and 1996, respectively, and consist primarily of cash and investments
carried at fair market value. Total liabilities of the Fund are $389,000 and
$703,000 at December 31, 1997 and 1996, respectively, and consist of amounts
payable to the Company. Total net assets of $59,993,000 and $57,429,000 at
December 31, 1997 and 1996, respectively, resulted primarily from Fund
deposits received or receivable from customers, capital gains (net of
transfers to reserves) and holding gains and losses experienced by the Fund.
32
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) PRE-NEED FUNERAL SERVICE DEBENTURES
From 1960 to 1975, the Association (the predecessor cemetery) sold pre-need
funeral service debentures at face amounts under subscription agreements which
provided for the collection of the amount on an installment basis. Debentures
were issued in denominations of $125 each when installments of the amount were
collected. The Company may redeem the debentures at any time prior to maturity
at the face amount or the holders thereof may at any time apply the debentures
to the purchase price of funeral services and arrangements furnished by the
Company.
Additionally, the subscription agreements may be canceled at any time by
either the Company or the subscriber. Interest on the debentures is calculated
at the rate of 3% per annum, is payable semiannually and continues to accrue
on debentures not presented for payment on their maturity date.
Under the indenture and supplemental indentures, as amended, the Company is
required to make payments to a trustee of the fund to be used for the
retirement of the debentures at maturity or upon their application to the
purchase price of funeral services. Initial funding payments in amounts equal
to 25% of the face amount of debentures being issued were required at the time
of issuance. The issued and outstanding debentures at December 31, 1997 mature
as follows (in thousands):
DATE AMOUNT
---- ------
Prior to February 1, 1997........................................... $659
February 1, 1998.................................................... 61
February 1, 1999.................................................... 78
February 1, 2000.................................................... 81
----
Total............................................................. $879
====
(8) INCOME TAXES
The provision for income tax (benefit) as of December 31, 1997 and 1996
follows (in thousands):
1997 1996
---- ----
Current:
Federal....................................................... $-- --
State......................................................... 14 18
---- ----
Total current................................................ 14 18
---- ----
Deferred:
Federal....................................................... (10) (121)
State......................................................... 91 (57)
---- ----
Total deferred............................................... 81 (178)
---- ----
Total income tax (benefit)................................... $ 95 (160)
==== ====
33
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between the provision for income taxes and income taxes at the
statutory Federal income tax rate are as follows (in thousands):
PERIOD FROM
NOVEMBER 19,
YEAR ENDED 1996 TO
DECEMBER 31, JANUARY 1,
1997 1996
------------ ------------
Expected Federal benefit........................... $(569) (234)
Net tax effects of:
Goodwill amortization............................. 640 102
State taxes, net of Federal benefit............... 87 (26)
Nondeductible expenses............................ 10 (2)
Other............................................. (73) --
----- ----
Actual income tax (benefit)...................... $ 95 (160)
===== ====
The components of the net deferred tax balances at December 31, 1997 and
1996 are as follows (in thousands):
1997 1996
------- ------
Deferred tax assets:
Operating reserves......................................... $ 1,469 452
Retirement benefits........................................ 2,563 1,474
Other reserve.............................................. 2,101 611
Net operating loss......................................... 1,032 --
Amortization............................................... 15 56
State taxes................................................ 29 259
Other...................................................... 31 113
------- ------
Total deferred tax assets................................. 7,240 2,965
------- ------
Deferred tax liabilities:
Acquisition step ups....................................... (5,819) (4,552)
Depreciation............................................... (1,022) (738)
Land....................................................... (863) (872)
------- ------
Total deferred tax liability.............................. (7,704) (6,162)
------- ------
Net deferred tax liability................................ $ (464) (3,197)
======= ======
Based upon the level of historic taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences at December 31, 1997.
At December 31, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of $2.8 million, which are available to offset
future federal income, if any, through 2012.
(9) RELATED PARTY TRANSACTIONS
Administrative Services Agreement
In connection with the Acquisition Transaction, as described in note 1, the
Company engaged Loewen to provide certain administrative services and share
certain resources pursuant to an Administrative Services
34
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreement. Pursuant to the Administrative Services Agreement, Loewen is to
provide accounting services, computer systems and support, telecommunications
support, general operations support, legal services, environmental compliance,
regulatory compliance, as well as expertise in management information systems,
sales, tax and fund management. As compensation for services provided under
the Administrative Services Agreement, Loewen is entitled to receive from the
Company, a minimum fee (the Administrative Services Fee) payable monthly in
arrears and in an aggregate amount equal to $334,000 for the first year
following the Acquisition and $250,000 for the second year and subsequent
years subject to specified annual increases for each year thereafter until the
termination of the Administrative Services Agreement. The Company is also
required to reimburse Loewen for all out-of-pocket costs and expenses incurred
from third parties in connection with services performed pursuant to the
Administrative Services Agreement. For the year and period ended December 31,
1997 and 1996, the Company had recorded approximately $323,000 and $42,000 for
Administrative Services Fee, respectively.
Monitoring Fee
The Company is required to pay annually a monitoring fee (the Monitoring
Fee) equal to $250,000 (subject to increases for inflation) to an affiliate of
a shareholder of the Parent company. The Company had paid the Monitoring Fee
as of December 31, 1997 and 1996 and had amortized approximately $250,000 and
$31,000 as a charge against earnings for the year and period ended December
31, 1997 and 1996, respectively.
(10) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996 (in
thousands):
1997 1996
-------- -------
Borrowings outstanding under Bank Credit Agreement, due
2002................................................... $ 73,503 75,000
Senior subordinated notes at 9.5%, due November 15,
2004................................................... 80,000 80,000
Notes payable and liabilities under noncompete
agreements bearing interest at rates ranging from 7.46%
to 9%. The notes and noncompete agreements have
variable maturities ranging from 1999 through 2007..... 3,128 3,825
Other................................................... 652 907
-------- -------
157,283 159,732
Less current portion.................................... (2,368) (1,968)
-------- -------
Long-term debt........................................ $154,915 157,764
======== =======
At December 31, 1997, annual maturities of long-term debt consisted of the
following (in thousands):
Year ending December 31:
1998............................................................ $ 2,368
1999............................................................ 1,909
2000............................................................ 3,401
2001............................................................ 7,262
2002............................................................ 9,247
Thereafter...................................................... 133,096
--------
$157,283
========
35
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bank Credit Agreement
Concurrent with the consummation of the Acquisition Transaction, the Company
entered into a credit agreement (the Bank Credit Agreement) with a group of
financial institutions in Canada and the United States, which provides for (1)
a senior secured amortization extended term loan facility (the Bank Term
Facility) in an aggregate principal amount of $75 million used to partially
finance the Acquisition Transaction, as described in note 1, to prefund
certain capital expenditures and to refinance existing indebtedness of the
Mortuary and (2) a senior secured revolving credit facility (the Revolving
Credit Facility) in an aggregate principal amount of $25 million, the proceeds
of which are available for general corporate purposes and a portion of which
may be extended (as agreed upon) in the form of swing line loans or letters of
credit for the account of the Company.
The Bank Credit Agreement contains certain affirmative and negative
covenants customary for this type of agreement and is guaranteed by the
Company, its subsidiaries and RH Holdings. All such guarantees are secured by
a first priority security interest of the capital stock of the Company and
each subsidiary and all intercompany receivables. The Company is required to
maintain certain defined financial ratios. The Company was in compliance with
all such requirements at December 31, 1997.
Borrowings under the Bank Term Facility bear interest at the Company's
option, at the reference rate (the Base Rate) of the agent acting on behalf of
the financial institutions plus 2%, or under a Eurodollar option, at a
reserve-adjusted Eurodollar rate (the Adjusted Eurodollar Rate) plus 3%. The
Bank Term Facility will mature seven years after the Acquisition and requires
semiannual installments aggregating $1 million in each of the first three
years after the Acquisition, $3 million in the fourth year after the
Acquisition, $7 million in the fifth year after the Acquisition, $9 million in
the sixth year after the Acquisition and $53 million in the seventh year after
the Acquisition.
As of December 31, 1997, the Company was paying interest at the Adjusted
Eurodollar Rate (5.94%) plus 3% on its outstanding borrowings under the Bank
Term Facility. Additionally, the Company had entered into interest rate collar
agreements to limit its interest rate risk. Pursuant to the terms of the
interest rate collar agreements, the minimum and maximum Base Rate or Adjusted
Eurodollar interest rates range from 5.5% to 6.5%, respectively, for the
period from January 2, 1997 through December 1, 2000.
Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at the Base Rate plus 1.75%, or the Adjusted Eurodollar Rate
plus 2.75%. The Company pays a commitment fee of .5% on the unused portion.
The Revolving Credit Facility is payable in full at maturity, with no prior
amortization. As of December 31, 1997, the Company had $500,000 of borrowings
under the Revolving Credit Facility.
Concurrent with the consummation of the Acquisition Transaction, the Company
issued $80 million of 9.5% senior subordinated notes payable due November 15,
2004 (the Notes). There are no sinking fund requirements on the Notes and they
may not be redeemed until November 2000. At such date, they are redeemable at
104.75% of principal amount, plus accrued and unpaid interest, if any, to the
redemption date, and thereafter, at an annually declining premium over par
until November 2003, when they are redeemable at par. The indenture limits the
payment of dividends and repurchase of capital stock, and includes certain
other restrictions on indebtedness and limitations customary with subordinated
indebtedness of this type.
The Company assumed liabilities under notes payable and noncompete
agreements from the Satellite Properties. The notes payable are secured by
land and bear interest at rates ranging from 7.46% to 8.00%. The noncompete
agreements consist of the net present value of future payments discounted at
9.00%.
36
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) RETIREMENT PLANS
Defined Benefit Plan
As a result of the Acquisition Transaction, the Retirement Plan for
Employees of Rose Hills Mortuary, L.P. (the Plan) was frozen as of December
31, 1996. It is the intention to formally terminate the Plan subsequent to
December 31, 1997. Prior to the Acquisition Transaction, all employees of the
Mortuary which employed all cemetery and mortuary employees were participants
in the Plan. Participants became fully vested upon the freezing of the Plan.
Employees may elect to receive their pension benefits in the form of a single-
life annuity or a qualified joint and contingent annuity.
The Company has funded or accrued the present value of these benefits. The
Company Plan is subject to and in compliance with the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). During 1995, the
Company Plan received a favorable letter of determination from the IRS.
The net pension cost included the following components (in thousands):
Service cost--benefits earned during the period..................... $ --
Interest cost on projected benefit obligations...................... 712
Actual earnings on Company Plan assets.............................. (692)
Net amortization and deferral....................................... (10)
-----
Total net periodic pension cost................................... $ 10
=====
The following table sets forth the Company Plan's funded status and the
amounts recognized in the accompanying consolidated financial statements (in
thousands):
DECEMBER 31, 1997
-----------------
Actuarial present value of benefit obligations--
accumulated benefit obligation, including vested
benefits of $10,701 for 1997.......................... $(10,701)
========
Projected benefit obligation for services rendered to
date.................................................. $(10,701)
Plan assets at fair market value, primarily listed
stocks, bonds and U.S. Government obligations......... 11,248
--------
Plan assets greater than projected benefit
obligations......................................... 547
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions........................................... (375)
Unrecognized net assets being recognized over 15
years................................................. --
Additional liability................................... --
--------
Prepaid pension costs................................ $ 172
========
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7% and 6.55% at December 31,
1997 and 1996, respectively. The expected long-term rate of return on assets
was 6.5%.
Defined Contribution Plan
The Company also has a defined contribution plan, which has been qualified
under Section 401(k) of the Internal Revenue Service Code (the Savings Plan).
During 1995, the predecessor mortuary received a favorable
37
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
letter of determination from the Internal Revenue Service regarding the
Savings Plan. The Savings Plan permits participation by all employees of the
Company who have completed six months of continuous service, subject also to
their entry into the Savings Plan on enrollment dates of January 1 or July 1
of each year. Participants may defer up to 15% of their compensation (subject
to certain limitations). In addition to the amount of compensation deferred by
participants, the Company matches up to 100% of the first $300 contributed and
50% of the next $3,400 contributed per year per participant. Additionally, the
Company may contribute to the trust for each Plan year, beginning with the
Plan year beginning January 1, 1997, such amounts as the Board of Directors
shall determine in its sole discretion. For the year ended December 31, 1997,
the Company's contribution to this Savings Plan on behalf of the participants
amounted to $388,000. For the period from November 19, 1996 to December 31,
1996, the Company's contribution to this Savings Plan on behalf of the
participants amounted to $48,000.
Supplemental Employee Retirement Plan
Three senior officers of Roses, the predecessor mortuary, had employment
agreements, which obligated Roses to provide these three employees with a
supplemental employee retirement plan (SERP). This nonqualified supplemental
pension plan covering certain employees provides for incremental pension
payments from Roses' funds so that the total pension payments would more
realistically approximate amounts that would have been payable from the Roses'
principal pension plan if it were not for limitations imposed by income tax
regulations. In conjunction with the Acquisition Transaction, the SERP
liability was assumed by the Company. The annual lifetime benefit is based
upon a percentage of salary during the final five years of employment, offset
by several other sources of income, up to age 62, at which time the benefit
becomes payable to the participant. The plan also provides for early
retirement, however benefits paid would be reduced accordingly.
The SERP net pension cost included the following components (in thousands):
Service cost--benefits earned during the period............... $ --
Interest cost on projected benefit obligation................. 321
Net amortization and deferral................................. (26)
-----
Total net periodic pension cost............................. $ 295
=====
The following table sets forth the SERP funded status and the amounts
recognized in the accompanying consolidated financial statements (in
thousands):
DECEMBER 31,
1997
------------
Actuarial present value of benefit obligations--accumulated
benefit obligation, including vested benefits of $3,351 for
1997........................................................ $(3,351)
=======
Projected benefit obligation for services rendered to date... $(4,656)
Plan assets at fair market value............................. --
-------
Plan assets less than projected benefit obligations........ (4,656)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions.......... (460)
Unrecognized net assets being recognized over 15 years....... --
-------
Accrued pension cost....................................... $(5,116)
=======
38
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation were 7.25% and 7.75% at
December 31, 1997 and 1996, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 4%.
To fund the SERP obligations, the Company has procured whole-life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7 million. The cash surrender value of the Company's
share of the policies is reflected in the consolidated balance sheets under
other assets and amounted to $940,000 and $407,000 as of December 31, 1997 and
1996, respectively.
Board of Trustees' Plan
The Association had a retirement plan (the Trustees' Plan) covering each
eligible member of the Association's Board of Trustees (Trustee). Per terms of
the Asset Purchase Agreement, the Company has assumed this liability. As a
result of the Acquisition Transaction, the Trustees' plan was frozen as of
December 31, 1996. Participants became fully vested upon the freezing of the
Plan.
The Company has accrued the present value of these benefits. The Company
Plan is subject to and in compliance with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA).
The net pension cost included the following components (in thousands):
Service cost--benefits earned during the period...................... $--
Interest cost on projected benefit obligation........................ 179
Actual earnings on Company Plan assets............................... --
Net amortization and deferral........................................ 33
----
Total net periodic pension cost.................................... $212
====
The following table sets forth the Trustee Plan funded status and the
amounts recognized in the accompanying consolidated financial statements (in
thousands):
DECEMBER 31,
1997
------------
Actuarial present value of benefit obligations--accumulated
benefit obligation, including vested benefits of $2,434 for
1997........................................................ $(2,434)
=======
Projected benefit obligation for services rendered to date... $(2,434)
Plan assets at fair market value............................. --
-------
Plan assets less than projected benefit obligations........ (2,434)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions.......... 573
Unrecognized net assets being recognized over 15 years....... --
Additional liability......................................... (573)
-------
Accrued pension cost....................................... $(2,434)
=======
The weighted average discount rate used in determining the actual present
value of the projected benefit obligation was 7.25%.
39
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Compensation
In addition, certain retired senior executives of the Association
participated in a nonqualified supplemental deferred compensation program. Per
terms of the Asset Purchase Agreement, the Company has assumed this liability.
At December 31, 1997 and 1996, the Company's liability for this program
totaled $143,000 and $443,000, respectively.
(12) FUNERAL SERVICE TRUST AGREEMENTS
The Company sells, on a limited basis, Funeral Service Trust Agreements to
consumers (the Trustor). These trust agreements are sold generally on an
installment basis and funds derived therefrom earn income subject to certain
limitations. Trusts may be terminated at any time with all principal and
accumulated net income being distributed to the Trustor. The Trustor may at
any time apply the trust amount to the purchase price of funeral services and
arrangements and/or to cemetery property, services and commodities furnished
by the Company. The amounts relating to these trusts are not included in the
accompanying consolidated financial statements; however, administration fees
earned by the Company are reflected in the consolidated statements of income.
(13) COMMITMENTS UNDER LEASE AGREEMENTS
As of December 31, 1997, the future minimum lease obligation pursuant to
operating lease agreements is summarized as follows (in thousands):
OPERATING
LEASES
---------
Year ending December 31:
1998........................................................... $ 681
1999........................................................... 481
2000........................................................... 379
2001........................................................... 324
2002........................................................... 257
Thereafter..................................................... 31
------
Total minimum lease obligation............................... $2,153
======
Rental expense under operating lease agreements for the year ended December
31, 1997 and period from November 19, 1996 to December 31, 1996 was $719,000
and $25,000, respectively.
(14) PURCHASE COMMITMENTS
In September 1992, the predecessor cemetery (the Association) and the local
County Sanitation District (the District) entered into an agreement (the
Agreement) whereby the Association agreed to construct a reclaimed water
storage reservoir (the Reservoir) with a capacity of 1.2 million gallons, one-
half of which would be made available to the District for its use at a site
located adjacent to the cemetery. The cost of the Reservoir, which was
completed during 1994, totaled $471,000. The Company is obligated, under this
Agreement, as successor to the Association.
The District has agreed to pay its proportionate share of the capital costs
associated with the Company's construction of the Reservoir. The District's
share of such costs is based on the proportion of the Reservoir's designed
capacity required for the Company to provide reclaimed water storage for the
District. Annual payment
40
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of such amounts will be equal to 1/20th of the District's share and will
reduce the annual payment made by the Company to the District for its share of
the reclaimed water transmission system described above.
The District agreed to construct a reclaimed water transmission system to
transport reclaimed water from its existing water reclamation plant to the
Company's Reservoir. The reclaimed water transmission system was completed in
1997. The Company has agreed to pay its proportionate share of the capital
costs incurred by the District in constructing the reclaimed water
transmission system. Such proportionate share will be determined based on the
percentage of peak flow design capacity required by the Company to the total
peak flow design capacity of the transmission facilities. The Company's
proportionate share is to be approximately $1,900,000. The Company's annual
payment of such costs is to be equal to 1/20th of its proportionate share of
the capital costs.
The Company and the District have also agreed to reimburse the other for
operating and maintenance costs associated with the Reservoir and the
reclaimed water transmission system based on criteria outlined in the
Agreement.
(15) COMMITMENTS AND OTHER MATTERS
Transaction with the International Buddhist Progress Society
During 1994, the predecessor cemetery sold the exclusive interment rights on
an undeveloped parcel of land located on the property to the International
Buddhist Progress Society (IBPS), an unrelated organization. In exchange for
the interment rights, IBPS agreed to pay the predecessor cemetery $1,375,000,
of which $160,000 was received as a deposit during 1994. Sales commissions
totaled $206,000 in connection with this transaction. It was determined that
because, among other matters, an adequate down payment was not received and
the interment rights were sold on a parcel of land that was not ready for the
purpose for which it was sold, the earnings process was not complete and
revenue and expense recognition relating to the transaction should be deferred
until such time IBPS has completed a significant portion of the project.
The remaining unpaid portion of the sales price is to be repaid after
construction of the columbarium is completed (estimated for Fall 1998), based
on a percentage of niches sales, but in no event later than January 1, 2003.
IBPS is currently building a columbarium on the developed parcel and IBPS will
sell the niches therein on an at-need and pre-need basis. Pursuant to the
agreement with IBPS, the Company will hold title to land improvements and the
completed building.
General
The Company has employment agreements with certain executive officers, the
terms of which expire at various dates. Such agreements provide for minimum
salary levels, as well as incentive bonuses which are payable if specified
management goals are attained.
(16) CONTINGENCIES
The Company is involved in certain matters of litigation, none of which, in
the judgment of management, will have a material impact on its consolidated
financial position or results of operations.
The State of California Department of Consumer Affairs (DCA) is currently
reviewing the funding levels of the endowment care trust fund at A.L.
Cemetery, one of the Satellite Properties. The amount of the additional
funding, if any, to the above-noted trust has not been determined.
41
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management is aware that some of the Satellite Properties may have been
contaminated from former or adjacent underground storage tanks. Management
believes these environmental contingencies and liabilities to be immaterial
individually and in aggregate.
Management is aware that Rose Hills cemetery may have been contaminated when
a portion of the cemetery was used to dispose of waste products prior to 1978.
The cost to remediate the waste disposal area is not known; however, under the
terms of the asset purchase agreement, the Seller assumed all liability to
remediate the property.
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Roses, Inc.:
We have audited the consolidated financial statements of Roses, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Roses, Inc. and subsidiaries as of November 18, 1996, and the results of
their operations and their cash flows for the period from January 1, 1996 to
November 18, 1996 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material aspects, the information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
June 12, 1997
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Roses, Inc.:
We have audited the accompanying consolidated balance sheet of Roses, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1995. 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Roses, Inc.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for each of the two years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
October 25, 1996
44
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1995 1996
------- -------
ASSETS
Cash and marketable securities:
Cash and cash equivalents................................... $ 1,269 $ 892
Marketable securities (market value of $142 at December 31,
1995)...................................................... 112 --
------- -------
Total cash and marketable securities....................... 1,381 892
------- -------
Receivables:
Customer accounts receivable, net........................... 1,831 1,686
Due from Rose Hills Memorial Park Association............... 3,786 248
Other....................................................... 1,328 114
------- -------
Total receivables.......................................... 6,945 2,048
------- -------
Other current assets:
Prepaid expenses, deferred charges and deposits............. 237 239
Prepaid taxes............................................... 726 --
Casket and other inventories................................ 472 449
Other....................................................... 207 407
Deferred tax asset.......................................... -- 624
------- -------
Total other current assets................................. 1,642 1,719
------- -------
Total current assets....................................... 9,968 4,659
------- -------
Property, plant and equipment, net........................... 13,784 12,791
------- -------
Intangible assets:
Goodwill.................................................... 2,732 2,655
Other....................................................... 121 21
------- -------
Total intangible assets.................................... 2,853 2,676
------- -------
Total assets............................................... $26,605 $20,126
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable and accrued liabilities:
Accounts payable and accrued expenses....................... $ 1,815 $ 774
Accrued compensation........................................ 1,468 1,238
Other current liabilities................................... 372 410
Current portion of Bank senior term loan.................... 2,500 15,100
Current portion of Rose Hills Memorial Park Association--
computer note.............................................. 313 220
Current portion of Obligation under financing lease......... 91 130
Current portion of Rose Hills Memorial Park Association--
promissory note............................................ -- 835
------- -------
Total current liabilities.................................. 6,559 18,707
Other long-term liabilities:
Accrued pension cost of supplemental employee retirement
plan....................................................... 3,528 3,910
Accrued pension cost of defined benefit plan................ 1,452 1,183
Retirement plan liability................................... 366 --
Deferred tax liability...................................... 260 --
------- -------
Total other long-term liabilities.......................... 5,606 5,093
Long-term debt:
Bank senior term loan....................................... 16,975 --
Rose Hills Memorial Park Association loans:
Promissory note............................................. 835 --
Computer note............................................... 300 --
Obligation under financing lease............................ 250 202
------- -------
Total long-term liabilities................................ 23,966 5,295
------- -------
Commitments and contingencies................................ -- --
------- -------
Total liabilities.......................................... 30,525 24,002
------- -------
Shareholders' deficit:
Common stock--($1 par value, authorized 1,000,000 shares,
issued 100,000 shares)..................................... 100 100
Accumulated deficit......................................... (4,020) (3,976)
------- -------
Total shareholders' deficit................................ (3,920) (3,876)
------- -------
Total liabilities and shareholders' deficit................ $26,605 $20,126
======= =======
See accompanying notes to consolidated financial statements.
45
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
-------- -------- --------
Sales and services:
Caskets......................................... $ 8,693 $ 8,757 $ 8,014
Funeral services................................ 7,958 8,183 8,224
Insurance commissions........................... 2,922 2,857 2,337
Flowers......................................... 1,717 1,796 1,502
Management fee and other........................ 768 841 345
-------- -------- --------
Total sales and services....................... 22,058 22,434 20,422
-------- -------- --------
Cost of sales and services:
Caskets......................................... 2,699 2,488 2,424
Funeral services................................ 2,548 2,765 2,413
Flowers......................................... 715 758 664
-------- -------- --------
Total cost of sales and services............... 5,962 6,011 5,501
-------- -------- --------
Gross profit................................... 16,096 16,423 14,921
-------- -------- --------
Selling, general and administrative expenses..... 10,719 11,229 12,331
Amortization of purchase related assets.......... 1,211 518 87
Settlement of intercompany balances.............. -- -- 1,853
-------- -------- --------
Income from operations......................... 4,166 4,676 650
-------- -------- --------
Interest income (expense):
Interest income................................. 64 39 378
Interest expense................................ (2,053) (2,429) (1,439)
-------- -------- --------
Total net interest expense..................... (1,989) (2,390) (1,061)
-------- -------- --------
Income (loss) before tax provision............. 2,177 2,286 (411)
Tax provision.................................... 34 1,094 545
-------- -------- --------
Net income (loss).............................. $ 2,143 $ 1,192 $ (956)
======== ======== ========
Net income (loss) per common share............... $ 21.43 $ 11.92 $ (9.56)
======== ======== ========
Weighted number of outstanding shares.......... 100,000 100,000 100,000
======== ======== ========
See accompanying notes to consolidated financial statements.
46
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996.
(DOLLARS IN THOUSANDS)
1994 1995 1996
-------- ------- -------
Cash flow from operating activities:
Net income (loss)................................ $ 2,143 $ 1,192 $ (956)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of purchase related assets.......... 1,211 518 87
Depreciation..................................... 930 1,075 1,065
Net loss (gain) on disposal of property, plant
and equipment.................................. 2 -- (1)
Provision for bad debts.......................... 200 100 53
Provision for deferred income taxes.............. -- 260 (883)
Changes in assets and liabilities associated with
operating activities:
(Increase) decrease in customer accounts
receivable...................................... (204) 8 92
(Increase) decrease in due from Rose Hills
Memorial Park Association....................... (1,405) 929 3,537
(Increase) decrease in other receivables.......... (369) (183) 1,213
Increase in other current assets.................. (111) (600) 660
Increase in accounts payable and accrued
expenses........................................ 449 522 (2,042)
Increase (decrease) in other current
liabilities..................................... 1,486 (1,066) 808
Other, net........................................ 304 119 90
-------- ------- -------
Net cash provided by operating activities..... 4,636 2,874 3,723
-------- ------- -------
Cash flow from investing activities--capital
expenditures...................................... (681) (432) (71)
-------- ------- -------
Cash flow from financing activities:
Financing costs.................................. (244) -- --
Dividend distributions............................ (9,320) -- --
Reduction of long-term debt....................... (18,372) (1,924) (4,776)
Proceeds from issuance of long-term debt.......... 23,000 -- --
Capital Contribution.............................. -- -- 1,000
Increase (decrease) in other long-term
liabilities...................................... 59 (176) (253)
-------- ------- -------
Net cash used in financing activities......... (4,877) (2,100) (4,029)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. (922) 342 (377)
Cash and cash equivalents at beginning of period... 1,849 927 1,269
-------- ------- -------
Cash and cash equivalents at end of period......... $ 927 $ 1,269 $ 892
======== ======= =======
Supplemental cash flow information:
Interest paid..................................... $ 2,053 $ 2,429 $ 2,544
======== ======= =======
Taxes paid........................................ $ 49 $ 1,565 $ 565
======== ======= =======
See accompanying notes to consolidated financial statements.
47
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
TOTAL
RETAINED EARNINGS/ SHAREHOLDERS'
SHARES COMMON (ACCUMULATED EQUITY
OUTSTANDING STOCK DEFICIT) (DEFICIT)
----------- ------ ------------------ -------------
Balance, December 31,
1992...................... 1000 $ 1 $ 1,835 $ 1,836
Net income................ -- -- 809 809
Distributions to share-
holders.................. -- -- (679) (679)
------- ---- ------- -------
Balance, December 31,
1993...................... 1000 1 1,965 1,966
Net income................ -- -- 2,143 2,143
Distributions to share-
holders.................. -- -- (2,401) (2,401)
Issuance of stock......... 99,000 99 -- 99
Special distribution to
shareholders............. -- -- (6,919) (6,919)
------- ---- ------- -------
Balance, December 31,
1994...................... 100,000 100 (5,212) (5,112)
Net income................ -- -- 1,192 1,192
------- ---- ------- -------
Balance, December 31,
1995...................... 100,000 100 (4,020) (3,920)
Net loss for the period
from January 1, 1996 to
November 18, 1996........ -- (956) (956)
Capital Contribution...... -- -- 1,000 1,000
------- ---- ------- -------
Balance, November 18,
1996...................... 100,000 $100 $(3,976) $(3,876)
======= ==== ======= =======
See accompanying notes to consolidated financial statements.
48
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The December 31, 1995 and November 18, 1996 consolidated financial
statements of Roses, Inc. and subsidiaries (collectively "Roses" or the
"Company") include the accounts of Roses, Inc., Rose Hills Mortuary, Inc.
("RHMI") and Rose Hills Mortuary, L.P. ("RHMLP"). Effective January 1, 1995
the consolidated financial statements include tax accounts as if Roses, Inc.
adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
Accounting for Income Taxes, on that date. The December 31, 1994 consolidated
financial statements of Roses, Inc. and subsidiaries include the accounts of
RHMI and RHMLP only, as predecessor companies. Through December 31, 1994,
RHMI, the general partner of RHMLP, had elected treatment as an S-Corporation,
accordingly RHMI's income, whether distributed or not, was taxed at the
shareholder level for income tax purposes. Therefore, the accompanying
consolidated financial statements as of December 31, 1994 and 1993 do not
include a provision for income taxes. For California franchise tax purposes,
S-Corporations were taxed at 2.5% of taxable income through 1993 and 1.5% of
taxable income in 1994. Deferred taxes are not provided for these years as the
amounts were immaterial.
The accounting and reporting policies of Roses conform to generally accepted
accounting principles ("GAAP") and the prevailing practices within the
mortuary industry. All significant inter-company accounts and transactions
have been eliminated.
On September 19, 1996, Roses entered into a purchase agreement (the Purchase
Agreement) whereby all shares of the common stock of Roses will be sold to a
new company formed by Blackstone Capital Partners II Merchant Banking Fund
L.P. and The Loewen Group Inc. (the Buyers) for approximately $75 million (the
Acquisition). In addition, in connection with this transaction, selected
assets of Rose Hills Memorial Park Association and Workman Mill Investment
Company (the Association) are being sold to the Buyers. The sale of Roses was
consummated on November 19, 1996.
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Roses, Inc., a California corporation, was formed in December 1994 and,
effective January 1, 1995, became the limited partner of RHMLP, replacing the
predecessor limited partner, and parent corporation of RHMI, California
corporation, (collectively "Roses" or the "Company"). As part of this
restructuring, the predecessor limited partner exchanged its partnership
interest in RHMLP for shares of stock in the newly formed Roses, Inc.
Additionally, the three shareholders of RHMI, the general partner of RHMLP,
all exchanged their share holdings for shares in the newly formed Roses, Inc.
As a result of this exchange, Roses, Inc. became both the parent corporation
to RHMI and the new limited partner of RHMLP.
Roses, Inc. has no other business interests or operations other than to
manage a 12.5% limited partnership interest in RHMLP and a 100% wholly owned
subsidiary RHMI, which as the general partner, has an 87.5% partnership
interest in RHMLP.
RHMLP was formed in 1990 for the purpose of owning and managing the funeral
operations and managing the cemetery operations of Rose Hills Memorial Park
Association (the "Association").
RHMLP's business is segmented into five main areas which include
professional mortuary services, casket sales, flower shop sales, sales of pre-
need funeral insurance products from which commissions are earned, and
management services from which fees are earned in accordance with an agreement
with the Association.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
49
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and short term certificates
of deposit.
Receivables
Receivables due from customers for mortuary services and merchandise are
generally due at the time services are rendered. However, financing
arrangements are available over a period of three to five years. Such
financial contracts bear interest at the rate of 12% per annum. An allowance
for doubtful accounts has been established to recognize that a portion of
these receivables may not be collectible. As of November 18, 1996 and December
31, 1995, the allowance for doubtful accounts was $216,000 and $287,000,
respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are valued at its fair market value at the
acquisition date. Additions subsequent to the acquisition date are recorded at
cost.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method
over the estimated useful life of the asset, ranging from 5 to 25 years.
Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and betterments are capitalized.
Goodwill
Goodwill is being amortized using the straight-line method over a 40 year
period. As of November 18, 1996 and December 31, 1995, accumulated
amortization of goodwill was $536,000 and $459,000, respectively.
Deferred Financing Costs
Deferred financing costs relating to the Bank Senior Term Loan entered into
in July 1994 and amended in December 1994 (see Note 6) are being amortized
over the life of the loan based on the effective interest method. As of
November 18, 1996 and December 31, 1995, accumulated amortization of these
costs was $231,000 and $142,000, respectively.
Income Taxes
Effective January 1, 1995, RHMI became a C-Corporation, which together with
its parent, Roses, Inc., also a C-Corporation, became obligated to file
consolidated federal and state tax returns. Beginning in 1995, RHMLP makes
cash distributions to Roses and RHMI in their respective interests for the
payment of federal and state taxes.
50
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, the IRS began an examination of federal income tax returns
filed for the tax year ended 1990 by both RHMI and RHMI's predecessor and its
subsidiaries, whose liabilities generally were assumed by RHMI. The IRS also
commenced examinations of the Association and its affiliated entities for
1990.
In December 1994, the Company agreed to certain adjustments proposed by the
IRS relating to both RHMLP and RHMLP's predecessor and its subsidiaries for
the tax years through December 31, 1992. In connection with this agreement
RHMLP paid approximately $294,000, consisting of tax and interest in the
approximate amounts of $201,000 and $93,000, respectively. Of the amount paid,
approximately $212,000 was allocated to the Association, for its share of the
tax adjustments. In June 1995, the Association reached an agreement (the
"Closing Agreement") with the IRS relating to its outstanding tax issues. The
Closing Agreement required the Association to pay $1.2 million to the IRS. Due
to the resolution of the Association's tax issues with the IRS and in
accordance with an agreement between the Company and the Association executed
in May 1990, the Company incurred an obligation to pay the Association
additional consideration for the covenant not to compete in the amount of $1.1
million. The net result of the obligations, arising from these IRS audits to
RHMLP was financed by the Association as explained in Note 6.
Special Distribution
In December 1994, RHMLP redeemed one-half of the predecessor's limited
partner's interest and their priority capital account for $6.9 million. In
accordance with the Partnership Agreement, this redemption and distribution to
the predecessor limited partner eliminated their priority capital account, the
accruing of a guaranteed return and changed the net income allocation to the
limited partner from 25% to 12.5% effective January 1, 1995. In addition, the
predecessor limited partner exchanged its partnership interest in RHMLP for
shares of stock in newly formed Roses, which became the new limited partner on
January 1, 1995.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, receivables and payable
approximate carrying value because of the short maturity of these instruments.
Impairment of Long-Lived Assets
In 1995, Roses adopted SFAS No. 121, "Accounting for the impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
which requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The adoption of SFAS No. 121 did not have a material impact
on the Company's financial position or results of operations.
Earnings Per Share
Earnings per share are computed based on the weighted average number of
shares outstanding during each year. The Company has no stock options or
warrants outstanding at November 18, 1996. Weighted average shares outstanding
at November 18, 1996 are 100,000 shares on a historical basis, weighted
average shares outstanding during 1994 are presented on a pro forma basis as
if Roses, Inc. were in existence during that year.
51
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
Land............................................. $ 3,275 $ 3,275
Buildings and improvements....................... 9,419 9,463
Furniture, fixtures and equipment................ 2,141 2,048
Vehicles......................................... 398 406
Computer software................................ 3,375 3,464
Construction in progress......................... 81 48
------- -------
Total property, plant and equipment.............. 18,689 18,704
Less: accumulated depreciation................... (4,905) (5,913)
------- -------
Property, plant and equipment, net............... $13,784 $12,791
======= =======
4. PRE-NEED FUNERAL INSURANCE
The pre-need funeral insurance policies sold by the Company are whole-life
policies sold on a pre-need basis to pay for the cost of funeral services.
Commissions earned varies based on a combination of factors, such as the
amount of funeral cost coverage sold, the age of the insured and the volume of
monthly sales activity. In addition, an annual profit-sharing commission is
received based upon the number of policies written. Insurance commissions
earned on individual policies, as well as commissions based on monthly volume
activity and annual profit-sharing arrangements, are recognized as income when
the policies are accepted by the insurance company.
RHMI, the general partner of RHMLP, holds the license to sell the pre-need
insurance as the general agent for RHMLP. However, pursuant to an assignment
agreement with RHMLP and RHMI, RHMLP receives the insurance commissions as
income for its efforts for managing, operating and employing the personnel
involved with the pre-need funeral insurance program.
5. INCOME TAXES
The provision for income taxes follows:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
Federal current.................................. $ 653 $1,085
State current.................................... 181 343
------ ------
Total current.................................. 834 1,428
------ ------
Federal deferred................................. 190 (665)
State deferred................................... 70 (218)
------ ------
Total deferred................................. 260 (883)
------ ------
Total income tax expense....................... $1,094 $ 545
====== ======
52
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
Federal tax at statutory rates................... $ 777 $(140)
Net tax effects of:
Goodwill amortization.......................... 22 28
State taxes, net of federal benefit............ 160 82
Acquisition costs.............................. 45 601
Other permanent differences.................... 90 (26)
------ -----
Actual tax expense............................... $1,094 $ 545
====== =====
As discussed in Note 1, Roses adopted SFAS No. 109 on January 1, 1995. Under
SFAS No. 109, deferred income tax assets or liabilities are computed based on
temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect
for the year in which differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period. The effect of adopting SFAS No. 109 was
not material to the financial position of Roses.
The components of the net deferred tax balances are as follows:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
Deferred tax assets:
Operating reserves................................... $ 231 $ 318
Retirement benefits.................................. 197 161
Supplemental employee retirement plan................ 892 1,067
Amortization......................................... 16 8
State taxes.......................................... 61 68
Other................................................ 84 4
Settlement of intercompany balances.................. -- 611
------- -------
Total deferred tax assets........................... 1,481 2,237
------- -------
Deferred tax liabilities:
Depreciation......................................... (876) (738)
Land................................................. (809) (873)
Other................................................ (56) (2)
------- -------
Total deferred tax liability........................ (1,741) (1,613)
------- -------
Net deferred tax asset (liability).................. $ (260) $ 624
======= =======
6. LONG TERM DEBT
In July 1994, the Company entered into a loan agreement, which provided for
a new senior term loan in the amount of $16.5 million, a revolving facility
available up to $1 million and an acquisition facility available up to $2.5
million. The proceeds from the senior term loan coupled with cash from
operations were used to repay the outstanding balance due under an existing
senior term loan with another bank in the amount of $11 million and the
outstanding balance due under the Association's subordinated note, which
included accrued interest, in the amount of $6.6 million.
53
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1994, the Company negotiated a modification to the existing
senior term loan agreement for an additional borrowing of $6.5 million. These
proceeds provided the funds to enable RHMLP to redeem one-half of the limited
partner interest in RHMLP and make the redemption and distribution payment in
the amount of $6.9 million. As a condition of this incremental borrowing, the
bank eliminated the availability of the revolving and acquisition facilities
previously approved by them in July 1994.
The maturity date on the loan was June 30, 1997. Interest on the outstanding
balance as of November 18, 1996 is calculated at various rates ranging from
fixed rates of 7.50% and 7.75% to a maximum variable rate of prime plus .25%.
Interest expense on the senior term loan for the period from January 1, 1996
to November 18, 1996 and for the year ended December 31, 1995 was $1,235,000
and $2,000,000, respectively. The senior term loan agreement contains certain
financial covenants, the most significant of this is the maintenance of
minimum levels of partnership equity, a cash flow coverage ratio and a
leverage ratio. At November 18, 1996, the Company was in compliance with all
of these covenants.
In connection with the Purchase Agreement, the senior term loan will be
repaid upon consummation of the Acquisition, accordingly the balance of the
loan has been reflected as a current obligation of the Company.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the long-term debt
approximates its carrying value as of November 18, 1996.
During 1993, as described in Note 11, the Company executed an unsecured
promissory note made payable to the Association for its share of computer
software. The promissory note, in the original amount of $1.2 million, matures
on June 30, 1997, and interest accrues at the rate of eight percent (8%) per
annum. The balance due on this note at November 18, 1996 and December 31, 1995
was $219,000 and $613,000, respectively. An installment payment of $28,000
including principal and interest is made monthly. Interest expense for 1996,
1995 and 1994 with respect to the promissory note was $24,000, $51,000 and
$73,000, respectively.
As referred to in Note 2 and resulting from the settlement and Closing
Agreement between the Association and the IRS, the Association agreed to pay
$1.2 million to the IRS. Due to previous agreements between the Company and
the Association, the Company's net share of the settlement was $835,000. The
Association agreed to finance this amount in the form of an unsecured
promissory note due November 30, 2000, bearing interest at eight percent (8%)
per annum. Only the interest is payable monthly through June 1997. Beginning
on July 31, 1997 the Company shall pay monthly installments of $28,000 until
the maturity date at which time any remaining interest and principal shall be
due and payable.
7. OPERATION AND MANAGEMENT AGREEMENTS
The businesses of the Company and the Association are complementary.
Effective October 1, 1989, and in conjunction with the Acquisition, the
Company and the Association entered into an Operation and Management Agreement
("O & M Agreement"), whereby RHMLP manages the Association's cemetery
operations for a ten-year term, subject to two additional five-year periods at
the option of either the Company or the Association. Under the terms of the O
& M Agreement, common costs, including but not limited to general and
administrative payroll, advertising, utilities and selling expenses, are
allocated between the Company and the Association at agreed upon percentages.
In the opinion of Roses management, these allocation percentages are
reasonable. Although most of the common costs are paid by the Company, the
accompanying Statements of Income reflect the net expenses of the Company.
However, the accompanying Balance Sheets include accounts payable and accrued
liabilities associated with the common costs and as of November 18, 1996 and
December 31, 1995 and 1994 reflect a net receivable from the Association in
the amount of $248,000 and $3,800,000, respectively. A
54
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
portion of the amount due from the Association reflects the Association's
share of the common costs payable at year end. General and administrative
payroll and other employee benefit expenses such as retirement plan costs, as
noted in Note 8, are generally paid by the Company and then allocated and
shared between RHMLP and the Association.
Effective January 1, 1993, RHMI, employed the senior managers of RHMLP.
Accordingly, RHMI has adopted the retirement plan, the 401(k) savings plan,
and the various other welfare and benefit plans for this group of
administrative employees, for whom the accrued benefits are guaranteed by
RHMLP. The wages and benefits for these senior managers are charged to RHMLP
and a portion then allocated to the Association as they are for all other
employees.
In connection with the Purchase Agreement, described more fully in note 1
and the Settlement Agreement between the Company and the Association, dated
November 19, 1996, all intercompany accounts related to operating transactions
between the Company and the Association as of November 18, 1996 were to be
settled. The Settlement Agreement sets forth a methodology by which such
intercompany obligations due and owing among the Company and the Association
pursuant to the operation and management agreement are to be settled. As a
result, the Company has recorded a charge of approximately $1.9 million in the
period ended November 18, 1996 which represents the Company's estimate of the
adjustment required to arrive at the actual cash amount to be paid to the
Association by the Company pursuant to the Settlement Agreement. The actual
amounts paid to the Association may differ from the amounts recorded at
November 18, 1996 and such differences would ultimately be the liability of
the selling shareholders of the Company. Management of the Company is of the
opinion that the amount recorded at November 18, 1996 is sufficient to satisfy
the cash amount ultimately due to the Association in settlement of the
intercompany accounts.
8. RETIREMENT PLANS
Defined Benefit Plan
As a result of the formation of the Company, all employees of the
Association became employees of the Company on or before October 1, 1990.
Prior to the Acquisition, all employees of the Association were participants
in the Retirement Plan for Employees of Rose Hills Memorial Park Association
(the "Association Plan"). In conjunction with the Acquisition, however, the
Association Plan was terminated in September 1990 and assets sufficient to
cover the projected benefit obligations for all currently active participants
in the Association Plan were transferred to the Retirement Plan for Employees
of Rose Hills Mortuary, L.P. (the "Company Plan"). As more fully explained in
Note 7, the expense of the Company Plan is shared between the Company and the
Association. Although the information presented below represents the net
pension cost and funded status for the Company Plan, the accompanying Income
Statements of the Company reflect RHMLP's expenses only, whereas the Balance
Sheets reflect the total Company Plan obligation as well as the receivable
attributable to the Company Plan due from the Association.
Participants are entitled to monthly pension benefits beginning at normal
retirement after age 65 equal to the product of the number of years of
credited service times a percentage of the employee's highest five-year
monthly compensation of the last ten years, computed in accordance with the
provisions of the Company Plan. Participants are fully vested after completing
five years of service. Employees may elect to receive their pension benefits
in the form of a single-life annuity or a qualified joint and contingent
annuity.
Employees with ten or more years of credited service are permitted early
retirement at age 55. However, if such participants terminate their employment
before completing ten years of service, they forfeit the right to receive
early retirement benefits.
55
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Roses has funded or accrued the present value of these benefits. The Company
Plan is subject to, and in compliance with, the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). During 1995, the Company
Plan received a favorable letter of determination from the IRS.
The net pension cost included the following components:
DECEMBER 31,
-----------------------
1994 1995 1996
----- ------- -------
(000'S)
Service cost--benefits earned during the
period...................................... $ 622 $ 647 $ 623
Interest cost on projected benefit
obligation.................................. 662 735 710
Actual (earnings) loss on company plan
assets...................................... 286 (2,353) (1,429)
Net amortization and deferral................ (793) 1,878 701
----- ------- -------
Total net periodic pension cost............ $ 777 $ 907 $ 605
===== ======= =======
The following table sets forth the Company Plan's funded status and the
amounts recognized in the accompanying financial statements:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
Actual present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $9,236 for 1996, $8,925 for 1995
and $7,706 for 1994............................ $ (9,328) $ (9,554)
-------- --------
Projected benefit obligation for services
rendered to date................................ $(10,660) $(11,320)
Plan assets at fair market value, primarily
listed stocks, bonds and U.S. Government
obligations..................................... 9,266 10,918
-------- --------
Plan assets less than projected benefit
obligations..................................... (1,394) (402)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions.......................... 225 (553)
Unrecognized net asset being recognized over 15
years........................................... (283) (228)
-------- --------
Accrued pension costs.......................... $ (1,452) $ (1,183)
======== ========
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.75% and 4.50%, respectively. The expected
long-term rate of return on assets was 8.00%.
As stated in Note 7 above, the common costs are shared between the
Association and Roses. The amounts for the Company Plan noted above are for
all participants before such costs are allocated between the Association and
Roses. However, the accompanying Statements of Income reflect only the net
pension plan expenses for Roses share of such expenses. Although the
accompanying Balance Sheets reflect the total Plan's assets and liabilities,
the total amount of these assets and liabilities is offset by the
Association's share of such amounts, including the expense of the Plan, which
are included in the net receivable from the Association. The Company's share
of the net periodic pension cost was $346,000, $254,000 and $487,000 for the
period ended November 18, 1996 and the years ended December 31, 1995 and 1994,
respectively. The Company's share of the accumulated benefit obligation was
$5.4 million and $4.4 million for the period ended November 18, 1996 and the
year ended December 31, 1995, respectively and its share of the projected
benefit obligation was $6.5 million, $5.0 million
56
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $4.4 million for the period ended November 18, 1996 and the years ended
December 31, 1995 and 1994, respectively.
The balance between the amounts disclosed above in the tables and the
amounts noted in the foregoing two sentences represent the amounts allocated
to the Association and included along with prior years' corresponding amounts,
in the net receivable due from the Association.
Defined Contribution Plan
The Company also has a defined contribution plan, which has been qualified
under section 401(k) of the Internal Revenue Service Code (the "Savings
Plan"). During 1995 RHMLP received a favorable letter of determination from
the Internal Revenue Service regarding the Savings Plan. The Savings Plan
permits participation by all employees of the Company who have completed six
months of continuous service, subject also to their entry into the Savings
Plan on enrollment dates of January 1 or July 1 of each year. Participants may
defer up to 15% of their compensation (subject to certain limitations). In
addition to the amount of compensation deferred by participants, the Company
matches up to a maximum of $2,000 per year per participant. During 1996, 1995
and 1994, the Company's contribution to this Savings Plan on behalf of the
participants amounted to $294,000 $270,000 and $292,000, respectively. Of
these amounts $112,000, $98,000 and $105,000 reflected the amount expensed by
the Company for its share of the total contributions in 1996, 1995 and 1994,
respectively, and the balance of the expense was borne by the Association.
Supplemental Employee Retirement Plan
At the time of the Acquisition, the three senior officers executed
employment agreements, which obligated the Company to provide these three
employees with a supplemental employee retirement plan ("SERP"). This non-
qualified supplemental pension plan covering certain employees provides for
incremental pension payments from the Company's funds so that the total
pension payments would more realistically approximate amounts that would have
been payable from the Company's principal pension plans if it were not for
limitations imposed by income tax regulations. The annual lifetime benefit is
based upon a percentage of salary during the final five years of employment,
offset by several other sources of income, up to age 62 at which time the
benefit becomes payable to the participant. The expenses of the SERP are
allocated between Roses and the Association as discussed in Note 7.
The SERP net pension cost included the following components:
DECEMBER 31,
--------------
1994 1995 1996
---- ---- ----
(000'S)
Service cost-benefits earned during the period.................. $234 $248 $ --
Interest cost on projected benefit obligation................... 234 266 312
Net amortization and deferral................................... 62 62 70
---- ---- ----
Total net periodic pension cost................................. 530 576 382
Less: Association's share of net periodic pension cost.......... 196 213 141
---- ---- ----
Roses share of net periodic pension cost...................... $334 $363 $241
==== ==== ====
57
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the SERP funded status and the amounts
recognized in the accompanying financial statements:
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,920 for 1995 and $2,166 for 1994.... $(2,920) $(2,978)
------- -------
Projected benefit obligation for services rendered
to date............................................ $(4,703) $(4,775)
Plan assets at fair market value.................... -- --
------- -------
Plan assets less than projected benefit
obligations........................................ (4,703) (4,775)
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes
in assumptions...................................... 411 (46)
Unrecognized prior service cost..................... -- 201
Unrecognized net asset being amortized over 15
years.............................................. 764 710
------- -------
Accrued pension costs................................ (3,528) (3,910)
Less: Association's share of accrued pension cost.... 1,305 1,447
------- -------
Roses share of accrued pension cost................ $(2,223) $(2,463)
======= =======
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.25% and 4.00%, at December 31, 1995 and
7.75% and 4.0% at November 18, 1996 respectively. The expected long term rate
of return on assets was 8.00%.
To fund the SERP obligations the Company has procured whole life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7 million. The insurance premiums, like other common
costs, are allocated between the Company and the Association and are charged
to expense, net of the annual increase in the cash surrender value of the
policies. The net premiums expensed by the Company for 1996, 1995 and 1994
amounted to $136,000, $75,000 and $68,000, respectively. The cash surrender
value of the Company's share of the policies is reflected in the Balance
Sheets under Other Current Assets and amounted to $420,000, $207,000 as of
November 18, 1996 and December 31, 1995, respectively. The Association's share
of the premiums and cash surrender value of the policies is reflected in the
net receivable due from the Association.
9. FUNERAL SERVICE TRUST AGREEMENTS
The Company sells, on a limited basis, Funeral Service Trust Agreements.
These trust agreements are sold generally on an installment basis and funds
derived therefrom earn income subject to certain limitations. Trusts may be
terminated at any time with all principal and accumulated net income being
distributed to the Trustor. Trustors may at any time apply the trust amount to
the purchase price of funeral services and arrangements furnished by the
Company and/or to cemetery property, services and commodities provided by the
Association. The amounts relating to these trusts are not included in the
accompanying financial statements, however, administration fees earned by the
Company are reflected in the Statements of Income.
10. COMMITMENTS UNDER LEASE AGREEMENTS
The Company and the Association jointly operate computer hardware and
software, which are used in the operation of their businesses. The
understanding of this joint ownership is captured in a separate agreement,
which was executed at the time of the Acquisition. Under this separate
agreement, the Company agreed to
58
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
assume 32% of the liability for both the computer hardware and software. The
computer hardware is leased under a capital lease, which was amended in 1994
and now extends to April 1999. The computer software was leased under a
financing lease until April 1993 at which time the Association paid off the
remaining balance. The Association and the Company then executed a promissory
note for the Company's remaining share of the software financing lease, as
described in Note 6. Roses interest in the assets relating to these agreements
is included in property, plant and equipment and the related liability for the
hardware is reflected as obligations under financing leases.
As of November 18, 1996, the future minimum lease obligation pursuant to the
joint and several operating lease agreement is summarized as follows:
COMPUTER HARDWARE
OPERATING LEASE
-----------------
(000'S)
Period from November 19, 1996 to December 31,
1996................................................... $ 28
Year ending December 31, 1997........................... 102
1998................................................... 159
1999................................................... 61
2000................................................... 22
----
Total minimum lease obligations......................... 372
Less: interest.......................................... 40
----
Total present value of lease obligations............ $332
====
11. COMMITMENTS AND CONTINGENCIES
Roses is involved in certain matters of litigation, none of which, in the
judgment of management, will have a material impact on its financial position
or results of operations.
During 1995, Roses along with the Association settled all outstanding tax
issues that had arisen in connection with audits conducted by the IRS of
RHMLP, its predecessor and the predecessor's subsidiary companies, the
Association and its affiliated entities for the tax year ended 1990. Roses
maintains a reserve for future taxes and interest that may arise in relation
to the Acquisition of RHMLP in May 1990. In the opinion of management, this
reserve is adequate to cover any future tax liability related to the
Acquisition.
Subsequent to the issuance of RHMLP's 1995 financial statements it was
determined that the actuarial report for the SERP used incorrect amounts for
the service period, salary rates of the senior officers and discount rate. A
corrected actuarial report was obtained from the actuary and these
calculations are reflected in Note 8. The effect of these corrections results
in an overall increase in the Accumulated Benefit Obligation ("ABO") from $3.7
million to $4.7 million at December 31, 1995 and an increase in pension cost
from approximately $800,000 to $3,500,000 over the period of May 1990 through
December 31, 1995. Accordingly, these increases are shared between Roses and
the Association as defined in the O&M Agreement. To date, the Association has
not disputed the existence and related liability for their share of the plan
obligation and costs. Management of Roses has asserted that the revised
actuarial calculations are appropriate and the allocations to the Association
are in accordance with the O&M Agreement. If the Association was to dispute
the existence of the SERP, the Company would be fully liable for the benefit
obligation and related plan costs, the effect of which would increase
liabilities of Roses by approximately $3.2 million and increase plan costs to
Roses of approximately $2.3 million since SERP's inception in May 1990.
59
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Rose Hills Memorial Park Association:
We have audited the combined financial statements of Rose Hills Memorial
Park Association and Workman Mill Investment Company as listed in the
accompanying index. In connection with our audits of the combined financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These combined financial statements and financial
statement schedule are the responsibility of the Association's management. Our
responsibility is to express an opinion on these combined financial statements
and financial statement schedule based on our audits.
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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
The accompanying combined financial statements were prepared to present the
combined assets and liabilities and related operations of Rose Hills Memorial
Park Association and Workman Mill Investment Company that are to be sold and
assumed, respectively, pursuant to the purchase agreement described in note 1,
and are not intended to be a complete presentation of the consolidated
financial statements of Rose Hills Memorial Park Association and its wholly
owned subsidiary, Murrieta Hills Holding Company, or its subsidiaries,
Murietta Hills, Inc. and Workman Mill Investment Company.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Rose
Hills Memorial Park Association and Workman Mill Investment Company as of
December 31, 1995 and November 18, 1996 and the changes in their net assets
and their cash flows for the years ended December 31, 1994 and 1995, and for
the period from January 1, 1996 to November 18, 1996, pursuant to the purchase
agreement described in note 1, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly, in all material aspects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 9, 1997
60
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1995 1996
------- -------
ASSETS
Cash and cash equivalents..................................... $ 488 $ 731
Receivables:
Customer accounts receivable, net............................ 5,266 6,149
Due from Endowment Care Fund................................. 280 539
Notes receivable from Rose Hills Company..................... 311 1,055
Other receivables............................................ 129 46
------- -------
Total current receivables................................. 5,986 7,789
------- -------
Inventories:
Cemetery property............................................ 5,439 4,904
Interment funeral and other inventories...................... 72 165
------- -------
Total inventories......................................... 5,511 5,069
------- -------
Due from Rose Hills Company................................... 859 1,038
------- -------
Total current assets...................................... 12,844 14,627
------- -------
Other assets:
Notes receivable from Rose Hills Company:
Unsecured note.............................................. 835 --
Computer note............................................... 192 --
Customer accounts receivable, net............................ 4,138 3,655
Prepaid expenses and other assets............................ 501 42
------- -------
Total other assests....................................... 5,666 3,697
------- -------
Property, plant and equipment, net............................ 32,020 39,491
------- -------
Total assets.............................................. $50,530 $57,815
======= =======
LIABILITIES AND NET ASSETS
Accounts payable.............................................. $ 518 $ 372
Accrued expenses.............................................. 964 1,116
Due to Endowment Care Fund.................................... 63 31
Other current liabilities..................................... 1,011 1,002
------- -------
Total current liabilities................................. 2,556 2,521
Retirement plan and other liabilities......................... 3,368 3,514
Obligations under capital leases, net......................... 782 766
Pre-need funeral service debentures:
Issued and outstanding....................................... 1,180 1,019
Less amounts on deposit with Trustee......................... (1,180) (1,019)
------- -------
Net pre-need funeral service debentures................... -- --
------- -------
Total liabilities......................................... 6,706 6,801
------- -------
Commitment and contingencies.................................. -- --
Net assets.................................................... 43,824 51,014
------- -------
Total liabilities and net assets......................... $50,530 $57,815
======= =======
See accompanying notes to combined financial statements.
61
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF ACTIVITIES
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
------- ------- -------
Sales and services:
Cemetery property, net of cancellations............ $10,984 $13,042 $10,929
Other cemetery sales and services.................. 8,756 9,104 8,299
------- ------- -------
Total sales and services.......................... 19,740 22,146 19,228
------- ------- -------
Cost of sales and services:
Cemetery property.................................. 805 749 658
Other cemetery sales and services.................. 3,997 3,609 3,257
------- ------- -------
Total cost of sales and services.................. 4,802 4,358 3,915
------- ------- -------
Gross profit...................................... 14,938 17,788 15,313
------- ------- -------
Other revenue:
Endowment Care Fund income......................... 1,439 1,451 1,833
Finance income..................................... 1,167 1,169 934
------- ------- -------
Total other revenue............................... 2,606 2,620 2,767
17,544 20,408 18,080
Selling, general and administrative expenses
(including retirement plan curtailment loss of $421
in 1996)........................................... 18,595 18,342 15,998
------- ------- -------
Operating income (loss)............................ (1,051) 2,066 2,082
Other income (expense):
Covenant not to compete............................ 1,955 266 --
Income tax expense resulting from IRS settlements.. (1,226) -- --
Interest expense................................... (155) (201) (93)
Other income, net.................................. 671 113 97
------- ------- -------
Net income........................................ $ 194 $ 2,244 $ 2,086
======= ======= =======
See accompanying notes to combined financial statements.
62
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
------- ------- -------
Net assets at beginning of year (period)............. $38,844 $36,571 $43,824
Net income........................................... 194 2,244 2,086
Adjustments for exclusion of certain cash and cash
equivalents pursuant to the Asset Purchase
Agreement........................................... (2,467) 5,009 (1,192)
Distributions received from Endowment Care Fund for
capital expenditures................................ -- -- 6,296
------- ------- -------
Net assets at end of year (period)................... $36,571 $43,824 $51,014
======= ======= =======
See accompanying notes to combined financial statements.
63
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
------- ------- -------
Cash flows from operating activities:
Net income......................................... $ 194 $ 2,244 $ 2,086
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 1,676 1,668 1,494
Net gain on sale of property, plant and
equipment....................................... -- (18) --
Provision for sales cancellations................. 2,122 1,647 852
Provision for bad debts........................... 120 60 53
Covenant not to compete........................... (1,955) (266) --
Changes in operating assets and liabilities:
Customer accounts receivable..................... (1,619) (1,851) (1,306)
Other receivables................................ (22) (14) 84
Due from Endowment Care Fund, net................ (537) (114) (291)
Inventories...................................... (825) (2,535) 331
Prepaid expenses and other assets................ (385) 397 460
Interest receivable on note from Rose Hills
Company......................................... (537) -- --
Accounts payable, accrued expenses and other
liabilities..................................... 3,730 (1,727) 6
Due from Rose Hills Company...................... (241) (284) (179)
Retirement plan liabilities...................... (686) 100 145
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 1,035 (693) 3,735
Cash flows from investing activities:
Purchases of property, plant and equipment......... (4,833) (4,240) (8,872)
Proceeds from dispositions of property, plant and
equipment......................................... 152 99 18
Distributions received from Endowment Care Fund for
capital expenditures.............................. -- -- 6,296
------- ------- -------
Net cash used in investing activities.......... (4,681) (4,141) (2,558)
------- ------- -------
Cash flows from financing activities:
Payments received on notes receivable from Rose
Hills Company..................................... 6,949 265 284
Issuance of unsecured note to Rose Hills Company... (835) -- --
Increase (decrease) in obligations under capital
leases, net....................................... 59 (318) (26)
------- ------- -------
Net cash provided by (used in) financing
activities.................................... 6,173 (53) 258
------- ------- -------
Increase (decrease) in cash and cash
equivalents................................... 2,527 (4,887) 1,435
Adjustments for exclusion of certain cash and cash
equivalents pursuant to the Asset Purchase
Agreement discussed in note 1...................... (2,467) 5,009 (1,192)
Cash and cash equivalents at beginning of year
(period)........................................... 306 366 488
------- ------- -------
Cash and cash equivalents at end of year (period)... $ 366 $ 488 $ 731
------- ------- -------
Cash paid during the year (period) for
interest...................................... $ 163 $ 202 $ 97
------- ------- -------
Non-cash investing activities:
Purchases of software financed by capital leases... $ 349 $ -- $ 256
======= ======= =======
See accompanying notes to combined financial statements.
64
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND NOVEMBER 18, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Rose Hills Memorial Park Association (the Association) is a California
nonprofit mutual benefit corporation which is exempt from Federal and state
income taxes. The Association owns property located in Los Angeles County,
near Whittier, California which it develops as cemetery plots and in which it
sells rights to inter remains to the surrounding community. The operations of
the Association are managed on a day-to-day basis by Rose Hills Mortuary, L.P.
(Rose Hills Company or the Company) pursuant to a Management Agreement as
discussed in note 8.
The Association has a wholly owned subsidiary, Murrieta Hills Holdings, Inc.
(Holdings), which owns Murrieta Hills, Inc. (Hills) and Workman Mill
Investment Company (Workman Mill). All three companies have been organized
under the laws of the state of California. Holdings and Hills were formed for
the purpose of holding the investment in and managing the entitlement and
future development of approximately 1,000 acres of real property located in
Riverside County, California. Workman Mill was formed for the purpose of
holding water rights and the operation of water distribution systems used
primarily by the Association in its cemetery operations.
Sale of Cemetery Business
On September 19, 1996, the Association entered into an Asset Purchase
Agreement (the Agreement) with an unrelated buyer to sell certain assets which
it uses in the conduct of the Association's business of managing, operating,
developing and selling of cemetery plots and related services and the seller
also agreed to assume certain liabilities related to the cemetery business.
The purchase price for the assets and operations of the business was $166.3
million and liabilities assumed were $6.8 million, and the closing of the
transaction occurred November 19, 1996. Settlement of the accounts with Rose
Hills Company was not included in the purchase price. In addition, the
Association entered into a settlement agreement (Settlement Agreement) with
the Company on November 19, 1996, and it is anticipated that there will be
certain closing and other adjustments as a result of the Settlement Agreement
(see notes 3 and 8). Based on current information, it is anticipated that such
adjustments that are not recorded in the accompanying combined financial
statements will result in a gain to the Association. The assets and operations
of the Association that were not sold and the liabilities that were not
assumed in this transaction have remained with the Association and together
with the proceeds of the sale of the Cemetery business will be used to fund
the operations of a charitable foundation which was formed during November,
1996.
Basis of Presentation
The accompanying combined financial statements were prepared to present the
combined assets and liabilities and related operations of Rose Hills Memorial
Park Association and Workman Mill Investment Company (collectively referred to
herein as the Association) that are to be sold and assumed, respectively,
pursuant to the Agreement. Certain assets of the Association which are not
used in the conduct of the Association's business, such as cash, investments,
undeveloped property, all assets of Holdings and Hills, with the exception of
certain of Workman Mill's assets, and other such assets not being sold, have
been excluded from the assets presented in the accompanying combined financial
statements. Similarly, pursuant to the Agreement, liabilities of the
Association arising out of assets that are not being sold and other
liabilities related to completion of certain of the Association's construction
projects, as more fully described in note 13, have been excluded from the
accompanying combined financial statements. Revenue and expense items that
relate to any of the Association's assets or liabilities that have been
excluded from sale or assumption have likewise been excluded from the
accompanying combined financial statements. As further discussed in note 4,
the accounts of
65
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the Endowment Care Fund are not included in the accompanying combined
financial statements. All significant intercompany accounts and transactions
among and between the Association and Workman Mill have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue related to cemetery interment rights is recognized when the contract
is signed by the customer and a minimum deposit is received, with concurrent
recognition of all related costs. Allowances for anticipated customer
cancellations are provided for at the date of sale at estimated amounts based
on historical trends. A portion of the proceeds from the sale of interment
rights is required by state law to be paid into the Endowment Care Fund to
provide for the perpetual care of the Association properties. Cemetery revenue
is recorded net of these amounts. Revenue from the sale of cemetery goods and
services is recognized at the time of interment.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of 3 months or less. Certain amounts of cash are on deposit in
trust for the purpose of servicing preneed funeral obligations, and are
therefore restricted for such use.
Receivables
Receivables resulting principally from pre-need sales of cemetery property
are generally due in monthly installments over periods of one to seven years
and bear interest at the rate of 9.6% per annum. An allowance for sales
cancellations has been established to recognize that cemetery property sold in
advance of need, for which a minimum down payment is received, may be
subsequently canceled. Accordingly, as of December 31, 1995 and November 18,
1996, the allowance for sales cancellations totaled $1,480,000 and $1,130,000,
respectively. A provision of $2,122,000, $1,647,000 and $852,000 was charged
to cemetery sales to provide for estimated future cancellations for the years
ended December 31, 1994, and 1995 and the period from January 1, 1996 to
November 18, 1996, respectively. An allowance for doubtful accounts has been
established to recognize that a portion of receivables arising from preneed
cemetery property sales and sales of cemetery goods and services may not
ultimately be collectible. As of December 31, 1995 and November 18, 1996, the
allowance for doubtful accounts totaled $312,000 and $370,000 respectively.
Inventories
Cemetery property is stated at average cost and consists of historical land
cost plus all charges incurred in readying the property for its intended use.
Interment, funeral and other inventories are stated at the lower of actual
cost (determined on a first-in, first-out basis) or market value.
Property, Plant and Equipment
Property is recorded at historical cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of 5 to 30 years for buildings, improvements and water
systems, 5 to 12 years for furniture, fixtures, equipment, and assets under
capital lease (not to exceed the lease term) for computer hardware and
software. Expenditures for maintenance and repairs are charged to operations
as incurred and expenditures for replacements and improvements are
capitalized.
66
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
Management of the Association has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these combined financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
Impairment of Long-Lived Assets
The Association adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Association's financial position, results of operations, or
liquidity.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with
classifications used in 1996.
3. NOTES RECEIVABLE
In May 1990, the Association sold its wholly owned mortuary subsidiary
company to the Company (see note 8). Of the total original consideration,
$4,000,000 related to a Covenant Not to Compete (Covenant). The Covenant was
increased to $5,155,000 during 1994 in connection with the IRS settlement
discussed in note 11. The original amount received relating to the Covenant
was recognized as income on a straight-line basis over its five-year term.
Income related to the Covenant recognized for the years ended December 31,
1994 and 1995 totaled $1,955,000 and $266,000, respectively.
As payment for the sale of the Mortuary, the Association received primarily
cash and assumed a secured but subordinated note receivable amounting to
$8,000,000 from the Company. In July 1994, the Company paid off its note
receivable to the Association in the amount of $6,670,000 which constituted
the balance due, including accrued but unpaid interest.
As described further in note 7, during 1993, the Association paid off a
financing lease relating to computer software used in operations. Due to its
cost-sharing arrangement with the Company, the Association received a
promissory note from the Company for its share of the financing lease. This
promissory note in the original amount of $1,200,000 matures on June 30, 1997
and interest accrues at the rate of 8% per annum. The outstanding principal on
this note at December 31, 1995 and November 18, 1996 totaled $503,000 and
$220,000, respectively. An installment payment of $28,000 including principal
and interest is due monthly.
As described further in note 11, in June 1995, the Association and the
Company settled their outstanding affairs with the Internal Revenue Service
and the Association received a promissory note from the Company for the
Company's additional consideration for the Covenant reduced by $320,000 tax
settlement paid for by the Company on behalf of the Association. This
promissory note in the original amount of $835,000 matures on
67
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
November 30, 2000 and interest accrues at the rate of 8% per annum. Interest
is payable monthly until July 1997, at which time monthly principal and
interest payments of $28,000 begin.
Concurrent with the sale of the Cemetery business, these notes receivable
were paid in full by the Company on November 19, 1996.
4. ENDOWMENT CARE FUND
The Association, pursuant to state law, has placed the cemetery under
endowment care. Therefore, when cemetery property is sold by the Association,
an endowment care charge is made for which a minimum amount is statutory.
Charges are payable to the Endowment Care Fund (the Fund), a separate
501(c)(13) organization, when the total sales contract amount has been
collected. Since a substantial portion of pre-need cemetery property sales is
made on an installment basis, many of the charges are not due currently.
Generally, the installment receivables, including late charges, are
collectible within one to seven years. As of December 31, 1995 and November
18, 1996, amounts owed to the Fund but not yet due or collected from customers
amounted to $1,778,000 and $1,824,000, respectively. The Fund's assets are
invested under the direction of the Board of Trustees of the Association, who
also serve as Trustees of the Fund. The change in net assets of the Fund, net
of amounts permitted to be withheld under state law, is paid by the Fund to
the Association and is used for the care, maintenance and embellishment of the
cemetery. As allowable by state law, a portion of the undistributed capital
gains of the Fund have been reserved and are available to the Association at
the discretion of the Trustees to fund certain capital expenditures. During
1996, distributions of net capital gains totalling $6,296,000 have been
recorded as an increase to net assets in the accompanying combined statements
of financial position. The amounts earned by the Fund and transferred to the
Association are reported in the combined statements of activities and amounted
to $1,439,000, $1,451,000 and $1,833,000 for the years ended December 31, 1994
and 1995 and the period from January 1, 1996 through November 18, 1996,
respectively.
Total assets of the Fund are $54,948,000 and $58,239,000 at December 31,
1995 and November 18, 1996, respectively, and consist primarily of cash and
investments carried at cost. Total liabilities of the Fund are $180,000 and
$538,000 at December 31, 1995 and November 18, 1996, respectively, and consist
of amounts payable to the Association. Total net assets of $54,768,000 and
$57,701,000, at December 31, 1995 and November 18, 1996, respectively,
resulted primarily from Fund deposits received or receivable from customers
and capital gains (net of transfers to reserves) earned by the Fund.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 124, "Accounting for Certain Investments
Held by Not-for-Profit Organizations.' This standard requires that investments
in equity securities with readily determinable fair value and all investments
in debt securities be measured at fair value in the statements of financial
position. This statement is effective for the year ended December 31, 1996,
but earlier application is permitted. If the Fund had implemented this
standard during 1996 assets and net assets as of January 1, 1996 would have
increased by $5,344,000, and would not be materially different as of November
18, 1996.
The American Institute of Certified Public Accountants issued Statement of
Position 94-3, "Reporting of Related Entities by Not-for-Profit
Organizations,' which is effective for fiscal years beginning after
December 15, 1994. This statement requires consolidation of affiliated
organizations when the not-for-profit reporting entity has both control of
such organization and an economic interest therein. Since the Fund and the
Association meet these criteria, it would be required that the activities and
financial position of the Fund be included in the consolidated financial
statements of Rose Hills Memorial Park Association and its wholly owned
subsidiary. However, in connection with the sale of certain assets and
operations of the Association, discussed in note 1,
68
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
management considers these special purpose combined financial statements to be
that of a commercial enterprise. In accordance with commercial cemetery
industry practice and given that the accompanying combined financial
statements have been prepared in connection with the sale of certain assets,
as discussed in note 1, such combined financial statements are not intended to
present a complete presentation of the combined financial position or changes
in net assets of the Association as a not-for-profit organization, and
accordingly, management has not consolidated the Endowment Care Fund with the
accompanying combined financial statements.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at (dollars in
thousands):
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
Land and improvements............................ $ 7,520 $ 7,520
Buildings and improvements....................... 11,857 12,645
Furniture, fixtures and equipment................ 4,292 4,349
Vehicles......................................... 1,269 1,261
Water systems.................................... 1,935 1,938
Streets, roads and parking lots.................. 2,178 2,192
Computers and software........................... 5,212 5,242
Construction in progress......................... 8,727 16,713
Other............................................ 3,183 3,201
Assets under capital leases (computer hardware
and software)................................... 1,451 1,624
-------- --------
Total property, plant and equipment............ 47,624 56,685
Less accumulated depreciation, including
accumulated amortization of assets under leases
of $896 and $1,095 respectively................. (15,604) (17,194)
-------- --------
Property, plant and equipment, net............... $ 32,020 $ 39,491
======== ========
Construction-in-progress encompasses various projects not yet completed,
including land and related development costs for cemetery property being
developed for inventory. See further discussion at note 13.
6. PRE-NEED FUNERAL SERVICE DEBENTURES
From 1960 to 1975, the Association sold pre-need funeral service debentures
at face amounts under subscription agreements which provided for the
collection of the amount on an installment basis. Debentures were issued in
denominations of $125 each when installments of the amount were collected. As
of December 31, 1995 and November 18, 1996 the debentures subscribed pursuant
to the subscription agreements amounted to less than $10,000. The Association
may redeem the debentures at any time prior to maturity at the face amount or
the holders thereof may at any time apply the debentures to the purchase price
of funeral services and arrangements furnished by the Association or the
Company.
Additionally, the subscription agreements may be canceled at any time by
either the Association or the subscriber. Interest on the debentures is
calculated at the rate of 3% per annum, is payable semiannually and continues
to accrue on debentures not presented for payment on their maturity date.
Under the indenture and supplemental indentures, as amended, the Association
is required to make payments to a trustee of the fund to be used for the
retirement of the debentures at maturity or upon their application to the
purchase price of funeral services. Initial funding payments in amounts equal
to 25% of the
69
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
face amount of debentures being issued were required at the time of issuance.
Approximately $231,000 and $474,000 of cash in excess of amounts required to
service the principal amount of such debentures is reflected in the
accompanying combined statements of financial position as cash and cash
equivalents as of December 31, 1995 and November 18, 1996, respectively.
In addition, the Funeral Service Trust (FST) was established in 1978 by
certain cemetery and/or mortuary companies that had sold pre-need funeral
service debentures to California residents. FST was formed by these companies
to provide a means by which the purchasers of the debentures be compensated
toward payment for funeral expenses if the entity issuing their debentures is
unable by reason of insolvency to perform such services at the time of need.
The Association's proportionate share of the funds in FST, which are reflected
as cash and cash equivalents in the accompanying statements of financial
position, amount to $257,000 at December 31, 1995 and November 18, 1996 and
are restricted from use until such time as substantially all of the debentures
are paid, retired or used for payment of funeral-related costs.
The issued and outstanding debentures at November 18, 1996 mature as follows
(dollars in thousands):
DATE AMOUNT
---- ------
Prior to February 1, 1996.......................................... $ 623
February 1, 1997................................................... 112
February 1, 1998................................................... 82
February 1, 1999................................................... 106
February 1, 2000................................................... 96
------
Total............................................................ $1,019
======
7. LEASE AGREEMENTS
During 1990, the Association initiated a plan to modernize its computer
equipment, convert old software programs and automate systems that were
previously handled manually. As a result of this plan, several customized
computer software developmental projects were completed. The Association and
the Company jointly made arrangements with a lessor for the financing of these
software developmental projects and for computer hardware equipment over
seven-year terms. The Association's interest in the assets relating to these
lease agreements is included in property, plant and equipment (see note 5) and
the related liability is reflected in the combined statements of financial
position as obligations under capital leases.
In April 1993, the Association paid off the remaining balance of the
financing lease relating to the computer software. The Association and the
Company then executed a promissory note for the Company's remaining share of
the software financing lease, as described in note 3.
Under a separate agreement executed at the time of the 1990 sale of the
mortuary operations, the Company agreed to assume the liability for 32% of the
commitments under these leases. Under terms of the agreement, the Company and
the Association will jointly own the software at the termination of the lease.
With respect to the computer hardware equipment, the companies have the option
at the end of the equipment lease to purchase or release the same equipment or
terminate the lease. The Association has included its 68% share of the
software costs and computer hardware equipment costs in property, plant and
equipment. The Company's share of all related lease commitments including
reimbursements of interest as of December 31, 1995 and November 18, 1996 is
$859,000 and $1,038,000, respectively and is included in "Due from Rose Hills
Company' in the accompanying combined statements of financial position.
70
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
As of November 18, 1996, the future minimum lease obligation pursuant to the
joint and several capital lease agreement is summarized as follows (dollars in
thousands):
YEARS (PERIOD)
ENDED
DECEMBER 31
--------------
1996...................................................... $ 72
1997...................................................... 435
1998...................................................... 475
1999...................................................... 139
2000...................................................... 69
------
Total of all lease payments............................. 1,190
Less amounts representing interest........................ (151)
------
Present value of minimum lease payments................. 1,039
Less current portion of obligations under capital leases
included in other liabilities............................ (273)
------
$ 766
======
8. OPERATION AND MANAGEMENT AGREEMENT AND RELATED MATTERS
The Operation and Management Agreement (Management Agreement) executed by
the Association with the Company in connection with the 1990 sale of the
mortuary operations provides for the on-site management of the cemetery
operations by the Company for a ten-year term expiring September 30, 1999. The
Management Agreement further provides for two renewal options of five years
each, exercisable by either the Association or the Company.
Under the terms of the Management Agreement, the Association receives
reimbursement from the Company for certain allocated costs and expenses, such
as utilities, insurance, operating supplies and other expenses based on
contractually agreed upon percentages, which vary according to the nature of
the cost or expense incurred. Likewise, the Association must reimburse the
Company pursuant to that same contractually agreed upon percentage formula for
similarly allocable costs and expenses, including payroll and related payroll
costs. The selling, general and administrative expenses presented in the
combined statements of activities reflect the net allocated expenses between
the Association and the Company. As of December 31, 1995 and November 18,
1996, the Association was indebted to Rose Hills Company in the amount of
$4,005,000 and $1,571,000 respectively, for unpaid expenses allocated pursuant
to the Management Agreement (the "Intercompany Account"). Such amounts have
been excluded from the accompanying combined statements of financial position
as of December 31, 1995 and November 18, 1996 pursuant to the terms of the
Agreement as they are not an assumed liability. Additionally, the Association
made payments totalling $1,786,000 on November 19, 1996 to the Company,
resulting in an overpayment of the intercompany account, prior to any
settlement adjustments. The final determination of the intercompany account as
of November 18, 1996 is subject to the terms of the Settlement Agreement
entered into between the Association and the Company. In connection with the
Settlement Agreement the Company performed a detailed analysis of the
intercompany account and it is anticipated that certain noncash and other
adjustments will be made to this account resulting in a significant gain to
the Association.
For services provided to the Association, the Association has agreed to pay
a management fee comprised of three elements. The three elements include: (1)
the reimbursement of compensation, including fringe benefits, of certain
management personnel at 110%; (2) an incentive sales fee based upon and to the
extent of achievement
71
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of targeted levels of total cemetery sales above threshold levels; and (3) an
expense savings fee based upon the achievement of managing the Association's
selling, general and administrative expenses as a percent of total sales below
a specified percentage. The expense savings fee also provides for a reduction
in the total management fee liability, if management causes the selling,
general and administrative expenses to exceed a specified percentage of sales
calculated as described above. During the years ended December 31, 1994 and
1995 and the period from January 1, 1996 through November 18, 1996, the
Association incurred management fees totaling $613,000 and $183,000 and
$159,000, respectively.
The Shared Facilities Agreement executed by the Association with the Company
in connection with the 1990 sale of the mortuary operations sets forth the
terms for the mutual use of certain property, plant and equipment at no cost
to either party and the allocations of certain ongoing costs related thereto
such as repairs and maintenance expenditures.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
As a result of the sale of the Company and execution of the Management
Agreement, all employees of the Mortuary and the Association became employees
of the Company on or before October 1, 1990. Prior to the sale, all employees
of the Mortuary and the Association were participants in the Retirement Plan
for Employees of Rose Hills Memorial Park Association (the Association Plan).
The Association Plan was terminated in September 1990. Assets sufficient to
cover the projected benefit obligations for all currently active participants
in the Association Plan totaling $4,743,000 were transferred to the Retirement
Plan for Employees of Rose Hills Mortuary, L.P. (the Company Plan).
The Company has funded or accrued the present value of these benefits, a
portion of which has been allocated to and funded by the Association. The
Company Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA) and the funding of the pension costs complies
with ERISA. During the years ended December 31, 1994 and 1995 and the period
from January 1, 1996 through November 18, 1996, the Association recognized the
allocated expense amounts totaling $334,000, $390,000 and $259,000,
respectively, in connection with this plan.
Defined Contribution Plan
The Company also has a defined contribution plan, which has been qualified
under Section 401(k) of the Internal Revenue Service Code (the Savings Plan).
The appropriate percentage costs of the Savings Plan are allocated to and
funded by the Association. During 1995, the Company received a favorable
letter of determination from the Internal Revenue Service regarding the
Savings Plan. The Savings Plan permits participation by all employees of the
Company who have completed six months of continuous service, subject also to
their entry into the Savings Plan on enrollment dates of January 1 or July 1
of each year. Participants may defer up to 15% of their compensation allowing
participants a pretax savings on their deferrals. The Company matches 100% of
a participant's first $300 deferred and 50% thereafter up to a maximum Company
match of $2,000 per year. All participants become vested upon entry into the
Savings Plan. Each participant directs his own investments among a variety of
up to six options, which are managed by professional investment managers.
During 1994, 1995 and the period from January 1, 1996 through November 18,
1996, the amounts expensed by the Association for its share of contributions
totaled $200,000, $187,000 and $178,000, respectively.
72
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Board of Trustees' Retirement Plan
The Association has a retirement plan (Trustees' Retirement Plan) covering
each eligible member of the Association's Board of Trustees (Trustee). A
Trustee is eligible to participate in this plan if such Trustee has completed
at least five years of service on the Board. Each eligible Trustee is entitled
to receive an annual retirement benefit equivalent to the annual Board meeting
fees. The benefit is paid for a period equal to the number of years that the
eligible Trustee served on the Board. Upon the death of an eligible Trustee,
the benefits, to which the eligible Trustee had been entitled, shall be
payable to such eligible Trustee's spouse, until receipt of the maximum
benefit to which the eligible Trustee would have been entitled, had he or she
survived, or until the death of the spouse, whichever first occurs, has been
paid.
The Trustees' Retirement Plan is a noncontributory, nonqualified and
unfunded plan and represents only an unsecured general obligation of the
Association. The Board of Trustees has full and final authority to interpret
the plan and to make determinations which it believes advisable for the
administration of the plan, and all such determinations and decisions by the
Board are binding upon all parties. Net pension cost included the following
components for the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 through November 18, 1996 (dollars in thousands):
1994 1995 1996
---- ---- ----
Service cost--benefits earned during the period.............. $ 78 $ 84 $ 83
Interest cost on projected benefit obligation................ 161 161 141
Net amortization and deferral................................ 126 162 197
---- ---- ----
Net periodic pension cost.................................. $365 $407 $421
==== ==== ====
The following table sets forth the Trustees' Retirement Plan's funded status
and amounts recognized in the Association's combined statements of financial
position at December 31, 1995 and November 18, 1996 (dollars in thousands):
1995 1996
------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation.............................. $ 2,217 $ 2,440
------- -------
Accumulated benefit obligation......................... $ 2,217 $ 2,440
------- -------
Projected benefit obligation........................... $ 2,217 $ 2,440
------- -------
Plan assets at fair value.............................. -- --
------- -------
Projected benefit obligation in excess of plan assets.... $(2,217) $(2,440)
Unrecognized net loss.................................... 551 468
Prior service cost not yet recognized in net periodic
pension cost............................................ 143 --
Adjustment required to recognize additional liability.... (847) (468)
Unrecognized net obligation at January 1, 1986 being
recognized over 15 years................................ 153 --
------- -------
Accrued pension liability.............................. (2,217) (2,440)
Less current portion included in other liabilities....... 554 569
------- -------
$(1,663) $(1,871)
======= =======
73
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The present value of the projected benefit obligation and related pension
cost was determined using an assumed discount rate of 8.0% for the years ended
December 31, 1994 and 1995 and 7.75% for the period ended November 18, 1996,
with no assumed pay increases due to certain Plan provisions. Since the
Trustees' Retirement Plan is unfunded, the Association is required, under the
provisions of Statement of Financial Accounting Standards No. 87 (SFAS 87), to
reflect an additional retirement plan liability of $847,000 and $468,000 as of
December 31, 1995 and November 18, 1996, respectively. This additional
liability is offset by an intangible asset of $296,000 at December 31, 1995,
which is included in other assets in the combined statements of financial
position. In addition, any excess of the pension liability over the intangible
pension asset is recorded as a component and reduction in net assets. Such
amounts were $551,000 and $468,000 at December 31, 1995 and November 18, 1996,
respectively.
Concurrent with the sale of the cemetery operations, the Trustees'
Retirement Plan ceased accrual of future benefits and vesting was accelerated
for all participants. The provisions of Statement of Financial Accounting No.
88 consider such an event a curtailment and require that any related gain or
loss is recognized in the current period. Accordingly, the Association has
recorded a curtailment loss of $421,000, which is included in selling, general
and administrative expenses in the accompanying combined statement of
activities for the period ended November 18, 1996.
The pension liabilities related to the Trustees Retirement Plan have been
assumed by the buyer pursuant to the Asset Purchase agreement.
Supplemental Deferred Compensation
In addition, certain retired executives of the Association participate in a
supplemental deferred compensation program which went into effect in 1988, at
which time the present value of the related liability was established. The
Association's liability related to this program totaled $527,000 and $443,000
at December 31, 1995 and November 18, 1996, respectively, which is included in
retirement plan and other liabilities in the accompanying combined statements
of financial position.
The liabilities related to this program have been assumed by the buyer
pursuant to the Asset Purchase Agreement.
Supplemental Employee Retirement Plan
The Senior Executive officers of the Company have a Supplemental Employee
Retirement Plan (SERP). The Association expenses its share of the costs
associated with the SERP based on predetermined allocation percentages. The
liability of the SERP is actuarially determined under the provisions of
Statement of Financial Accounting Standards No. 87 (SFAS 87). Amounts
allocated to the Association totaled $196,000, $214,000 and $141,000 for the
years ended December 31, 1994 and 1995 and the period from January 1, 1996
through November 18, 1996, respectively.
The Association's portion of the unfunded liability at December 31, 1995 and
November 18, 1996 amounted to $1,305,000 and $1,447,000, respectively, and
such amounts have been included in retirement plan and other liabilities in
the accompanying combined statements of financial position, net of the
allocated portion of the cash surrender value of life insurance policies,
which amounted to $127,000 and $247,000, respectively.
To ultimately fund the SERP obligation, the Company has procured whole life
insurance policies on the key executives which have an aggregate face amount
of $7 million. The cash surrender value of such policies
74
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
has been allocated to the Association, like other common costs; but since the
Association is not the owner of such policies, such cash surrender values have
been shown as a reduction of the SERP liability.
This SERP liability has been assumed by the buyer pursuant to the Asset
Purchase Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK
The carrying value of the Association's debt instruments (capital leases)
approximates fair value which is based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities.
The fair values of the Association's accounts and notes receivable in excess
of one year approximate carrying values and are determined as the present
value of expected future cash flows discounted at the interest rate currently
offered by the Association, which approximates rates currently offered for
loans with similar terms and collateral to borrowers with comparable credit
risk.
The carrying amounts of the remaining current assets and liabilities
approximate fair value because of the short-term nature of those accounts.
11. INCOME TAX SETTLEMENTS
During 1993, the Internal Revenue Service (IRS) began an examination of
Federal tax returns filed by the Association, the Company and the Company's
predecessor and its subsidiaries for the 1990 tax year. The IRS proposed
multiple positions and tax adjustments for all of these entities. In December
1994, the Company, with the consent of the Association, agreed to certain
adjustments proposed by the IRS relating to both the Company and the Company's
predecessor and its subsidiaries for the tax years through December 31, 1992.
A portion of this settlement amount totaling $320,000 was agreed to in
December 1994 and was attributable to the Association in accordance with an
Indemnity Agreement between the Association and the Company executed in May
1990. Such amount was paid by the Company on behalf of the Association.
In June 1995, the Association and the IRS entered into a Closing Agreement
settling all outstanding issues of the Association and the Endowment Care Fund
for $1,155,000. In accordance with the Indemnity Agreement, the settlement
made by the Association is reimbursable by the Company as additional covenant
not to compete consideration. After offsetting the Association's liability to
the Company for the $320,000 settlement of tax issues with the IRS in 1994,
the Association agreed to finance the Company's share of the settlement, which
financing terms are further described in note 3. Such adjustments are
reflected in the 1994 accompanying combined financial statements.
12. PURCHASE COMMITMENT
In September 1992, the Association and the local County Sanitation District
(the District) entered into an agreement (the Agreement) whereby the
Association agreed to construct a reclaimed water storage reservoir (the
Reservoir) with a capacity of 1.2 million gallons, one-half of which would be
made available to the District for its use at a site located adjacent to the
cemetery. The cost of the Reservoir, which was completed during 1994, totaled
$471,000.
Similarly, the District agreed to construct a reclaimed water transmission
system to transport reclaimed water from its existing water reclamation plant
to the Association's Reservoir. It is anticipated that the reclaimed water
transmission system will be completed in 1997.
75
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In connection with this Agreement, the Association is obligated to purchase
initially 500 acre feet per year of reclaimed water from the District, with
such amount increasing by 50 acre feet per year, up to a maximum of 3,200 acre
feet per year. The annual price to be paid by the Association for the
reclaimed water shall be the greater of (a) one-half of the unit price in
effect at the beginning of the applicable fiscal year, currently estimated at
$220 per acre foot per year, multiplied by the amount of reclaimed water
delivered to the Association, less one-half of the annual payment made by the
Association for the reclaimed water transmission system, as discussed further
below, and (b) one-fifth of the unit cost of operation and maintenance of the
Inland Reclamation Plants multiplied by the amount of reclaimed water
delivered. Such costs are currently estimated at $105 per acre foot.
The Association has agreed to pay its proportionate share of the capital
costs incurred by the District in constructing the reclaimed water
transmission system. Such proportionate share will be determined based on the
percentage of peak flow design capacity required by the Association to the
total peak flow design capacity of the transmission facilities. The
Association's proportionate share of these costs is estimated to total
approximately $1,500,000. The Association's share may exceed this estimate
since such costs are based on current anticipated demand for transporting
reclaimed water. Actual costs and demand could vary significantly from these
estimates.
The Association's annual payment of such costs is to be equal to 1/20th of
its proportionate share of the capital costs or approximately $108,000, as
originally estimated.
The District has agreed to pay its proportionate share of the capital costs
associated with the Association's construction of the Reservoir. The
District's share of such costs is based on the proportion of the Reservoir's
designed capacity required for the Association to provide reclaimed water
storage for the District. Annual payment of such amounts will be equal to
1/20th of the District's share and will reduce the annual payment made by the
Association to the District for its share of the reclaimed water transmission
system described above.
The Association and the District have also agreed to reimburse the other for
operating and maintenance costs associated with the Reservoir and the
reclaimed water transmission system based on criteria outlined in the
Agreement.
13. COMMITMENTS AND OTHER MATTERS
Transaction with the International Buddhist Progress Society
During 1994, the Association sold the exclusive interment rights on an
undeveloped parcel of land located on the Association's property to the
International Buddhist Progress Society (IBPS), an unrelated organization. In
exchange for the interment rights, IBPS agreed to pay the Association
$1,375,000, of which $160,000 was received as a deposit during 1994 and is
included in other current liabilities in the accompanying 1995 and 1996
statements of financial position. Sales commissions totaled $206,000 in
connection with this transaction. It was determined that because, among other
matters, an adequate down payment was not received and the interment rights
were sold on a parcel of land that was not ready for the purpose for which it
was sold, the earnings process was not complete and revenue and expense
recognition relating to the transaction should be deferred until such time
IBPS has completed a significant portion of the project.
IBPS plans to build a columbarium on the developed parcel and IBPS will sell
the niches therein on an at-need and pre-need basis. The remaining unpaid
portion of the sales price is to be repaid after construction of the Temple is
completed, based on a percentage of niches sales, but in no event later than
January 1, 2003. IBPS has agreed to reimburse the Association up to $1,150,000
for the costs it will incur to ready the undeveloped parcel
76
ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of land for construction of the columbarium. Pursuant to the agreement with
IBPS, the Association will hold title to land and improvements and the
completed building. As of November 18, 1996, development of this project was
substantially complete, and development costs expended by the Association in
connection with this project totaled $2,100,000 and are included in
construction in progress at November 18, 1996, reduced by cash collections of
$931,000.
Sky Rose Chapel
During 1995, the Association entered into an agreement with a building
contractor for the construction of a new funeral chapel, which has become
known as Sky Rose Chapel. The project is currently expected to cost $15.7
million and is scheduled for completion in Spring 1997. As of November 18,
1996, costs incurred in connection with this project totaled approximately
$14.9 million. Pursuant to the terms of the Asset Purchase Agreement discussed
in Note 1, the association agreed to fund the remaining amounts necessary to
complete the project as specified at November 19, 1996, and therefore, amounts
payable at December 31, 1995 and November 18, 1996 relating to this project
have been excluded from the accompanying combined financial statements.
14. ENVIRONMENTAL AND LITIGATION MATTERS
The Association's operations are subject to various Federal, state and local
environmental laws, regulations and guidelines, including those related to the
remediation of hazardous substances and protection of endangered or threatened
species. In connection with the sale of the Association's properties,
environmental audits were conducted and it has been determined that certain
solid waste disposal areas will require remediation. Pursuant to an
environmental compliance agreement between the Association and the Company,
the Association has agreed to pay for such remediation costs or indemnify the
buyer for such costs. Accordingly, the Association has recorded a provision of
$325,000 at November 18, 1996, which amount is included in accrued expenses in
the accompanying combined statement of financial position as of that date.
Such provision was based on the existing facts and circumstances and after
consultation with engineers; however, given the inherent uncertainties in
evaluating environmental exposures, actual costs to be incurred at the sites
might exceed current estimates. Management does not anticipate that such
excess, if any, will have a material adverse effect on its financial position.
In addition, two of the Association's properties in or near areas of
groundwater contamination. Although information has been submitted to the
authorities in connection with the contamination of one of these areas, the
Association believes it has not contributed to the groundwater contamination
in either of the areas.
The Association is involved in certain matters of routine litigation, none
of which, in the opinion of management, will have a material adverse effect on
its combined financial position or results of operation.
77
AUDITORS' REPORT
The Board of Directors
Rose Hills Company:
We have audited the accompanying combined balance sheet of certain
subsidiaries (as defined in note 1) of Loewen Group International, Inc. as of
December 31, 1995 and November 18, 1996 and the combined statements of
operations and cash flows for the year ended December 31, 1995 and for the
period from January 1, 1996 to November 18, 1996. 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 audit.
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 provide a reasonable basis
for our opinion.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of certain subsidiaries of Loewen
Group International, Inc. as of December 31, 1995 and November 18, 1996, and
the results of their operations and their cash flows for the year ended
December 31, 1995 and for the period from January 1, 1996 to November 18,
1996. in accordance with generally accepted accounting principles in the
United States.
KPMG
Chartered Accountants
Vancouver, Canada
March 21, 1997
78
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1995 AND NOVEMBER 18, 1996
1995 1996
----------- -----------
ASSETS
Current assets:
Cash................................................. $ 36,757 $ 223,490
Receivables, net of allowances (note 4).............. 1,343,438 1,189,731
Inventories.......................................... 457,025 377,275
Prepaid expenses..................................... 132,472 160,538
----------- -----------
1,969,692 1,951,034
Long-term receivables, net of allowances (note 4)..... 641,432 901,520
Prearranged funeral services (note 5)................. 3,562,801 2,955,338
Cemetery property, at cost (note 6)................... 1,776,926 1,914,966
Property and equipment (note 7)....................... 12,101,134 13,490,769
Covenants not to compete (note 8)..................... 949,104 826,568
Names and reputations (note 9)........................ 4,064,811 4,095,310
----------- -----------
$25,065,900 $26,135,505
=========== ===========
LIABILITIES AND PARENT COMPANY'S INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities............. $ 401,716 $ 163,262
Long-term debt, current portion (note 11)............ 133,151 150,019
Other liabilities, current portion (note 12)......... 93,482 130,753
----------- -----------
628,349 444,034
Deferred prearranged funeral service revenue (note
5)................................................... 3,712,801 3,105,338
Long-term debt (note 11).............................. 1,600,014 1,537,559
Other liabilities (note 12)........................... 569,382 585,505
Cemetery long-term liabilities........................ 444,527 591,680
Deferred income taxes (note 13)....................... 763,141 606,323
Parent company's investment (note 15)................. 17,347,686 19,265,066
Commitments and contingencies (note 16)............... -- --
----------- -----------
$25,065,900 $26,135,505
=========== ===========
See accompanying notes to combined financial statements.
79
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
1995 1996
----------- -----------
Revenue:
Funeral.............................................. $ 9,763,992 $ 8,472,964
Cemetery............................................. 1,462,932 1,780,743
----------- -----------
11,226,924 10,253,707
Cost and expenses:
Funeral.............................................. 6,860,088 6,312,914
Cemetery............................................. 1,251,972 1,560,299
----------- -----------
8,112,060 7,873,213
----------- -----------
3,114,864 2,380,494
Expenses:
General and administrative........................... 1,094,510 806,116
Depreciation and amortization........................ 688,608 735,136
----------- -----------
1,783,118 1,541,252
----------- -----------
Earnings from operations.............................. 1,331,746 839,242
Interest expense...................................... 905,479 754,326
----------- -----------
Earnings before income taxes.......................... 426,267 84,916
Income taxes (note 13):
Current.............................................. 213,543 220,934
Deferred............................................. (10,869) (156,818)
----------- -----------
202,674 64,116
----------- -----------
Net earnings.......................................... $ 223,593 $ 20,800
=========== ===========
See accompanying notes to combined financial statements.
80
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
1995 1996
----------- -----------
CASH PROVIDED BY (USED IN)
Operations
Net earnings......................................... $ 223,593 $ 20,800
Item not affecting cash
Depreciation and amortization....................... 688,608 735,136
Deferred income taxes............................... (10,869) (156,818)
Changes in operating assets and liabilities
Receivables......................................... (321,431) (106,381)
Inventories......................................... (102,402) 79,750
Prepaid expenses.................................... (7,101) (28,066)
Accounts payable and accrued liabilities............ 79,448 (238,454)
Other............................................... 16,768 147,153
----------- -----------
566,614 453,120
Investments
Business acquisitions............................... (2,900,518) (138,040)
Purchase of property and equipment.................. (391,255) (1,881,440)
Development of cemetery property.................... (92,206) (46,365)
----------- -----------
(3,383,979) (2,065,845)
Financing
Contributions from parent and affiliates............ 2,612,438 1,896,580
Decrease in long-term debt.......................... (84,175) (150,516)
Decrease (increase) in other liabilities............ (86,454) 53,394
----------- -----------
2,441,809 1,799,458
----------- -----------
Decrease in cash during the year...................... (375,556) 186,733
Cash, beginning of year............................... 412,313 36,757
----------- -----------
Cash, end of year..................................... $ 36,757 $ 223,490
=========== ===========
See accompanying notes to combined financial statements.
81
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. GENERAL
These financial statements present the combined financial position and
results of operations and cash flows of certain direct or indirect
subsidiaries ("Companies") of Loewen Group International, Inc. ("Parent
Company") which have been sold (see Note 18). The companies that are combined
in the preparation of these statements are:
Harbor Lawn Memorial Park, Inc. A.L. Cemetery
Dimond Service Corporation Custer Christiansen Covina Mortuary, Inc.
Neel Funeral Directors, Inc. Colton Funeral Chapel, Inc.
Richardson-Peterson Mortuary,
Inc. Glasband-Willen Mortuaries
Grove Colonial Funeral Chapel,
Inc. San Fernando Mortuary, Inc.
White Funeral Home, Inc.
The Combined Statements of Operations and Cash Flows reflect the operations
of the Companies from their dates of acquisition and incorporate push-down
accounting. All significant intercompany balances and transactions have been
eliminated in the combined financial statements. The Companies are principally
engaged in the operation of cemetery facilities and funeral services.
2. BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in
accordance with principles of accounting generally accepted in the United
States.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Prearranged funeral services
Prearranged funeral services provide for future funeral services generally
determined by prices prevailing at the time the contract is signed. The
payments made under the contract are either placed in trust or are used to pay
the premiums of life insurance policies under which the Companies will be
designated as beneficiary. Except for amounts not required to be trusted which
are used to defray costs of administration, no income is recognized until the
performance of a specific funeral.
Trust fund principal amounts and insurance contract amounts, together with
trust fund investment earnings retained in trust and annual insurance
benefits, are deferred until the service is performed. The Companies estimate
that trust fund investment earnings and annual insurance benefits exceed the
increase in cost over time of providing the related services. Upon performance
of the specific funeral service, the Companies will recognize the trust fund
principal amount or insurance contract amount together with the accumulated
trust earnings and annual insurance benefits as funeral revenues. Indirect
obtaining costs relating to the sale of prearranged funeral services are
expensed in the period incurred.
(b) Cemetery operations
Pre-need sales of cemetery interment rights and other related products and
services are recorded as revenue when customer contracts are signed with
concurrent recognition of estimated related costs. Allowances for customer
cancellations and refunds are provided at the date of sale based on
management's estimates of expected cancellations. Actual cancellation rates in
the future may result in a change in estimate.
A portion of the proceeds from cemetery sales is generally required by law
to be paid into perpetual or endowment care trust funds. Cemetery revenue is
recorded net of the amount to be deposited to perpetual or endowment care
trust funds. Earnings of perpetual or endowment care trust funds are used to
defray the
82
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
maintenance costs of cemeteries. Additionally, pursuant to state law, a
portion of the proceeds from the sale of pre-need merchandise and services may
also be required to be paid into trust funds which are recorded as long-term
receivables.
(c) Inventories
Inventories are valued at the lower of cost, determined primarily on a
specific identification basis or a first in first out basis, and net
realizable value.
(d) Property and equipment
Property and equipment is recorded at cost and depreciated on a straight-
line basis over the estimated useful lives of the assets as follows:
Buildings and improvements... 10 to 40 years
Automobiles.................. 6 years
Computer hardware and soft-
ware........................ 6 to 10 years
Leasehold improvements....... over the term of the lease plus one renewal
Furniture, fixtures and
equipment................... 6 to 10 years
(e) Covenants not to compete
Covenants not to compete carried on the combined balance sheet represent
amounts prepaid or the present value of future payments under non-competition
agreements between the parent company directly or indirectly and certain key
management personnel of the Companies. For financial statement presentation
purposes, covenants not to compete have been recorded in these combined
financial statements. Amortization of such covenants not to compete is
provided on a straight-line basis over the terms of the relevant agreements,
typically ten years.
(f) Names and reputations
The amount paid by the parent company, directly or indirectly, for the names
and reputations of operations acquired is equivalent to the excess of the
purchase price over the fair value of identifiable net assets of the Companies
acquired, as determined by management. For financial statement presentation
purposes, names and reputations have been recorded in these combined financial
statements. Amortization is provided on a straight-line basis over 40 years.
(g) Deferred income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Temporary differences
are tax effected at current rates. There was no effect of changes in tax rates
during 1995 or 1996.
(h) Parent Company's investment
Parent Company's investment consists of contributions to the Companies
directly or indirectly by the parent company plus current earnings and losses
of the Companies from the date of their acquisition.
83
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(i) Impairment of long-lived assets
Effective December 15, 1995, the Companies adopted FAS121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. FAS121 requires the recognition of impairment losses on long-lived assets
used in operations and intangible assets whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. The Companies monitor the recoverability of long-lived assets
based upon projections of future undiscounted cash flows and recognize losses
if carrying value is in excess of future cash flows.
(j) Use of Estimates
Management of the Companies has made a number of estimates and assumptions
that affect the amounts reported in the accompanying combined financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from these estimates.
4. RECEIVABLES, NET OF ALLOWANCES
1995 1996
---------- ----------
Receivables, net of allowances
Trade accounts.................................... $1,361,887 $1,108,256
Instalment contracts.............................. 209,565 249,440
Notes receivable and other........................ 69,267 321,088
Unearned finance income........................... (41,472) (100,053)
Allowance for contract cancellation and doubtful
accounts......................................... (255,809) (389,000)
---------- ----------
$1,343,438 $1,189,731
========== ==========
1995 1996
---------- ----------
Long-term receivables, net of allowances
Instalment contracts.............................. $ 596,456 $1,049,554
Notes receivable and other........................ 337,114 263,501
Unearned finance income........................... (199,421) (269,978)
Allowance for contract cancellation and doubtful
accounts......................................... (92,717) (141,557)
---------- ----------
$ 641,432 $ 901,520
========== ==========
5. PREARRANGED FUNERAL SERVICES
Prearranged funeral services are amounts in short-term interest bearing
deposits made in accordance with state trusting laws with various financial
institutions together with accrued earnings. The Companies will receive the
prearranged funeral trust amounts when the funeral services are performed.
1995 1996
---------- ----------
Short-term investments................................ $ 922,455 $ 823,707
Fixed maturities...................................... 2,640,346 2,131,631
---------- ----------
Prearranged funeral trust assets...................... $3,562,801 $2,955,338
Prearranged funeral trust liabilities................. 3,712,801 3,105,338
---------- ----------
Net prearranged funeral trust liabilities............. $ 150,000 $ 150,000
========== ==========
84
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
As at November 18, 1996 and December 31, 1995, the total carrying value of
prearranged funeral trust assets were approximately equal to market value. The
weighted average rate of return on the above prearranged funeral trust assets
for the period January 1, 1996 to November 18, 1996 was 3.97% and for the year
ended December 31, 1995 was 4.18%.
6. CEMETERY PROPERTY, AT COST
1995 1996
---------- ----------
Cemetery undeveloped land............................. $ 400,560 $ 404,330
Developed land and lawn crypts........................ 1,376,366 1,510,636
---------- ----------
$1,776,926 $1,914,966
========== ==========
7. PROPERTY AND EQUIPMENT
1995 1996
----------- -----------
Land............................................... $ 4,059,991 $ 4,856,297
Building and improvements.......................... 6,506,638 7,659,515
Automobiles........................................ 637,329 613,652
Computer hardware and software..................... 132,976 166,531
Leasehold improvements............................. 157,449 193,136
Furniture, fixtures and equipment.................. 1,985,668 1,865,693
----------- -----------
$13,480,051 $15,354,824
Less, accumulated depreciation..................... (1,378,917) (1,864,055)
----------- -----------
$12,101,134 $13,490,769
=========== ===========
8. COVENANTS NOT TO COMPETE
1995 1996
---------- ----------
Covenants not to compete............................. $1,627,806 $1,638,028
Less: accumulated amortization....................... (678,702) (811,460)
---------- ----------
$ 949,104 $ 826,568
========== ==========
9. NAMES AND REPUTATIONS
1995 1996
---------- ----------
Names and reputations................................. $4,319,059 $4,458,354
Less: accumulated amortization........................ 254,248 (363,044)
---------- ----------
$4,064,811 $4,095,310
========== ==========
On August 8, 1996, the parent company acquired an individual's name to be
used in the future operation of certain combined subsidiaries for a total cost
of approximately $105,000.
10. RELATED PARTY TRANSACTIONS
General and administrative expenses of the parent representing accounting,
treasury, regulatory compliance and management advisory services which are not
specifically identifiable to a particular subsidiary, have been
85
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
allocated to subsidiaries proportionately using revenue as the base. During
the period through November 18, 1996, the parent company charged the Companies
approximately $806,116 and in 1995 such charges were $1,094,000. Such charges
are included in general and administrative expenses in these combined
financial statements.
An employee of Glasband-Willen Mortuaries subscribed for a 5% interest in
the issued and outstanding common shares of Glasband-Willen Mortuaries in
return for a $150,000 promissory note to the Parent Company. For financial
statement presentation purposes, this note has been netted against the cost of
subscription in the combined financial statements. As of March 21, 1997, these
shares have not been issued.
Included in interest expense is approximately $719,000 and $575,865 in
interest charges on intercompany loans and advances from the parent company
and affiliates for the year ended December 31, 1995 and the period ended
November 18, 1996, respectively.
During the periods the Companies obtained automobile, general liability and
other insurance through an affiliated company.
11. LONG-TERM DEBT
The notes payable relating to White Funeral Home, Inc. totalling
approximately $1,630,000 at December 31, 1995 and $1,494,000 at November 18,
1996, are secured by land and are guaranteed by an affiliated company. The
notes bear interest at rates ranging from 7.46% to 8.00% per annum and are
repayable in equal annual instalments. The notes payable agreements are
between the sellers and the parent company or a subsidiary of the parent
company. For financial statement presentation purposes, these notes have been
recorded in these combined financial statements.
Principal repayments are to be made as follows:
1997............................................................ $ 150,019
1998............................................................ 161,331
1999............................................................ 173,501
2000............................................................ 186,588
2001............................................................ 200,664
Thereafter...................................................... 815,475
----------
$1,687,578
==========
12. OTHER LIABILITIES
Other liabilities consist of the net present value of future covenant not to
compete payments discounted at 9% per annum. Payments under agreements may be
made variously at closing or over future periods.
Future payments under these agreements are to be made as follows:
1997.............................................................. $130,753
1998.............................................................. 143,193
1999.............................................................. 166,598
2000.............................................................. 150,045
2001.............................................................. 62,102
Thereafter........................................................ 63,567
--------
$716,258
========
86
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
The Companies' parent files consolidated federal and state income tax
returns and pays all related income taxes on behalf of the Companies. The
Companies' income tax expense and income taxes are computed as if the
Companies joined in filing consolidated federal, and to the extent applicable,
state income tax returns and reported only the Companies' taxable income.
A reconciliation between the Companies' income tax expense and income taxes
computed by applying the statutory federal income tax rate to earnings before
income taxes is as follows for the period from January 1, 1996 to November 18,
1996 and the year ended December 31, 1995:
1995 1996
-------- -------
Expected federal income tax at statutory rate........... $144,931 $28,871
Increase in taxes resulting from:
Non-deductible goodwill amortization arising from
acquisitions.......................................... 26,962 25,192
State income tax expense, net of federal taxes......... 26,130 5,205
Other, net............................................. 4,651 4,848
-------- -------
Income tax expense.................................... $202,674 $64,116
======== =======
The Companies' net deferred tax liability at November 18, 1996 and at
December 31, 1995 is as follows:
1995 1996
-------- --------
Deferred tax liabilities
Property and equipment and cemetery property.......... $863,350 $820,985
-------- --------
Deferred tax assets
Allowance for contract cancellation and doubtful ac-
counts............................................... 55,343 90,031
Intangibles........................................... 44,866 124,631
-------- --------
Total deferred tax assets............................ $100,209 $214,662
-------- --------
Net deferred tax liability............................. $763,141 $606,323
======== ========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
1995 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial Asset
Long-term receivables
Practicable to estimate fair
market.......................... $ 337,114 $ 329,329 $ 263,501 $ 261,913
Not practicable.................. 304,318 -- 638,019 --
Financial Liability
Long-term debt.................... $1,733,165 $1,513,917 $1,687,578 $1,642,626
Other liabilities................. 662,864 686,090 716,258 722,208
The carrying amount of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to the short-term maturities of these
instruments. The fair value of long-term debt subject to fixed interest rates
is estimated by discounting the future cash flows, including interest
payments, using rates currently available for debt of similar terms and
maturity, based upon credit standing and other market factors. Similarly, the
fair value of other liabilities is estimated by discounting the cash flows
using the current borrowing rate. The
87
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
long-term receivables for which it is not practicable to estimate fair value
comprise primarily of instalment contracts receivable on cemetery sales which
generally have terms of three to seven years and bear interest ranging from 7%
to 11%.
15. PARENT COMPANY'S INVESTMENT
1995
-----------
Balance, beginning of year.................................... $14,511,655
Net earnings for the year..................................... 223,593
Net contributions from parent company and affiliates.......... 2,612,438
-----------
Balance, end of year.......................................... $17,347,686
Net earnings for the period................................... 20,800
Net contributions from parent company and affiliates.......... 1,896,580
-----------
Balance, November 18, 1996.................................... $19,265,066
===========
For financial statement presentation purposes, the intercompany loans and
advances from the Parent Company and affiliates have been classified as an
investment in the Companies pursuant to the terms of the definitive sale
agreement referred to in Note 18.
16. COMMITMENTS AND CONTINGENCIES
(a) Leases
At December 31, 1995, the Companies were committed to operating lease
payments under agreements with terms ranging from 3 to 10 years for premises,
automobiles and office equipment in the following approximate amounts:
1997............................................................ $ 465,000
1998............................................................ 267,000
1999............................................................ 123,000
2000............................................................ 81,000
2001............................................................ 89,000
Thereafter...................................................... 62,000
----------
$1,087,000
==========
(b) Other
The Companies are party to legal proceedings in the ordinary course of their
business but they do not expect the outcome of any such proceedings to have a
material adverse effect on the Companies' financial condition.
The State of California Department of Consumer Affairs ("DCA") is currently
reviewing the funding levels of the endowment care trust fund at A.L.
Cemetery. As of March 21, 1997, the amount of additional funding, if any, to
the above noted trust, has not been determined.
Management is aware that some of their properties may have been contaminated
from former or adjacent underground storage tanks. Management believes that
these environmental contingencies and liabilities to be immaterial
individually and in aggregate.
Two liens totalling approximately $500,000 are registered against the
property of A.L. Cemetery. The holders of these liens have not exercised any
right, if any, they may have on these liens.
88
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
17. RETIREMENT PLAN
Certain employees are members of the parent company's 401(k) defined
contribution retirement plan. There are no required future contributions under
these plans in respect of past or current service.
18. SUBSEQUENT EVENTS
(a) On September 20, 1996, the Companies' parent entered into a definitive
agreement to sell its interest in the Companies to an entity in which the
parent company will retain an equity investment in. The transaction was
consummated on November 19, 1996. These combined financial statements are on a
historical cost basis and therefore do not reflect decisions and activities of
their new owners.
89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Roses, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Roses, Inc. and subsidiaries included
in this Form 10-K and have issued our report thereon dated October 25, 1996.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The amounts listed for Roses, Inc. and
subsidiaries on Schedule II for the year ended December 31, 1995 are the
responsibility of the company's management and are presented for purposes of
complying with the Securities and Exchange Commissions rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Los Angeles, California
October 25, 1996
90
ROSE HILLS COMPANY AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) PERIOD
----------- ---------- ---------- ------------- -------------- ----------
(IN THOUSANDS OF DOLLARS)
Allowance for contract cancella-
tions and doubtful accounts:
Year ended December 31,
1997................... 2,170 1,959 636 (1,918) 2,847
Period from November
19, 1996 to
December 31, 1996
(the Company)........ 1,716 62 552 (160) 2,170
Period from January 1,
1996 to November 18,
1996
(Proforma
Predecessor)(3)...... 2,079 1,015 (1,378) 1,716
Year ended December 31,
1995...................
Roses, Inc and
Subsidiaries......... 331 100 (144) 287
Rose Hills Memorial
Park Association and
Workman Mill
Investment Company... 2,005 1,707 (1,920) 1,792
- --------
(1) Primarily the opening balances for the Satellite Properties (1996) and
reclassifications to other accounts (1997).
(2) Uncollected receivables written off, net of recoveries.
(3) The financial data for the period January 1, 1996 to November 18, 1996
represent the combined financial data for the predecessor Mortuary and
Cemetery. Such presentation is pro forma in that generally accepted
accounting principles would not allow such combination due to the lack of
common ownership of the predecessor operations.
91