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 owner and operator of the Rose Hills Mortuary and purchasing certain assets and assuming certain liabilities of Rose Hills Memorial Park Association (the "Association") and Workman Mill Company, the owners of the real property and other cemetery assets of the Rose Hills Memorial Park (Rose Hills Cemetery). In connection with the acquisition, The Loewen Group Inc., a shareholder of RH Holdings, also caused one of its subsidiaries to contribute to the Company's 14 funeral homes and 2 funeral home cemetery combination properties (the "Contributed Properties"). As a result of these acquisitions (collectively the "Acquisition Transaction"), the Company is the successor to the operations, assets and liabilities of the Rose Hills Mortuary and Cemetery (collectively, "Rose Hills") and the Contributed Properties.
Rose Hills is the largest, single-location cemetery and funeral home combination in the United States, and the Cemetery is the largest, single- location cemetery in the United States. The Rose Hills Cemetery and the Rose Hills Mortuary have been continuously operating since 1914 and 1956, respectively. Rose Hills is situated less than 14 miles from downtown Los Angeles on approximately 1,400 acres of land near Whittier, California.
In addition to Rose Hills, the Company operated 10 funeral homes, 2 funeral home cemetery combination properties and one cemetery ("Affiliates") as of December 31, 2001. We believe that Rose Hills, together with the Affiliates, constitute a strategic assembly of cemeteries and funeral homes in the greater Los Angeles area.
CHANGE IN CONTROL OF REGISTRANT (See Item 13 - -Certain Relationships and Related Transactions)
In April 2001, the shareholders of RH Holdings reached an agreement ("Loewen Blackstone Settlement Agreement") pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. and its affiliates (collectively "Blackstone"), then the beneficial owner of 80.55% of the outstanding common stock of the Company, would exercise its put right and the minority shareholder, a reorganized Loewen Group International, Inc. ("Loewen"), would acquire all of the stock of RH Holdings owned by Blackstone upon Loewen's emergence from bankruptcy. The U.S. Bankruptcy Court confirmed Loewen's reorganization plan, including the proposed acquisition of shares of RH Holdings from Blackstone on December 5, 2001, and the plan became effective on January 2, 2002. Effective with its emergence from bankruptcy, Loewen has since been renamed the Alderwoods Group, Inc. ("Alderwoods"). Since the U.S. Bankruptcy Court approved the reorganization plan on December 5, 2001, such approval effectively obligated Blackstone and Loewen to consummate the put agreement. Accordingly, the Company has recorded this transaction effective on December 31, 2001.
On January 3, 2002, in full satisfaction of its obligations under the put arrangement, Alderwoods delivered to Blackstone unsecured, subordinated notes in the aggregate principal amount of $24,678,571 and Alderwoods common stock with an aggregate value of $6,515,143. As a result of the delivery of the consideration, Alderwoods completed its purchase of all of the stock of RH Holdings beneficially owned by Blackstone. Upon closing of the transaction ("Alderwoods Purchase Transaction"), Alderwoods increased its ownership from 20.45% to 100% of the outstanding common stock of RH Holdings, thereby causing the Company to become a wholly owned subsidiary of Alderwoods. The shareholders agreement, and all other agreements, between Alderwoods and Blackstone with respect to the Company terminated as of the closing of the transaction, and Alderwoods became entitled to elect all of the directors of the Company as of such date.
THE FUNERAL SERVICE AND CEMETERY INDUSTRY AND LOCAL CHARACTERISTICS
Since 1986, demand for funeral services and related commodities has grown steadily at a 1% compound annual growth rate while the aggregate number of funeral homes has remained relatively constant. Management believes these demographic trends will help contribute to the 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 approximately 34 million, will more than double in size to over 73 million by 2035. Over the next 10 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.
Historically, the death care industry has been made up of relatively small, family owned and operated businesses. In the last several decades, several large "consolidators" have sought to take advantage of economies of scale by acquiring a large number of smaller funeral homes and cemeteries. Management believes large consolidators serve approximately 20% of the overall market in the United States. In 1999, the trend toward consolidation changed significantly. Two of the larger consolidators, Service Corporation, International and Stewart Enterprises, Inc, both of which compete directly in the Company's market, announced plans to significantly curtail their acquisition activity and to offer properties for sale. In June 1999, the second largest consolidator, Loewen, now a reorganized Alderwoods and beneficial owner of 100% of the Company, entered into bankruptcy proceedings, abandoned its acquisition strategy and began to offer properties for sale. These trends of curtailed acquisition activity and property sales continued for these consolidators in 2001. Management believes that the curtailment of acquisitions and the divesture of certain locations by the large consolidators are likely to reduce their expansion in the Company's immediate market area for the foreseeable future. In addition, Management believes that the divestitures and reduction in acquisitions have reduced acquisition multiples for funeral homes and cemeteries in the Company's market area, which contributed to a fall off in local acquisition activity.
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, the Census Bureau and Los Angeles County, the estimated population of Los Angeles County was approximately 9.9 million people (over 3 million households) in 2000. Approximately 17% of this population was age 55 or older, 10% age 65 or older, and 4% age 75 or older. The death rate in Los Angeles County has demonstrated stability 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. However, slight year-to-year variations can occur in the number of deaths. In 2000, deaths for Los Angeles County decreased by approximately 1%. Data through November 2001 indicates deaths have increased 0.9% from the same 11 month period in 2000.
The Company believes that significant barriers exist for new competitors to enter the funeral and cemetery business within the Los Angeles market. Development of new cemetery property requires significant capital investment over several years. New cemeteries must also meet the demands of a rigorous local entitlement process. Management believes that Rose Hills' strategic location and large amount of undeveloped and unsold cemetery property provide it with a significant long-term competitive advantage.
Funeral Operations
The Rose Hills Mortuary, which first began operations in 1956, 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 sites. An experienced counselor coordinates all funeral arrangements provided to each mortuary customer with the assistance of a centralized computer system. Management believes its centralized computer and operating systems combine to reduce fixed costs per funeral call, giving the Rose Hills Mortuary a competitive advantage over smaller, independently operated funeral homes. The Mortuary has the current capacity to provide over 30 funeral services per day. In 2001, the Rose Hills Mortuary performed approximately 5,000 funeral calls.
In addition to the Rose Hills Mortuary, the Company also operates 10 funeral homes and 2 funeral home cemetery combination properties located in Los Angeles and Northern Orange County. These Affiliate funeral homes provide a wide variety of funeral services to various communities in such counties. While the demographics of the population served by these funeral homes, taken as a whole, are generally similar to that of Rose Hills' clients, the smaller size and unique location of each funeral home has led each to develop a demographically unique client base within its particular community. Therefore, as a result of this extended cluster of funeral service providers, Management believes that the strategically located Affiliate locations permit the Company to access a base of mortuary clients that it otherwise would be unable to develop solely from its location near Whittier. In 2001, the affiliates performed approximately 2,900 calls.
The Rose Hills Mortuary and its Affiliates sell funeral services on both an at-need and a pre-need basis. Substantially all pre-need funeral services offered by the Company have been funded through the sale of a life insurance product. Under the insurance plan, the Company is named the beneficiary of the insurance policy. Revenue related to the contracted services is recognized when such services are provided, although the Company's general agent commission and related selling expenses are recognized upon the sale of such policies. On the date of performance of the prearranged funeral service, the Company recognizes funeral service income and the proceeds received under the policy are applied against the contract. Currently, the Company has an arrangement with its third party insurance carrier which locks in the price of caskets at the time an insurance policy is sold, protecting future casket margins. Prior to 1987, the Rose Hills Mortuary also offered trust-backed and debenture-backed pre-need products.
Substantially all revenues from funeral operations are derived from at-need services (including services funded through insurance policies). In 2001, total revenues from at-need services accounted for 89% of funeral operation revenue and 38% of total Company revenue. The remaining 11% of funeral operation revenue for the period was derived from insurance commissions and trust administration fees. The amount and percentage of the Company's total revenues contributed by the funeral operations during each of the last three fiscal years is set forth herein under the caption "Item 7 - -Management's Discussion and Analysis." For additional information about the revenues, income and assets attributable to the Company's mortuary operations, see note 21 to the Company's consolidated financial statements which are included as part of this Annual Report on Form 10-K.
Cemetery Operations
The Rose Hills Cemetery is the largest single location cemetery in the United States and consists of approximately 1,457 total acres. As of December 31, 2001, the cemetery property is described as approximately 710 acres of developed and sold, 33 acres of developed and unsold and 662 acres of undeveloped permitted cemetery property. The Company estimates that approximately 329 acres of the undeveloped property is rugged terrain (including a utility company easement) and cannot be easily developed for cemetery property for economic and environmental reasons. Since its founding in 1914, the Rose Hills Cemetery has performed over 350,000 interments, of which 9,090 occurred in 2001. The Rose Hills Cemetery provides a complete line of cemetery products (including a selection of burial spaces, private estates, vaults, crypts, memorials and niches) and burial and cremation services on both an at-need and pre-need basis.
In addition to the Rose Hills Cemetery, the Company also operates one small cemetery located in Los Angeles and two funeral home cemetery combinations located in Northern Orange County. In 2001, the Company performed approximately 600 interments at these locations.
Pre-need sales of cemetery interment rights are recognized as revenue when the customer contracts are signed with concurrent recognition of related costs. In cases where inadequate initial down payments are made or cemetery property is not fully developed and significant development costs remain, cemetery interment right revenue is deferred and recognized on a percentage of completion basis.
Prior to 2000, the Company recognized the sale of cemetery merchandise and services at the time a customer contract was signed. Effective July 1, 2000, the Company stopped selling cemetery merchandise and
services on cemetery contracts in advance of need. For sales made prior to July 1, 2000, the Company voluntarily trusted 100% of pre-need cemetery service revenue when the sales contracts are paid in full. Also, the Company has an agreement with a vendor to purchase pre-need merchandise when pre-need contracts are paid in full. Funds voluntarily trusted for pre-need cemetery services are shown as trust receivables in the consolidated financial statements.
The Company funds its obligation to maintain cemetery grounds by placing a portion, generally ranging from $100 per standard lot to $38,000 for certain private estates, of the proceeds from cemetery property sales into perpetual care trust funds. Income from these funds is withdrawn and used for maintenance of the cemetery.
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 eight non-denominational chapels (including the Sky Rose Chapel, a 350 seat chapel and mausoleum designed by architect Fay Jones that was completed in 1997), seven additional mausoleums and a crematory. In addition, in 1994, the Company entered into a development agreement with the International Buddhist Progress Society ("IBPS") under which the Company:
. Granted IBPS the interment rights with respect to 7.5 acres of Cemetery property;
. Agreed to contribute to IBPS's development of a 16,000 square foot columbarium and surrounding stupa gardens; and
. Granted IBPS a seven-year option to build a second columbarium on an adjacent 2.7-acre site for $2.0 million.
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 agreed to pay the remaining balance at the rate of $100,000 per quarter starting April 1, 2000. In addition, IBPS has agreed to pay the Company $75 per niche on the first 5,000 niches sold and $50 per niche thereafter. The first columbarium and stupa gardens are complete and open for interments.
In March 2001, the IBPS exercised its option for the adjacent 2.7-acre parcel.
In 2001, approximately 54% of cemetery revenue and 31% of total Company revenue was derived from pre-need sales of cemetery interment rights. The amount and percentage of the Company's total revenue contributed by the cemetery operations during each of the last three fiscal years is set forth herein under the caption "Item 7 - -Management's Discussion and Analysis." For additional information concerning the revenues, income and assets attributable to the Company's cemetery operations, see Note 21 to the Company's consolidated financial statements which are included as part of this Annual Report on Form 10-K.
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, 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. Consistent with this strategy, certain affiliate properties were re-named "Rose Hills" in January 2002 in order to leverage Rose Hills' name recognition in the Los Angeles market.
The Company also faces competition from large "consolidators" in the industry as well as casket retailers (including internet casket stores) and low-cost funeral providers. Such competitors include several large, publicly traded multinational funeral services companies, including Service Corporation International and Stewart Enterprises, Inc. Management believes that, in the Los Angeles area, large consolidators control over 20% of the funeral market, and together with large independents, control over 40% of the Los Angeles funeral market. Alderwoods, the parent of the Company, does not own or operate funeral homes and cemeteries that directly compete with the Company in its markets.
In 2001, cremations represented 20% and 26% of the Rose Hills' and its Affiliates funeral business, respectively. In 2000, cremations in the Los Angeles market area were approximately 35% of total death cases. The Company's traditional funeral and cemetery operations face increasing competition from non-traditional cremation and alternative service firms. The Company believes that it can capitalize on its reputation and name to compete with lesser-known companies through its own alternative service strategy, which include products and services tailored to the cremation market.
REGULATION
The Company's funeral home operations are regulated by the Federal Trade Commission (FTC), which administers the Trade Regulation Rule on Funeral Industry Practices (the "Funeral Rule"). The Funeral Rule became effective on April 30, 1984 and was revised as of July 19, 1994. The FTC is currently reviewing the Funeral Rule but has yet to issue any proposed changes in regulation. 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 cemetery property and funeral services and commodities, and licenses sales persons, funeral directors and others engaged in the provision of these 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. Capital gains from investments in the fund can be set-aside in a special reserve fund for major maintenance and repair projects. 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 specifically applicable to the cemetery and mortuary businesses. The Company cannot predict the outcome of any proposed legislation or regulation, or the effect that any such legislation or regulation might have on the Company.
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, the handling and disposal of biological materials, 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. Management is aware of certain areas within the Cemetery that have required and may in the future require remediation, including a solid waste disposal area that previously was used to dump rubbish, green waste and used motor oil in the 1970's. The Company believes that Rose Hills Foundation (the "Foundation"), an unaffiliated company that is the successor to the Association, is obligated to pay for or otherwise indemnify the Company for the remediation costs associated with this area pursuant to the terms of an Environmental Compliance Agreement entered into at the time of the Acquisition Transaction. To date, the Foundation has taken charge of the investigation and remediation of the areas, including installing a cap on the area. In the past the Company and the Foundation have disagreed about the amount of work required to remedy the situation. As a result, the Company retained its own outside technical consultant to further investigate the solid waste disposal area to determine what risks, if any, the solid waste disposal area poses for the Company, and to quantify such risks. The Foundation has recently submitted a report, which incorporated the findings of the Company's consultant, to the local regional water quality control board (Water Board), concluding that the capping has been successful and requesting that the water board issue a closure letter for the disposal area. The Water board is the agency overseeing the remediation. However, no assurance can be given that the Water Board will agree with the Foundation's conclusions and issue a letter closing the area, or whether the Water Board will require additional work or monitoring.
In addition, two of the Company's cemetery 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 was informed by the Environmental Protection Agency that the Company will not be included in the Super Fund cleanup of the basin.
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.
During August and September 2000, the Company discovered that there had been some land movement in a portion of Rose Hills Cemetery. The affected area represents approximately 13 acres of the Cemetery's approximately 1,457 total acres, and consists of approximately 12,000 interment sites. The Company hired outside geo-technical and engineering consultants to study the affected area, to identify the underlying cause and the extent of the land movement, and to make recommendations with regard to both short-term and long-term remediation and stabilization measures. Pending the Company's receipt of the engineer's report, the Company undertook various remediation measures including the installation of additional dewatering wells to improve water drainage conditions in the affected area.
The Company's consultants advised that the affected area could continue to move, particularly in the event of heavy rainfall during the winter months. Accordingly, during October 2000, the Company began to take some intermediate remediation measures, including the installation of additional dewatering wells in the affected area and the relocation to other areas of the Cemetery (at the Company's expense) of approximately 140 interred remains that were in the most severely impacted portion of the affected area. Such expenses could increase if significant further movement is detected in the affected area or if additional families request the relocation of interred remains from the affected area. As of January 31, 2002, the Company had relocated, at its expense, approximately 900 interred remains from the affected areas to other areas of the Cemetery.
The engineering firm delivered a preliminary report to the Company in July 2001. In the preliminary report, the engineers advised the Company that the land movement most likely had been caused by a combination of geologic, topographic, water and soil conditions within the affected area. The preliminary report also identified a variety of measures that the Company could take to remediate and improve the stability of the land area, including the construction and installation of engineered reinforcement fill berms at the base of the slide, the installation of horizontal and other additional drains throughout the affected area, and the implementation of other erosion control measures. In October 2001, the engineering firm completed additional tests and revised their intital recommendation to include de-watering wells instead of horizontal drains.
Based upon additional tests and analysis performed in October 2001, the engineering consultants advised that a combination of the remediation measures discussed above can restore the affected area to a condition suitable for interments. The Company's management is continuing to confer with the engineering consultants to determine the appropriate combination and timing of remediation measures that will restore the affected area to achieve such a result. The Company will likely implement the measures in stages, with the installation of the de-watering wells, erosion control measures and related improvements taking place as early as the second quarter of fiscal 2002, and the construction and installation of the reinforcement fill berms beginning in the third or fourth quarter of fiscal 2002. If the area cannot be restored for interments, the Company will implement only those measures that are necessary to repair and stabilize the affected area, and management will then consider whether the area may be utilized for alternate purposes. In this latter case, the Company is likely to incur additional costs in connection with the relocation of interred remains to other parts of the Cemetery.
The estimated aggregate construction and related costs to restore and stabilize the affected area will be approximately $3.2 million. The Company expects to incur approximately $0.5 million of these costs during the second quarter of fiscal 2002, with the balance to be incurred during the last two quarters of fiscal 2002. The Company also believes that the total direct costs of relocating interred remains for the affected areas to other areas of the Cemetery (should that become necessary) could approximate $0.8 million.
To the extent that funds are available, the Company intends to seek reimbursement from the improvement reserve in the Company's Endowment Care Fund (ECF) for the costs of relocating interred remains and for a significant portion of the site assessment, repair, maintenance and remediation costs associated with the affected area. Between October 2000 and December 31, 2001, the Company incurred $2.3 million and had been reimbursed from the ECF reserve $1.1 million of direct costs relating to the relocation of interred remains and professional and other services associated with the assessment, remediation and stabilization of the affected area. As of December 31, 2001, the ECF has $1.8 million in reserves for cemetery improvements available to reimburse the Company for direct costs related to the affected areas.
Based on the additional test results, revised estimates provided by the engineering firm during third quarter of 2001, and the amounts available in the ECF improvement reserve fund, the Company has recorded a $3.0 million reserve for these matters as of December 31, 2001.
EMPLOYEES
As of December 31, 2001, the Company had 688 employees. Management believes that the Company's relationship with its 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 two employees and a favorable decision in the alleged failure to recognize and bargain in good faith with the union.
On October 3, 1997, the Company filed an appeal with the United States Ninth Circuit Court of Appeals. On December 15, 1999, the United States Ninth Circuit Court of Appeals reviewed the case and upheld the original unfavorable decision. In June 2000, the Company reached a final settlement with the two employees, which resulted in the reinstatement of one employee and payment of approximately $0.3 million for settlement and back wages and benefits.
ITEM 2.
ITEM 2. PROPERTIES.
The property on which the Rose Hills Cemetery is located consists of approximately 1,457 total acres. As of December 31, 2001, the cemetery property is described as approximately 710 acres of developed and sold, 33 acres of developed and unsold and 662 aces of undeveloped permitted cemetery property. The Company estimates that approximately 329 acres of the undeveloped property is rugged terrain (including a utility company easement) and cannot be easily developed for cemetery property for economic and environmental reasons. Also located on the grounds of Rose Hills are eight chapels that seat over 800 people in the aggregate, seven mausoleums, 39 visitation rooms, a crematory and a 43,460 square foot administrative building. In addition to the above facilities, Sky Rose Chapel, a 26,490 square foot chapel and mausoleum facility, is also located on the Cemetery grounds.
The Mortuary's facilities consist of 13.3 acres of land, a two-story, 74,000 square foot mortuary and administrative building (inclusive of relevant properties above), an adjacent flower shop and storage facilities.
The Affiliates consist of the funeral homes and combination properties located in the cities listed below:
- -------- (1) Combination property located on 28 acres; includes a funeral home and a cemetery (with crematory). (2) Combination property located on 20 acres; includes a funeral home and a cemetery. (3) Cemetery property located on 35 acres and includes a funeral home that, while not currently in use, can be made fully operational.
The Company owns ten of the Affiliate locations, while the remaining three are leased.
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, "Selected Financial Data."
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY 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.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data for the Company as of and for the fiscal year ended December 31, 2001, and as of and for each of the preceding four fiscal years. The selected financial data under the captions "Income Statement Data", "Other Financial Data" and "Balance Sheet Data" for the years ended December 31, 1997 through 2001 were derived from the Company's financial statements.
Effective January 1, 2000, the Company changed its method of accounting for revenue recognized on sales of pre-need interment rights, cemetery services and merchandise, and for earnings realized through the cemetery service and merchandise trust funds. For further details, see Note 4 to the Company's consolidated financial statements included in Item 14. Data for fiscal years 1997 through 1999 are presented as originally reported.
The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's consolidated financial statements and notes thereto and other financial information included elsewhere in this report. As a result of the changes in control discussed in Item 1, certain financial statements are referred to as "Predecessor" and others as "Successors". The Income Statement Data and Other Financial Data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 are presented as "Predecessor". The Balance Sheet Data for the period ended December 31, 2001 is presented as "Successor" and all remaining years are presented as "Predecessor". As a result, the Balance Sheet Data as of December 31, 2001 is on a different cost basis and will not be comparable.
- -------- (1) EBITDA is defined as income (loss) before income taxes and cumulative effect of accounting change plus interest expense, depreciation, amortization and non-recurring items (asset write down and other changes).
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 should not be considered in isolation, as a substitute for net income or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America, or as a measure of a company's profitability or liquidity. Also, this measure of EBITDA may not be comparable to similar measures reported by other companies.
EBITDA was negatively effected by the change in accounting principle adopted January 1, 2000.
(2) Long-Term Obligations include long-term debt (including bank borrowings and subordinated notes) and capital leases.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTORY NOTES --
CHANGE IN CONTROL OF REGISTRANT
As discussed above in Item 1 - -Business, effective December 31, 2001, the minority shareholder acquired 100% of the outstanding common stock of Rose Hills Holdings Corporation. Accordingly, the December 31, 2001 consolidated balance sheet reflects the fresh-start accounting that has been "pushed down" as a result of this transaction. As a result, the consolidated balance sheet as of December 31, 2001 is on a different cost basis, and therefore is not comparable. The consolidated balance sheet dated December 31, 2001 is referred to as "successor" and all consolidated balance sheets reported for the years ended December 31, 2000 and 1999 are referred to as "predecessor". See further discussion below of methods and assumptions in Critical Accounting Policies and in Note 1 to the Consolidated Balance Sheets for an itemized accounting of the "push down" adjustments.
CHANGE IN ACCOUNTING PRINCIPLE
SAB 101. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (the "Bulletin"). The Bulletin provides the Staff's views on the application of existing accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The Bulletin, which applies to all companies and was not directed at the death care industry, states that industry practice would not override these views. The Bulletin among other matters emphasizes the importance of physical delivery of a product or service to justify the recognition of revenue. The Company had heretofore followed industry practice in recognizing revenues, including recognizing revenue upon the sale of cemetery merchandise and services before the time of death.
In response to the issuance of the Bulletin and consultation with the SEC Staff, the Company changed the following accounting principles effective January 1, 2000:
. Revenue recognition of pre-need interment rights are now accounted for in accordance with Financial Accounting Standards No. 66, Accounting for the Sales of Real Estate (FAS 66). The direct and acquisitions costs for the deferred sales will be deferred and recognized concurrent with the recognition of the deferred sales. Prior to January 1, 2000, the Company recognized the sale of pre-need interment rights, and their related costs, at the time of sale;
. Revenue recognition of pre-need cemetery services and merchandise, and their direct and acquisition costs, are now deferred until time of delivery or performance of service. Prior to January 1, 2000, the Company recognized the sale of pre-need service and merchandise, and their related costs, at the time of sale; and
. Earnings realized by the cemetery service and merchandise trust funds are now deferred until the underlying service and merchandise is delivered. Previously, the Company recognized the earnings as they accrued.
The cumulative effect of these changes in accounting principles on prior years resulted in $12.3 million decrease in net earnings before taxes and $7.5 million decrease in net earnings after taxes.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are as follows:
Cemetery Revenue Recognition
Pre-need sales of cemetery interment rights are recognized in accordance with the guidance of Statement of Financial Accounting Standards No. 66, Accounting for the Sales of Real Estate (FAS 66). Accordingly, sales of interment rights are recognized under the full accrual method, the percentage of completion method, or the deposit method depending on the level of the buyer's down payment and any continuing involvement the Company has in developing sold property. Direct and acquisition costs of the sales are deferred and recognized concurrent with the recognition of deferred sales.
Allowances for anticipated customer cancellations and refunds are provided at the date of sale based on management's estimate of expected cancellations using historical trends. Actual cancellation rates in the future may result in a change in estimate. Significant variances in expected cancellations could impact future gross margins.
Deferred merchandise and service sales, and their direct and acquisition costs, are recognized at the time of delivery of merchandise or performance of service.
At-need sales of cemetery interment rights, merchandise and services are recognized when the merchandise is delivered or the service is rendered.
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, the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trust funds. A significant increase in cost of services or loss of principal in the trust could negatively impact future gross margins.
It is the Company's policy to voluntarily trust 100% of pre-need service revenue when contracts are paid in full. Also, the Company has an agreement with a vendor to purchase pre-need merchandise when the sales contracts are paid in full. Funds voluntarily trusted for pre-need cemetery services are included in the consolidated financial statements.
Effective January 1, 2000, the Company changed its method of accounting for pre-need sales of cemetery products and services. See "Introductory Notes-- Change in Accounting Principles".
Funeral Revenue Recognition
Pre-arranged 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 third party 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 annual volume of monthly sales activity. Insurance commissions earned and related selling expenses are recognized when the insurance company accepts the policies. 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 amounts together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Costs relating to the sale of pre-arranged funeral services, including sales commission expense, are expensed in the period incurred. A significant increase in the cost of services or loss of trust principal could negatively impact future gross margins.
At-need funeral services revenues are recognized when the service is performed.
Valuation of Long-Lived Assets
The Company assesses the impairment of long-lived assets 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 undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset based on a discounted cash flow analysis. In 2001, the long-lived assets of two operating locations were reduced $1,032,000 and charged to Asset Write-Down and Other Charges. The valuation of long-lived assets are subject to future economic and competitive considerations effecting the death care industry.
Critical Accounting Policies related to Push-down Accounting
Valuation of the Company--In April 2001, Loewen and Blackstone negotiated a settlement pursuant to which Blackstone would exercise its Put Option (see "Item 13 - Certain Relationships and Related Transactions") and Loewen would acquire all of RH Holdings common shares owned by Blackstone. The Loewen Blackstone Settlement Agreement, which was contingent on Loewen's emergence from bankruptcy, indicated Blackstone would receive a Promissory note for approximately $24.7 million and newly reorganized Loewen (Alderwoods) common stock valued at approximately $6.6 million, in full satisfaction of all of Blackstone's claims in the Loewen bankruptcy. Management did not use the consideration received by Blackstone as the purchase price to value the Company's assets, since the amount of consideration was an amount negotiated to settle Blackstone's claims under the Put/Call Agreement and other claims with Loewen and not based on the fair value of RH Holdings common stock. Instead, management based the purchase price paid by Blackstone to Alderwoods upon a third party appraisal of the Company's enterprise value of $64.5 million which was recorded by the Company in the push-down of the fresh start accounting. Management also used third party appraisals to estimate the fair value of the Company's long-lived assets and cemetery inventory and in the push-down accounting. The Company increased the value in the push-down accounting of its long-lived assets to $33.3 million and adjusted the value of its cemetery property inventory and goodwill by $41.4 million and $46.1 million, respectively, based upon the third party appraisals.
Market value of debt--The estimated market value at the consummation of the change in ownership of the Company's senior subordinated notes was 96% of their maturity value. Accordingly, a $3.2 million adjustment was recorded to reduce the subordinated notes to their fair value, resulting in a new effective rate of 11.34%. In addition, the remaining $4.1 million deferred financing costs related to the Acquisition Transaction debt was eliminated.
Restatement of deferred pre-need cemetery contract revenue in conjunction with push down accounting--Management has estimated the value of deferred pre- need cemetery contract revenue by 1) performing an analysis to determine the current cost of the services to be rendered by the company, 2) utilizing mortality rates to anticipate the date of service fulfillment, and 3) using inflationary rates and discount rates to project the present value of the cost to perform the obligated services. As a result, the deferred pre-need cemetery contract revenue was reduced $7.7 million in the push-down accounting. Significant changes in mortality, costs of services and merchandise, inflation, and interest rates could negatively impact future gross margins.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage of total sales as reported for the years ended December 31, 2001, 2000 and 1999. In addition, presented are the proforma results for the year ended December 31, 1999 after giving effect to the accounting change (see SAB 101 discussion above):
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The following table presents the results as reported for the years ended December 31, 2001 and 2000:
- -------- (1) 2001 includes non-recurring charges related to the disposal of certain funeral locations and environmental issues. Excluding these charges, the loss before taxes and cumulative effect of accounting change would have been $4.1 million (see note 3 in the consolidated financial statements).
Consolidated revenues for the year ended December 31, 2001 totaled $77.2 million compared to $76.6 million for the year ended December 31, 2000. Consolidated gross profit totaled $18.5 million in 2001 compared to $21.0 million in 2000. As a percentage of revenue, consolidated gross profit percentage decreased to 24.0% in 2001 from 27.4% in 2000.
Funeral Operations:
Revenues from funeral operations increased 1.2% to $32.7 million in 2001 compared to $32.3 million in 2000. At-need funeral revenue "same store sales" totaled $28.4 million, representing a 2.5% increase from the prior year. On a same store sales basis, the Company performed 7,628 funeral service calls in 2001 compared to 7,512 in 2000. The Rose Hills funeral home experienced a 3.5% call increase, which was partially offset by a 2.5% decrease at the affiliate funeral locations. Based upon available independent vital statistic market data from Vital Statistics, the Company believes that the increase in funeral calls at Rose Hills' was due to an overall increase in deaths in the facilities geographic region and an increase in market share. Pre-need funeral service
revenue totaled $3.2 million compared to $2.9 million in the prior year, an increase of 13.8%. The significant increase over the prior year was due to a greater emphasis on increasing prearranged funeral services and beginning in July 2000, offering cemetery merchandise and services as part of the pre- arranged funeral insurance contracts. As of December 31, 2001, the Company had a prearranged funeral and cemetery backlog of $172.1 million.
As a percentage of sales, gross profit for the funeral segment increased from 26.6% in 2000 to 27.3% in 2001. The increase in gross profit percentage was primarily attributable to the divestiture in June 2001 of four under performing affiliate funeral home locations that were operating near breakeven, but did not fit the original "clustering" model.
Cemetery Operations:
Cemetery revenue in 2001 was comparable to 2000 at $44.5 million. Pre-need cemetery revenue increased 2.1% from $23.7 million in 2000 to $24.2 million in 2001. The total property units sold in 2001 were 8,392 compared to 9,256 in 2000. In 2001, over 30% of pre-need property revenue was in semi-private and private estate products, compared to 17% in 2000. The shift in property product revenue mix to higher priced custom estates resulted in property unit averages increasing over 3.5%. However, custom estate properties generally have lower margins due to added development costs. In the fourth quarter of 2001, the Company offered several lower interest rate-financing programs that resulted in increased volume. The lower interest rate programs also resulted in $0.7 million of imputed sales discounts, negatively affecting gross profit margins. At-need cemetery revenue in 2001 was $16.8 million compared to $16.7 million in the prior year. Total interments increased 2.7% from 9,446 in 2000 to 9,705 in 2001.
Gross profit, as a percentage of sales, decreased from 28.0% in 2000 to 21.6% in 2001. The $2.8 million margin decline over prior year is due to a change in sales mix to lower margin private and semi-private estate sales, the IBPS $1.8 million bulk land sale in 2001 and lower interest rate financing programs. In addition, pre-need commission expense has increased as a percentage of sales from 28% to 29% along with approximately $1.0 million in increased spending on a major media campaign in early 2001.
Other:
Corporate general and administrative expenses of $7.5 million for 2001, approximates 9.7% of sales. Included in 2001 was a $0.6 million legal settlement. Excluding this one-time charge in 2001, corporate general and administrative expenses decreased 8.7% over the prior year.
EBITDA, earnings before taxes, depreciation and amortization (including cemetery property amortization included in cost of sales and excluding non recurring charges of $8.2 million), decreased to $22.8 million for 2001 from $23.8 million for 2000. EBITDA decreased $1.0 million as a result of decreased cemetery profit margins and a $0.6 million legal settlement. 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 the Company's profitability or liquidity.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999:
The following table represents the results as reported for the year ended December 31, 2000 and the proforma results for the year ended December 31, 1999 after giving effect to the accounting change (see SAB 101 discussion above):
- -------- (1) 1999 excludes a non-recurring gain on settlement agreement of $2.5 million.
Consolidated revenues decreased 2.3% to $76.6 million for the year ended December 31, 2000 compared to $78.4 million for the year ended December 31, 1999. Consolidated gross profit totaled $21.0 million in 2000 compared to $25.7 million in 1999. As a percentage of revenue, consolidated gross profit percentage decreased to 27.4% in 2000 from 32.8% in 1999.
Funeral Operations:
Revenue from funeral operations accounted for more than 42% of the Company's total revenue in 2000. Revenues from funeral operations decreased 2.9% to $32.3 million in 2000 compared to $33.3 million in 1999. At-need funeral revenue totaled $29.2 million representing a 3.0% decrease from the prior year. The Company performed 8,111 total funeral service calls in 2000 compared to 8,547 in 1999. Management believes that the 5% decrease in funeral service calls from the prior year was principally due to increased price competition from other full service providers and lower-end budget funeral homes. The average revenue per funeral service increased 3.1% from the prior year due primarily to a change in product mix toward higher priced product packages. Pre-need funeral service revenue increased 26.1% from $2.3 million in 1999 to $2.9 million in 2000. The significant increase over the prior year is due to a greater emphasis on increasing prearranged funeral services and selling of cemetery merchandise and services beginning in July 2000. As of December 31, 2000, the Company had a prearranged funeral and cemetery backlog of $161.7 million.
As a percentage of sales, gross profit for the funeral segment decreased from 32.9% in 1999 to 26.6% in 2000. The decline in gross profit percentage was primarily attributable to declines in profit margin experienced at the Satellite Properties (14 funeral homes). The same store sales profit margin from these small funeral home operations declined from 20% to 10%. The increased local competition and the decline in case volume have resulted in negative cash flows at some of these locations. The Company ultimately divested of several of these
funeral home locations in 2001 that did not fit the original "clustering" model anticipated from acquiring all the Satellite Properties. The Rose Hills Mortuary also experienced a gross profit margin decline from 37% to 33% due to its 5.2% case volume decline and the inflation-driven increase in various semi-fixed operating costs. In addition, the 1999 funeral segment margin also included a bonus of $0.5 million from the insurance product provider.
Cemetery Operations:
Cemetery revenue in 2000 decreased 1.9 % from the prior year to $44.3 million. Pre-need cemetery revenue in 2000 was $23.5 million compared to $24.1 million (excluding the $1.1 million sale to IBPS) for 1999. At-need cemetery revenue in 2000 was $16.7 million, representing a 5.0% increase over the prior year due to increased average property sales. Total internments slightly increased to 9,446 in 2000 from 9,343 in 1999.
Gross profit, as a percentage of sales, decreased from 32.7% in 1999 to 28.0% in 2000 (29.9% excluding the $0.9 million cemetery property tax charge). Cemetery labor and park maintenance expenses have increased up to 5% over the prior year. The increases were part of a plan to enhance the appearance and maintenance standards for Rose Hills Memorial Park. Total direct selling expense was relatively constant at 36.2% of sales in 2000 compared to 36.6% in 1999. The Company plans to invest in a new media campaign in the first quarter 2001. The planned advertising expenditures for the first quarter 2001 was approximately $1.0 million and are designed to increase consumer awareness and improve both funeral and cemetery market share. The Company has not run a major media campaign since the early 1990's.
Other:
Corporate general and administrative expenses of $7.6 million for 2000 were 6% higher than in the prior year. As a percentage of total revenue, corporate general and administrative expenses increased from 9.1% for the year ended December 31, 1999 to 9.9% for the year ended December 31, 2000. Charges included in 2000 were $0.6 million of Phantom Equity Plan expense, $0.2 million related to land movement legal fees and $0.1 million in a 1996 union labor dispute settlement. In 1999, nonrecurring items were $.2 million related to Y2K incremental expenses, $0.3 million related to the settlement of environmental issues with the previous owners of Rose Hills Memorial Park and a net of $0.1 million loss from the sale of two vacant properties.
EBITDA, earnings before taxes, depreciation and amortization (including cemetery property amortization included in cost of sales), decreased to $23.8 million for 2000 from $28.4 million for 1999. EBITDA decreased $4.6 million as a result of the funeral cash volume declines, the IBPS sale of $1.1 million in 1999 and the $.9 million property tax charge in 2000. 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 company's profitability or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently believes that, based upon current levels of operations and anticipated growth and the availability of the Bank Revolving Facility (see description below), it can meet working capital and short-term liquidity requirements for current operations, satisfy its contingent obligations and service its indebtedness through March 31, 2003. As of December 31, 2001, the Company had net working capital of $7.5 million and a current ratio of 1.33 as compared to $11.0 million of net working capital and current ratio of 1.62 at December 31, 2000.
Net cash provided by operating activities was $11.4 million for the year ended December 31, 2001, compared to $14.1 million for the same period in 2000.
The primary uses of cash were for principal payments on outstanding long- term indebtedness and capital expenditures as permitted under the terms of bank agreements. The Company's capital expenditures in 2001 of
approximately $4.3 million were used primarily to develop and improve the existing infrastructure and cemetery grounds.
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 $75.0 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") in an aggregate principal amount of up to $25.0 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. Effective May 2, 2001 the Company amended the Bank Revolving Facility reducing the aggregate principal amount available to $10.0 million and extending its maturity date to April 1, 2003. Borrowings under the Revolving Credit Facility must be fully paid for a minimum period of 30 days for each 12-month period ending December 1. As of March 23, 2002, the Company had no borrowings under the Revolving Credit Facility, accordingly, any borrowings during the remaining months in 2002 will not be due until April 1, 2003 when the Revolving Credit Facility expires.
The Bank Term Facility is payable, subject to certain conditions, in semi- annual installments in the amounts of $1.0 million in each of the first three years after the anniversary of the closing date of the Bank Term Facility (the "Bank Closing"); $3.0 million in the fourth year after the Bank Closing; $7.0 million in 2001; $9.0 million in 2002, $26.0 million in May 2003 and $26.0 million upon maturity of the Bank Term Facility in November 2003.
All obligations under the Bank Credit Facilities entered into with the lenders or their affiliates in connection therewith are unconditionally guaranteed (the "Bank Guarantees"), jointly and severally, by Rose Hills Holdings Corp. and each of the Company's existing and future domestic subsidiaries (the "Bank Guarantors"). All obligations of the Company and the Bank Guarantees are secured by first priority security interests in all existing and future assets (including real property located at Rose Hills but excluding other real property and vehicles covered by certificates of title) of the Company and the Bank Guarantors. In addition, the Bank Credit Facilities are secured by a first priority security interest in 100% of the capital stock of the Company and each subsidiary thereof and all intercompany receivables.
In connection with the Acquisition Transaction, the Company also issued $80 million of 9-1/2% Senior Subordinated Notes due 2004, which were exchanged in September 1997 for $80 million of 9-1/2% Senior Subordinated Notes due 2004 (the "Notes") that were registered under the Securities Act of 1933. The Notes mature on November 15, 2004. Interest on the Notes is payable semi-annually on May 15 and November 15 at the annual rate of 9-1/2%. The Notes are redeemable in cash at the option of the Company, in whole or in part, at any time on or after November 15, 2000, at prices ranging from 104.75% with annual reductions to 100% in 2003 plus accrued and unpaid interest, if any, to the redemption date. The proceeds of the Notes were used, in part, to finance the Acquisition Transaction.
As a result of the Acquisition Transaction and the application of proceeds thereof, the Company's total outstanding indebtedness was approximately $140.1 million as of December 31, 2001. Management currently believes that, based upon current levels of operations, anticipated growth and the availability under the Bank Revolving Facility, it can adequately service its existing indebtedness through March 31, 2003. If the Company cannot generate sufficient cash flow from operations or borrow under the Bank Revolving Facility to meet such obligations, the Company may be required to take certain actions, including reducing capital expenditures, restructuring its debt, selling assets or seeking additional equity in order to avoid an Event of Default. There can be no assurance that such actions could be effected or would be effective in allowing the Company to meet such obligations.
The Company currently expects that it will have to obtain new or additional financing to pay some or all the principal amount due at maturity under the Bank Term Facility and under the Notes ($80 million on
November 15, 2004). No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company. Further, the Company does not expect Alderwoods to provide additional liquidity in the form of capital contributions or loan guarantees. Under the terms of certain Alderwoods debt agreements, Alderwoods is prohibited from guaranteeing the Company's debt or contributing capital.
The Company and its Subsidiaries are subject to certain restrictive covenants contained in the indenture to the Notes, including, but not limited to, covenants imposing limitations on: the incurrence of additional indebtedness; certain payments, including dividends and investments; the creation of liens; sales of assets and preferred stock; transactions with interested persons; payment restrictions affecting subsidiaries; sale- leaseback transactions; and mergers and consolidations. In addition, the Bank Credit Facilities contain certain restrictive covenants that, among other things, limit the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness (including the Exchange Notes), pay dividends or make certain restricted payments, create liens on assets, engage in mergers or acquisitions or enter into leases or transactions with affiliates. At December 31, 2001 the Company was in compliance with the terms of the indenture and the Bank Credit Facilities.
Although the Company has no material commitments for capital expenditures, the Company anticipates capital expenditures primarily of approximately $3.5 million for 2002, which includes $2.5 million in internal growth initiatives and $1.0 million for maintenance capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (Statement 141). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all business combinations completed after June 30, 2001. The Company has adopted the provisions of Statement 141 during 2001, there was no material impact of the adoption.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (Statement 142) was approved by the FASB. Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill from past business combinations, will cease upon adoption of this statement. The provisions of Statement 142 will be effective for fiscal years beginning after December 15, 2001 and must be adopted at the beginning of a fiscal year. Management does not anticipate any adjustments to goodwill upon the adoption of Statement 142 in the first quarter of 2002 due to the elimination of predecessor goodwill and the successor goodwill recorded at the consummation of the change in ownership on December 31, 2001. Also, effective in the first quarter of 2002, the Company will account for goodwill by an impairment method instead of an amortization method. Amortization expense related to goodwill was $3.7 million for the twelve months ended December 31, 2001 and December 31, 2000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144), which supersedes both FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121), and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142, "Goodwill and Other Intangible Assets".
The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001. Accordingly, the Company will adopt Statement 144 in the first quarter of 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, Management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements.
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, results of operations, its objective to increase revenues and cash flows, reduce general and administrative expense, take advantage of synergies, and make capital expenditures, and the Company's ability to service its indebtedness, 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.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual consolidated results and could cause the Company's actual consolidated results in the future to differ materially from the goals and expectations expressed elsewhere herein:
The Company may not be able to achieve growth in its revenues and cash ---------------------------------------------------------------------- flows. Maintaining current revenue and cash flow levels and achieving future - ----- growth depends in part on sustaining the current level of pre-need cemetery sales and maintaining and increasing funeral market share. Several important factors, among others, affect the Company's ability to sustain and grow revenue:
. The volume and prices of properties, products and services sold.
The inability of the Company to increase volume and prices could affect the Company's ability to increase revenue in the future. The ability to achieve volume and price increases at Rose Hills and other Company locations depends on several factors including local competition, death rates, changes in consumer buying patterns, economic conditions and the availability of qualified sales personnel. Furthermore, the Company may experience pricing pressures from low-cost funeral service and merchandise providers and from large consolidators with greater market power than the Company, which could result in reduced volume or having to reduce prices in order to recapture market share.
. Performances of endowment care and trust funds.
The Company includes earnings from endowment care and trust funds in its results of operations. Although substantially all of these funds are invested in fixed income securities, the performance of these funds is subject to market conditions beyond the control of the Company.
. The level of pre-arranged funeral sales in prior periods.
The level of pre-arranged funeral sales in prior periods may affect future revenues. The Company's inability to maintain and increase pre-arranged funeral sales could impact future revenues. The ability to maintain and increase the level of pre-arranged funeral sales may be adversely affected by such factors as competition and general economic conditions which may reduce individual discretionary income.
. Changes in the sales organization, or in its size, compensation or morale.
Pre-need cemetery sales are a significant component of the Company's cemetery revenue, and are usually associated with new customers of the Company. Changes in the Company's sales organization, or in the size, compensation, or morale thereof, may affect the Company's ability to increase pre-need sales.
Our earnings may be adversely affected by a number of factors. Such factors ------------------------------------------------------------- include:
. The ability of the Company to manage its growth in terms of implementing internal controls and information gathering systems, and retaining, attracting, and motivating key personnel, among other things.
. The amount and rate of growth in the Company's general and administrative expenses.
. Changes in interest rates, which can increase or decrease the amount the Company pays on borrowings with variable rates of interest.
. The impact on the Company's financial statements of accounting charges that may result from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures.
. Changes in government regulations, including tax rates and their effects on corporate structure.
. Changes in inflation and other general economic conditions, both domestically and internationally, affecting financial markets (e.g. marketable security values).
. Unanticipated legal proceedings and unanticipated outcomes of legal proceedings.
. Changes in accounting policies and practices adopted voluntarily or required to be adopted by accounting principles generally accepted in the United States of America.
. The Company's ability to, as necessary, access debt markets on satisfactory terms and conditions, including without limitation its ability to obtain such new or additional financing as may become necessary to avoid defaults under any of its existing debt agreements. See "Liquidity and Capital Resources" above.
. Any amendments, renegotiations, or extensions of existing debt agreements.
. Environmental liabilities that are unanticipated or unanticipated in their extent, including without limitation costs and expenses associated with past or future land movement within Rose Hills and costs and expenses associated with remediation of existing contamination of Company properties. See "Environmental Matters" above and Note 20 to the Company's consolidated financial statements, which are included as part of this Annual Report on, Form 10-K.
. An unfavorable outcome in the dispute with the County of Los Angeles regarding the supplemental property tax accrued by the Company. See Note 20 to the Company's consolidated financial statements which are included as part of this Annual Report on Form 10-K.
. The impact of actions, including reducing capital expenditures, selling assets, or seeking additional equity, the Company may become required to take to avoid defaults under any of its debt agreements. See "Liquidity and Capital Resources" above.
. The impact of any defaults that may occur under any of the Company's debt agreements.
. The Company's continuing ability to reduce costs and enhance revenue by integrating its prior acquired properties and taking advantage of "clustering."
The Company's ability to remain in compliance with the restrictions of its debt agreements is affected by several factors, including the Company's earnings and fixed charges. The Company's ability to achieve projected earnings and fixed charges depends upon many uncertainties, including each of the factors discussed herein.
The Company also cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by or on behalf of the Company.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is impacted by changes in interest rates. Pursuant to the Company's policies, derivative financial instruments may be utilized to reduce the impact of adverse changes in interest rates. The Company does not use derivative instruments for speculation or trading purposes, and has no material sensitivity to changes in market rates and prices on its derivative financial instrument positions.
The Company entered into interest rate Collar Agreements in 1996, which effectively set maximum and minimum interest rates on the principal amount of Senior Debt, ranging from a floor of 5.5% (the Company would pay 5.5% even if rates fall below that level) to a maximum or cap of 6.5% for the period commencing January 2, 1997 through December 1, 2000.
The counter party to these contractual relationships is a major financial institution with which the Company has other financial relationships. The Collar Agreement expired in December 2000 and was not replaced.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors and executive officers of the Company as of March 27, 2002:
Dennis C. Poulsen. Mr. Poulsen was named Chief Executive Officer on February 1, 2002. He has served as Chairman of the Board of the Company since November 1996 and has served as a director of the Company since its formation in 1996. Mr. Poulsen joined Rose Hills in 1981 and became President in 1984. Mr. Poulsen is a member of the American, California and Los Angeles Bar Associations. He served as a director and Chairman of the Los Angeles Chamber of Commerce in 1997 and is past director of the American Cemetery Association.
Kenton C. Woods. Mr. Woods was named director of the Company effective January 3, 2002. Mr. Woods joined the Company as Senior Vice President and Chief Financial Officer in May 1997. From 1990 to 1997, Mr. Woods served in senior financial positions at Baskin-Robbins including Vice President-Finance and Chief Financial Officer. Mr. Woods previously spent 10 years with KPMG LLP.
Virginia C. Phillips. Ms. Phillips was named Executive Vice President, Chief Operations Officer of the Company on September 1, 2000. Ms. Phillips was Vice President of Human Resources of the Company from 1991 to August 2000.
Gregg M. Williamson. Mr. Williamson was named Executive Vice President, Sales and Marketing of the Company on June 11, 2001. From 1990 to 2001, Mr. Williamson served as Executive Vice President, Marketing and Sales Officer for Palm Mortuary, Inc. in Las Vegas, Nevada.
John S. Lacey. Mr. Lacey was named a director of the Company effective March 10, 2000. Since January 1999, Mr. Lacey has been Chairman of the Board and a director of Alderwoods Group, Inc., formerly The Loewen Group, Inc., the corporate parent of the Company. In December 1998, Mr. Lacey became a director of Loewen. From July 1998 to November 1998, Mr. Lacey was President and Chief Executive Officer of The Oshawa Group Ltd. in Toronto, Ontario. From November 1996 to July 1998, Mr. Lacey was President and Chief Executive Officer of WIC Western International Communications Inc. in Vancouver, British Columbia.
Paul A. Houston. Mr. Houston was named a Director of the Company effective May 22, 2001. Since December 1999, Mr. Houston has been President and Chief Executive Officer of Alderwoods Group, Inc., formerly The Loewen Group, Inc., the corporate parent of the Company, where he had also served as a director since June 1999. From August 1995 to October 1999, Mr. Houston was President and Chief Executive Officer of Scott's Restaurant's Inc. From December 1992 to April 1995, Mr. Houston was President and Chief Executive Officer of Photo Corporation.
Kenneth A. Sloan. Mr. Sloan was named a director of the Company effective May 22, 2001. Since November 2000, Mr. Sloan has been Senior Vice President and Chief Financial Officer of Alderwoods Group,
Inc., formerly The Loewen Group, Inc., the corporate parent of the Company. From September 1987 to September 2000, Mr. Sloan served as Senior Executive Vice President, Finance and Planning of Shoppers Drug Mart.
Shawn R. Phillips. Mr. Phillips was named a director of the Company effective January 3, 2002. Mr. Phillips is currently a Geographic Vice President of Alderwoods Group, Inc, formerly the Loewen Group, Inc., the corporate parent of the Company. Mr. Phillips has served in various management positions since joining the Loewen Group in 1993.
Concurrent with the change in control of the Company on January 3, 2002, the directors assigned by Blackstone resigned as directors of RH Holdings and the bylaws of RH Holdings were amended to reduce the number of required directors of RH Holdings from eight to six. Each of the directors of the RH Holdings is also a member of the Company's Board of Directors.
Each of the Company's directors is elected to serve until their respective successor is elected and qualified (unless the director earlier resigns or is removed from office). Alderwoods, as the sole shareholder of the Company, has the power to elect all of the Company's directors. Each of the Company's officers serves at the pleasure of the Board of Directors, subject to the rights under their employment agreements.
Directors of the Company receive no compensation for their service as directors or for service on committees of the Board. All directors are reimbursed for all reasonable expenses of attendance at each meeting.
Mr. Poulsen has an employment agreement with the Company effective as of March 1, 2000. Under the terms of his employment agreement, Mr. Poulsen's annual salary is $120,000. Mr. Poulsen may be terminated without "cause" (as defined in the employment agreement) at any time, but if so terminated, Mr. Poulsen will continue to receive his salary for twenty-four (24) months after the date on which the Company notifies him of the termination. The employment agreement provides that a resignation by Mr. Poulsen within three (3) months following a change in control of the Company is deemed a termination by the Company without cause. The Alderwoods Purchase Transaction constituted a change of control for purposes of the employment agreement. On March 25, 2002, the Board of Directors approved an amendment to Mr. Poulsen's agreement extending the period through December 31, 2002. In accordance with the provision of the agreement, his resignation will be deemed a termination by the Company without cause following the change in control. See Item 13, "Certain Relationships and Related Transactions". Mr. Poulsen has the right to terminate the employment agreement at any time with 60 days notice to the Company.
On March 20, 2001, a committee of the Company's Board of Directors authorized the grant of a bonus award to Mr. Poulsen in the amount of $ 335,000 pursuant to the Company's Phantom Equity Appreciation Plan. The Company paid this bonus on January 3, 2002, effective upon the closing of the Alderwoods Purchase Transaction. In conjunction with the Loewen Blackstone Settlement Agreement, Mr. Poulsen was awarded a share of Loewen's Promissory Note (as defined in Item 11, "Executive Compensation--Change-in-Control Arrangements"), conditioned upon and granted only in the event that the closing of Alderwoods acquisition occurs.
Mr. Lacey, Mr. Houston, Mr. Sloan and Mr. Phillips were directors and/or officers of the Loewen Group, Inc., which filed for bankruptcy in June 1999 and emerged from bankruptcy as a reorganized Alderwoods Group, Inc. in January 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to or accrued for the benefit of the Chief Executive Officer and certain other executive officers of the Company for the period indicated. The position identified in the table for each person is their current position unless otherwise indicated:
SUMMARY COMPENSATION TABLE
- -------- (1) Mr. Ward resigned from the Company effective February 1, 2002, on which date Mr. Poulsen assumed the position of CEO. (2) Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan, a payment of $792 for life insurance premiums, and $711,000 under the Phantom Equity Appreciation Plan. (3) Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan, a payment of $180 for life insurance premiums, and $585,000 under the Phantom Equity Appreciation Plan. (4) Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan, a payment of $180 for life insurance premiums, and $172,000 under the Phantom Equity Appreciation Plan. (5) Mr. Schillaci resigned from the Company on April 9, 2001. (6) Amount includes a payment of $264 for life insurance premiums. (7) Mr. Williamson was named Executive Vice President of Marketing and Sales on June 11, 2001. (8) Amount includes a payment of $100,000 for a sign-on bonus and a payment of $81,667 for a sales bonus. (9) Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan and a payment of $645 for life insurance premiums.
Change-in-Control Arrangements
On March 20, 2001, a committee of the Company's Board of Directors authorized the grant of bonus awards to certain of the Company's executive officers pursuant to the Company's Phantom Equity Appreciation Plan (the "Plan"). Each of the bonus awards represented the right to receive a fixed sum in cash conditioned upon and payable only in the event the Alderwoods Purchase Transaction occurred on or before December 31, 2001. The bonus amounts paid upon the closing of the Alderwoods Purchase Transaction to each of the named executive officers were as follows: Dillis R. Ward, $711,000; Kenton C. Woods, $585,000; Virginia C. Phillips, $172,000. For accounting purposes, the Alderwoods Acquisition was reflected as of December 31, 2001, thus the Company has expensed these amounts in its December 31, 2001 statement of operations. These amounts were subsequently paid to the officers in January 2002.
Pursuant to the Loewen Blackstone Settlement Agreement, Blackstone granted certain of the Company's executive officers who were entitled to awards under the Phantom Equity Appreciation Plan a share of a note
issued by the reorganized Loewen (Alderwoods Note). The Alderwoods Note is partial consideration received by Blackstone under the terms of the Settlement Agreement. The Alderwoods Note is in the amount of $24,678,571, bears interest at an annual rate of 12.25%, and matures in 2012. The aggregate amount of the share in the Alderwoods Note received by certain Company directors and officers was $500,000. Each Director and Executive Officer was allocated a proportionate share of the $500,000, based upon their proportionate allocation under the Phantom Equity Appreciation Plan.
The U.S. Bankruptcy Court confirmed Loewen's reorganization plan, including the proposed acquisition of shares of RH Holdings Corp. from Blackstone on December 5, 2001, and the reorganization plan became effective on January 2, 2002. Effective with its emergence from bankruptcy, Loewen was renamed the Alderwoods Group, Inc. ("Alderwoods"). On January 3, 2002, in full satisfaction of Loewen's obligations under the put, Alderwoods delivered to Blackstone unsecured, subordinated notes and Alderwoods common stock. As a result of the delivery of the consideration, Alderwoods completed its purchase of all of the stock of RH Holdings Corp. beneficially owned by Blackstone. Upon closing of the transaction, Alderwoods increased its ownership from 20.45% to 100% of the outstanding common stock of RH Holdings Corp., thereby causing the Company to become a wholly owned subsidiary of Alderwoods. Effective upon completion of the transaction, the Company paid approximately $2.4 million in January 2002 in aggregate compensation under the Company's Phantom Equity Appreciation Plan that was recorded as an expense as of December 31, 2001. Additionally, Blackstone transferred an aggregate $500,000 in Alderwoods notes to certain Company directors and executive officers.
Employment Agreements and Termination of Employment Arrangements
Dillis R. Ward. The Company entered into a Resignation and General Release Agreement with Mr. Ward dated as of January 31, 2002. Pursuant to the agreement, Mr. Ward resigned as the Company's President and Chief Executive Officer effective February 1, 2002. Mr. Ward is to receive severance equal to two year's base pay for an aggregate of $500,000 to be paid in bi-weekly installments for a period of twenty-four months beginning February 2, 2002. The Company agreed to reimburse Mr. Ward for the cost of moving, up to $10,000, and COBRA coverage during the eligible period.
Kenton C. Woods. The Company has an employment agreement with Mr. Woods dated as of December 1, 1998, pursuant to which Mr. Woods currently serves as the Company's Executive Vice President and Chief Financial Officer. Mr. Woods' base salary is $169,000, which is subject to annual review and may be increased (but not reduced) at the sole discretion of the Board. Mr. Woods' cash bonus may range from 0%-100% of his base salary and is based on the Company's performance as measured against EBITDA targets established annually by the Board. Mr. Woods may be terminated without "cause" (as defined in the employment agreement) at any time with 12 months notice to Mr. Woods, but if so terminated, Mr. Woods will receive (i) his then base salary and benefits through the effective date of the termination; (ii) his annual bonus for all years completed prior to the effective date of the termination; and (iii) a prorated portion of the annual bonus for the year in which the termination becomes effective. Mr. Woods has the right to terminate the employment agreement at any time with 90 days notice to the Company.
Virginia C. Phillips. The Company has an employment agreement with Ms. Phillips dated as of September 1, 2000, pursuant to which Ms. Phillips currently serves as the Company's Executive Vice President, Chief Operations Officer. Ms. Phillips' base salary is $135,000, which is subject to annual review and may be increased (but not reduced) at the sole discretion of the Board. Ms. Phillips' cash bonus may range from 0%-50% of her base salary and is based on the Company's performance as measured against EBITDA targets determined annually by the Board. Ms. Phillips may be terminated without "cause" (as defined in the employment agreement) at any time but if so terminated will receive one year's then base salary, plus a prorated portion of the annual bonus. Ms. Phillips has the right to terminate the employment agreement at any time with 90 days notice to the Company.
Gregg M. Williamson. The Company has an employment agreement with Mr. Williamson dated as of June 11, 2001, pursuant to which Mr. Williamson currently serves as the Company's Executive Vice President, Sales and Marketing. Mr. Williamson's base salary is $200,000, which is subject to annual review and may be increased (but not reduced) at the sole discretion of the Board. Mr. Williamson is eligible for an "EBITDA" cash bonus, ranging from 0%-20% of his base salary, based on the Company's performance as measured against EBITDA targets determined annually by the Board. Also, Mr. Williamson is eligible for a "sales" cash bonus, ranging from 0%-80% of his base salary, based upon the Company's pre-need cemetery and funeral insurance sales. Mr. Williamson may be terminated without "cause" (as defined in the employment agreement) at any time but if so terminated prior to December 31, 2002, will receive one year's then base salary. Mr. Williamson has the right to terminate the employment agreement at any time with 90 days notice to the Company.
Joseph R. Schillaci. The Company entered into a Resignation and General Release Agreement with Mr. Schillaci dated as of April 9, 2001. Pursuant to the agreement, Mr. Schillaci resigned as the Company's Executive Vice President--Sales and Marketing. The Company agreed to retain Mr. Schillaci as a consultant with payments made to him in the aggregate amount of $120,000. The payments were made in three equal installments beginning in May 2001.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Compensation policies applicable to executive officers are determined by the Board of Directors. As directors of the Company, Mr. Ward and Mr. Poulsen participated in the deliberations of the Board concerning executive compensation in 2001. Currently, Messrs. Poulsen and Woods are the only directors who are also Executive Officers of the Company.
During fiscal 2000, Mr. Poulsen provided consulting services to the Company for which he was paid $16,046. As discussed in Item 10, "Directors and Executive Officers of the "Registrant": (i) on March 20, 2001, the consulting agreement was terminated and replaced by an employment agreement providing for an annual salary of $120,000; (ii) on March 20, 2001, Mr. Poulsen was awarded a bonus amount of $335,000, conditioned upon and payable only in the event that the closing of the Alderwoods Acquisition; and (iii) on April 12, 2001, Blackstone granted Mr. Poulsen a share in the Alderwoods Note, conditioned upon and granted only in the event of the closing of the Alderwoods Acquisition. Due to the approval of Loewen's reorganization plan by the U.S. Bankruptcy court on December 5, 2001, the Company recorded an accrued expense for the $350,000 bonus that was paid in January 2002.
ITEM 12.
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 forth certain information as of March 23, 2002 regarding the beneficial ownership of the common stock of RH Holdings:
- -------- (1) The address for Alderwoods Group, Inc. is 2225 Sheppard Ave, 11th Floor, Atria III, Toronto, Ontario, Canada M2J 5C2. (2) Messrs. Lacey, Houston, Sloan and Phillips are affiliated with Alderwoods in the capacities described under Item 10, "Directors and Executive Officers of the Registrant," above. Each of Messrs. Lacey, Houston, Sloan and Phillips disclaim beneficial ownership of the shares owned or controlled by Loewen and its affiliates.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The summaries of the Shareholders' Agreement, the Put/Call Arrangement, the Administrative Services Agreement, and the Loewen Settlement Agreement set forth below do not purport to be complete and are qualified in their entirety by reference to all the provisions of the Stockholders' Agreement, the Put/Call Agreement, the Administrative Services Agreement, and the Loewen Settlement Agreement, respectively. Copies of the Stock Purchase Agreement, the Stockholders' Agreement, the Put/Call Agreement, the Administrative Services Agreement and the Loewen Settlement Agreement are incorporated by references as exhibits to this Annual Report on Form 10-K.
One or more of our directors during 2001 were affiliated with entities which were parties to these agreements. Effective upon closing of the Alderwoods Purchase Transaction, all of these agreements terminated.
Shareholders' Agreement
In connection with the Acquisition Transaction, Blackstone and Loewen entered into an agreement (the "Shareholders' Agreement") setting forth certain of their rights and obligations as shareholders of RH Holdings. The Shareholders' Agreement provided that, subject to the Put/Call Agreement referred to below, none of the shareholders was 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 Loewen had 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 Loewen 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 provided that certain actions by or with respect to RH Holdings would require the unanimous consent of the Board.
In addition, in the event that Loewen owned, operated or controlled any funeral home or cemetery within 20 miles of any other funeral home or cemetery owned by the Company, Loewen had 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.
Put/Call Arrangement
Pursuant to a separate agreement among Blackstone, LWN, LGII and LN Sub (the "Put/Call Agreement"), (i) LGII had a call option, exercisable from and after November 19, 2000 (the fourth anniversary of the Acquisition Closing Date), until but excluding November 19, 2002 (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 had a put option, exercisable from and after November 19, 2002 (the sixth anniversary of the Acquisition Closing Date) until but excluding November 19, 2004 (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 was to be derived from a formula based on EBITDA. The performance by LGII of its obligations under the Put/Call Agreement was guaranteed by LWN.
On June 1, 1999, LWN, LGI and LN Sub filed for protection from their creditors under Chapter 11 of the U.S. Bankruptcy Code. On November 15, 2000, LWN submitted a plan of reorganization to the U.S. Bankruptcy Court. The Plan was amended on February 15, 2001. In April 2001, LWN reached an agreement with Blackstone and RHMID, pursuant to which Blackstone would exercise its put and a reorganized Alderwoods would acquire 100% of the outstanding common stock of RH Holdings. The acquisition was approved by U.S. Bankruptcy Court and upon Alderwoods emergence from bankruptcy, Blackstone's put was exercised. Upon exercise of the Put option, RH Holdings became a wholly owned subsidiary of a reorganized Alderwoods, and the Shareholders' Agreement and the Put/Call Agreement were terminated.
The exercise of the Put Option on January 3, 2002 did not give rise to a Change of Control under the Indenture.
Monitoring Fee Arrangement. Pursuant to the Put/Call Agreement, from the Acquisition Closing Date until the date on which Loewen or Blackstone exercised the Call Option or the Put Option, an affiliate of Blackstone received a monitoring fee equal to $250,000 per annum (as such fee may be increased to account for inflation) from the Company (the "Monitoring Fee Arrangement"). The Company paid $250,000 in fiscal 2000 and $250,000 in fiscal 2001 to Blackstone pursuant to the Monitoring Fee Arrangement. Such amounts are recorded in general and administrative expenses.
Administrative Services Agreement
In connection with the Acquisition, the Company engaged Loewen to provide certain administrative services and to share certain resources pursuant to an Administrative Services Agreement. The services to be provided by Loewen under the Administrative Services Agreement included: accounting services, computer, telecommunications, general operations support, legal services, environmental compliance, regulatory compliance, employee training and corporate development. In addition, Loewen agreed to provide management expertise in planning MIS, sales, tax, and fund management strategy. The Company also could benefit under the Administrative Services Agreement from access to some of Loewen's vendor agreements.
As compensation for services provided under the Administrative Services Agreement, Loewen was 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 Administrative Services Agreement. The Company was also generally required (in certain cases, subject to approval in advance by Blackstone) to reimburse Loewen 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 Company recorded and paid $250,000 during fiscal 1998 and recorded $289,000 during fiscal 1999 in Administrative Services Fees under the Administrative Services Agreement.
In July 1999, the Company began proceedings to terminate the Administrative Services Agreement due to a disagreement between Loewen and the Company with respect to the value of services rendered by Loewen under the Agreement. On February 4, 2000, the Company filed a motion in U.S. Bankruptcy Court for an order setting a deadline for Loewen to assume or reject the Administrative Services Agreement. On March 4, 2000, the parties agreed at a hearing to resolve the motion through a stipulation and order. As a result of the order, effective March 1, 2000, the Company was no longer obligated to pay Loewen for administrative services under the Administrative Services Agreement until such time as Loewen exercised its right to assume the Administrative Services Agreement or the Company requested that services be performed thereunder.
As of December 2000, the Company had accrued a total of $332,000 in unpaid Administrative Services Fees due Loewen under the Administrative Services Agreement. The Company had further accrued, over the life of the Administrative Services Agreement, $400,000 due Loewen as reimbursement for out-of-pocket costs and expenses incurred by Loewen from third parties in connection with performing the administrative services described in the Administrative Services Agreement. In December 2000, as part of the Loewen Settlement Agreement described below, the Company paid Loewen the sum of $514,000 in full settlement of all amounts due Loewen under the Administrative Services Agreement, including both Administrative Services Fees and reimbursement of expenses.
The Administrative Service Agreement terminated on the effective date of the Alderwoods Purchase Transaction.
Loewen Settlement Agreement
The Company and Loewen were involved in a dispute with respect to the right to receive proceeds arising from the sale of a vacant parcel of land to an unrelated party in October 1999. The Company maintained that it was the legal owner of the Property, and as such, that the Company was entitled to receive the sale proceeds. Loewen disputed the Company's contention, and the sale proceeds of approximately $936,000 remained in escrow pending resolution of the dispute.
On September 27, 2000, the Company and Loewen entered into a letter agreement (the "Loewen Settlement Agreement") that resolved the dispute of the escrow. At the time the Loewen Settlement Agreement was executed, the escrow contained approximately $968,000, inclusive of $32,000 in accrued interest. Pursuant to the Loewen Settlement Agreement, which was approved by the U.S. Bankruptcy Court on November 12, 2000, Loewen consented to the release to the Company of the entire $968,000. This amount was partially offset by the obligation of the Company to pay Loewen the sum of $514,000 to settle amounts due under the Administrative Services Agreement as described above.
Formation of RHIMD; Loans to Management
In connection with the Acquisition Transaction, on the Acquisition Closing Date, RHIMD purchased 10.2273 shares (approximately 1.02%) of RH Holdings common stock (the "RHIMD-Owned Stock"). PSI P&S Corp., an affiliate of Blackstone Group L.P., is the general partner of RHIMD. Limited partnership interests in RHIMD have subsequently been allocated to certain officers of the Company (the "RHIMD Limited Partners").
In order to effect the purchase of the RHIMD-Owned Stock, on the Acquisition Closing Date, the Company made a loan to RHIMD in the principal amount of $450,000 which is evidenced by a note bearing interest at an annual rate of 9% and secured by the RHIMD-Owned Stock. RHIMD was to have made loans to each of the RHIMD Limited Partners in connection with their subscription for limited partnership interests in RHIMD. Individual subscription agreements and loan documents were never executed.
Pursuant to the Settlement and Mutual Release the RHIMD note was cancelled.
Loewen Blackstone Settlement Agreement
On April 12, 2001, Blackstone and Loewen entered into a settlement agreement ("the Settlement Agreement and Mutual Release") pursuant to which Blackstone, the beneficial owner of 80.55% of the outstanding common stock of the Company, would exercise its put right and the minority shareholder, a reorganized Loewen, would acquire all of the stock of RH Holdings owned by Blackstone upon Loewen's emergence from bankruptcy. Under the terms of the agreement, Alderwoods delivered to Blackstone unsecured, subordinated notes in the aggregate principal amount of $24,678,571 and 379,449 shares of Alderwoods common stock with an aggregate value of $6,515,143 in full satisfaction of Alderwoods obligations under the put. As a result of the delivery of the consideration, Alderwoods completed its purchase of all of the stock of RH Holdings beneficially owned by Blackstone.
The shareholders agreement, and all other agreements, between Alderwoods and Blackstone with respect to the Company terminated as of the closing of the transaction, and Alderwoods became entitled to elect all of the directors of the Company as of such date.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements
(b) Exhibits
(c) Reports on Form 8-K
Implementation of SAB No. 101, Revenue Recognition in Financial Statements dated March 23, 2001.
Change in control registrant dated January 17, 2002. - -------- (1) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-4 (Registration No. 33-321411) (2) Incorporated by reference from Rose Hills' Report on Form 10-Q for the quarter ended September 30, 1998, filed on November 5, 1998 (3) Incorporated by reference from Rose Hills' Report on Form 10-K for the year ended December 31, 1999, filed on March 24, 1999 (4) Incorporated by reference from Rose Hills' Report on Form 10-Q for the quarter ended June 30, 2000, filed on August 10, 2000. (5) Incorporated by reference from Rose Hills' Report on Form 10-K for the year ended December 31, 2000, filed on March 28, 2001. (6) Incorporated by reference from Rose Hills' Report on Form 10-Q for the quarter ended March 31, 2001, filed on May 15, 2001. (7) Incorporated by reference from Rose Hills' Report on Form 10-Q for the quarter ended June 30, 2001, filed on August 14, 2001. (8) Filed herewith
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 Holdings Corporation) 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 audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 (Successor) and 2000 (Predecessor) and the results of the Predecessor's operations and the Predecessor's cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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.
As discussed in note 1 to the consolidated financial statements, effective December 31, 2001, the minority shareholder of the Rose Hills Holdings Corporation emerged from bankruptcy and acquired 100% of the outstanding common stock of Rose Hills Holdings Corporation. Accordingly, the December 31, 2001 (Successor) consolidated balance sheet reflects the parent Company's fresh-start accounting basis that has been "pushed down" as a result of this transaction. As a result of the foregoing transaction, the consolidated balance sheet as of December 31, 2001 (Successor), is presented on a different cost basis than that for the period prior to December 31, 2001 and, therefore, is not comparable.
As discussed in note 4 to the consolidated financial statements, the Company changed its method of recognizing revenue in 2000.
/s/ KPMG LLP
Los Angeles, California March 15, 2002
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000 (In thousands)
See accompanying notes to consolidated financial statements.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999 (In thousands)
See accompanying notes to consolidated financial statements.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999 (In thousands)
See accompanying notes to consolidated financial statements.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2001, 2000 and 1999 (In thousands except for share amounts)
See accompanying notes to consolidated financial statements.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Basis of Presentation
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 owner and operator of the Rose Hills Mortuary and purchasing certain assets and assuming certain liabilities of Rose Hills Memorial Park Association (the "Association") and Workman Mill Company, the owners of the real property and other cemetery assets of the Rose Hills Memorial Park (Rose Hills Cemetery). In connection with the acquisition, The Loewen Group Inc., a shareholder of RH Holdings, also caused one of its subsidiaries to contribute to the Company 14 funeral homes and 2 funeral home cemetery combination properties (the "Contributed Properties"). As a result of these acquisitions (collectively the "Acquisition Transaction"), the Company is the successor to the operations, assets and liabilities of the Rose Hills Mortuary and Cemetery (collectively, "Rose Hills") and the Contributed Properties.
Rose Hills is the largest, single-location cemetery and funeral home combination in the United States, and the Cemetery is the largest, single- location cemetery in the United States. The Rose Hills Cemetery and the Rose Hills Mortuary have been continuously operating since 1914 and 1956, respectively. Rose Hills is situated less than 14 miles from downtown Los Angeles on approximately 1,400 acres of land near Whittier, California. In addition to Rose Hills, the Company operated 10 funeral homes, 2 funeral home cemetery combination properties and one cemetery ("Affiliates") as of December 31, 2001. Together with Rose Hills, the Affiliates constitute a strategic assembly of cemeteries and funeral homes in the greater Los Angeles area.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and the prevailing practices within the cemetery and mortuary industry. All significant intercompany accounts and transactions have been eliminated.
Changes in Control of Registrant
In April 2001, the shareholders of RH Holdings reached an agreement ("Loewen Blackstone Settlement Agreement") pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. ("Blackstone"), the beneficial owner of 80.55% of the outstanding common stock of the Company, would exercise its put right and the minority shareholder, a reorganized Loewen Group International, Inc. ("Loewen"), would acquire all of the stock of RH Holdings owned by Blackstone upon Loewen's emergence from bankruptcy. The U.S. Bankruptcy Court confirmed Loewen's reorganization plan, including the proposed acquisition of the shares of RH Holdings from Blackstone on December 5, 2001, and the plan became effective on January 2, 2002. Effective with its emergence from bankruptcy, Loewen has since been renamed the Alderwoods Group, Inc. ("Alderwoods").
On January 3, 2002, in full satisfaction of Loewen's obligations under the put, Alderwoods delivered to Blackstone unsecured, subordinated notes in the aggregate principal amount of $24,678,571 and Alderwoods common stock with an aggregate value of $6,515,143. As a result of the delivery of the consideration, Alderwoods completed its purchase of all of the stock of RH Holdings beneficially owned by Blackstone. Upon closing of the transaction ("Alderwoods purchase transaction"), Alderwoods increased its ownership from 20.45% to 100% of the outstanding common stock of RH Holdings, thereby causing the Company to become a wholly owned subsidiary of Alderwoods. The shareholders agreement, and all other agreements, between Alderwoods and Blackstone with respect to the Company terminated as of the closing of the transaction, and Alderwoods became entitled to elect all of the directors of the Company as of such date.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For accounting purposes, the effective date of the change in control has been determined by the Company as December 31, 2001. This is based on the fact that the U.S. Bankruptcy Court confirmed Loewen's reorganization plan, including the proposed acquisition of the shares of RH Holdings from Blackstone on December 5, 2001. Thus, Blackstone and Loewen were obligated under the put. Accordingly, the Company has recorded the push-down of Loewen's fresh start reporting in its Successor consolidated balance sheet as of December 31, 2001.
Push down Accounting Adjustments
Since the Company has pushed-down the fresh start reporting that occurred as a result of Loewen's purchase of Blackstone's interest in the Company, the Company's Successor consolidation balance sheet as of December 31, 2001, is presented on a different cost basis than the Predecessor consolidated balance sheet as of December 31, 2000. Therefore, such statements are not comparable. The following provides a balance sheet continuity from the Company's predecessor balance sheet prior to push-down of the fresh-start reporting to the Company's "successor" balance sheet.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- -------- (1) Amounts due from trust funds and third-party insurance companies, net of an allowance for non-deliverance by a Company owned funeral home have been included in the successor balance sheet, as further discussed in note 7. (2) Independent appraisals were utilized to revalue unsold cemetery property, land and buildings to their fair value at the date of change in ownership. Cemetery property was reduced $41,358,000 and land and buildings and improvements were increased $25,329,000 and $7,923,000, respectively. (3) The Company has estimated the excess of the purchase price over the fair values of identifiable net assets (goodwill) based upon a third party appraisal of the Company's enterprise value. Management also used third party appraisals to estimate the fair value of the Company's long-lived assets and cemetery inventory in the allocation of the purchase price. Based upon the third party appraisals, the Company recorded goodwill of $67,685,000. (4) At the consummation of the change in ownership, the estimated market value of the Company's senior subordinated notes was 96% of their maturity value. Accordingly, $80,000,000 of its 9% Senior Subordinated Notes have been recorded at $76,800,000 and $4,148,000 of deferred finance charges was eliminated. (5) The amount represents severance due to the resignation of the Company's President and Chief Executive Officer concurrent with the change of control. (6) The net effect of the push-down accounting transactions decreased the net deferred tax liability by $5,542,000. (7) Pre-need cemetery contracts carried on the Company's predecessor balance sheet include the sales price of unserviced and undelivered cemetery services and merchandise, net of their direct and acquisition costs. In accordance with fresh start accounting pushed down by Alderwoods, the successor Company balance sheet
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
carries obligations to perform pre-arranged cemetery services and provide cemetery merchandise at their fair value, net of their direct fulfillment costs. Deferred commission costs have been eliminated. The fair value of future cemetery services was estimated by management to be 70% of the current sales price of those services adjusted for an inflation factor and reduced by a discount rate dependant on the expected fulfillment date. The cost to deliver cemetery merchandise was obtained from independent vendors adjusted for an inflation factor and reduced by a discount rate dependant on the expected fulfillment date. Accordingly, the Company has recorded deferred pre-need cemetery revenue of $8,866,000. (8) In April 2001, Loewen and Blackstone negotiated a settlement pursuant to which Blackstone would exercise its Put Option and Loewen would acquire all of RH Holdings common shares owed by Blackstone. The settlement agreement, which was contingent on Loewen's emergence from bankruptcy, indicated Blackstone would receive a note for approximately $24.7 million and newly reorganized Loewen (Alderwoods) common stock valued at approximately $6.6 million in full satisfaction for all Blackstone's claims in the Loewen bankruptcy. Management did not use the consideration received by Blackstone since it was an amount negotiated to settle Blackstone's claims under the Put/Call Agreement and was not based on the fair value of RH Holdings common stock. Accordingly, the Company has recorded in the push-down of the fresh start reporting, an additional paid-in capital balance of $64,881,000 that represents the Company's enterprise value in its December 31, 2001, Successor consolidated balance sheet. This enterprise value is based on an independent appraisal of the Company as of December 31, 2001.
(2) Summary of Critical and Significant Accounting Policies
Critical Accounting Policies
(a) Cemetery Revenue Recognition
Pre-need sales of cemetery interment rights are recognized in accordance with the guidance of Statement of Financial Accounting Standards No. 66, Accounting for the Sales of Real Estate (FAS 66). Accordingly, sales of interment rights are recognized under the full accrual method, the percentage of completion method, or the deposit method depending on the level of the buyer's down payment and any continuing involvement the Company has in developing sold property. Direct and acquisition costs of the sales are deferred and recognized concurrent with the recognition of deferred sales. Deferred sales are recognized at the time of delivery or merchandise or performance of service.
Allowances for anticipated customer cancellations and refunds are provided at the date of sale based on management's estimate of expected cancellations using historical trends. Actual cancellation rates in the future may result in a change in estimate.
Deferred merchandise and service sales, and their direct and acquisition costs, are recognized at the time of delivery of merchandise or performance of service.
At-need sales of cemetery interment rights, merchandise and services are recognized when the merchandise is delivered or the service is rendered.
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, the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trust funds.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
It is the Company's policy to voluntarily trust 100% of pre-need service revenue when contracts are paid in full. Also, the Company has an agreement with a vendor to purchase pre-need merchandise when the sales contracts are paid in full. Funds voluntarily trusted for pre-need cemetery services are included in the consolidated financial statements.
Effective January 1, 2000, the Company changed its method of accounting for pre-need sales of cemetery products and services. See note 4.
(b) Funeral Revenue Recognition
Pre-arranged 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 third-party 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. Insurance commissions earned and related selling expenses are recognized when the insurance company accepts the policies. 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 amounts together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Costs relating to the sale of pre-arranged funeral services, including sales commission expense, are expensed in the period incurred.
At-need funeral services revenues are recognized when the service is performed.
(c) Valuation of Long-Lived Assets
The Company accounts for long-lived assets under Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted 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 exceeds 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. In 2001, the long-lived assets of two operating locations were reduced $1,032,000 and charged to Asset Write-Down and Other Charges.
In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long- lived assets. This Statement requires that long-lived assets 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 the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002. The Company does not expect the adoption of this new accounting principle to have an impact on its consolidated financial condition and results of operations.
(d) Valuation of 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. In June 2001, the Financial Accounting Standards Board issued FAS 142, Goodwill and Other Intangible Assets. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective January 1, 2002. Application of the non-amortization provisions of FAS 142 for goodwill is expected to result in an increase in operating income of approximately $3.7 million in 2002. At December 31, 2001, the Company's Successor balance sheet included recorded goodwill of approximately $67,385,000. Pursuant to FAS 142, the Company will test its goodwill for impairment upon adoption and, if impairment is indicated, record such impairment as a cumulative effect of an accounting change. The Company does not anticipate any impairment of goodwill upon the adoption of FAS 142.
Significant Accounting Policies
(a) 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. Significant estimates include those required in the valuation of intangible assets, evaluating the impairment for long-lived assets, the recording of allowances for sales cancellations and doubtful accounts and various elements of the push-down of the fresh start accounting related to the change in control of the Company (including the valuation of purchased assets and liabilities, as well as the determination of deferred revenues). Actual results could differ from those estimates.
(b) 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.
(c) Receivables
Receivables due from customers for cemetery property, merchandise and services sold in advance of need are generally collected over one to seven years and bear interest at the rate of 12.75% 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 cancelled. Accordingly, as of December 31, 2001 and December 31, 2000, allowance for sales cancellations totaled $2,275,000 and $2,223,000, respectively. A provision of $1,027,000, $1,717,000, and $4,685,000 was charged to cemetery sales to provide for estimated future cancellations for the years ended December 31, 2001, 2000 and 1999, respectively.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, receivables due from customers for cemetery and mortuary goods and services provided at the time of need are generally collected over a period of one to five years bearing interest at the rate of 12.75% 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, 2001 and 2000, the allowance for doubtful accounts totaled $273,000 and $333,000, respectively.
Finance income earned on long-term receivables is recognized on a current basis.
(d) Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value.
(e) 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 cost of sales and services as sales of cemetery plots occur.
(f) Property and Equipment
Property and equipment are valued at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
Expenditures for maintenance and repairs are charged to operations as incurred and expenditures for replacements and betterment are capitalized.
(g) Covenants Not to Compete
Covenants not to compete included in "Other Assets" 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. The carrying amount of the covenants not to compete was $65,000 and $512,000 as of December 31, 2001 and 2000, respectively. As of December 31, 2001 and 2000, accumulated amortization of covenants not to compete was $1,945,000 and $1,726,000, respectively.
(h) Deferred Financing Cost
Pursuant to the original debt acquisition in 1996, deferred financing costs relating to the bank senior-term loan and the senior subordinated notes were being amortized over the life of the loan and the notes based on the
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective interest method. As of December 31, 2000, accumulated amortization of these costs was $6,721,000. Commensurate with the change in control, the Company's debt was revalued based on market conditions and the unamortized deferred financing costs were eliminated.
(i) Income Taxes
The Company accounts for income taxes 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.
(j) Fair Value of Financial Instruments
The carrying value of the Company's debt instruments approximates fair value that 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 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.
(k) Earnings (Loss) per Share
Earnings (loss) per share have not been included, as the Company is a wholly owned subsidiary.
(l) Reclassifications
Certain reclassifications have been made to the 2000 consolidated financial statements to conform to the 2001 presentation.
(3) Asset Write Downs and Other Charges:
Disposition of Funeral Homes
In 2001, the Company began assessing the long-term term prospects of certain Contributed Properties including their fit with the Rose Hills Cemetery and Mortuary and the effectiveness of clustering synergies. Based on this assessment, the Company determined that four of the Contributed Properties did not fit the Company's long-term market strategy. In June 2001, the Company completed disposition of these four locations, which included sub-leasing three locations, and leasing one owned location to independent funeral operators. In connection with the disposition of these four locations, the Company restructured its Affiliate operations and terminated approximately 40 employees. The Company recorded a charge of $1.7 million ($1.1 million non cash charges relating to the write-off of goodwill and other assets and $.6 million in severance pay and lease termination costs) in 2001. As of December 31, 2001, $0.3 million remains in the lease termination provision.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Asset Impairment of Long-lived Assets
In the fourth quarter of 2001, the Company determined that Affiliate locations had suffered asset impairments due to market conditions. The Company recorded a $2.1 million non-cash charge for the write-off of goodwill and other assets.
Change in Control Compensation Agreements
Pursuant to the Phantom Equity Plan, the consummation of the change in control discussed in note 1, triggered an additional $1,354,000 bonus award commitment by the Company to certain members of the Company's management. The incremental amount was recorded in the 2001 Statement of Operations and paid on January 3, 2002.
Land Movement
As more fully discussed in note (20), during 2001 the Company recorded $3.0 million for remediation and related costs to be incurred in connection with the land movement in a portion of the Rose Hills Memorial Park.
The following table below sets forth the impact to the statement of operations for those amounts indicated in the notes above:
(4) Change in Accounting Principles
In response to the issuance of Staff Accounting Bulletin No. 101 (SAB 101) and consultation with the U.S. Securities Exchange Commission, the Company changed the following accounting principles effective January 1, 2000:
Revenue recognition of pre-need interment rights are now accounted for in accordance with FAS 66. The direct and acquisitions costs for the deferred sales are now deferred and recognized concurrent with the recognition of the deferred sales. Previously, the Company recognized the sale of pre-need interment rights, and their related costs, at the time of sale.
Revenue recognition of pre-need cemetery services and merchandise, and their direct and acquisition costs, are now deferred until time of delivery or performance of service. Previously, the Company recognized the sale of pre- need service and merchandise, and their related costs, at the time of sale.
Earnings realized by the cemetery service and merchandise trust funds are now deferred until the underlying service and merchandise is delivered. Previously, the Company recognized the earnings as they accrued.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The cumulative effect of these changes in accounting principles on prior years resulted in $12,329,000 decrease in net earnings before taxes and $7,467,000 decrease in net earnings after taxes. The Company realized cemetery sales and services revenue of $2,152,000 and $1,324,000 during the years ended December 31, 2001 and 2000, respectively, that were previously included in the cumulative effect of accounting change (pre-tax) as of January 1, 2000.
(5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at December 31, 2001 and 2000 (in thousands):
(6) Property and Equipment
Property and equipment consist of the following at December 31, 2001 and 2000 (in thousands):
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Long-term Receivables
The balance in long-term receivables represents amounts due from customer receivables beyond one year and related allowance for doubtful accounts, funeral trust funds less an allowance for cancellations and non-fulfillment, insurance companies for unperformed, price guaranteed, pre-need funeral contracts and allowance for cancellations and non-fulfillment, and unearned finance income. The components of accounts receivable in the consolidated balance sheets are as follows:
For funeral and cemetery installment contracts, an allowance for cancellations and refunds is provided at the date of sale based on management's estimates.
Amounts receivable from funeral trusts represent the proceeds deposited in the funeral trust funds. Amounts receivable from third party insurance companies represent the value of the unserviced policies. An allowance for cancellations and non-fulfillment by company-owned funeral homes is provided at the date of sale based upon management's estimates. The company will receive these amounts when the contracted services are performed.
(8) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following at December 31, 2001 and 2000 (in thousands):
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) 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 principal amount of Senior Debt (note 12), 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% through December 2000. The Collar Agreement was based on three-month LIBOR. The Collar Agreement expired in December 2000. There were no derivative financed instruments outstanding as of December 31, 2001.
(10) Cemetery Funds
(a) 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, 2001 and 2000, amounts owed to the Funds, but not yet due or collected from customers, amounted to $1,745,000 and $1,742,000, respectively. The Funds' assets are invested under the direction of the Board of Trustees of the Funds. The principal of the funds generally cannot be withdrawn by the Company and therefore is not included on the consolidated balance sheet. The change in net assets of the Funds, net of amounts required to be withheld under state law, is paid by the Funds to the Company and is used for the care, maintenance and embellishment of the cemeteries. As allowable by state law, a portion of the undistributed capital gains of the Funds 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 Funds and transferred to the Company are reported as cemetery revenues in the consolidated statements of operations and amounted to $3,616,000, $3,814,000 and $3,770,000 for the years ended December 31, 2001, 2000 and 1999 respectively.
Total assets of the Funds are $64,586,000 and $63,671,000 at December 31, 2001 and 2000, respectively, and consist primarily of cash and investments carried at market value. Total liabilities of the Funds are $293,000 and $837,000 at December 31, 2001 and 2000, respectively, and consist primarily of amounts payable to the Company. Total net assets of $64,292,000 and $62,834,000 at December 31, 2001 and 2000, respectively, resulted primarily from Funds' deposits received or receivable from customers, capital gains (net of transfers to reserves) and holding losses experienced by the Funds.
(b) Special Care Funds
In 1998, the Company established Cemetery Special Care Funds (SCF) pursuant to state law for the investment of proceeds from the sale of pre-need cemetery services and merchandise. The Company's policy is to voluntarily set aside in trust, 100% of the pre-need cemetery service revenue when the contracts are paid in full. American Funeral and Cemetery Trust Services is the trustee of the Special Care Funds.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total assets of the SCF are $10,779,000 and $11,260,000 at December 31, 2001 and 2000, respectively, and consist primarily of cash and investments carried at market value. Total liabilities of the SCF are $786,000 and $508,000 at December 31, 2001 and 2000, respectively, and consist of amounts payable to the Company. Total net assets of $9,993,000 and $10,752,000 at December 31, 2001 and 2000 respectively, resulted primarily from SCF deposits received or receivable from customers, capital gains (net of transfers to reserves) and holding losses experienced by the SCF's.
(11) 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. As of December 31, 2001 and 2001, the debentures subscribed pursuant to the subscription agreements amounted to less than $10,000. 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, 2001, equaling $515,000, have matured.
(12) Income Taxes
The provision for income tax expense (benefit) is as follows (in thousands):
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 tax expense (benefit) (exclusive of the tax benefit related to the cumulative effect of the accounting change) and income tax expense (benefit) at the statutory Federal income tax rate are as follows (in thousands):
The components of the net deferred tax balances at December 31, 2001 and 2000 are as follows (in thousands):
As of December 31, 2001, the Company has established a $6.2 million valuation allowance related to the entire net operating loss carry forward available to the Company at that time. There was no valuation allowance as of December 31, 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which those temporary differences become deductible, or the NOLs can be used. We consider scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the periods which the deferred tax assets are deductible and the NOLs can be used, and the change of ownership accounted for as of December 31, 2001, and the potential limitation imposed on the utilization of the Company's NOLs resulting from that change, management believes it is more likely than not that the benefits of these Net Operating Loss carry forwards will not be utilized by the Company.
(13) Related Party Transactions
(a) Administrative Services Agreement
In connection with the Acquisition, the Company engaged Loewen to provide certain administrative services and to share certain resources pursuant to an Administrative Services Agreement. The services to be provided by Loewen under the Administrative Services Agreement included: accounting services, computer, telecommunications, general operations support, legal services, environmental compliance, regulatory compliance, employee training and corporate development. In addition, Loewen agreed to provide management expertise in planning MIS, sales, tax, and fund management strategy. The Company also planned to benefit under the Administrative Services Agreement from access to some of Loewen's vendor agreements.
As compensation for services provided under the Administrative Services Agreement, Loewen was 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 Administrative Services Agreement. The Company was also generally required (in certain cases, subject to approval in advance by Blackstone) to reimburse Loewen 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 Company recorded and paid $250,000 during fiscal 1998 and recorded $289,000 during fiscal 1999 in Administrative Services Fees under the Administrative Services Agreement.
In July 1999, the Company began proceedings to terminate the Administrative Services Agreement due to a disagreement between Loewen and the Company with respect to the value of services rendered by Loewen under the Agreement. On February 4, 2000, the Company filed a motion in U.S. Bankruptcy Court for an order setting a deadline for Loewen to assume or reject the Administrative Services Agreement. On March 4, 2000, the parties agreed at a hearing to resolve the motion through a stipulation and order. As a result of the order, effective March 1, 2000, the Company was no longer obligated to pay Loewen for administrative services under the Administrative Services Agreement until such time as Loewen exercised its right to assume the Administrative Services Agreement or the Company requested that services be performed thereunder.
As of December 2000, the Company had accrued a total of $332,000 in unpaid Administrative Services Fees due Loewen under the Administrative Services Agreement. The Company had further accrued, over the life of the Administrative Services Agreement, $400,000 due Loewen as reimbursement for out-of-pocket costs and expenses incurred by Loewen from third parties in connection with performing the administrative services described in the Administrative Services Agreement. In December 2000, as part of the Loewen Settlement Agreement described below, the Company paid Loewen the sum of $514,000 in full settlement of all amounts due Loewen under the Administrative Services Agreement, including both Administrative Services Fees and reimbursement of expenses.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Administrative Service Agreement terminated on the effective date of the Alderwoods Purchase Transaction.
(b) Escrow Transaction
The Company and Loewen were involved in a dispute with respect to the right to receive proceeds arising from the sale of a vacant parcel of land to an unrelated party in October 1999. The Company maintained that it was the legal owner of the Property, and as such, that the Company was entitled to receive the sale proceeds. Loewen disputed the Company's contention, and the sale proceeds of approximately $936,000 remained in escrow pending resolution of the dispute.
On September 27, 2000, the Company and Loewen entered into a letter agreement (the "Loewen Settlement Agreement") that resolved the dispute of the escrow. At the time the Loewen Settlement Agreement was executed, the escrow contained approximately $968,000, inclusive of $32,000 in accrued interest. Pursuant to the Loewen Settlement Agreement, which was approved by the U.S. Bankruptcy Court on November 12, 2000, Loewen consented to the release to the Company of the entire $968,000. This amount was partially offset by the obligation of the Company to pay Loewen the sum of $514,000 to settle amounts due under the Administrative Services Agreement as described above.
(c) Monitoring Fee
In connection with the Acquisition Transaction, Blackstone received a monitoring fee (the Monitoring Fee) equal to $250,000 per annum (subject to increases for inflation) from the Company. The Company has expensed the Monitoring Fee of $250,000 for December 31, 2001, 2000 and 1999. Effective upon the consummation of the change in control, the Company is no longer required to pay the annual Monitoring Fee.
(d) Insurance Commissions
In 1999, the Company earned insurance commissions totaling approximately $482,000 from a subsidiary of Loewen. Effective May 1999, the Company changed back to an unrelated insurance provider. As of December 31, 2001 the Company has $8,262,000 of deferred pre-need funeral insurance contract revenue and pre-need funeral insurance contract receivable.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Long-Term Debt
Long-term debt consists of the following at December 31, 2001 and 2000 (in thousands):
At December 31, 2001, annual maturities of long-term debt consisted of the following (in thousands):
The Company has 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 $75.0 million and (2) a senior secured revolving credit facility (the Revolving Credit Facility) in an aggregate principal amount of $25.0 million, 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. Effective May 2, 2001, the Company amended the Revolving Credit Facility reducing the aggregate principal amount available to $10.0 million and extending its maturity date to April 1, 2003. Borrowings under the Revolving Credit Facility must be fully paid for a minimum period of 30 days for each 12-month period ending December 1.
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 inter-company receivables. The Company is required to maintain certain defined financial ratios. The Company was in compliance with all such requirements at December 31, 2001.
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
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1.0 million in each of the first three years after the Acquisition, $3.0 million in the fourth year after the Acquisition, $7.0 million in the fifth year after the Acquisition, $9.0 million in the sixth year after the Acquisition and $53 million in the seventh year after the Acquisition.
As of December 31, 2001, the Company was paying interest at the Adjusted Eurodollar Rate (1.9375%) plus 3.0% 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, 2001, the Company had no borrowings under the Revolving Credit Facility.
The Company has face value $80.0 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 is in compliance with all such requirements as of December 31, 2001.
The Company assumed liabilities under notes payable and non-compete 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 non-compete agreements consist of the net present value of future payments discounted at 9.00%.
(15) Retirement Plans
The Company has a defined benefit plan, a defined contribution plan, supplemental employee retirement plan (SERP) and a retirement plan for the Board of Trustees. All plans except for the defined contribution plan are frozen. As a result of the change in control effective December 31, 2001, the Company has eliminated any unrealized gain or loss in the change in funded status footnotes.
(a) Defined Benefit Plan
The Company has a defined benefit plan, a defined contribution plan, supplemental employee retirement plan (SERP) and a retirement plan for the Board of Trustees. All plans except for the defined contribution plan are frozen.
The Retirement Plan for Employees of Rose Hills Mortuary, L.P. (the Plan) is frozen. It is the intention to formally terminate the Plan at a later date. 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.
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The Company has funded or accrued the present value of these benefits. The Plan is subject to and in compliance with the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). During 1995, the Plan received a favorable letter of determination from the IRS.
The change in benefit obligation included the following components (in thousands):
The net pension cost included the following components (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.25% and 7.50% for 2001 and 2000, respectively. The expected long-term rate of return on assets was 6.50% for 2001 and 2000.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
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(b) 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 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 50% of up to $4,000 contributed per year per participant. Additionally, the Company may contribute to the Savings Plan 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. The Company's contribution to this Savings Plan on behalf of the participants amounted to $446,000, $486,000 and $472,000, for the year ended December 31, 2001, 2000 and 1999 respectively.
(c) 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 non-qualified 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 Company assumed the SERP liability. 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 change in SERP benefit obligation included the following components (in thousands):
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in SERP funded status included the following components (in thousands):
The net SERP pension cost included the following components (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.50% and 7.50% for 2001 and 2000, respectively. The expected long-term rate of return on assets was 6.50% for 2001 and 2000.
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 $7.0 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 $2,403,000 and $2,021,000 as of December 31, 2001 and 2000, respectively.
(d) 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 change in benefit obligation included the following components (in thousands):
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in plan assets included the following components (in thousands):
The change in funded status included the following components (in thousands):
The net pension cost included the following components (in thousands):
The weighted average discount rate used in determining the actual present value of the projected benefit obligation was 6.50% for 2001 and 7.50% for 2000.
(e) Deferred Compensation
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. Annual payments are immaterial and are expensed as paid.
(16) 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 furnished by the Company and/or to cemetery property, services and commodities provided by the Association. The amounts relating to these trusts are included in the accompanying consolidated financial statements as long-term receivables; administration fees earned by the Company are reflected in the consolidated statements of income.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Commitments under Lease Agreements
As of December 31, 2001, the future minimum lease obligation pursuant to operating lease agreements is summarized as follows (in thousands):
Rental expense under operating lease agreements for the years ended December 31, 2001, 2000 and 1999 was $827,000, $877,000 and $856,000, respectively.
(18) Purchase Commitments
In September 1992, the cemetery that existed prior to the Company (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 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 $2,000,000, which is being paid in $34,500 ($138,000 annualized) quarterly installments over a 20 year period, which began in July 1998.
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.
(19) Commitments and Other Matters
(a) 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
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exchange for the interment rights, IBPS agreed to pay the predecessor cemetery $1,405,000, of which $160,000 was received as a deposit during 1994. It was determined that because, among other matters, 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. In 1999, the construction of the columbarium was completed and ready for inurnments. Accordingly, the Company recorded the sale in the fourth quarter of 1999. The $1,245,000 unpaid portion of the sales price is to be paid in quarterly installments beginning April 2000 with the final payment due January 2003. The unpaid balance of that receivable at December 31, 2001 was $445,000.
In April 2001, IBPS exercised its option and purchased the 2.7 acre site for $2.0 million in cash at the time of the transaction.
(b) General
The Company has employment agreements with its 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.
(c) Phantom Equity Appreciation Plan
In June 2000, the Board of Directors of the Rose Hills Company met in a special session and approved the Rose Hills Phantom Equity Appreciation Plan (Plan). The purpose of the Plan is to promote the interests of the Company and its stockholders by attracting and retaining officers and other key employees and motivate such individuals to maximize stockholder value by awarding opportunities based upon future appreciation in the value of the Company.
The Plan established a bonus pool, the aggregate amount of which shall be equal to ten (10) percent of the excess of (i) the product of six times EBITDA for the exit year of the Plan (2003) over the product of six times EBITDA for the base year of the Plan (1997), and (ii) all debt for the exit year of the Plan over the base year. Under the terms of the Plan a "Committee" was formed consisting of three Board Members to administer, interpret, and make individual awards under the Plan. The Plan contains annual vesting provisions based on time and performance measures. Vesting accelerates upon a change in control where any party acquires over 50% of the outstanding stock of Rose Hills Holdings, Corp. The bonus pool is fixed at $2.5 million in the event of a change in control. The U.S. Bankruptcy Court confirmed Loewen's reorganization plan, including the proposed acquisition of shares of Holdings from Blackstone on December 5, 2001, and the reorganization plan became effective on January 2, 2002. As of December 31, 2001, the Company accrued the $2.5 million bonus pool in the statement of operations. Effective upon completion of the transaction, the Company paid $2.4 million in aggregate compensation to certain members of the Company's management under the Company's phantom equity appreciation plan.
(20) Contingencies
The Company is involved in certain matters of threatened and filed litigation, none of which, in the judgment of management, will have a material impact on its consolidated financial position or results of operations.
Environmental Issues
Environmental audits of the Company's various properties were conducted in connection with the Acquisition Transaction. Management is aware of certain areas within the Cemetery that have required and may
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the future require remediation, including a solid waste disposal area that previously was used to dump rubbish, green waste and used motor oil in the 1970's. The Company believes that Rose Hills Foundation (Foundation), an unaffiliated company that is the successor to the Association, is obligated to pay for or otherwise indemnify the Company for the remediation costs associated with this area pursuant to the terms of an Environmental Compliance Agreement entered into at the time of the Acquisition Transaction. To date, the Rose Hills Foundation has taken charge of the investigation and remediation of the areas, including installing a cap on the area. In the past the Company and the Foundation have disagreed about the amount of work required to remedy the situation. As a result, the Company retained its own outside technical consultant to further investigate the solid waste disposal area to determine what risks, if any, the solid waste disposal area poses for the Company, and to quantify such risks. The Foundation has recently submitted a report, which incorporated the findings of the Company's consultant findings, to the local regional water quality control board (Water Board), concluding that the capping has been successful and requesting that the water board issue a closure letter for the disposal area. The Water board is the agency overseeing the remediation. However, no assurance can be given that the Water Board will agree with the Foundation's conclusions and issue a letter closing the area, or whether the Water Board will require additional work or monitoring.
In addition, two of the Company's cemetery 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 was informed by the Environmental Protection Agency that the Company will not be included in the Super Fund cleanup of the basin.
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.
Land Movement
During August and September 2000, the Company discovered that there had been some land movement in a portion of Rose Hills Cemetery. The affected area represents approximately 13 acres of the Cemetery's approximately 1,425 total acres, and consists of approximately 12,000 interment sites. The Company hired an outside geo-technical and engineering consultant to study the affected area, to identify the underlying cause and the extent of the land movement, and to make recommendations with regard to both short-term and long-term remediation and stabilization measures. Pending the Company's receipt of the engineer's report, the Company undertook various remediation measures including the installation of additional dewatering wells to improve water drainage conditions in the affected area.
The Company's consultants advised that the affected area could continue to move, particularly in the event of heavy rainfall during the winter months. Accordingly, during October 2000, the Company began to take some intermediate remediation measures, including the installation of additional dewatering wells in the affected area and the relocation to other areas of the Cemetery (at the Company's expense) of approximately 140 interred remains that were in the most severely impacted portion of the affected area. Such expenses could increase if significant further movement is detected in the affected area or if additional families request the relocation of interred remains from the affected area. As of January 31, 2002, the Company had relocated, at its expense, approximately 900 interred remains from the affected areas to other areas of the Cemetery.
The engineering firm delivered a preliminary report to the Company in July 2001. In the preliminary report, the engineers advised the Company that the land movement most likely had been caused by a combination of geologic, topographic, water and soil conditions within the affected area. The preliminary report also identified a
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
variety of measures that the Company could take to remediate and improve the stability of the land area, including the construction and installation of engineered reinforcement fill berms at the base of the slide, the installation of horizontal and other additional drains throughout the affected area, and the implementation of other erosion control measures. In October 2001, the engineering firm completed additional tests and revised their initial recommendation to include de-watering wells instead of horizontal drains.
Based upon additional tests and analysis performed in October 2001, the engineering consultants advised that a combination of the remediation measures discussed above can restore the affected area to a condition suitable for interments. The Company's management is continuing to confer with the engineering consultants to determine the appropriate combination and timing of remediation measures that will restore the affected area to achieve such a result. Management has now advised the Company that it will likely implement the measures in stages, with the installation of the de-watering wells, erosion control measures and related improvements taking place as early as the second quarter of fiscal 2002, and the construction and installation of the reinforcement fill berms beginning in the third or fourth quarter of fiscal 2002. If the area cannot be restored for interments, the Company will implement only those measures that are necessary to repair and stabilize the affected area, and that management will then consider whether the area may be utilized for alternate purposes. In this latter case, the Company is likely to incur additional costs in connection with the relocation of interred remains to other parts of the Cemetery.
The estimated aggregate construction and related costs to restore and stabilize the affected area is approximately $3.2 million. The Company expects to incur approximately $0.5 million of these costs during the second quarter of fiscal 2002, with the balance to be incurred during the last two quarters of fiscal 2002. The Company also believes that the total direct costs of relocating interred remains for the affected areas to other areas of the Cemetery (should that become necessary) could approximate $0.8 million.
To the extent that funds are available, the Company intends to seek reimbursement from the improvement reserve in the Company's Endowment Care Fund (ECF) for the costs of relocating interred remains and for a significant portion of the site assessment, repair, maintenance and remediation costs associated with the affected area. Between October 2000 and December 31, 2001, the Company incurred $2.3 million and had been reimbursed from the ECF reserve $1.1 million of direct costs relating to the relocation of interred remains and professional and other services associated with the assessment, remediation and stabilization of the affected area. As of December 31, 2001, the ECF has $1.8 million in reserves for cemetery improvements available to reimburse the Company for direct costs related to the affected area.
Based on the additional test results, revised estimates provided by the engineering firm during third quarter of 2001, and the amounts available in the ECF improvement reserve fund, the Company has recorded a $3.0 million reserve for these matters as of December 31, 2001.
Property Taxes
In connection with the November 19, 1996 Acquisition Transaction, the Rose Hills Memorial Park cemetery land was subject to a significant step-up in assessed value by the County of Los Angeles. Prior to the Transaction, the Cemetery was operated as a not-for profit corporation and was largely exempt from property taxes. In connection with the Transaction, the Company obtained an independent appraisal of the fair value of the undeveloped and unsold cemetery property. In early 1998, the Company also engaged an independent property tax consultant to prepare an estimate of the fair value of the property to assist in the process.
In July 2000, the County of Los Angeles completed its property tax reassessment reflecting its opinion of the fair value of Rose Hills' cemetery property at the Transaction date. The County placed a fair value on the
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cemetery property that is approximately 60% higher than the independent appraisal prepared by the property tax consultant and approximately 50% higher than the fair market value computed by the independent appraiser at the time of the Transaction. The Company filed an assessment appeal with the Los Angeles County Assessor, however, the supplemental tax based on the reassessment must be paid during the appeal process. The total supplemental property tax assessed by the County for the period November 1996 to September 2000 is approximately $2.1 million greater than the amount accrued by the Company using the independent property tax appraisal. A large portion of the supplemental tax bill is payable, interest-free, over four years beginning in 2001.
The Company believes, based in part on the advice of its property tax advisors, that it can obtain a significant reduction in assessed value during the appeal process. However, there is no assurance that the appeal will succeed. In the event the Company does not prevail upon appeal, the Company will pursue other administrative procedures, including filing for a reduction in assessed value under California's Proposition 8, which requires the County to reduce assessed values when declines deemed other than temporary occur.
(21) Segment Information
The Company's reportable segments are comprised of the two businesses it operates, each of which offers different products and services: funeral homes and cemeteries. The funeral home segment is an aggregation of funeral home and funeral plan operations.
The funeral homes offer a full range of funeral services, encompassing the collection of remains, registration of death, professional embalming, use of funeral home facilities, sale of caskets and other merchandise, and transportation to the place of worship, funeral chapel, cemetery or crematorium. In addition to providing at-need funeral services, the Company sells insurance contracts for which it receives commission revenue.
The cemeteries assist families in making burial arrangements and offer a complete line of cemetery products (including a selection of burial spaces, burial vaults, lawn crypts, caskets, memorials, niches and mausoleum crypts), the opening and closing of graves and cremation services. The majority of cemetery revenue is from pre-need sales.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company sells entirely to external customers. The Company evaluates performance based on earnings from operations of the respective businesses. The Company does not allocate income taxes or other corporate expenses to the operating segments.
The following table reconciles gross profit of reportable segments to (loss) income before income taxes:
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reconciles total assets of reportable segments to consolidated total assets:
(22) Quarterly Financial Data
- -------- (1) The first, second and third quarters of fiscal 2000 have been restated from the Company's respective Quarterly Reports on Form 10-Q to reflect the Company's change in accounting principle effective January 1, 2000.
ROSE HILLS COMPANY AND SUBSIDIARIES (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- -------- (1) Primarily consists of reclassifications to other accounts. (2) Uncollected receivables written off, net of recoveries.
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. WoodsExecutive 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/ Dennis C. Poulsen Chairman and Chief March 23, 2002 - ------------------------------------- Executive Officer Dennis C. Poulsen
/s/ Kenton C. Woods Executive Vice March 23, 2002 - ------------------------------------- President, Chief Kenton C. Woods Financial Officer, Secretary and Treasurer (Principal Financial Officer)
/s/ Mary C. Guzman Vice President, March 23, 2002 - ------------------------------------- Controller Mary C. Guzman (Principal Accounting Officer)
/s/ JOHN S. LACEY Director March 23, 2002 - ------------------------------------- John S. Lacey
/s/ PAUL A. HOUSTON Director March 23, 2002 - ------------------------------------- Paul A. Houston
/s/ KENNETH A. SLOAN Director March 23, 2002 - ------------------------------------- Kenneth A. Sloan
/s/ SHAWN R. PHILLIPS Director March 23, 2002 - ------------------------------------- Shawn R. Phillips