<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1997
REGISTRATION NO. 333-21411
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO.4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ROSE HILLS COMPANY
(FORMERLY KNOWN AS ROSE HILLS ACQUISITION CORP.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7261 13-3915765
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
</TABLE>
------------------------
3888 SOUTH WORKMAN MILL ROAD
WHITTIER, CALIFORNIA 90601
(562) 692-1212
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENDALL E. NUNGESSER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROSE HILLS COMPANY
3888 SOUTH WORKMAN MILL ROAD
WHITTIER, CALIFORNIA 90601
(562) 692-1212
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
WILSON S. NEELY, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED AUGUST 11, 1997
PROSPECTUS
ROSE HILLS COMPANY
(FORMERLY KNOWN AS ROSE HILLS ACQUISITION CORP.)
OFFER TO EXCHANGE $80,000,000 OF ITS 9 1/2% SENIOR SUBORDINATED NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR $80,000,000 OF ITS
OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE 'EXPIRATION DATE').
------------------------
Rose Hills Company (formerly known as Rose Hills Acquisition Corp.) (the
'Issuer') hereby offers to exchange (the 'Exchange Offer') up to $80,000,000
aggregate principal amount of its new 9 1/2% Senior Subordinated Notes due 2004
(the 'Exchange Notes') for $80,000,000 aggregate principal amount of its
outstanding 9 1/2% Senior Subordinated Notes due 2004 (the 'Notes'). THE ISSUER
HAD $74.5 MILLION OF SENIOR INDEBTEDNESS (AS DEFINED ON PAGE 77) OUTSTANDING, NO
SUBORDINATED INDEBTEDNESS OUTSTANDING AND NO FIRM ARRANGEMENTS TO ISSUE ANY
SIGNIFICANT SUBORDINATED INDEBTEDNESS, IN EACH CASE AS OF JUNE 30, 1997, AND ITS
SUBSIDIARIES HAD APPROXIMATELY $30.4 MILLION OF LIABILITIES OUTSTANDING AS OF
SUCH DATE. THE EXCHANGE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL
OUTSTANDING LIABILITIES OF THE ISSUER AND ITS SUBSIDIARIES, WHICH TOTALLED
APPROXIMATELY $104.9 MILLION IN THE AGGREGATE AS OF JUNE 30, 1997. THE ISSUER
CURRENTLY HAS NO OUTSTANDING INDEBTEDNESS TO WHICH THE EXCHANGE NOTES WOULD BE
SENIOR. THE INDENTURE (AS DEFINED HEREIN) DOES NOT GENERALLY LIMIT THE ABILITY
OF THE ISSUER TO SECURE SENIOR INDEBTEDNESS. SUBJECT TO CERTAIN REQUIREMENTS
WITH RESPECT TO THE AMOUNT OF ADDITIONAL INDEBTEDNESS (AS DEFINED HEREIN) THAT
MAY BE INCURRED BY THE ISSUER AND/OR ANY OF ITS SUBSIDIARIES, THE INDENTURE DOES
NOT CONTAIN ANY LIMIT ON THE AMOUNT OF DEBT THAT MAY BE SENIOR TO OR ON A PARITY
WITH THE EXCHANGE NOTES.
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Notes for which they may be exchanged pursuant to this offer, except that the
Exchange Notes will be freely transferable by holders thereof (other than as
provided below) and are issued free from any covenant regarding registration.
The Exchange Notes will evidence the same indebtedness as the Notes and contain
terms which are identical in all material respects to the terms of the Notes
that are to be exchanged therefor. The Notes were sold by the Issuer to finance,
in part, the Issuer's acquisition (the 'Acquisition') of the cemetery related
assets and liabilities of Rose Hills Memorial Park Association (the
'Association') which represent the largest single location cemetery in the
United States (the 'Cemetery'), as well as the separately owned mortuary
operations of Roses, Inc. and its subsidiaries located on the grounds of the
Cemetery in Los Angeles County, California (the 'Mortuary'; together with the
Cemetery, 'Rose Hills'). The Issuer is indirectly owned by Blackstone Capital
Partners II Merchant Banking Fund L.P. and its affiliates (collectively,
'Blackstone') and by affiliates of The Loewen Group Inc. (The Loewen Group Inc.,
collectively with its affiliates, 'Loewen'). In connection with the Acquisition,
which was consummated on November 19, 1996, 14 additional funeral homes and two
combination funeral home and cemetery properties previously owned or leased by
Loewen and located in Los Angeles, San Bernardino and northern Orange Counties
(the 'Satellite Properties') were contributed to subsidiaries of the Issuer.
Interest on the Exchange Notes will be payable semi-annually on May 15 and
November 15 of each year, commencing May 15, 1997. The Exchange Notes will
mature on November 15, 2004. The Exchange Notes will be unsecured senior
subordinated obligations of the Issuer, will be subordinated in right of payment
to all existing and future Senior Indebtedness of the Issuer (which includes all
indebtedness of the Issuer under the Bank Credit Facilities (as defined herein))
and
(Cover continued on next page)
SEE 'RISK FACTORS' BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
, 1997
<PAGE>
(Cover continued from previous page)
effectively subordinated to all existing and future liabilities of the Issuer's
subsidiaries and will rank senior in right of payment to all other subordinated
indebtedness of the Issuer.
The Exchange Notes will be redeemable in cash at the option of the Issuer,
in whole or in part, at any time on or after November 15, 2000 at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the
redemption date. Subject to certain conditions and limitations, in the event of
a Change of Control (as defined herein), the Issuer will be obligated to make an
offer to purchase all of the then outstanding Exchange Notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the purchase date. There can be no assurance that the Issuer will
have sufficient funds to purchase all such Exchange Notes upon a Change of
Control. In addition, the Issuer will be obligated to make an offer to purchase
Exchange Notes in the event of certain asset sales. See 'Description of Exchange
Notes.'
The Notes were issued and sold on November 19, 1996 in transactions not
registered under the Securities Act of 1933, as amended (the 'Securities Act'),
in reliance upon the exemption provided in Section 4(2) of the Securities Act.
Accordingly, the Notes may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities Act
is available. The Exchange Notes are being offered hereunder in order to satisfy
certain of the obligations of the Issuer under a registration rights agreement
relating to the Notes. See 'The Exchange Offer--Purpose of the Exchange Offer.'
The Issuer is making the Exchange Offer in reliance upon an interpretation by
the staff of the Securities and Exchange Commission set forth in a series of
no-action letters issued to third parties. See Exxon Capital Holdings Corp.
(available April 13, 1989), Morgan Stanley & Co. Incorporated (available June 5,
1991) and Shearman & Sterling (available July 2, 1993). Based on such
interpretation, the Issuer believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than any such holder that is
an 'affiliate' of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business, such holder has no arrangement with
any person to participate in the distribution of such Exchange Notes and neither
such holder nor any such other person is engaging in or intends to engage in a
distribution of such Exchange Notes. However, the Issuer has not sought, and
does not intend to seek, its own no-action letter, and there can be no assurance
that the staff of the Securities and Exchange Commission would make a similar
determination with respect to the Exchange Offer. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal relating to the Exchange Offer
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an 'underwriter' within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Notes where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. Each broker-dealer that received Notes from the Issuer in the
offering of the Notes and not as a result of market-making or other trading
activities, in the absence of an exemption, must comply with the registration
requirements of the Securities Act. The Issuer will, for a period of 180 days
after the Expiration Date (as defined herein), make copies of this Prospectus
available to any broker-dealer for use in connection with any such resale. See
'Plan of Distribution.'
The Notes are designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ('PORTAL') market. The Exchange Notes
constitute securities for which there is no established trading market. Any
Notes not tendered and accepted in the Exchange Offer will remain outstanding.
The Issuer does not currently intend to list the Exchange Notes on any
securities exchange. To the extent that any Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Notes could be
adversely affected. No assurance can be given as to the liquidity of the trading
market for either the Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Notes being tendered for exchange. The date of acceptance and exchange
of the Notes (the 'Exchange Date') will be the first business day following the
Expiration Date. Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. The Issuer will pay all expenses
incident to the Exchange Offer. The Issuer will not receive any proceeds from
the Exchange Offer.
2
<PAGE>
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the 'Registration
Statement') under the Securities Act with respect to the Exchange Notes being
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Issuer and the Exchange
Notes, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and, where such contract or other document is an exhibit
to the Registration Statement, each such statement is qualified in all respects
by the provisions in such exhibit, to which reference is hereby made. Copies of
the Registration Statement may be examined without charge at the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and the Commission's Regional Offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any portion of the Registration Statement can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain fees prescribed by the Commission. The
Registration Statement has been and will be filed through the Electronic Data
Gathering, Analysis and Retrieval ('EDGAR') system. Electronic registration
statements filed through the EDGAR system are publicly available through the
Commission's Web Site (http://www.sec.gov).
The Issuer is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'). Upon
completion of the Exchange Offer, the Issuer will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file periodic reports and other information with the Commision at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of any material so filed can be
obtained from the Public Reference Section of the Commission, upon payment of
certain fees prescribed by the Commission. In addition, pursuant to the
Indenture covering the Notes and the Exchange Notes, the Issuer has agreed to
file with the Commission and provide to the Noteholders the annual reports and
the information, documents and other reports otherwise required pursuant to
Section 13 of the Exchange Act.
------------------
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes 'forward-looking statements.' All statements other
than statements of historical facts included in this Prospectus, including,
without limitation, the statements under 'Summary--The Company,' and
'--Business Strategy,' 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' and 'Business--Company Overview,' '--The
Funeral Service and Cemetery Industry,' '--Business Strategy,' '-- Environmental
Matters,' '--Employees,' and '--Litigation,' and 'Management--Compensation of
Executive Officers,' and located elsewhere herein regarding the Company's
financial position, plans to increase revenues, reduce general and
administrative expense and take advantage of synergies and regarding other
future events or future prospects of the Company, are forward-looking
statements. Although Management 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 Management's expectations ('Cautionary
Statements') are disclosed in this Prospectus, including, without limitation, in
conjunction with the forward-looking statements included in this Prospectus and
under 'Risk Factors.' All subsequent written and oral forward-looking statements
attributable to the Issuer or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
3
<PAGE>
SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references to the
'Company' shall mean, collectively, the Issuer and its subsidiaries and, prior
to the Acquisition Transaction, the Mortuary, the Cemetery and the Satellite
Properties. All references to the 'Acquisition Transaction' shall mean the
collective reference to the Acquisition and the related uses of proceeds, the
capitalization of the Company as described herein, including the contribution to
the Company of the Satellite Properties, the initial borrowing by the Company
under the Bank Credit Facilities and the offering of the Notes. All references
to 'Management' shall mean the new management of the Company following the
Acquisition Transaction.
THE COMPANY
The Issuer was formed to acquire Rose Hills, which is the largest single
location cemetery and funeral home combination in the United States. As a result
of the acquisition of Rose Hills and the Satellite Properties, which was
consummated on November 19, 1996, the Company owns a strategic assembly of
cemeteries and funeral homes in the greater Los Angeles area that, in addition
to Rose Hills, includes a group of 14 surrounding funeral homes and two cemetery
and funeral home combination properties located in Los Angeles, San Bernardino
and northern Orange Counties. Rose Hills is situated less than 14 miles from
downtown Los Angeles on approximately 1,418 acres of permitted cemetery land
near Whittier, California. The Cemetery and Mortuary have been continuously
operating since 1914 and 1956, respectively.
In 1996, the Cemetery sold approximately 9,600 pre-need and 1,300 at-need
cemetery grave sites and performed approximately 9,000 interments.* In 1996, the
Mortuary performed approximately 5,500 funeral calls and sold approximately
3,300 funeral services on a pre-need basis. Since its founding, Rose Hills has
performed more than 300,000 interments at the Cemetery, and has the capacity to
provide more than one million additional interments (without taking into account
measures that might be undertaken to increase capacity). The Satellite
Properties, which were acquired by Loewen between 1990 and 1995, were
contributed to the Company as part of the Acquisition Transaction. In 1996, the
Satellite Properties performed approximately 3,800 funeral calls and 500
interments. For a discussion of the funeral service industry, see 'Business--The
Funeral Service Industry.'
Since the Acquisition Transaction, the Company has been managed by a single
management team which includes certain members of the previous management of
Rose Hills, a newly hired senior sales executive with over 25 years of
experience in the industry and a new Chief Financial Officer with 19 years of
finance and accounting experience.
Management believes that the integration of the Satellite Properties with
Rose Hills effected through the Acquisition Transaction will enable the Company
to take advantage of the benefits of 'hub and spoke clustering,' including
opportunities to share personnel, vehicles and other key resources, and
implement revenue enhancing cross-marketing programs. In addition, the Company
intends to leverage Rose Hills' outstanding reputation in the region by using
the Rose Hills name at many of the Satellite Properties. Management also expects
to generate significant additional cost-savings through the implementation of an
administrative services agreement with Loewen (the 'Administrative Services
Agreement').
- ------------------
* The services offered by funeral homes and cemeteries can be purchased at the
time of death ('at-need') or in advance through a prearranged contract
('pre-need'). Generally, the pre-need sale of cemetery property and
merchandise is financed on an installment basis according to credit terms
offered by the Cemetery. Pre-need sales of funeral services, on the other
hand, are generally financed using an insurance policy purchased by the
customer at the time the arrangements are made, which names the funeral home
as the beneficiary.
4
<PAGE>
BUSINESS STRATEGY
Management believes that, when measured by such factors as tradition,
heritage, reputation, physical size, volume of business, name recognition,
aesthetics and potential for development or expansion, Rose Hills is one of the
country's premier cemetery and funeral home facilities. Management's strategy is
to build market share, enhance revenue and maximize profitability by leveraging
these qualities with the additional opportunities made available by the
clustering of the Satellite Properties. The principal components of the
Company's growth strategy consist of the following: (i) continue Rose Hills'
tradition of providing high quality funeral and cemetery services; (ii)
significantly enlarge Rose Hills' commission-based cemetery pre-need sales force
and implement programs to increase revenues per pre-need sale; (iii) introduce a
focused effort to provide existing pre-need Cemetery customers an opportunity to
purchase additional and/or improved merchandise and services; (iv) increase
funeral market share through the integration of and cross-marketing with the
Satellite Properties; (v) capitalize on the clustering advantages available
through the integration of the Satellite Properties; (vi) reallocate the assets
of the Cemetery's endowment care fund from equities to fixed income securities
in order to increase the income from such fund available to be paid to the
Company; and (vii) implement other profit enhancing measures, including the use
of Loewen's proven merchandising and cost reduction programs through the
Administrative Services Agreement.
THE ACQUISITION TRANSACTION
The Notes were sold by the Issuer to finance, in part, the Issuer's
Acquisition of Rose Hills. In addition to the sale of the Notes, the principal
components of the Acquisition Transaction, which was consummated on November 19,
1996, included the following:
o The contribution by Blackstone, Loewen and RHI Management Direct L.P., a
Delaware limited partnership ('RHIMD') to Rose Hills Holdings Corp., the
Issuer's parent company ('RH Holdings'), in exchange for all the equity
of RH Holdings, and by RH Holdings to the Company, of $106.6 million in
cash ($107.0 million less $0.4 million to be advanced by the Company to
RHIMD to finance its purchase of common stock of RH Holdings).
o The contribution by Loewen to RH Holdings of the Satellite Properties,
which were valued at $23.0 million and which were in turn contributed to
the Company.
o The acquisition by a subsidiary of the Issuer of the Mortuary in
consideration of the payment of approximately $59.9 million in cash,
after giving effect to the payment of outstanding indebtedness carried by
the Mortuary at closing.
o The acquisition by a subsidiary of the Issuer of the Cemetery in
consideration of the payment of approximately $166.3 million in cash
(including repayment of approximately $1.0 million of certain outstanding
intercompany indebtedness owed by the Mortuary to the Cemetery).
o The establishment of new senior secured credit facilities (the 'Bank
Credit Facilities') between the Issuer and a syndicate of financial
institutions (the 'Bank Lenders'), with Goldman Sachs Credit Partners
L.P. ('GSCP'), an affiliate of Goldman, Sachs & Co. ('Goldman Sachs'), as
arranging agent. The Bank Credit Facilities provided the Company with a
$75.0 million term loan facility (the 'Bank Term Facility'), the proceeds
of which were used to finance, in part, the Acquisition and related
transaction costs, to repay approximately $15.1 million of existing debt
of the Mortuary and to pre-fund approximately $0.5 million of
restructuring costs of the Company, and a $25.0 million revolving credit
facility (the 'Revolving Credit Facility'), the proceeds of which are
available for general corporate purposes. RH Holdings and each of the
Issuer's subsidiaries (collectively, the 'Bank Guarantors') have
guaranteed (the 'Bank Guarantees') all obligations of the Issuer under
the Bank Credit Facilities. The Bank Credit Facilities and the Bank
Guarantees are secured by substantially all of the assets of the Issuer
and the Bank Guarantors (including the real property at Rose Hills but
excluding other real property and certificates of title on vehicles),
100% of the capital stock of the Issuer and each of the Issuer's
subsidiaries and all intercompany receivables.
See 'Certain Related Transactions--Acquisition Transaction' and
'Description of Credit Facilities.'
5
<PAGE>
The following table sets forth a summary of the sources and uses of funds
and other capital contributions associated with the Acquisition Transaction:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES:
Bank Term Facility........................................... $ 75.0
Senior Subordinated Notes.................................... 80.0
Blackstone/Loewen Contribution............................... 129.6
Existing cash................................................ 0.2
-------------
Total..................................................... $ 284.8
-------------
-------------
USES:
Payment for the Mortuary..................................... $ 59.9
Repayment of existing indebtedness (other than intercompany
indebtedness) of the Mortuary............................. 15.1
Payment for the Cemetery (including repayment of certain
intercompany indebtedness)................................ 166.3
Pre-funding of certain restructuring expenses of the
Company................................................... 0.5
Receipt of Satellite Properties.............................. 23.0
Payment of fees and expenses related to the Acquisition
Transaction............................................... 20.0
-------------
$ 284.8
-------------
-------------
</TABLE>
See 'Certain Related Transactions--Acquisition Transaction.'
PUT/CALL AND OTHER ARRANGEMENTS
Pursuant to an agreement (the 'Put/Call Agreement') executed by Blackstone,
The Loewen Group Inc. ('LWN') and Loewen Group International Inc. ('LGII') in
connection with the Acquisition Transaction, (i) LGII has a call option,
exercisable from and after the fourth anniversary of the closing date of the
Acquisition Transaction (the 'Acquisition Closing Date') until but excluding the
sixth anniversary of the Acquisition Closing Date, to purchase the shares of
common stock of RH Holdings held by Blackstone and (ii) Blackstone has a put
option, exercisable from and after the sixth anniversary of the Acquisition
Closing Date until but excluding the eighth anniversary of the Acquisition
Closing Date, to sell such shares of common stock of RH Holdings held by
Blackstone to LGII. The option price in either case is derived from a formula
based on income (loss) before interest, taxes, depreciation, and amortization.
In addition, pursuant to the terms of a shareholders' agreement entered into by
Blackstone, LWN and LGII, neither Blackstone nor LGII is permitted to transfer
its shares without the prior written consent of the other party, subject to
certain exceptions. See 'Certain Related Transactions.'
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer...... The Issuer is offering to exchange pursuant to the
Exchange Offer up to $80,000,000 aggregate principal
amount of its new 9 1/2% Senior Subordinated Notes due
2004 (the 'Exchange Notes'), for $80,000,000 aggregate
principal amount of its outstanding 9 1/2% Senior
Subordinated Notes due 2004 (the 'Notes'). The Notes
were issued and sold on November 19, 1996, in
transactions not registered under the Securities Act,
to Smith Barney Inc. (the 'Initial Purchaser'), in
reliance upon the exemption provided in Section 4(2) of
the Securities Act. The terms of the Exchange Notes are
identical in all material respects (including principal
amount, interest rate and maturity) to the terms of the
Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are
freely transferable by holders thereof (other than as
provided herein), and are not subject to any covenant
regarding registration under the Securities Act. See
'The Exchange Offer--Terms of the Exchange' and
'--Terms and Conditions of the Letter of Transmittal'
and 'Description of Exchange Notes.'
Interest Payments....... Interest on the Exchange Notes shall accrue from the
last Interest Payment Date (May 15 or November 15) on
which interest was paid on the Notes so surrendered or,
if no interest has been paid on such Notes, from
November 19, 1996.
Minimum Condition....... The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Notes being tendered for
exchange.
Expiration Date......... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless extended
(the 'Expiration Date'). Any Note not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer.
Exchange Date........... The date of acceptance for exchange of the Notes will
be the first business day following the Expiration
Date.
Conditions of the
Exchange Offer........ The Issuer's obligation to consummate the Exchange
Offer will be subject to certain conditions. See 'The
Exchange Offer--Conditions to the Exchange Offer.'
The Issuer reserves the right to terminate or amend
the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
Withdrawal Rights....... The tender of Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date.
Procedures for Tendering
Notes................. See 'The Exchange Offer--Tender Procedure.'
Federal Income Tax
Consequences.......... The exchange of Notes for Exchange Notes will not be
a taxable exchange for federal income tax purposes.
See 'United States Federal Income Tax Consequences.'
Effect on Holders of
Notes................. As a result of the making of, and upon acceptance
or exchange of all validly tendered Notes pursuant
to the terms of, this Exchange Offer, the Issuer
will have fulfilled a covenant contained in the
Registration Rights Agreement (the 'Registration
Rights Agreement') dated as of November 15, 1996
between the Issuer and the Initial Purchaser and,
accordingly, there will be no increase in the interest
rate on the Notes pursuant to the terms of the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Registration Rights Agreement, and the holders of the
Notes will have no further registration or other rights
under the Registration Rights Agreement. Holders of the
Notes who do not tender their Notes in the Exchange
Offer will continue to hold such Notes and will be
entitled to all the rights and subject to all the
limitations applicable thereto (including the
restrictions on transfer thereof) under the Indenture,
dated as of November 15, 1996, between the Issuer and
United States Trust Company of New York, as Trustee,
relating to the Notes and the Exchange Notes (the
'Indenture'), except for any such rights under the
Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a
result of the making of, and the acceptance for
exchange of all validly tendered Notes pursuant to, the
Exchange Offer. Except for the restrictions on
registrations and transfers, all untendered Notes and
the Exchange Notes will be treated as one class of
securities for purposes of the covenants and the other
terms contained in the Indenture.
Use of Proceeds......... There will be no cash proceeds to the Issuer from the
exchange pursuant to the Exchange Offer.
Exchange Agent.......... United States Trust Company of New York is serving as
Exchange Agent in connection with the Exchange Offer.
</TABLE>
8
<PAGE>
TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Issuer.................. Rose Hills Company (formerly known as Rose Hills
Acquisition Corp.).
Notes Offered........... $80 million principal amount of 9 1/2% Senior
Subordinated Notes due 2004.
Maturity Date........... November 15, 2004.
Interest Payment
Dates................. May 15 and November 15 of each year, commencing May 15,
1997.
Ranking................. The Exchange Notes will be unsecured senior
subordinated obligations of the Issuer, will be
subordinated in right of payment to all existing and
future Senior Indebtedness (as defined herein) of the
Issuer (which includes all indebtedness of the Issuer
under the Bank Credit Facilities) and effectively
subordinated to all existing and future liabilities of
its subsidiaries and will rank senior in right of
payment to all other subordinated indebtedness of the
Issuer ('Senior Indebtedness'). The Issuer had $74.5
million of Senior Indebtedness outstanding as of June
30, 1997, and its subsidiaries had $30.4 million of
liabilities outstanding as of that date. The Company
had no subordinated indebtedness outstanding as of that
date and had no firm arrangements to issue any
significant subordinated indebtedness as of that date.
The Exchange Notes will be effectively subordinated to
all existing liabilities of the Issuer and its
subsidiaries, which totalled $104.9 million in the
aggregate as of June 30, 1997. See 'Description of
Exchange Notes--Subordination.' The Indenture does not
generally limit the ability of the Issuer to secure
Senior Indebtedness subject to certain requirements
with respect to the amount of additional Indebtedness
that may be incurred by the Issuer and/or any of its
Subsidiaries. See 'Description of Exchange
Notes--Certain Covenants--Limitation on Indebtedness.'
Optional Redemption..... The Exchange Notes will be redeemable at the option of
the Issuer, in whole or in part, at any time on or
after November 15, 2000 at a premium declining to par
in 2003, plus accrued and unpaid interest, if any, to
the redemption date. See 'Description of Exchange
Notes--Redemption--Optional Redemption.'
The Issuer has established a sinking fund for the
benefit of the Exchange Notes.
Change of Control....... In the event of a Change of Control (as defined
herein), the Issuer will be obligated to make an offer
to purchase the then outstanding Exchange Notes at a
purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to
the purchase date. The Issuer's ability to purchase the
Exchange Notes if a Change of Control occurs will be
dependent upon obtaining third-party financing to the
extent it does not have available funds to meet its
purchase obligations. There can be no assurance that
the Issuer will be able to obtain such financing. The
term 'Change of Control' is limited to certain
specified transactions (which do not include the
purchase by Loewen of the shares of RH Holdings held by
Blackstone) and may not include other events that might
adversely affect the financial condition of the Issuer
or result in a
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
downgrade of the credit rating of the Exchange Notes.
Pursuant to the Bank Credit Facilities, the Company
would be required to satisfy its obligations thereunder
prior to its purchase of the Exchange Notes upon a
Change of Control in accordance with the Indenture. As
of June 30, 1997, the aggregate amount of the Company's
indebtedness under the Bank Credit Facilities was $74.5
million. See 'Description of Exchange Notes--Certain
Covenants--Change of Control.'
Certain Covenants....... The Indenture contains certain covenants by the Issuer
and its Subsidiaries (as defined herein), including,
but not limited to, covenants with respect to
limitations on the following matters: (i) the
incurrence of additional indebtedness, (ii) certain
payments, including dividends and investments, (iii)
the creation of liens, (iv) sales of assets and
preferred stock, (v) transactions with interested
persons, (vi) payment restrictions affecting
subsidiaries, (vii) sale-leaseback transactions and
(viii) mergers and consolidations. See 'Description of
Exchange Notes--Certain Covenants.' In addition, the
Bank Credit Agreement (as defined herein) contains
certain covenants that, among other things, restrict
the ability of the Issuer 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. See 'Description of Bank Credit
Facilities.' Immediately after giving effect to the
Acquisition Transaction, the Company was in material
compliance with all financial and operating covenants
contained in the Indenture and the Bank Credit
Agreement.
Absence of a Public
Market for the
Exchange Notes........ The Exchange Notes are new securities, and there is
currently no established market for the Exchange Notes.
The Exchange Notes will generally be freely
transferable (subject to the restrictions discussed
elsewhere herein) but will be new securities for which
there will not initially be a market. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the Exchange Notes. The
Initial Purchaser has advised the Issuer that it
currently intends to make a market in the Exchange
Notes. However, the Initial Purchaser is not obligated
to do so, and any market making with respect to the
Exchange Notes may be discontinued at any time without
notice. The Issuer does not intend to apply for a
listing of the Exchange Notes on a securities exchange.
</TABLE>
RISK FACTORS
Holders of Notes should consider carefully the information set forth in
this Prospectus and, in particular, should evaluate the specific factors set
forth under 'Risk Factors' before tendering Notes in exchange for Exchange
Notes.
10
<PAGE>
SUMMARY PRO FORMA AND OTHER FINANCIAL INFORMATION
The following table presents the unaudited pro forma statement of
operations and other unaudited financial information for the Company for the
year ended December 31, 1996 and gives effect to the following transactions as
if they had occurred on January 1, 1996: (i) the Acquisition; (ii) the
contribution to the Company of the Satellite Properties; (iii) the termination
of certain contractual arrangements; (iv) new contractual arrangements between
the Company, Management, Blackstone and Loewen; (v) the change in status of the
Cemetery from a not-for-profit association to a taxable entity; and (vi) the
sale of the Notes, the borrowing under the Bank Term Facility and the
application of the net proceeds therefrom. The adjustments, which are based upon
available information and upon certain assumptions that Management believes are
reasonable, are described in the notes accompanying 'Unaudited Pro Forma
Financial Information.' The pro forma financial information should be read in
conjunction with 'Unaudited Pro Forma Financial Information,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements, including the notes thereto, and the
other financial information included elsewhere in this Prospectus.
The pro forma financial information is not necessarily indicative of either
future results of operations or the results that might have occurred if the
foregoing transactions had been consummated on the indicated dates.
11
<PAGE>
SUMMARY PRO FORMA AND OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
---------------
(IN MILLIONS)
<S> <C>
PRO FORMA INCOME STATEMENT DATA:
Revenues:
Funeral sales and services................................ $ 29.3
Cemetery sales and services............................... 25.0
Other..................................................... 5.2
-------
59.5
-------
Cost of sales:
Funeral sales and services................................ 12.6
Cemetery sales and services............................... 6.5
-------
19.1
-------
Selling, general and administrative expenses................. 34.9
Amortization of goodwill and other intangibles............... 3.2
-------
Operating income............................................. 2.3
-------
Other income and expense:
Interest expense.......................................... 16.1
Interest income........................................... (0.5)
-------
15.6
-------
Loss before taxes............................................ (13.3)
Income tax benefit........................................... (3.8)
-------
Net loss..................................................... $ (9.5)
-------
-------
PRO FORMA OTHER FINANCIAL DATA AND RATIOS:
Cash flows from(1):
Operating activities...................................... $ 10.6
Investing activities...................................... (251.3)
Financing activities...................................... 247.4
Capital expenditures......................................... (11.1)
Depreciation and amortization(2)............................. 7.1
Cash interest expense(3)..................................... 14.4
Ratio of earnings to fixed charges(4)........................ --
OTHER FINANCIAL INFORMATION:
EBITDA(5).................................................... $ 14.4
Ratio of EBITDA to cash interest expense..................... 1.0x
Adjusted EBITDA(6)........................................... 19.0
Ratio of adjusted EBITDA to cash interest expense............ 1.3x
</TABLE>
- ------------------
(1) Pro forma cash flows from operating activities reflect the impact of the pro
forma adjustments on net income, depreciation and amortization. Pro forma
cash flows from investing activities are assumed to be unchanged from the
historic cash flows. Pro forma cash flows from financing activities reflect
the cash flows relating to the Acquisition and the offering of the Notes
which are assumed to occur as of the Acquisition Closing Date.
(Footnotes continued on next page)
12
<PAGE>
(Footnotes continued from previous page)
(2) The amount does not include amortization of deferred financing costs, which
are included in interest expense.
(3) Cash interest expense is defined as interest expense less amortization of
deferred financing costs.
(4) Earnings used in computing the ratio of earnings to fixed charges consist of
loss before provision for income taxes plus fixed charges. Fixed charges
consist of interest expense, including amortization of debt issuance costs,
and a portion of operating lease rental expense deemed to be representative
of the interest factor. Earnings were insufficient to cover fixed charges in
the year ended December 31, 1996 by $13.3 million.
(5) EBITDA is defined as income (loss) before income taxes plus interest
expense, depreciation and amortization, the non-cash portion of cemetery
cost of sales and certain reductions of selling, general and administrative
expenses and other intercompany expenses which are expected to have an
ongoing impact. EBITDA is presented because Management believes that EBITDA
provides relevant and useful information and it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation, as a substitute for
net income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Also, this measure of EBITDA may not be comparable to similar
measures reported by other companies.
The calculation of EBITDA is shown below:
YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN MILLIONS)
Loss before taxes.......................................... $ (13.3)
Net interest............................................... 15.6
Depreciation............................................... 3.9
Amortization............................................... 3.2
Noncash portion of cemetery cost of sales.................. 1.1
Net reduction in selling, general and administrative
expenses................................................. 2.0
Elimination of intercompany expense........................ 1.9
-------
$ 14.4
-------
-------
The net reduction in selling, general and administrative expenses results
from new contractual arrangements involving Rose Hills, Blackstone and
Loewen (see Note D to 'Unaudited Pro Forma Statements of Operations'). The
elimination of intercompany expense pertains to certain intercompany
expenses between the Mortuary and the Cemetery (see Note B to 'Unaudited Pro
Forma Statements of Operations').
(6) Adjusted EBITDA is defined as EBITDA plus (i) the revenue impact of a change
in the investment strategy of the endowment care fund (the 'Fund'), which
the Company expects to increase from $1.8 million actually generated in 1996
to $3.4 million on an illustrative basis and (ii) non-recurring
transaction-related expenses for legal, accounting and investment banking
services which amounted to $3.0 million for the year ended December 31, 1996
(See 'Unaudited Pro Forma Financial Information').
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
THE MORTUARY AND THE COMPANY
The following table sets forth certain selected historical consolidated
financial data for the Mortuary and the Company as successor by merger to the
Mortuary (i) for and at the end of each of the years in the four-year period
ended December 31, 1995, (ii) the period from January 1, 1996 to November 18,
1996, (iii) the period from November 19, 1996 to December 31, 1996 and (iv) for
the three months ended March 31, 1996 and March 31, 1997. The selected
historical financial data for the four years ended December 31, 1995 and for the
period from January 1, 1996 to November 18, 1996 were derived from the
Mortuary's financial statements for the two years ended December 31, 1995 and
the period from January 1, 1996 to November 18, 1996. The selected historical
financial data for the period from November 19, 1996 to December 31, 1996 were
derived from the Company's financial statements for the period from November 19,
1996 to December 31, 1996. Such financial statements, with the exception of the
financial statements for the two years ended December 31, 1993 which are
unaudited, have been audited by Arthur Andersen LLP, independent public
accountants, as of and for the two years ended December 31, 1995 and audited by
KPMG Peat Marwick LLP, independent certified public accountants, as of and for
the periods from January 1, 1996 to November 18, 1996 and November 19, 1996 to
December 31, 1996 as indicated in their respective reports included elsewhere
herein. The selected historical financial data for the three months ended March
31, 1996 were derived from the unaudited financial statements for the Mortuary
and Cemetery and the selected historical financial data for the three months
ended March 31, 1997 were derived from the unaudited financial statements for
the Company which in both cases, in the opinion of Management, include all
adjustments (consisting only of usual recurring adjustments) necessary for a
fair presentation of the data. The results for the three months ended March 31,
1997 are not necessarily indicative of the results for the full fiscal year.
The following table should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Company', '--The Mortuary' and the Consolidated Financial Statements of the
Mortuary and the Company, including the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THE MORTUARY THE COMPANY
------------------------------------------------ ----------------------------------------
(SUCCESSOR)
(PREDECESSOR) FOR THE
PERIOD FROM PERIOD FROM THREE MONTHS
JANUARY 1, NOVEMBER 19, ENDED
FOR THE YEAR ENDED DECEMBER 31, 1996 TO 1996 TO MARCH 31,
-------------------------------- NOVEMBER 18, DECEMBER 31, ------------------------
1992 1993 1994 1995 1996 1996 1996(4) 1997
----- ----- ----- ----- ------------ ------------ ----------- ---------
(IN MILLIONS) (COMBINED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................... $19.6 $20.1 $22.1 $22.4 $ 20.4 $ 7.0 $11.8 $ 17.8
Cost of sales.................... 5.6 5.6 6.0 6.0 5.5 1.6 2.8 3.8
Selling, general and
administrative expenses........ 9.9 10.4 10.7 11.2 14.1 3.8 7.4 8.1
Amortization of goodwill and
other intangibles.............. 1.8 1.2 1.2 0.5 0.1 0.4 -- 1.1
----- ----- ----- ----- ------ ------------ ----------- ---------
Operating income................. 2.3 2.9 4.2 4.7 0.7 1.2 1.6 4.8
----- ----- ----- ----- ------ ------------ ----------- ---------
Other expense.................... 2.4 2.1 2.0 2.4 1.1 1.9 0.3 3.8
----- ----- ----- ----- ------ ------------ ----------- ---------
Income (loss) before income
taxes.......................... (0.1) 0.8 2.2 2.3 (0.4) (0.7) 1.3 1.0
Income tax expense (benefit)..... -- -- -- 1.1 0.6 (0.2) 0.6 0.5
----- ----- ----- ----- ------ ------------ ----------- ---------
Net income (loss)................ $(0.1) $ 0.8 $ 2.2 $ 1.2 $ (1.0) $ (0.5) $ 0.7 $ 0.5
----- ----- ----- ----- ------ ------------ ----------- ---------
----- ----- ----- ----- ------ ------------ ----------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
THE MORTUARY THE COMPANY
------------------------------------------------ ----------------------------------------
(PREDECESSOR) (SUCCESSOR)
FOR THE
PERIOD FROM PERIOD FROM THREE MONTHS
JANUARY 1, NOVEMBER 19, ENDED
FOR THE YEAR ENDED DECEMBER 31, 1996 TO 1996 TO MARCH 31,
-------------------------------- NOVEMBER 18, DECEMBER 31, ------------------------
1992 1993 1994 1995 1996 1996 1996(4) 1997
----- ----- ----- ----- ------------ ------------ ----------- ---------
(IN MILLIONS) (COMBINED)
OTHER FINANCIAL DATA AND RATIOS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA(1)........................ 5.0 5.0 6.4 6.3 1.9 2.4 2.5 7.4
Cash flows from:
Operating activities........... 6.7 1.4 4.6 2.9 3.7 5.1 2.4 0.8
Investing activities........... (1.1) (0.9) (0.7) (0.4) (0.1) (246.6) (3.1) (0.6)
Financing activities........... (5.0) (0.8) (4.9) (2.1) (4.0) 249.4 (0.7) (0.1)
Ratio of earnings to fixed
charges(2)..................... -- 1.4x 2.1x 2.0x -- -- 4.3x 1.3x
BALANCE SHEET DATA:
Total assets..................... $28.2 $28.4 $27.8 $26.6 $ 20.1 $ 317.8 $72.7 $ 318.0
Total debt(3).................... 13.0 11.0 22.0 19.5 15.1 75.0 19.6 75.0
Shareholders' equity
(deficiency)................... 1.8 2.0 (5.1) (3.9) (3.9) 129.0 37.6 129.5
</TABLE>
- ------------------
(1) EBITDA is defined as income (loss) before income taxes plus interest
expense, depreciation and amortization. EBITDA is presented because
Management believes that EBITDA provides relevant and useful information and
it is a widely accepted financial indicator of a company's ability to incur
and service debt. However, EBITDA should not be considered in isolation, as
a substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Also, this measure of EBITDA may not be
comparable to similar measures reported by other companies.
(2) Earnings used in computing the ratio of earnings to fixed charges consist of
income (loss) before provision for income taxes plus fixed charges. Fixed
charges consist of interest expense, including amortization of debt issuance
costs, and a portion of operating lease rental expense deemed to be
representative of the interest factor. Earnings were insufficient to cover
fixed charges in the year ended December 31, 1992, the period from January
1, 1996 to November 18, 1996 and the period from November 19, 1996 to
December 31, 1996 by $0.1 million, $0.4 million, and $0.7 million,
respectively.
(3) Total debt is defined as funded debt comprising bank borrowings.
(4) Comparative financial information as of and for the three months ended March
31, 1996 has been included on a historical basis for the predecessor
Mortuary and Cemetery and are not comparable. Such combined financial data
for the predecessor operations have been included solely to facilitate a
discussion of operations from period to period. Such presentation of the
1996 data is pro forma in that generally accepted accounting principles
would not allow such combination due to the lack of common ownership of the
predecessor operations. The operations of the Satellite Properties for 1996
have been omitted from the presentation on the basis of immateriality.
15
<PAGE>
THE CEMETERY
The following table sets forth certain selected historical combined
financial data with respect to the Cemetery for and at the end of each of the
years in the four-year period ended December 31, 1995 and the period from
January 1, 1996 to November 18, 1996. The selected historical financial data for
the four years ended December 31, 1995 and for the period from January 1, 1996
to November 18, 1996. were derived from the Cemetery's combined financial
statements for the two years ended December 31, 1995 and for the period from
January 1, 1996 to November 18, 1996, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, and the combined
financial statements for the two years ended December 31, 1993.
The following table should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Mortuary and the Cemetery--The Cemetery' and the Combined Financial Statements
of the Cemetery, including the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
FOR THE YEAR ENDED DECEMBER 31, 1996 TO
-------------------------------- NOVEMBER 18,
1992 1993 1994 1995 1996
----- ----- ----- ----- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............................. $22.1 $21.6 $22.3 $24.7 $ 22.0
Cost of sales......................... 5.1 5.3 4.8 4.4 3.9
Selling, general and administrative
expenses............................ 17.4 17.9 18.6 18.3 16.0
Amortization of goodwill and other
intangibles......................... (0.8) (0.8) (2.0) (0.3) --
----- ----- ----- ----- ------
Operating income (loss)............... 0.4 (0.8) 0.9 2.3 2.1
----- ----- ----- ----- ------
Other (income) and expense............ (1.2) (1.0) (0.5) 0.1 --
----- ----- ----- ----- ------
Income before income taxes............ 1.6 0.2 1.4 2.2 2.1
Income tax expense.................... -- 0.3 1.2 -- --
----- ----- ----- ----- ------
Net income (loss)..................... $ 1.6 $(0.1) $ 0.2 $ 2.2 $ 2.1
----- ----- ----- ----- ------
----- ----- ----- ----- ------
OTHER FINANCIAL DATA AND RATIOS:
EBITDA(1)............................. 2.4 1.1 2.7 4.7 4.3
Cash flows from:
Operating activities................ (8.3) 5.7 1.0 (0.7) 3.7
Investing activities................ 1.6 (1.5) (4.7) (4.1) (2.6)
Financing activities................ 6.0 (4.8) 6.2 (0.1) 0.3
Ratio of earnings to fixed
charges(2).......................... 4.2x -- 8.0x 12.0x 22.0x
<CAPTION>
AS AT DECEMBER 31, AS AT
-------------------------------- NOVEMBER 18,
1992 1993 1994 1995 1996
----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $46.6 $47.3 $45.1 $50.5 $ 57.8
Total debt(3)......................... -- -- -- -- --
Net assets............................ 36.9 38.8 36.6 43.8 51.0
</TABLE>
- ------------------
(1) EBITDA is defined as income (loss) before income taxes plus interest
expense, depreciation and amortization and the non-cash portion of cemetery
cost of sales. EBITDA is presented because Management believes that EBITDA
provides relevant and useful information and it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation, as a substitute for
net income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Also, this measure of EBITDA may not be comparable to similar
measures reported by other companies.
(2) Earnings used in computing the ratio of earnings to fixed charges consist of
income (loss) before provision for income taxes plus fixed charges. Fixed
charges consist of interest expense and a portion of operating lease rental
expense deemed to be representative of the interest factor.
(3) Total debt is defined as funded debt comprising bank borrowings.
16
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, holders of Notes
should consider carefully the following factors before tendering their Notes for
Exchange Notes offered hereby. The risk factors set forth below are generally
applicable to the Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Issuer has incurred substantial indebtedness in connection with the
Acquisition Transaction and is highly leveraged. At June 30, 1997, the Issuer's
total indebtedness was $158.8 million, its debt to total capitalization ratio
was 55.0% and the Company had consolidated liabilities (including indebtedness)
of approximately $184.9 million. In the ordinary course of business, the Company
has incurred and, subject to certain covenants and financial tests set out in
the Bank Credit Agreement (as defined herein) and the Indenture, will continue
to incur additional indebtedness to fund working capital requirements and for
other corporate purposes, including to finance acquisitions. See
'Capitalization,' 'Description of Bank Credit Facilities,' 'Description of
Exchange Notes' and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus.
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including: (i) the Company's
ability to obtain financing in the future for working capital or other purposes
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness; (iii) the indebtedness outstanding under the Bank Credit
Facilities is secured and will mature prior to the maturity of the Exchange
Notes; (iv) certain of the Company's borrowings are at variable rates of
interest, which could result in higher interest expense in the event of
increases in interest rates; and (v) the Company's high degree of leverage makes
it more vulnerable to economic downturns and may limit its ability to withstand
competitive pressures.
The Company believes that, based upon current levels of operations and
anticipated growth and availability under the Revolving Credit Facility, it will
be able to meet its principal and interest payment obligations. There can be no
assurance, however, that the Company's business will generate sufficient cash
flow from operations or that future working capital borrowings will be available
in an amount sufficient to enable the Company to service its indebtedness,
including the Exchange Notes. If the Company cannot generate sufficient cash
flow from operations or borrow under the Revolving Credit Facility to meet such
obligations, then 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 (as defined herein).
There can be no assurance that such actions could be effected or would be
effective in allowing the Company to meet such obligations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources.'
EXCHANGE NOTES REPRESENT UNSECURED, SUBORDINATED CLAIMS; NO LIMITATION ON
ADDITIONAL INDEBTEDNESS
The Exchange Notes will be unsecured obligations of the Issuer that are
subordinated in right of payment to all Senior Indebtedness of the Issuer,
including all indebtedness under the Bank Credit Facilities. As of June 30,
1997, approximately $74.5 million of Senior Indebtedness was outstanding and the
Issuer had borrowing availability of approximately $25.0 million under the
Revolving Credit Facility. The Indenture and the Bank Credit Facilities permit
the Company to incur additional Senior Indebtedness, provided that certain
conditions are met, and the Company expects from time to time to incur
additional Senior Indebtedness. Furthermore, the Indenture does not limit the
Issuer's ability to secure additional or replacement Senior Indebtedness. In the
event of the insolvency, liquidation, reorganization, dissolution or other
winding up of the Issuer or upon a default in payment with respect to, or the
acceleration of, or if a judicial proceeding is pending with respect to any
default under, any Senior Indebtedness, the Bank Lenders and any other creditors
who are holders of Senior Indebtedness must be paid in full before a holder of
the Exchange Notes may be paid. Accordingly, there may be insufficient assets
remaining after such payments to pay principal or interest on the Exchange
Notes. See 'Description of Exchange Notes--Subordination.' In addition, the
Exchange Notes will be structurally subordinated to any liabilities or
obligations of the Issuer's subsidiaries as described below under '--Holding
Company Structure.'
17
<PAGE>
The Issuer's obligations under the Bank Credit Facilities are secured by
substantially all of the assets of the Issuer and its subsidiaries. If a default
occurs under the Bank Credit Agreement and the Issuer is unable to repay such
borrowings, the Bank Lenders would have the right to exercise the remedies
available to secured creditors under applicable law and pursuant to the Bank
Credit Agreement. Accordingly, the Bank Lenders would be entitled to payment in
full out of the assets securing such indebtedness prior to payment to holders of
the Exchange Notes. If the Bank Lenders or the holders of any other secured
indebtedness were to foreclose on the collateral securing the Issuer's
obligations to them, it is possible that there would be insufficient assets
remaining after satisfaction in full of all such indebtedness to satisfy in full
the claims of holders of the Exchange Notes.
RESTRICTIVE DEBT COVENANTS; CONSEQUENCES OF FAILURE TO COMPLY WITH DEBT
COVENANTS
The Bank Credit Agreement and the Indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness, pay dividends, prepay
subordinated indebtedness (including, in the case of the Bank Credit Agreement,
the Exchange Notes), enter into sale and leaseback transactions, create liens,
make capital expenditures and make certain investments or acquisitions and
otherwise restrict corporate activities. In addition, under the Bank Credit
Agreement, the Company is required to satisfy specified financial ratios and
tests, including, without limitation, minimum fixed charge coverage, minimum
interest coverage, minimum net worth, maximum senior debt leverage and maximum
total debt leverage tests. The ability of the Company to comply with such
provisions may be affected by events beyond the Company's control. To the extent
that the Company does not achieve the pro forma estimates with respect to its
operations, it may not be in compliance with certain of the covenants included
in the Bank Credit Agreement. See 'Unaudited Pro Forma Financial Information.'
The breach of any of these covenants could result in a default under the Bank
Credit Agreement. See 'Description of Bank Credit Facilities.' In the event of
any such default, depending upon the actions taken by the Lenders, the Company
could be prohibited from making any payments of principal or interest on the
Exchange Notes. See 'Description of Exchange Notes-- Subordination.' In
addition, the Bank Lenders could elect to declare all amounts borrowed under the
Bank Credit Facilities, together with accrued interest, to be due and payable or
could proceed against the collateral securing such indebtedness.
POTENTIAL ADVERSE CONSEQUENCES IN IMPLEMENTING BUSINESS STRATEGY
The Company's business strategy involves a number of elements which
Management may not be able to implement successfully. For example, the enactment
of price increases may result in a reduction in market share, and the
implementation of staff reductions intended to decrease general and
administrative expenses may lead to low morale and the further loss of
personnel. The strategic integration of the Satellite Properties with Rose Hills
may not result in the increase in market share hoped for, and efforts to sell
additional pre-need services and merchandise to Rose Hills' existing customer
base may not be successful. The implementation of the Administrative Services
Agreement and the clustering of Rose Hills and the Satellite Properties may
encounter operational difficulties such that the expected savings are not
realized. There can be no assurance that these adverse consequences will not
occur and, if they occur, there can be no assurance that they will not result in
a material adverse effect on the Company's results of operations.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES TO SERVICE INDEBTEDNESS;
EXCHANGE NOTES SUBORDINATED TO SUBSIDIARY LIABILITIES
The Issuer is a holding company with no significant independent business
operations. Accordingly, its primary sources of cash to meet debt service and
other obligations (including payments on the Exchange Notes) are dividends and
other payments from its subsidiaries. Consequently, obligations of the Issuer to
its creditors, including holders of the Exchange Notes, are effectively
subordinated in right of payment and junior to all liabilities (including trade
payables) of the Issuer's subsidiaries. The Bank Credit Facilities are
guaranteed by each of the Issuer's subsidiaries. As of June 30, 1997, the
aggregate amount of liabilities of the Issuer's subsidiaries (excluding
intercompany indebtedness) was approximately $30.4 million.
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CONSEQUENCES OF FRAUDULENT TRANSFER
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Issuer, at the time it issued the Notes in exchange for which the Exchange Notes
will be issued, (a) incurred such indebtedness with the intent to hinder, delay
or defraud creditors, or (b)(i) received less than reasonably equivalent value
or fair consideration and (ii)(A) was insolvent at the time of such incurrence,
(B) was rendered insolvent by reason of such incurrence (and the application of
the proceeds thereof), (C) was engaged or was about to engage in a business or
transaction for which the assets remaining with the Issuer constituted
unreasonably small capital to carry on its business, or (D) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they mature, then, in each such case, a court of competent jurisdiction could
avoid, in whole or in part, the Exchange Notes or, in the alternative,
subordinate the Exchange Notes to existing and future indebtedness of the
Issuer. The measure of insolvency for purposes of the foregoing would likely
vary depending upon the law applied in such case. Generally, however, the Issuer
would be considered insolvent if the sum of its debts, including contingent
liabilities, were greater than all of its assets at a fair valuation, or if the
present fair saleable value of its assets were less than the amount that would
be required to pay the probable liabilities on its existing debts, including
contingent liabilities, as such debts became absolute and matured. The Issuer
believes that, for purposes of the United States Bankruptcy Code and state
fraudulent transfer or conveyance laws, the Notes were issued without the intent
to hinder, delay or defraud creditors and for proper purposes and in good faith,
and that the Issuer received a reasonably equivalent value or fair consideration
therefor. In addition, the Issuer believes that it (i) is not and will not be
insolvent, (ii) has and will have sufficient capital for carrying on its
business and (iii) is and will be able to pay its debts as they mature. However,
there can be no assurance that a court passing on such issues would agree with
the determination of the Issuer.
In rendering their opinions in connection with the offering of the Notes,
counsel for the Issuer and counsel for the Initial Purchaser did not express any
opinion as to the applicability of federal or state fraudulent transfer laws.
CONTROL BY BLACKSTONE; POSSIBLE FUTURE CONTROL BY LOEWEN; POTENTIAL CONFLICTS OF
INTEREST
Blackstone owns, on a fully diluted basis, approximately 80% of the issued
and outstanding common stock of RH Holdings, which in turn owns 100% of the
issued and outstanding common stock of the Issuer. Accordingly, Blackstone,
subject to certain exceptions described in the Shareholders' Agreement (as
defined herein), effectively exercises control over the election of a majority
of the Issuer's directors, the appointment of its management and decisions
concerning any action requiring the approval of the Issuer's shareholders,
including adopting amendments to the Issuer's Certificate of Incorporation and
approving mergers or sales of substantially all of the Issuer's assets. There
can be no assurance that the interests of Blackstone will not conflict with the
interests of holders of the Exchange Notes. Loewen may acquire control of RH
Holdings after the fourth anniversary of the Acquisition Closing Date pursuant
to an option contained in the Put/Call Agreement. There can be no assurance that
such option will be exercised or, if Loewen does acquire control of RH Holdings,
that its interests will not conflict with the interests of the holders of the
Exchange Notes. See 'Principal Shareholders' and 'Certain Related
Transactions--Put/Call Arrangement.'
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Notes. The Notes
were offered and sold in November 1996 to a small number of institutional
investors and are eligible for trading in the National Association of Securities
Dealers, Inc.'s PORTAL market.
There is currently no established market for the Exchange Notes and there
can be no assurance that a public market will develop or, if such a market
develops, as to the liquidity of such market, nor can there be any assurance as
to the ability of the holders of the Exchange Notes to sell their Exchange Notes
or the price at which such holders would be able to sell their Exchange Notes.
The Exchange Notes will not be listed on any securities exchange. If the
Exchange Notes are traded after their initial issuance, they may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, the performance
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of the Company and other factors. Although there is currently no market for the
Exchange Notes, the Initial Purchaser has advised the Company that it intends to
make a market in the Exchange Notes after consummation of the Exchange Offer, as
permitted by applicable laws and regulations; however, the Initial Purchaser is
not obligated to do so and any such market-making activity may be discontinued
at any time without notice.
USE OF PROCEEDS
There will be no cash proceeds to the Company resulting from the Exchange
Offer. The net proceeds from the offering of the Notes were used, together with
the proceeds of the Bank Term Facility and the cash contributions by Blackstone
and Loewen, as follows: (i) approximately $166.3 million was used to acquire the
Cemetery (including repayment of approximately $1.0 million of certain
outstanding intercompany indebtedness owed by the Mortuary to the Cemetery),
(ii) approximately $59.9 million was used to acquire the Mortuary, (iii)
approximately $15.1 million was used to repay outstanding indebtedness of the
Mortuary owed to Wells Fargo Bank, N.A., (iv) approximately $0.5 million was
used to pre-fund certain restructuring costs of the Company; and (v)
approximately $20.0 million was used to pay other fees and expenses related to
the Acquisition Transaction. See 'Summary--The Acquisition Transaction,'
'Capitalization' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources'.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Notes were originally issued and sold on November 19, 1996. The offer
and sale of the Notes was not required to be registered under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
In connection with the sale of the Notes, the Issuer agreed to use its best
efforts to cause to be filed with the Commission a registration statement
relating to an exchange offer pursuant to which new senior subordinated notes of
the Issuer covered by such registration statement and containing terms
indentical in all material respects to the terms of the Notes would be offered
in exchange for Notes tendered at the option of the holders thereof, or, if
applicable interpretations of the staff of the Commission did not permit the
Issuer to effect such an Exchange Offer, the Issuer agreed to file a shelf
registration statement covering resales of the Notes (the 'Shelf Registration
Statement') and use its best efforts to have such Shelf Registration Statement
become effective under the Securities Act and to keep effective the Shelf
Registration Statement for 180 days after the effective date thereof or such
shorter period ending when all Notes covered by the Shelf Registration Statement
have been sold pursuant to the Shelf Registration Statement.
The purpose of the Exchange Offer is to fulfill certain of the Issuer's
obligations under the Registration Rights Agreement. Except as otherwise
expressly set forth herein, this Prospectus may not be used by any holder of the
Notes or any holder of the Exchange Notes to satisfy the registration and
prospectus delivery requirements under the Securities Act that may apply in
connection with any resale of such Notes or Exchange Notes. See '-- Terms of the
Exchange.'
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See 'Plan of Distribution.'
TERMS OF THE EXCHANGE
The Issuer hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of Notes.
The terms of the Exchange Notes are identical in all material respects to the
terms of the Notes for which they may be exchanged pursuant to this Exchange
Offer, except that the Exchange Notes will generally be freely transferable by
holders thereof and will not be subject to any covenant regarding registration.
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The Exchange Notes will evidence the same indebtedness as the Notes and will be
entitled to the benefits of the Indenture. See 'Description of Exchange Notes.'
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Notes being tendered for exchange.
The Issuer has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Notes
may be offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties
(see Exxon Capital Holdings Corp. (available April 13, 1989), Morgan Stanley &
Co. Incorporated (available June 5, 1991) and Shearman & Sterling (available
July 2, 1993)), the Issuer believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Notes may be offered for resale, resold and
otherwise transferred by any holder of such Exchange Notes (other than any such
holder that is an 'affiliate' of the Issuer within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such holder nor any other such person is
engaging in or intends to engage in the distribution of such Exchange Notes.
Since the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. Any
holder who is an affiliate of the Company or who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes cannot
rely on such interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each holder must acknowledge that it has
no arrangement or understanding with any person to participate in the
distribution of Exchange Notes. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Notes, where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See '--Terms and Conditions of the
Letter of Transmittal' and 'Plan of Distribution.'
Interest on the Exchange Notes shall accrue from the last Interest Payment
Date on which interest was paid on the Notes so surrendered or, if no interest
has been paid on such Notes, from November 19, 1996.
Tendering holders of the Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Notes pursuant
to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer shall expire on the Expiration Date. The term
'Expiration Date' means 5:00 p.m., New York City time, on , 1997,
unless the Issuer in its sole discretion extends the period during which the
Exchange Offer is open, in which event the term 'Expiration Date' shall mean the
latest time and date on which the Exchange Offer, as so extended by the Company,
shall expire. The Issuer reserves the right to extend the Exchange Offer at any
time and from time to time by giving oral or written notice to United States
Trust Company of New York (the 'Exchange Agent') and by timely public
announcement communicated, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Notes previously tendered and not withdrawn
pursuant to the Exchange Offer will remain subject to the Exchange Offer.
The term 'Exchange Date' means the first business day following the
Expiration Date. The Issuer expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Notes if any of the events set
forth below under 'Conditions to the Exchange Offer' shall have occurred and
shall not have been waived by the Company and (ii) amend the terms of the
Exchange Offer in any manner which, in its good faith judgment, is advantageous
to the holders of the Notes, whether before or after any tender of the Notes.
Unless the
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Issuer terminates the Exchange Offer prior to 5:00 p.m., New York City time, on
the Expiration Date, the Issuer will exchange the Exchange Notes for the Notes
on the Exchange Date.
TENDER PROCEDURE
The tender to the Issuer of Notes by a holder thereof pursuant to one of
the procedures set forth below and the acceptance thereof by the Issuer will
constitute a binding agreement between such holder and the Issuer in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. This Prospectus, together with the Letter of Transmittal, will
first be sent out on or about , 1997, to all holders of Notes
known to the Issuer and the Exchange Agent.
A holder of Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Notes being tendered and any required signature guarantees and
any other documents required by the Letter of Transmittal, to the Exchange Agent
at its address set forth on the Letter of Transmittal on or prior to the
Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Notes are registered in the name of the signer of the Letter of
Transmittal and the Exchange Notes to be issued in exchange therefor are to be
issued (and any untendered Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
'book-entry transfer facility') whose name appears on a security listing as the
owner of Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Issuer and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a commercial bank or trust company located or
having an office, branch, agency or correspondent in the United States, or by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc. (any of the foregoing hereinafter
referred to as an 'Eligible Institution'). If the Exchange Notes and/or Notes
not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the Notes, the signature in
the Letter of Transmittal must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF NOTES AND ALL OTHER DOCUMENTS IS AT THE ELECTION
AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE OBTAINED, AND THE MAILING BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR
NOTES SHOULD BE SENT TO THE ISSUER.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility system may make book-entry
delivery of Notes by causing such book-entry transfer facility to transfer such
Notes into the Exchange Agent's account with respect to the Notes in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of Notes may be effected through book-entry transfer into the Exchange
Agent's accounts at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Notes to reach the Exchange Agent before the Expiration
Date or the procedure for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if the Exchange Agent has received at its office
listed on the Letter of Transmittal on or prior to the Expiration Date a letter,
telegram or facsimile transmission (receipt
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confirmed by telephone and an original delivered by guaranteed overnight
courier) from an Eligible Institution setting forth the name and address of the
tendering holder, the names in which the Notes are registered and, if possible,
the certificate numbers of the Notes to be tendered, and stating that the tender
is being made thereby and guaranteeing that three New York Stock Exchange
trading days after the date of execution of such letter, telegram or facsimile
transmission by the Eligible Institution, the Notes, in proper form for transfer
(or a confirmation of book-entry transfer of such Notes into the Exchange
Agent's account at the book-entry facility), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Notes being tendered by
the above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Notes (or a confirmation of book-entry transfer of such Notes
into the Exchange Agent's account at the book-entry transfer facility) is
received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) by an Eligible Institution will be made only against deposit of
the Letter of Transmittal (and any other required documents) and the tendered
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Notes will be determined
by the Issuer, whose determination will be final and binding. The Issuer
reserves the absolute right to reject any Notes not properly tendered or the
acceptance for exchange of which may, in the opinion of the Issuer's counsel, be
unlawful. The Issuer also reserves the absolute right to waive any of the
conditions of the Exchange Offer or any defect or irregularity in the tender of
any Notes. Unless waived, any defects or irregularities in connection with
tenders of Notes for exchange must be cured within such reasonable period of
time as the Company shall determine. None of the Issuer, the Exchange Agent or
any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. See 'Plan of Distribution.'
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the 'Transferor') exchanges,
assigns and transfers the Notes to the Issuer and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Notes and to acquire Exchange Notes issuable
upon the exchange of such tendered Notes, and that, when the same are accepted
for exchange, the Issuer will acquire good and unencumbered title to the
tendered Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Issuer to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Notes or transfer ownership of
such Notes on the account books maintained by a book-entry transfer facility.
The Transferor further agrees that acceptance of any tendered Notes by the
Issuer and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Issuer of certain of its obligations under the
Registration Rights Agreement. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every
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obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By tendering, each holder of Notes will represent to the Issuer that, among
other things, (i) such Holder is not an 'affiliate' of the Issuer within the
meaning of Rule 405 under the Securities Act, (ii) Exchange Notes to be acquired
by such holder of Notes in connection with the Exchange Offer are being acquired
by such holder in the ordinary course of business of such holder and (iii) such
holder has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes. If the holder is a broker-dealer that will
receive Exchange Notes for such holder's own account in exchange for Notes that
were acquired as a result of market-making activities or other trading
activities, such holder will be required to acknowledge in the Letter of
Transmittal that such holder will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, such holder will not be deemed to admit that it is an 'underwriter'
within the meaning of the Securities Act. See 'Plan of Distribution.' This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Issuer will,
for a period of 180 days after the Expiration Date, make copies of this
Prospectus available to any broker-dealer for use in connection with any such
resale.
WITHDRAWAL RIGHTS
Tenders of Notes pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the Letter of Transmittal, and with respect to a facsimile
transmission, must be confirmed by telephone and an original delivered by
guaranteed overnight delivery. Any such notice of withdrawal must specify the
person named in the Letter of Transmittal as having tendered Notes to be
withdrawn, the certificate numbers of Notes to be withdrawn, the principal
amount of Notes to be withdrawn, a statement that such holder is withdrawing his
election to have such Notes exchanged, and the name of the registered holder of
such Notes, and must be signed by the holder in the same manner as the original
signature on the Letter of Transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to the Issuer that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Notes promptly following receipt of notice of withdrawal. If Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Notes or otherwise comply
with the book-entry transfer procedure. All questions as to the validity of
notices of withdrawals, including time of receipt, will be determined by the
Issuer and such determination will be final and binding on all parties.
Any Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Notes which have been tendered
for exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Notes tendered by
book-entry transfer into the Exchange Agent's account at the book-entry transfer
facility pursuant to the book-entry transfer procedures described above, such
Notes will be credited to an account with such book-entry transfer facility
specified by the holder) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Notes may be
retendered by following one of the procedures described under '--Tender
Procedure' above, at any time on or prior to the Expiration Date.
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the satisfaction or waiver, prior to the Expiration Date, of all the
terms and conditions of the Exchange Offer, the acceptance for exchange of Notes
validly tendered and not withdrawn and issuance of the Exchange Notes will be
made on the Exchange Date. For the purposes of the Exchange Offer, the Issuer
shall be deemed to
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have accepted for exchange validly tendered Notes when, as and if the Issuer has
given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Notes for
the purposes of receiving Exchange Notes from the Issuer and causing the Notes
to be assigned, transferred and exchanged. Upon the terms and subject to the
conditions of the Exchange Offer, delivery of Exchange Notes to be issued in
exchange for accepted Notes will be made by the Exchange Agent promptly after
acceptance of the tendered Notes. Tendered Notes not accepted for exchange by
the Issuer will be returned without expense to the tendering holders promptly
following the Expiration Date or, if the Issuer terminated the Exchange Offer
prior to the Expiration Date, promptly after the Exchange Offer is so
terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Notes
in respect of any properly tendered Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News
Service), or, at its option, modify or otherwise amend the Exchange Offer, if
any of the following events occur:
(a) any law, rule or regulation or applicable interpretations of the
staff of the Commission which, in the good faith determination of the
Issuer, do not permit the Issuer to effect the Exchange Offer; or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Notes to be offered for resale, resold
and otherwise transferred by holders thereof (other than any such holder
that is an 'affiliate' of the Issuer within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Exchange Notes
are acquired in the ordinary course of such holders' business and such
holders have no arrangements with any person to participate in the
distribution of such Exchange Notes; or
(c) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Issuer to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(d) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Issuer that is or may be adverse to the Issuer, or the
Issuer shall have become aware of facts that have or may have adverse
significance with respect to the value of the Notes or the Exchange Notes;
which, in the reasonable judgment of the Issuer in any case, and regardless of
the circumstances (including any action by the Issuer) giving rise to any such
condition, makes it inadvisable to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such exchange.
The Issuer expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Notes upon the occurrence of any of the foregoing
conditions (which represent all of the material conditions to the acceptance by
the Issuer of properly tendered Notes). In addition, the Issuer may amend the
Exchange Offer at any time prior to the Expiration Date if any of the conditions
set forth above occur. Moreover, regardless of
25
<PAGE>
whether any of such conditions has occurred, the Issuer may amend the Exchange
Offer in any manner which, in its good faith judgment, is advantageous to
holders of the Notes.
The foregoing conditions are for the sole benefit of the Issuer and may be
waived by the Issuer, in whole or in part, in the reasonable judgment of the
Issuer. Any determination made by the Issuer concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
The Issuer is not aware of the existence of any of the foregoing events.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. Letters of Transmittal must be addressed to the
Exchange Agent at its address set forth on the Letter of Transmittal. United
States Trust Company of New York also acts as Trustee and Registrar (the
'Registrar') under the Indenture.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and related documents to the
beneficial owners of the Notes and in handling or forwarding tenders for their
customers.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Issuer. Neither the delivery
of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Notes in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Issuer may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Notes in
such jurisdiction. In any jurisdiction in which the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Issuer by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
TRANSFER TAXES
Holders who tender their Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Issuer to register Exchange Notes in the name of, or request that Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
EFFECTS OF TENDERING ON HOLDERS OF NOTES
Participation in the Exchange Offer is voluntary, and holders of Notes
should carefully consider whether to participate. Holders of the Notes are urged
to consult their financial and tax advisors in making their own decisions on
which action to take.
26
<PAGE>
As a result of the making of, and upon acceptance for exchange of all
validly tendered Notes pursuant to the terms of, this Exchange Offer, the Issuer
will have fulfilled certain covenants contained in the Registration Rights
Agreement. Holders of Notes who do not tender their Notes in the Exchange Offer
will continue to hold such Notes and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for such rights
under the Registration Rights Agreement that by their terms terminate or cease
to have further effectiveness as a result of the making of this Exchange Offer.
See 'Description of Exchange Notes.' All untendered Notes will continue to be
subject to the restrictions on transfer set forth in the Indenture. In general,
the Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Notes under the Securities Act.
To the extent that Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered Notes could be adversely affected.
The Issuer may in the future seek to acquire untendered Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuer has no present plan to acquire any Notes which are not
tendered in the Exchange Offer.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997. This table should be read in conjunction with 'Unaudited Pro Forma
Financial Information' and the Consolidated Financial Statements and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS AT
MARCH 31, 1997
-------------------
(IN MILLIONS)
<S> <C>
Bank Term Facility (1):
Current.................................... $ 1.0
Non-current................................ 74.0
Senior Subordinated Notes.................... 80.0
Other long term debt:
Current.................................... 0.7
Non-current................................ 3.9
-------
Total debt (2).......................... 159.6
Total shareholders' equity................... 129.5
-------
Total capitalization.................... $ 289.1
-------
-------
</TABLE>
- ------------------------
(1) The Company has the right under the Bank Credit Facilities to increase the
amount of the Bank Term Facility by $25.0 million if certain performance
criteria are met.
(2) The Company has the ability, subject to customary borrowing conditions, to
borrow up to $25.0 million for general corporate purposes pursuant to the
Revolving Credit Facility.
28
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following presents unaudited pro forma statements of operations for the
Company for the year ended December 31, 1996 and gives effect to the following
transactions as if they had occurred on January 1, 1996: (i) the Acquisition;
(ii) the contribution to the Issuer of the Satellite Properties; (iii) the
termination of certain contractual arrangements; (iv) new contractual
arrangements between the Company, Management, Blackstone and Loewen; (v) the
change in status of the Cemetery from a not-for-profit association to a taxable
entity; and (vi) the sale of the Notes, the borrowing under the Bank Term
Facility and the application of the net proceeds therefrom. The adjustments,
which are based upon available information and upon certain assumptions that
Management believes are reasonable, are described in the accompanying notes. The
pro forma financial information should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements and the accompanying notes thereto and the
other financial information included elsewhere in this Prospectus.
The Acquisition and the contribution of the Satellite Properties were
accounted for using the purchase method of accounting. The total purchase cost
was allocated to the tangible and intangible assets acquired and liabilities
assumed based on their respective fair values. The excess of purchase cost over
the historical basis of the net assets acquired has been allocated in the
accompanying pro forma financial information based upon appraisal estimates and
other valuation studies and certain assumptions that Management believes are
reasonable. The actual allocation is subject to the finalization of these
studies; however Management does not expect that the difference between the
preliminary and final allocations will have a material impact on the Company's
financial position or results of operations.
The pro forma financial information is not necessarily indicative of either
future results of operations or the results that might have occurred if the
foregoing transactions had been consummated on the indicated dates.
A pro forma balance sheet as of December 31, 1996 is not included since the
Acquisition occurred on November 18, 1996. Accordingly, the December 31, 1996
balance sheet of Rose Hills Company includes the events described in the first
paragraph above.
29
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
1/1-11/18 11/19-12/31
------------------------------ ----------------------
HISTORICAL (PREDECESSOR) HISTORICAL (SUCCESSOR)
------------------------------ ----------------------
SATELLITE ACQUISITION OTHER COMPANY
MORTUARY CEMETERY PROPERTIES ROSE HILLS COMPANY ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- ---------- ---------------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Funeral sales and
services........... $ 17.7 $ -- $8.5 $ 3.1 $ -- $ -- $29.3
Cemetery sales and
services........... -- 20.2 1.8 3.0 -- -- 25.0
Other................ 2.7 1.8(A) -- 0.9 -- (0.2)(B) 5.2
-------- -------- ----- ----- ----------- ----------- ---------
20.4 22.0 10.3 7.0 -- (0.2) 59.5
-------- -------- ----- ----- ----------- ----------- ---------
Cost of sales and
services:
Funeral sales and
services........... 5.5 -- 6.3 0.8 -- -- 12.6
Cemetery sales and
services........... -- 3.9 1.6 0.8 -- 0.2(C) 6.5
-------- -------- ----- ----- ----------- ----------- ---------
5.5 3.9 7.9 1.6 -- 0.2 19.1
-------- -------- ----- ----- ----------- ----------- ---------
Selling, general and
administrative
expenses............. 14.1 16.0 1.5 3.8 -- (0.5)(B,D) 34.9
Amortization of
goodwill and other
intangibles.......... 0.1 -- -- 0.4 2.7(E) -- 3.2
-------- -------- ----- ----- ----------- ----------- ---------
Operating income....... 0.7 2.1 0.9 1.2 (2.7) 0.1 2.3
-------- -------- ----- ----- ----------- ----------- ---------
Other income and
expense:
Interest expense..... 1.5 0.1 0.8 2.0 11.7(F) -- 16.1
Other income......... (0.4) (0.1) -- (0.1) -- 0.1(B) (0.5)
-------- -------- --- ----- ----------- ----------- ---------
1.1 -- 0.8 1.9 11.7 0.1 15.6
-------- -------- --- ----- ----------- ----------- ---------
Income (loss) before
taxes................ (0.4) 2.1 0.1 (0.7) (14.4) -- (13.3)
Income tax expense
(benefit)............ 0.6 -- 0.1 (0.2) -- (4.3)(G) (3.8)
-------- -------- --- ----- ----------- ----------- ---------
Net income (loss)...... $ (1.0) $ 2.1 $ -- $ (0.5) $ (14.4) $ 4.3 $(9.5)
-------- -------- --- ----- ----------- ----------- ---------
-------- -------- --- ----- ----------- ----------- ---------
</TABLE>
See Notes to Unaudited Pro Forma Financial Information
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
A) Other cemetery revenues principally relate to investment income on the
Endowment Care Fund. During 1996 the Association changed its investment strategy
from capital growth to current income. The impact of a 1.0% change in the
investment return over a full year, based on the Endowment Care Fund balance in
marketable securities of $54.4 million at December 31, 1996, is an increase or
decrease in investment income of $0.5 million before taxation.
B) Represents the elimination of intercompany balances and income between
the Mortuary and the Cemetery as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
--------------
(IN MILLIONS)
<S> <C>
Elimination of cemetery management fee:
Other revenue................................ $ (0.2)
-------
-------
Elimination of interest on intercompany notes:
Other income................................. 0.1
-------
-------
</TABLE>
Both historical and pro forma selling, general and administrative expenses
include a $1.9 million non-recurring charge in the period ended November 18,
1996 which represents the Mortuary's estimate of the adjustment required to
settle its intercompany accounts with the Cemetery pursuant to the terms of the
Settlement Agreement. As the terms of the settlement are not yet final, the
Cemetery did not record a corresponding gain. See Note 7 to the audited
financial statements of the Mortuary and Note 8 to the audited financial
statements of the Cemetery.
C) Represents the incremental non-cash cost of cemetery sales of grave
sites, crypts and niches based on preliminary appraisals and Management's final
evaluation of the fair value of cemetery property. See Note (J). Such final
allocation and the resulting effect on net income is not expected to differ
significantly from the pro forma amounts included herein.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
-----------------
(IN MILLIONS)
<S> <C>
Non-cash cost of grave sites, crypts and niches
sold:
Pro forma cost............................... $ 0.9
Less historical cost......................... (0.7)
-------
Net adjustment to cemetery cost of sales..... $ 0.2
-------
-------
</TABLE>
D) Represents the net reduction in selling, general and administrative
expenses resulting from (i) the termination of certain contractual arrangements
with executive management and between the Mortuary and the Cemetery, (ii) the
change in status of the Cemetery from a not-for-profit association to a taxable
entity and (iii) the application of purchase accounting adjustments.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
-----------------
(IN MILLIONS)
<S> <C>
Employee and trustee benefits plans(1)............ $ 1.2
Cemetery management fees(2)....................... 0.2
Real estate and personal property taxes(3)........ (0.9)
-------
Net reduction..................................... $ 0.5
-------
-------
</TABLE>
--------------------------
(1) Represents the effect of applying purchase accounting to historical
benefits plan expense after taking into account that certain plans
were terminated, frozen, or otherwise discontinued after the
Acquisition Closing Date in accordance with the terms of the
definitive agreements relating to the Acquisition. See 'Certain
Related Transactions--The Acquisition.'
(2) Represents the termination of fees payable to trustees and the
elimination of cemetery management fees charged by the Mortuary to
the Cemetery pursuant to the Operating and Management Agreement that
was terminated as of the Acquisition Closing Date. See
'Business--Company Overview.'
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
(3) Represents estimated incremental real estate and personal property
taxes that will be incurred as a result of the change in status of
the Cemetery from a not-for-profit association to a taxable entity.
The Unaudited Pro Forma Statements of Operations do not give effect to
certain additional cost savings resulting from new contractual arrangements
involving Rose Hills, Blackstone and Loewen.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
-----------------
(IN MILLIONS)
<S> <C>
Salaries and benefits(1).......................... $ 1.8
Overhead allocation(2)............................ 0.8
Administrative Services Agreement(3).............. (0.3)
Monitoring fee(4)................................. (0.3)
-------
Net reduction..................................... $ 2.0
-------
-------
</TABLE>
--------------------------
(1) Represents the reduction of executive/owner salaries and benefits
from historic levels to new contractual amounts and the reduction of
salaries and benefits related to specifically identified job
positions that were eliminated and replaced, in part, by the
Administrative Services Agreement that was entered into on the
Acquisition Closing Date. See 'Certain Related Transactions--
Administrative Services Agreement' and 'Management.'
(2) Represents the elimination of overhead charges allocated by Loewen
to the Satellite Properties that were replaced by the Administrative
Services Agreement. See 'Certain Related Transactions--
Administrative Services Agreement.'
(3) Represents base fees payable to Loewen pursuant to the
Administrative Services Agreement. See 'Certain Related
Transactions--Administrative Services Agreement.'
(4) Represents monitoring fees payable to an affiliate of Blackstone
pursuant to the Shareholder's Agreement that was entered into on the
Acquisition Closing Date. See 'Certain Related Transactions--Payment
of Certain Fees and Expenses.'
In addition, the Unaudited Pro Forma Statements of Operations do not reflect
certain additional cost savings expected to be achieved from the changes in
operating strategy described under 'Business Strategy Following Acquisition.'
Both historical and pro forma selling, general and administrative expenses
include non-recurring transaction-related expenses for legal, accounting and
investment banking services which amounted to $3.0 million for the year ended
December 31, 1996.
E) Represents the incremental amortization of goodwill resulting from the
preliminary allocation of the purchase cost.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
-----------------
(IN MILLIONS)
<S> <C>
Pro forma amortization:
Goodwill(1)..................................... $ 2.8
Covenants not to compete(2)..................... 0.2
Less historical amortization...................... (0.3)
-------
Net adjustment.................................... $ 2.7
-------
-------
</TABLE>
--------------------------
(1) Represents total pro forma goodwill amortization based upon goodwill
of $129.6 million and an amortization period of 40 years.
(2) Represents total pro forma amortization of covenants not to compete
based upon a capitalized valuation of $1.3 million and average term
of 5 years.
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
F) Interest expense based on the pro forma capitalization of the Company is
summarized in the table below.
<TABLE>
<CAPTION>
FOR THE PERIOD
1/1 - 11/18
-----------------
(IN MILLIONS)
<S> <C>
Notes(1).......................................... $ 6.6
Bank Term Facility(2)............................. 5.6
Commitment fees(3)................................ 0.1
Interest on covenants not to compete(4)........... 0.2
Less historical interest on debt repaid........... (2.0)
Less intercompany interest expense(5)............. (0.1)
--------
Increase in cash interest expense................. 10.4
Amortization of deferred financing costs(6)....... 1.4
Less historical amortization of deferred financing
costs........................................... (0.1)
--------
Total increase in interest expense................ $ 11.7
--------
--------
</TABLE>
--------------------------
(1) Based on 9.5% Senior Subordinated Notes.
(2) Pro forma average balances for the Bank Term Facility were
determined based on the scheduled maturities. The pro forma average
balance for the Bank Term Facility was $74.8 million for the year
ended December 31, 1996. Assumes an interest rate of 8.60%.
(3) Represents a commitment fee of 0.5% applied to the $25.0 million
unused portion of the Revolving Credit Facility. The pro forma
average balance drawn-down was nil.
(4) Represents interest at 10% on covenants not to compete.
(5) Represents the elimination of interest expense on intercompany notes
and the interest expense charged by Loewen to the Satellite
Properties.
(6) Deferred financing costs are amortized over the life of the related
debt, seven years for the Revolving Credit Facility and the Bank
Term Facility and eight years for the Notes.
A change of 0.125% in the interest rate shown above would change interest
expense on the Bank Credit Facilities by $81,800 for the year ended December 31,
1996.
G) Represents the adjustment required to record income taxes on the pro
forma results of operations assuming a 41% combined federal and state income tax
rate. Based on estimates of future taxable income, it is Management's opinion
that the realization of such tax benefits is more likely than not; however, no
assurance can be given as to the levels of taxable income in the future, if any.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE COMPANY
As a result of the acquisition transaction as described elsewhere herein,
the Company is the successor to the operations of the predecessor Mortuary,
Cemetery and the Satellite Properties. As of November 19, 1996, the Company's
assets and liabilities were adjusted to their estimated fair values under
purchase accounting. In addition, the Company entered into new financing
arrangements and changed its capital structure. Accordingly, financial position
and results of operations subsequent to November 18, 1996 are not comparable to
prior periods. Operations of the Company since November 18, 1996 reflect
increased depreciation, amortization, and interest expense. Accordingly,
comparative financial information as of and for the three months ended March 31,
1996 has been included on a historical basis for the predecessor Mortuary and
Cemetery and are not comparable. Such combined financial data for the
predecessor operations has been included solely to facilitate a discussion of
the operations from period to period. Such presentation of the 1996 data is pro
forma in that generally accepted accounting principles would not allow such
combination due to the lack of common ownership of the predecessor operations.
The operations of the Satellite Properties for 1996 have been omitted from the
presentation on the basis of immateriality.
QUARTER ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
Revenues for the quarter ended March 31, 1997 increased 50.1% to $17.8
million from $11.9 million for the quarter ended March 31, 1996. Approximately
half of the growth was attributed to the acquisition of the Satellite Properties
which contributed $3.2 million to the increase. The remainder of the increase
was attributed to a 59.6% increase in pre-need cemetery property sales and a
7.9% increase in funeral service revenues. Pre-need property sales increased due
to the expansion of products offered on pre-need contracts and the addition of
over 100 counselors to the sales force. Funeral service revenue increased due to
a price increase of approximately 17% for the average funeral call which was
partially offset by a decline in casket sales.
Gross margins from Cemetery sales increased slightly from 77.9% in the
quarter ended March 31, 1996 to 79.9% in the quarter ended March 31, 1997. The
increase was due to the increase in the percentage of higher margin pre-need
cemetery sales to total cemetery sales and services. Gross margins for funeral
services increased from 68.6% in the quarter ended March 31, 1996 to 73.7% in
the quarter ended March 31, 1997 due to the price increase.
Other revenues which include financing, commission, Endowment Care Fund
('ECF') and management fee income was approximately $1.4 million for each
period. A reduction in commission income from sales of pre-need funeral service
insurance contracts was offset by an increase of $.4 million in earnings from
the ECF. The decrease in commission income was due to a change in 1997 sales
focus which placed greater emphasis on sales of pre-need property and
merchandise contracts and less emphasis on the sale of pre-need funeral service
insurance contracts.
Selling, general and administrative expenses increased 10.3% from $7.4
million at March 31, 1996 to $8.1 million at March 31, 1997. The primary reason
for the increase was due to the additions to the sales force which resulted in a
net increase in salaries and commissions. As a percentage of net sales, selling,
general and administrative expense for the quarter ended March 31, 1997 declined
from 62.4% in the quarter ended March 31, 1996 to 45.8%. The decline is
attributed to the absorption of the Satellite Property operations within the
existing Company corporate infrastructure and additional leverage realized from
the increase in pre-need property sales.
Amortization and interest expense increased $1.1 million and $3.5 million,
respectively, for the quarter ended March 31, 1997 compared to March 31, 1996.
Amortization, which includes amortization of goodwill and covenants not to
compete, increased as a result of the Acquisition Transaction. Interest expense
increased due to borrowings incurred under the Company's Bank Credit Agreement
and issuance of Notes related to the Acquisition Transaction.
EBITDA increased to $7.4 million for the quarter ended March 31, 1997 from
$2.5 million for the quarter ended March 31, 1996. The increase was primarily a
result of (i) an increase in pre-need contract sales (ii) an increase in
leverage of existing corporate overhead and (iii) the addition of the Satellite
Properties.
34
<PAGE>
PERIOD FROM THE ACQUISITION TRANSACTION, NOVEMBER 19, 1996 THROUGH DECEMBER 31,
1996
Consolidated revenues and gross profits were approximately $7.0 million and
$5.4 million, respectively, for the period.
The Company reported a consolidated net loss of $0.5 million for the
period. The consolidated net loss included $2.0 million of interest expense on
borrowings outstanding under the Company's Bank Credit Agreement and Notes, and
approximately $0.4 of amortization of goodwill.
THE MORTUARY
GENERAL
In 1996, the Mortuary performed approximately 5,500 funeral calls and has a
current capacity to provide over 30 funeral services per day. The Mortuary
provides a complete range of funeral services, including collection of remains,
certification of death, embalming, sale of caskets and related merchandise, sale
of flowers, visitation facilities and transportation to place of services and to
burial site. All funeral arrangements provided to each of the Mortuary's
customers are delivered by experienced counselors with the assistance of a
centralized computer system.
The Mortuary began operations in 1956, when the Association recognized that
additional revenue opportunities existed in funeral services. The Mortuary was
spun off in 1976 as a taxable, for profit, wholly-owned subsidiary of the
Association. In 1990, the Association sold the Mortuary business to senior
management in a leveraged buyout transaction. During the period from 1990 until
the closing of the Acquisition Transaction, the Mortuary operated the Cemetery
pursuant to a management agreement between the Mortuary and the Association. In
conjunction with the sale of the Mortuary, the Cemetery entered into a covenant
not to compete which generated expense to the Mortuary (and income to the
Cemetery) through May 1995.
The Mortuary provides funeral services on both an at-need and pre-need
basis. Since 1987, all pre-need funeral services have been funded through the
sale by the Mortuary to its customers of a life insurance product provided by
ForeThought, a subsidiary of Hillenbrand Industries. Under the ForeThought Plan,
the Mortuary is named the beneficiary of the insurance policy but does not
recognize funeral service revenue related to the contracted services until such
services are provided, although it does recognize commission income upon the
sale of such policies. On the date of performance of the prearranged funeral
service, the Mortuary recognizes funeral service income and the proceeds
received under the policy are applied against the contract. Prior to 1987, the
Mortuary also offered trust-backed and debenture-backed pre-need products.
The following table sets forth certain historical income statement data as
a percentage of total sales of the Mortuary:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 18,
1994 1995 1996
----- ----- ------------
<S> <C> <C> <C>
Revenues...................................... 100.0% 100.0% 100.0%
Gross Profit.................................. 73.0% 73.2% 73.1%
Selling, General and Administrative Expense... 48.6% 50.1% 60.4%
Amortization.................................. 5.5% 2.3% 0.4%
Interest Expense.............................. 9.3% 10.8% 7.0%
</TABLE>
RESULTS OF OPERATIONS
As a result of the acquisition transaction described elsewhere herein, the
predecessor operations of the Mortuary are included through November 18, 1996.
For purposes of this discussion of predecessor operations the period ended
November 18, 1996 is being compared to the year ended December 31, 1995.
35
<PAGE>
THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996 COMPARED WITH THE YEAR
ENDED DECEMBER 31, 1995
Overall, revenues decreased 9.0% to $20.4 million primarily due to the
shortened 1996 reference period. Funeral service income during the period ended
November 18, 1996 exceeded that of the period ended December 31, 1995 while
casket and flower sales were lower. Funeral service income was higher due to a
routine increase in the average funeral call price and a 4% increase in case
count (through November 1996). Casket sales for the Mortuary in 1996 were lower
than in 1995 due to a shift in product mix to lower priced caskets as a
percentage of total casket sales. Funeral cost of sales as a percentage of sales
decreased by 4.5% while cost of sales of caskets as a percentage of sales
increased 1.8%. Overall gross profit margin decreased slightly for the period
ended November 18, 1996, while total gross profit decreased $1.5 million as a
result of decreased revenues.
Selling, and General and Administrative expense increased from 50.1% of
sales ($11.2 million) last year to 60.4% ($12.3 million) for the period,
primarily due to $2.1 million increase in professional services related to the
Acquisition Transaction. Amortization of goodwill and other intangibles for the
period decreased from last year as a result of a covenant not to compete
amortization charge which expired in 1995. A one time charge resulting from a
Settlement Agreement between the Association (predecessor owner of the Cemetery
assets) and the Mortuary reduced overall operating income by $1.9 million. The
settlement charge and increase in professional fees were the primary factors in
reducing operating income by $4.0 million or 86.1% from last year.
Net interest expense decreased $1.3 million from the prior year as a result
of lower average debt balances and lower interest rates in 1996 compared to
1995.
1995 COMPARED WITH 1994
1995 compared to 1994 revenues increased 1.4% to $22.4 million in 1995
from $22.1 million in 1994, primarily due to increased funeral service, casket
and flower revenues. The increased funeral revenues resulted from routine
service and casket price increases, which more than offset a 1.5% decrease in
funeral call volume. Cost of sales and services for the two respective periods,
although constant, decreased slightly as a percentage of sales reflecting
decreased funeral service margins offset by increased casket margins due to a
change in the product mix of caskets offered. As a result, gross profit margins
were essentially unchanged at approximately 73.0%. Gross profit rose from $16.1
million to $16.4 million primarily as a result of an increase in revenues.
Selling, general and administrative expense increased 4.7% to $11.2 million
in 1995 from $10.7 million in 1994, primarily due to an increase in personnel
expenses and pension costs, partially offset by decreases in advertising and
selling expenses and professional services. As a percentage of revenue, selling,
general and administrative expense increased from 48.4% to 50.0% during the
period from 1994 to 1995. The expiration of the covenant not to compete during
the first half of 1995 resulted in a $0.7 million reduction in amortization of
goodwill and other intangibles, as compared to the same period in 1994.
Operating income increased 11.9% to $4.7 million in 1995 from $4.2 million
in 1994. Net income decreased 45.5% to $1.2 million in 1995 from $2.2 million in
1994. The primary reasons for the decrease in net income relative to the
increase in income from operations were $1.1 million of income tax expense
following the Mortuary's restructuring in early 1995 and $0.4 million of
additional interest expense as a result of a higher average debt balance related
to that restructuring. Prior to the restructuring, the Mortuary was operated as
a limited partnership and had no entity tax charge.
THE CEMETERY
GENERAL
The Cemetery is the largest single location cemetery in the United States,
consisting of approximately 1,418 acres, 698 of which are developed cemetery
property and the remaining 720 of which have been permitted as cemetery
property. Since its founding in 1914, the Cemetery has performed over 300,000
interments, approximately 9,000 of which were performed in fiscal 1996. The
Cemetery provides a complete line of cemetery products, including a selection of
grave sites, crypts and niches (sold on both an at-need and pre-need basis) as
36
<PAGE>
well as vaults, memorials and burial and cremation services on an at-need basis.
The sale of pre-need property accounted for approximately 46% of the Cemetery's
revenues during the 1995 fiscal year.
Although the Cemetery is non-sectarian, in order to better serve its
diverse customer base it has developed many lawn areas for use by particular
ethnic, religious or fraternal organizations. The Cemetery also has nine
non-denominational chapels including the SkyRose Chapel, a newly constructed 350
seat chapel and mausoleum designed by award-winning architect Fay Jones, eight
additional mausoleums and a crematory. Construction has also commenced on a
pagoda-style columbarium and stupa garden which is expected to be completed
within thirteen months. In conjunction with the sale of the Mortuary in 1990,
the Cemetery entered into a covenant not to compete which generated income to
the Cemetery (and expense to the Mortuary) through May 1995.
The following table sets forth certain historical income statement data as
a percentage of total sales and services of the Cemetery:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 18,
1994 1995 1996
----- ----- ------------
<S> <C> <C> <C>
Total sales and services...................... 100.0% 100.0% 100.0%
Gross profit.................................. 75.7% 80.3% 79.6%
Selling, general and administrative
expenses.................................... 94.2% 82.8% 83.2%
Amortization.................................. 9.9% 1.2% 0.0%
Interest expense.............................. 0.8% 1.0% 0.5%
</TABLE>
RESULTS OF OPERATIONS
As a result of the acquisition transaction described elsewhere herein, the
predecessor operations of the Cemetery are included through November 18, 1996.
For purposes of this discussion of predecessor operations the period ended
November 18, 1996 is being compared to the year ended December 31, 1995.
THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996 COMPARED WITH THE YEAR
ENDED DECEMBER 31, 1995
Revenues (including cemetery sales and services, finance income, and
Endowment Care Fund income) decreased 11.2% from $22.0 million in 1995 to $19.1
million for the period ended November 18, 1996 compared to 1995. The primary
reason for the overall decline in sales was due to the shortened 1996 reference
period. Property sales decreased 16.2% from $13.0 million in 1995 to $10.9 in
the period ended November 18, 1996. In addition to the shortened period, other
factors affecting sales included a slower pace of group and premium sales. Other
cemetery sales and services, consisting of revenues relating to the opening and
closing of graves, and sales of markers and vaults decreased by 8.8% from $9.1
million in 1995 to $8.3 million in the 1996 period. The number of interments
through November 1996 was 1.8% higher than the comparable period in the prior
year. Earnings from the Endowment Care Fund and interest income earned from
financing contracts increased from $2.6 million in the prior full year to $2.8
million in the 1996 period due to a higher percentage of the the Fund's
portfolio having been invested in fixed income securities. The gross profit
margins of 79.6% for the 1996 period approximated the prior full year gross
margin.
Selling, and general and administrative expenses decreased to $16.0 million
in 1996 from $18.3 million in 1995. In addition to the shortened reference
period, the 13% reduction was also attributable to reduced personnel,
advertising, selling, and public relations expenses partially offset by a $0.4
million charge relating to the curtailment of pension plan. As a percentage of
sales and services, selling, and general and administrative expenses increased
from 82.8% to 83.2%.
Operating income of $2.1 million for the period ended November 18, 1996
approximated that of the year ended December 31, 1995. 1996 period net income of
$2.1 million approximates that of 1995.
1995 COMPARED WITH 1994
Revenues increased 9.4% to $24.7 million in 1995 from $22.3 million in
1994. Cemetery property revenue increased 18.2% from $11.0 million to $13.0
million. The increase in cemetery property sales resulted primarily from a
higher number of group and premium property sales as compared to 1994. Other
cemetery sales and services increased 3.4% from $8.8 million in 1994 to $9.1
million in 1995. Although the actual number of burials at the Cemetery declined
in 1995 relative to 1994, by approximately 3%, an increase in the prices of
cemetery
37
<PAGE>
services and commodities more than offset the reduction in the number of
burials. Cemetery property and other cemetery sales and services revenues
increased primarily as a result of a number of large group and premium sales and
routine price increases. Revenues from the Fund and interest income earned on
financed contracts remained constant from $2.6 million to $2.5 million. Fund
income decreased 6.1% primarily due to a higher percentage of the portfolio
being invested in equity securities at lower dividend yields than the fixed
income securities formerly held by the Fund. Gross profit margins increased from
75.7% in 1994 to 80.3% in 1995. Gross profit increased from $14.9 million to
$17.8 million in 1995 primarily as a result of an increase in revenues derived
from significant premium property sales.
Selling, general and administrative expenses decreased to $18.3 million in
1995 from $18.6 million in 1994, a decrease of 1.6%. The decrease was primarily
due to a non-recurring charge of approximately $0.9 million in 1994 related to a
writedown of property, plant and equipment. As a percentage of sales and
services, selling, general and administrative expense decreased to 82.8% in 1995
from 94.2% in 1994. The significant decrease in selling, general and
administrative expense as a percentage of revenues was due to a nonrecurring
charge, referred to above, in 1994 and higher revenue in 1995. The termination
of the covenant not to compete with the Mortuary in May 1995 resulted in a $1.7
million reduction in operating income from 1994 to 1995.
Operating income was $2.1 million in 1995, an increase of $3.2 million
compared with operating loss during 1994 of $1.1 million. As noted above, this
increase was primarily attributable to the increase in sales and gross profit in
1995 as well as the absence of the non-recurring charge incurred in 1994 being
partially offset by the loss of $1.7 million of covenant not to compete income.
A decrease of $0.6 million in other income and a decrease of $1.2 million in
income tax expense on income earned under the covenant not to compete resulted
in a net increase in 1995 income relative to 1994 of $2.0 million. Consequently,
net income increased to $2.3 million in 1995 compared to $0.2 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash for the Company is funds provided by operating
activities of the predecessor Cemetery, Mortuary and Satellite Properties and
the proceeds from long-term indebtedness. For the periods ended December 31,
1996 and March 31, 1997, operating activities generated $.2 million and $.8
million in cash, respectively. Cash from operating activities was reduced by
$2.0 million in interest expense for the period ended November 18, 1996 and $3.9
million for the period ended March 31, 1997.
The primary uses of cash will be principal payments on outstanding
long-term indebtedness and capital expenditures as permitted under the terms of
bank agreements. The Company estimates its current year capital expenditures of
approximately $3.0 million will be used primarily for the repair and improvement
of existing infrastructure and cemetery grounds, as well as the addition of
rolling stock.
As a result of the Acquisition Transaction and the application of proceeds
therefrom, the Company's total outstanding indebtedness approximately $160.0
million as of March 31, 1997. As of March 31, 1997, the Company also has $25.0
million of borrowing capacity available under the Revolving Credit Facility.
Management believes that, based upon current levels of operations and
anticipated growth and the availability under the Revolving Credit Facility, it
can adequately service its indebtedness. If the Company cannot generate
sufficient cash flow from operations or borrow under the Revolving Credit
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 and its Subsidiaries are subject to certain restrictive
covenants contained in the Indenture, including, but not limited to, covenants
imposing limitations on the incurrence of additional indebtedness; certain
payments, including dividends and investments; the creation of liens; sales of
assets and preferred stock; transactions with interested persons; payment
restrictions affecting subsidiaries; sale-leaseback transactions; and mergers
and consolidations. See 'Description of Exchange Notes--Certain Covenants.' In
addition, the Bank Credit Agreement contains 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. See 'Description of Bank Credit
Facilities--Covenants.'
38
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Issuer, a Delaware corporation, was formed in 1996 to acquire Rose
Hills, which is the largest single location cemetery and funeral home
combination in the United States. As a result of the Acquisition of Rose Hills
and the Satellite Properties, the Company owns a strategic assembly of
cemeteries and funeral homes in the greater Los Angeles area that, in addition
to Rose Hills, includes a group of 14 surrounding funeral homes and two cemetery
and funeral home combination properties located in Los Angeles, San Bernardino
and northern Orange Counties. Rose Hills is situated less than 14 miles from
downtown Los Angeles on approximately 1,418 acres of permitted cemetery land
near Whittier, California. The Cemetery and Mortuary have been continuously
operating since 1914 and 1956, respectively. During the period from 1990 until
the Acquisition Closing Date, the Cemetery and Mortuary functioned as separate
entities, with the Cemetery owned by a not-for-profit association and the
Mortuary owned by a closely held corporation controlled by previous management.
Pursuant to an Operation and Management Agreement (the 'Management
Agreement'), during the period commencing October 1989 until the Acquisition
Closing Date, the Mortuary operated and managed the Cemetery for the
Association. In connection with the Management Agreement, certain senior
officers of the Mortuary agreed to work exclusively for the Association. The
Association paid the Mortuary certain management and other incentive based fees
in payment for services provided by the Mortuary under the Management Agreement.
In 1996, the Cemetery sold approximately 9,600 pre-need and approximately
1,300 at-need cemetery grave sites and performed approximately 9,000 interments.
In 1996, the Mortuary performed approximately 5,500 funeral calls and sold
approximately 3,300 funeral services on a pre-need basis. Since its founding,
Rose Hills has performed more than 300,000 interments at the Cemetery, and has
the capacity for more than one million additional interments (without taking
into account measures that might be undertaken to increase capacity). The
Satellite Properties, which were acquired by Loewen between 1990 and 1995, were
contributed to the Company as part of the Acquisition Transaction. In 1996, the
Satellite Properties performed approximately 3,800 funeral calls and 500
interments. Since the Acquisition Transaction, the Company has been managed by a
single management team which includes certain members of the previous management
of Rose Hills, a newly hired senior sales executive with over 25 years of
experience in the industry and a new Chief Financial Officer with 19 years of
finance and accounting experience. The Company also benefits from the strength
of Loewen's management team through the Administrative Services Agreement.
Management believes that the integration of the Satellite Properties with
Rose Hills effected through the Acquisition Transaction will enable the Company
to take advantage of the benefits of 'hub and spoke clustering,' including
opportunities to share personnel, vehicles and other key resources, and
implement revenue enhancing cross-marketing programs. Management anticipates
that such an integration will create a group of funeral homes and cemeteries
capable of serving the majority of the greater Los Angeles metropolitan area, a
region with a population of more than 9.2 million. In addition, the Company
intends to leverage Rose Hills' outstanding reputation in the region by using
the Rose Hills name at many of the Satellite Properties. Management also expects
to generate significant additional cost-savings through the implementation of
the Administrative Services Agreement.
The principal executive offices of the Company are located at 3888 South
Workman Mill Road, Whittier, California 90601 and its telephone number is (562)
692-1212.
THE FUNERAL SERVICE AND CEMETERY INDUSTRY AND LOCAL CHARACTERISTICS
The funeral service and cemetery industry historically has been
characterized by low business risk compared with most other businesses.
According to the Business Failure Record published by The Dun & Bradstreet
Corporation, the average business failure rate in the United States in 1996 was
80 per 10,000. The 1996 failure rate of the funeral service and crematoria
industry was only 12 per 10,000, 85% lower than the average rate and among the
lowest of all industries. This low failure rate can be attributed to a number of
factors, including stable demand in the industry, positive demographic trends
and the low rate of new market entrants due to the length of time required to
establish community acceptance.
In the last 15 years, demand has grown steadily at a 1% compound annual
growth rate while the aggregate number of funeral homes has remained relatively
constant. Future demographic trends are expected to contribute
39
<PAGE>
to the continued stability of the funeral service industry. The first members of
the 'Baby Boom' generation began to turn 50 in 1996 and are advancing into the
prime savings and planning phases of their lives. The Census Bureau projects
that the segment of the United States population over 65 years old, which
presently totals 34 million, will more than double in size to over 73 million by
2035. Over the next 15 years, the aging of this population is expected to
outweigh the effects of increased life expectancies. The Census Bureau projects
that the number of deaths in the United States will grow at approximately 1%
annually through 2010.
A Wirthlin Group study conducted in 1995 concluded that the three most
important factors in selecting a funeral home are that it had previously served
the family, was close to the respondent's residence and had a strong reputation
in the community. Fewer than 5% of the respondents to the Wirthlin study
specified price as an important factor in selecting a funeral home. The
relationship between reputation and market share is an important competitive
advantage for existing funeral homes in that until a new market entrant is able
to establish the community reputation necessary to gain market share, existing
homes will retain considerable pricing flexibility.
The Company attracts customers from a geographic region encompassing
substantially all of Los Angeles County and the northern portion of Orange
County. According to statistics compiled by the State of California Department
of Health Services and the Census Bureau, the estimated population of Los
Angeles County was approximately 9.4 million people (3.1 million households) in
1996. Approximately 16.5% of this population was age 55 or older. The death rate
in Los Angeles County (approximately 62,000 in 1996) has demonstrated stability
from year to year over the last decade and the number of deaths is expected to
increase in step with the 1% annual projected population growth in Los Angeles
County over the next five years.
BUSINESS OPERATIONS
Mortuary Operations
In 1996, the Mortuary performed approximately 5,500 funeral calls and has a
current capacity to provide over 30 funeral services per day. The Mortuary
provides a complete range of funeral services, including collection of remains,
certification of death, embalming, sale of caskets and related merchandise, sale
of flowers, visitation facilities and transportation to place of services and to
burial site. All funeral arrangements provided to each of the Mortuary's
customers are provided by an experienced counselor with the assistance of a
centralized computer system.
The Mortuary began operations in 1956, when the Association recognized that
additional revenue opportunities existed in funeral operations. As the
division's success continued, the Mortuary was spun off in 1976 as a taxable,
for profit, wholly-owned subsidiary of the Association. In 1990, the Association
sold the Mortuary business to senior management in a leveraged buyout
transaction. During the period from October 1989 through the Acquisition Closing
Date, pursuant to the Management Agreement, the Mortuary also operated the
Cemetery.
The Mortuary provides funeral services on both an at-need and a pre-need
basis. Since 1987, all pre-need funeral services have been funded through the
sale by the Mortuary to its customers of a life insurance product called
ForeThought. Under the ForeThought Plan, the Mortuary is named the beneficiary
of the insurance policy but does not recognize funeral service revenue related
to the contracted services until such services are provided, although it does
recognize commission income upon the sale of such policies. On the date of
performance of the prearranged funeral service, the Mortuary recognizes funeral
service income and the proceeds received under the policy are applied against
the contract. Prior to 1987, the Mortuary also offered trust-backed and
debenture-backed pre-need products.
The Satellite Properties consist of 14 funeral homes and two combination
properties located in Los Angeles, San Bernardino and northern Orange Counties
which provide a wide variety of funeral services to various communities in such
counties. While the demographics of the population served by the Satellite
Properties, taken as a whole, are generally similar to that of Rose Hills'
clients, the smaller size and long-standing local reputations of the various
Satellite Properties have led each of such properties to develop a
demographically unique client base within its particular community. Therefore,
as a result of this extended cluster of funeral service providers as well as the
ability of particular Satellite Properties to meet special needs of local
communities, Management believes that the acquisition of the Satellite
Properties will permit the Company to access a base of mortuary clients that it
was previously unable to develop solely from its location near Whittier.
40
<PAGE>
Cemetery Operations
The Cemetery is the largest single location cemetery in the United States.
The Cemetery consists of approximately 1,418 acres, 401 of which have been
developed and sold, 297 of which are developed unsold cemetery property and the
remaining 720 of which have been permitted as cemetery property. Since its
founding in 1914, the Cemetery has performed over 300,000 interments, of which
approximately 9,000 were performed in 1996. The Cemetery provides a complete
line of cemetery products (including a selection of burial spaces, vaults,
crypts, memorials and niches) and burial and cremation services on both an
at-need and pre-need basis. The sale of pre-need property arrangements accounted
for approximately 52% of the Cemetery's total revenues during 1996.
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
in addition to its nine non-denominational chapels including the newly
constructed SkyRose Chapel, a 350 seat chapel and mausoleum designed by
architect Fay Jones, eight additional mausoleums and a crematory. In addition
the Company is cooperating with IBPS in developing a pagoda-style columbarium
and stupa gardens the completion of which should occur within thirteen months.
PROPERTIES
The property on which the Cemetery is located, and which the Company
acquired in the Acquisition, consists of approximately 1,418 acres, 401 of which
have been developed and sold as Cemetery properties, 297 of which are developed
unsold cemetery property and the remaining 720 of which have been permitted as
cemetery property. Also located on the grounds of Rose Hills are eight chapels
which seat over 1,100 people in the aggregate, eight mausoleums, 39 visitation
rooms, a crematory and a 43,460 square foot administrative building. In addition
to the above facilities the Company has recently completed the construction of
the SkyRose Chapel, a 26,490 square foot chapel and mausoleum facility and has
commenced construction pursuant to a development agreement with IBPS under which
the Company (i) granted IBPS the interment rights with respect to 4.5 acres of
Cemetery property and agreed to contribute to IBPS's development of a 16,000
square foot columbarium and surrounding stupa gardens and (ii) granted IBPS a
seven-year option to build a second columbarium on an adjacent 2.7 acre site. In
exchange for these rights, IBPS agreed to pay the Company approximately $1.4
million. IBPS paid $160,000 upon execution of the development agreement and will
pay 10% of the gross revenues received by IBPS from the sale of niches for seven
years, and any remaining balance will be paid on January 1, 2003. In addition,
IBPS will pay the Company $75 per lot on the first 5,000 cemetery lots sold and
$50 per lot thereafter.
In connection with the Acquisition, the Company was granted an option,
exercisable for a period of three years after the Acquisition Closing Date, to
purchase from the Association an additional 75 acres of permitted cemetery
property located in Los Angeles County, for an aggregate price of $18.2 million.
The Mortuary's facilities consist of 6.2 acres of land, a two-story, 74,000
(inclusive of relevant properties above) square foot mortuary and administrative
building, an adjacent flower shop and storage facilities.
The Satellite Properties, which were conveyed by Loewen to the Company in
the Acquisition Transaction, consist of the funeral homes and combination
properties located in the cities listed below.
<TABLE>
<CAPTION>
NAME LOCATION
- ------------------------------------------------- -----------------------------
<S> <C>
Custer Christiansen (five funeral homes) West Covina, Covina,
Glendora, LaPuente (two
locations)
White's Funeral Home Bellflower
Neels-Brea Funeral Home Brea
Dimond & Sons-Mettlor Chapel Garden Grove
Shannon-Donegan Chapel Orange
San Fernando Mortuary San Fernando
Glasband-Willen Mortuaries(1) West Hollywood
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME LOCATION
- ------------------------------------------------- -----------------------------
<S> <C>
Colton Funeral Chapel Colton
Grove Colonial Mortuary San Bernardino
Richardson-Peterson Mortuary Ontario
Harbor Lawn(2) Costa Mesa
Melrose Abbey (including Angels Lawn Cemetery)(3) Anaheim
</TABLE>
- ------------------
(1) 95% owned by the Company.
(2) Combination property located on 28 acres; includes a cemetery and crematory.
(3) Combination property located on 20 acres; includes a cemetery.
The facilities of ten of the Satellite Properties are owned by the Company
and the facilities of the remaining six Satellite Properties are leased by the
Company.
BUSINESS STRATEGY
Management believes that, when measured by such factors as tradition,
heritage, reputation, physical size, business volume, name recognition,
aesthetics and potential for development or expansion, Rose Hills is one of the
country's premier cemetery and funeral home facilities. Management's strategy is
to build market share, enhance revenue and maximize profitability by leveraging
these qualities with the additional opportunities made available by the
clustering of the Satellite Properties. The principal components of the
Company's growth strategy consist of the following: (i) continue Rose Hills'
tradition of providing high quality funeral and cemetery services; (ii)
significantly enlarge Rose Hills' commission-based cemetery pre-need sales force
and implement programs to increase revenues per pre-need sale; (iii) introduce a
focused effort to provide existing pre-need Cemetery customers an opportunity to
purchase additional and/or improved merchandise and services; (iv) increase
funeral market share through the integration of and cross-marketing with the
Satellite Properties; (v) capitalize on the clustering advantages available
through the integration of the Satellite Properties; (vi) reallocate the assets
of the Fund from equities to fixed income securities in order to increase the
income from such fund available to be paid to the Company; and (vii) implement
other profit enhancing measures, including the use of Loewen's proven
merchandising and cost reduction programs through the Administrative Services
Agreement.
CONTINUE ROSE HILLS' TRADITION OF QUALITY SERVICE: Rose Hills has served the
greater Los Angeles area since 1914 and has built a favorable reputation within
its surrounding communities. In 1996, Rose Hills performed approximately 9,000
interments, a volume equal to more than 14% of all deaths recorded in Los
Angeles County in 1996. Despite its already strong market position, Rose Hills
has continued to develop its infrastructure in order to improve its ability to
serve the diverse population of the greater Los Angeles area. For example,
construction of the SkyRose Chapel, a 350 seat chapel and mausoleum designed by
award-winning architect Fay Jones was officially opened on May 30, 1997.
Management intends to market use of the SkyRose Chapel to the upper-income
segment of its customer base and, in conjunction with this effort, is developing
premium burial lawns on approximately 15 acres immediately surrounding the
SkyRose Chapel. In addition the Company is cooperating with IBPS in developing a
pagoda-style columbarium and stupa gardens on Cemetery grounds. The columbarium
is expected to be the largest of its kind in the United States, and Management
believes the columbarium will significantly increase Rose Hills' appeal to the
large Asian population in the Los Angeles area.
EXPAND CEMETERY PRE-NEED SALES: Management believes that the Company can
realize significant near-term revenue growth through an increased emphasis on
the sale of Cemetery pre-need arrangements. Management also believes that
Cemetery pre-need sales not only secure additional Cemetery market share, but
also considerably enhance the long term revenue potential of its properties.
Management plans to increase revenues per pre-need sale through a combination of
selling Cemetery merchandise and services along with grave sites (prior to the
Acquisition, it was Rose Hills' policy to sell only grave sites on a pre-need
basis), expanding the range of higher margin product offerings and selectively
increasing prices to competitive levels. In addition, Management intends to
increase the volume of pre-need sales by expanding the Company's pre-need
cemetery salesforce from approximately 120 prior to the Acquisition to
approximately 140 persons.
Since joining Loewen in early 1995, Loewen's cemetery management team has
increased same-store revenue and gross margin at Loewen's cemeteries. Loewen
cemetery revenue and gross margin for the nine months ended September 30, 1996
in comparison to the nine months ended September 30, 1994, for locations in
42
<PAGE>
operation for all of the nine months ended September 30, 1996 and 1994,
increased by 50% and 122.3%, respectively. Management plans to employ a variety
of sales management techniques currently utilized at Loewen to enhance
salesforce productivity. Since the Acquisition, the Company has been managed by
a single management team which includes certain members of the previous
management of Rose Hills a newly hired senior sales executive with over 25 years
of experience in the industry and a new Chief Financial Officer with 19 years of
finance and accounting experience. The Company also benefits from the strength
of Loewen's cemetery management team through the Administrative Services
Agreement.
PROVIDE EXISTING CEMETERY PRE-NEED CUSTOMER BASE WITH ADDITIONAL BUYING
OPPORTUNITIES: Rose Hills has been marketing pre-need cemetery property since
1930 and currently has approximately 255,000 individual lots which have been
sold to customers on a pre-need basis but have not yet been utilized.
Historically, the Cemetery's pre-need focus has been almost exclusively on the
sale of grave sites, such as cemetery plots, niches or crypts. Management
estimates that approximately 85% of the Cemetery's pre-need customers have
completed payments on their grave sites but have not yet purchased pre-need
cemetery merchandise such as vaults or markers or interment services from Rose
Hills. As a result, Management believes that there is a significant opportunity
to provide existing pre-need Cemetery customers, who are already committed to
Rose Hills, with the opportunity to purchase such additional merchandise and
interment services on a pre-need basis. The Company will hire and train
approximately 30 salespersons (in addition to the increase of 20 salespersons
described above) who will focus on selling pre-need cemetery merchandise and
interment services to Rose Hills' existing Cemetery pre-need customer base.
INCREASE FUNERAL MARKET SHARE: Historically, the Cemetery has been competitive
over a broader geographic area than the Mortuary. While Management considers the
Cemetery to be very competitive within a 20 mile radius of the site, the
Mortuary's customer base is drawn primarily from within a 10 mile radius. The
Mortuary's narrower geographic reach reflects the different customer selection
criteria for funeral homes and cemeteries. Industry research indicates that
proximity is much more important in consumer selection of a funeral home than a
cemetery, and lack of proximity is a key reason given by Cemetery customers of
Rose Hills for selecting a funeral services provider other than the Mortuary.
Management intends to leverage Rose Hills' strong heritage and name recognition
by incorporating the Rose Hills name into certain of the Satellite Properties.
In addition, Management intends to utilize the existing Cemetery pre-need
customer base as a source of leads for the Satellite Properties' funeral
pre-need marketing efforts. Management believes that this strategic integration
of the Satellite Properties with Rose Hills will broaden the geographic scope of
the Company's funeral home operations and thereby increase the Company's ability
to capture the funeral business of Cemetery customers who do not live in close
proximity to Rose Hills but do reside in an area served by one of the Satellite
Properties.
In addition, Management believes that an increased emphasis on pre-need
sales of funeral services can enhance the Company's revenues and market share.
In 1996, the Mortuary performed approximately 5,500 funeral calls, which is
equal to approximately 60% of the approximately 9,000 interments performed at
the Cemetery, compared to an industry average of 80%. Enhanced pre-need selling
efforts for the Mortuary are designed to significantly improve the productivity
of its sales force and bring the 60% ratio closer to the industry average.
CAPITALIZE ON CLUSTERING OPPORTUNITIES: The proximity of the Satellite
Properties to Rose Hills will enable the facilities to create a 'cluster'
capable of sharing resources and facilities. The Company's new operating
structure is designed to maximize such sharing opportunities between the
Satellite Properties and Rose Hills. Operating as a cluster will enable many of
the Company's facilities to share vehicles, equipment and employees, to reduce
administrative expense, to centralize embalming, staffing and other services and
to pool inventories of caskets and other merchandise. The Company will also
initiate cross-marketing programs such as advertising and merchandising programs
to increase market share. Management believes it can significantly reduce the
Company's operating expenses and increase cash flow by implementing these
cross-marketing and cost-saving initiatives. In the future, the Company will
also pursue an opportunistic acquisitions strategy in order to expand the
benefits of its clustered operation.
REALLOCATE THE ASSETS OF THE ENDOWMENT CARE FUND: The Company expects to
increase revenue derived from the Fund by changing the Fund's investment
policies. In accordance with California State regulations, the Cemetery collects
and deposits into the Fund a required amount of cash from every grave site sold
for the continued maintenance of the Cemetery. As of March 31, 1997, the Fund
had total assets of approximately
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$54.2 million. By law, up to 100% of the investment income from the Fund may be
distributed for the development, improvement, embellishment and maintenance of
the Cemetery. The Fund trustees appointed by the Association have from time to
time invested the majority of the Fund in equity securities. This investment
strategy limited the Fund's distributable income to the dividend yield of its
portfolio. The Company has recently begun to pursue a more conservative policy
by generally limiting the investments of the Fund's portfolio to fixed income
securities with at least investment grade credit ratings. Management believes
that this change in investment strategy will maximize the Fund's distributable
income. By way of illustration, if the Fund were to realize a return on its
income generating assets with a fair market value of $54.4 million as of
December 31, 1996 equivalent to the current return on five-year U.S. Treasury
Securities (6.21% per annum as of December 31, 1996) plus 75 basis points, the
Cemetery would have recognized annual Fund investment income of approximately
$3.8 million, as compared to the $2.6 million it actually generated in 1996, an
increase of $1.2 million.
LOEWEN ADMINISTRATIVE SERVICES AGREEMENT AND OTHER PROFIT ENHANCEMENTS: Since
the Acquisition, pursuant to the Administrative Services Agreement, Loewen has
undertaken some of the Company's administrative functions including: accounting
services, computer, telecommunications, general operations support, legal
services, environmental compliance, regulatory compliance, employee training and
corporate development. In addition, Loewen provides management expertise in
planning MIS, sales, tax, and fund management strategy. The Company also
benefits under the Administrative Services Agreement from access to some of
Loewen's vendor agreements. Management believes that the Administrative Services
Agreement will provide considerable savings in terms of administrative personnel
at Rose Hills and further decrease the Company's ongoing operating expenses. By
leveraging the Loewen corporate infrastructure, Management believes the Company
will gain competitive advantages in terms of operating and sales expertise.
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. See 'Business--Business
Strategy.' The Company also faces competition from large 'consolidators' in the
industry which seek to reap profits from an acquisition and consolidation
strategy. Such competitors include several large, publicly-traded funeral
services companies, including Service Corporation International, Stewart
Enterprises, Inc. and Equity Corporation International.
REGULATION
The Company's funeral home operations are regulated by the Federal Trade
Commission ('FTC'), which administers the Trade Regulation Rule on Funeral
Industry Practices (the 'Funeral Rule'), which became effective on April 30,
1984, and was revised as of July 19, 1994. The Funeral Rule defines certain acts
and practices in connection with the provision of funeral goods or services as
unfair or deceptive and sets forth various requirements intended to prevent such
unfair or deceptive acts and practices. The Company also must comply with other
federal legislation, including the Americans with Disabilities Act and
regulations administered by the Occupational Safety and Health Administration.
The Company's operations also are regulated by the State of California,
which regulates the sale of pre-need cemetery and funeral services. California
state regulations require, among other things, that a portion of the funds
received by the Company in connection with all cemetery sales be deposited in an
endowment care fund. The principal of such endowment care fund must be invested
and the income from such investment may be used only for the development,
improvement, embellishment and maintenance of the cemetery. California state
regulations also require that money received from the sale of pre-need funeral
service contracts be held in trust until the services are delivered, that such
contracts may be cancelled by the customer at any time prior to the delivery of
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such services and that upon any such cancellation the principal and interest of
such trust (less, in certain cases, a revocation fee) be repaid to the customer.
The Company believes that it is currently in substantial compliance with
the Funeral Rule and all other applicable federal, state and local laws and
regulations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
environmental laws and regulations, including those pertaining to remediation of
hazardous substances and protection of endangered or threatened species. These
laws and regulations may require the Company to incur compliance, remediation
and other costs from time to time or restrict development in certain
environmentally sensitive areas.
Environmental audits of the Company's various properties were conducted in
connection with the Acquisition Transaction. In connection with the Cemetery and
Mortuary, Management is aware of certain areas, including certain solid waste
disposal areas, that will require remediation. However, pursuant to an
Environmental Compliance Agreement entered into between the Association and the
Company, the Association has agreed to pay or indemnify the Company for certain
costs relating to such remediation at some of these areas. In connection with
the Satellite Properties, Management is also aware of certain areas which may
have been contaminated from former or adjacent underground storage tanks.
In addition, two of the Company's properties are located in or near areas
of regional groundwater contamination. Although the Company has been requested
to submit information in connection with contamination at one of these areas,
the Company believes its operations have not contributed to the regional
groundwater contamination in either of these areas.
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.
EMPLOYEES
The Company currently employs approximately 653 people. Management believes
that the Company's relationship with employees is good.
In December 1993 the National Labor Relations Board ('NLRB') certified the
Teamsters Union as the collective bargaining representative of 57 employees in
the Company's Park Department. In December 1994, certain of these employees
petitioned the NLRB to hold an election regarding decertifying the union. During
the same period the Teamsters filed numerous unfair labor practice charges
against the Company with the NLRB. On April 29, 1996, the NLRB General Counsel
issued a Consolidated Amended Complaint and Notice of Hearing on certain of the
union's charges. In April 1997 the Administrative Law Judge issued an
unfavorable decision regarding the unlawful termination of the two employees and
a favorable decision in the alleged failure to recognize and bargain in good
faith with the union. In reviewing the decision of the Administrative Law Judge
counsel has advised the Company that an error with respect to certain
interpretations of the law may have been made. Based upon this advice counsel in
May 1997 filed on behalf of the Company an exception brief to the NLRB seeking a
complete reversal of the former decision. In June 1997 the NLRB counsel
submitted an answering brief to the exceptions in the brief filed on behalf of
the Company and an ultimate decision is expected within the next 45 days. In
accordance with its normal practice, the NLRB has not acted on the employees'
petition for a decertification election because of the pending unfair labor
practice charges. The Company believes that these charges are without merit and
intends to contest them vigorously. Although there can be no assurances, the
Company does not believe that the outcome of the proceeding with regard to these
charges will have a material adverse effect on the Company's financial
condition.
LITIGATION
The Company is a 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 operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers directors, and their ages as of January 1,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------
<S> <C> <C>
Chinh E. Chu........... 30 Director; Secretary
David I. Foley......... 29 Director
Mark Helmintoller...... 47 Regional Vice President, Sales
Kenton C. Woods........ 42 Senior Vice President; Chief Financial Officer
Howard A. Lipson....... 32 Director
Douglas McKinnon....... 52 Director
Lawrence Miller........ 47 Director; Chairman Elect
Kendall E. Nungesser... 49 Director; President; Chief Executive Officer
Dennis C. Poulsen...... 54 Director; Chairman
</TABLE>
The business experience of each of such executive officers and directors is
set forth below.
Chinh E. Chu is a Managing Director of The Blackstone Group L.P., which he
joined in 1990. Prior to joining Blackstone, Mr. Chu was a member of the Mergers
and Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990. He currently
serves on the Board of Directors of Prime Succession Inc.
David I. Foley is an Associate at The Blackstone Group L.P., which he
joined in 1995. Prior to joining Blackstone, Mr. Foley was a member of AEA
Investors, Inc. and The Monitor Company.
Mark Helmintoller became Regional Vice President, Sales of the Issuer upon
consummation of the Acquisition. He has spent his entire professional career in
the deathcare industry. Prior to joining Rose Hills, Mr. Helmintoller worked for
Service Corporation International as its regional sales manager for Brevard
County, Florida. Mr. Helmintoller joined Service Corporation International in
1995 when it acquired his previous employer, Gibralter Mausoleum, where he had
worked in various positions since 1985.
Howard A. Lipson is Senior Managing Director of The Blackstone Group L.P.,
which he joined in 1988. Prior to joining Blackstone, Mr. Lipson was a member of
the Mergers and Acquisitions Group of Salomon Brothers Inc. He currently serves
on the Board of Directors of UCAR International Inc., Volume Services, Inc., AMF
Group Inc., Ritvik Holdings, Inc., and Prime Succession Inc.
Douglas McKinnon joined Loewen in April 1996 and as Executive Vice
President is responsible for overseeing Loewen's organizational structure and
providing direction and support to senior management. Mr. McKinnon has over 20
years of experience in senior executive roles, including the position of
President of Paperboard Industries Corporation in Mississauga, Ontario.
Lawrence Miller is Executive Vice President, Operations for Loewen. Mr.
Miller was President of Osiris Holding Corporation from 1988 to 1995 when Osiris
joined Loewen. From 1972 to 1988 Mr. Miller was President of Morlan
International, a cemetery and funeral service company.
Kendall E. Nungesser became President and Chief Executive Officer of the
Issuer upon consummation of the Acquisition. He joined Rose Hills in 1987 and
has extensive experience at both operational and financial levels. Prior to
joining Rose Hills, he functioned as the Executive Manager, Chief Financial
Officer and a Director of Los Alamitos Race Course. He successfully managed the
merger of Los Alamitos Race Course with Hollywood Park Race Course and was named
Vice President and Chief Financial Officer of Hollywood Park Race Course.
Dennis C. Poulsen became the Chairman of the Issuer upon consummation of
the Acquisition. Mr. Poulsen joined Rose Hills in 1981 and became President in
1984. Prior to joining the Company, Mr. Poulsen was employed by INA Corporation
and Transamerica Corporation, and is a past director of the American Cemetery
Association. Mr. Poulsen is a member of the American, California and Los Angeles
Bar Associations. His
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community activities include serving as a director and Chairman of the Los
Angeles Chamber of Commerce in 1997.
Kenton C. Woods became Senior Vice President and Chief Financial Officer of
the Issuer on May 19, 1997. Prior to joining the Issuer, Mr. Woods served in
senior financial positions at Baskin-Robbins, a wholly-owned subsidiary of
Allied Domecq Plc., including Vice President-Finance, CFO and Corporate
Controller. Mr. Woods also spent 10 years with KPMG Peat Marwick LLP and is a
Member of the California Society and American Institute of Certified Public
Accountants.
Under the Shareholders' Agreement described below (see 'Certain Related
Transactions--Shareholders' Agreement'), Blackstone and Loewen have the right to
designate five and three nominees, respectively, to the Board of Directors of RH
Holdings. Blackstone designated Messrs. Chu, Foley, Lipson and Nungesser and has
the right to designate one other person and Loewen designated Messrs. McKinnon,
Miller and Poulsen. Each of Blackstone's and Loewen's nominees to the Board of
Directors are also members of the Board of Directors of the Issuer.
Directors of the Company will receive no compensation for their service as
Directors or for service on committees of the Board except for the reimbursement
of expenses.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table sets forth for the fiscal year ended December 31, 1996
the compensation paid by the Company to its Chief Executive Officer and each of
the other most highly compensated executive officers of the Company(a):
<TABLE>
<CAPTION>
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
Kendall E. Nungesser
President & Chief Executive Officer
(after the Acquisition)............. 1996 420,061 0 $6,348(b)
Dennis C. Poulsen
President & Chief Executive Officer
(before Acquisition)................ 1996 500,796 0 6,576(b)
G. Dan Barefoot
Vice President of MIS............... 1996 129,520 20,000 288(c)
</TABLE>
- ------------------
(a) Mr. Helmintoller joined the Issuer on November 19, 1996 with an annualized
base salary of $250,000. His total compensation was $35,410.00 for the
fiscal year ended December 31, 1996. Mr. Woods joined the Issuer on May 19,
1997.
(b) These amounts consist primarily of taxable automobile allowances.
(c) This figure represents excess life insurance premiums paid on behalf of Mr.
Barefoot.
Employment Agreements
The Issuer has entered into employment agreements with Messrs. Nungesser,
Poulsen, Woods and Helmintoller.
The agreement with Mr. Nungesser has an initial term of three years and
provides that Mr. Nungesser be paid a base salary of $250,000 per year (subject
to cost of living adjustments) plus an annual cash bonus. In 1997, such bonus
will be determined by the Board of Directors based on whether the Issuer
achieves projected EBITDA and other financial criteria and thereafter will be
based on a formula agreed to by Mr. Nungesser and the Board of Directors based
on achievement of levels of EBITDA in excess of budgeted EBITDA.
Mr. Poulsen's agreement provides that Mr. Poulsen be employed by the
Company through 1997 and be paid an annual salary of $420,000.
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<PAGE>
Mr. Woods' agreement provides that Mr. Woods be paid an annual salary of
$150,000 and bonus of up to 25% of such annual salary based on Issuer and
Individual performance.
Mr. Helmintoller's agreement provides that Mr. Helmintoller be paid an
annual salary of $250,000, a monthly override based on gross sales, and
temporary relocation and housing allowances.
In connection with the Acquisition, Messrs. Nungesser and Poulsen and one
other shareholder of Roses, Inc. entered into noncompetition agreements pursuant
to which the Company agreed to pay such shareholders, during each of the three
calendar years following the Acquisition Closing Date, an aggregate annual
amount for all three persons equal to $1,040,000 minus the aggregate amount paid
to such persons in the form of annual salary for each such year. Such payments
will be allocated among the three shareholders in accordance with instructions
provided by them.
PRINCIPAL SHAREHOLDERS
The Company is a direct, wholly-owned subsidiary of RH Holdings. The
following table sets forth certain information regarding the beneficial
ownership of the common stock of RH Holdings:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF OWNER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES COMMON STOCK
- --------------------------------------- --------- ------------
<S> <C> <C>
Blackstone entities(1)................. 795.455 79.55%
Loewen Group International, Inc.(2).... 204.545 20.45%
Chinh E. Chu(3)........................ -- --
David Foley(3)......................... -- --
Howard A. Lipson(3).................... -- --
Douglas McKinnon(4).................... -- --
Lawrence Miller(5)..................... -- --
Kendall E. Nungesser(6)................ -- --
Dennis C. Poulsen(7)................... -- --
</TABLE>
- ------------------
(1) The 795.455 shares are held collectively by Blackstone Capital Partners II
Merchant Banking Fund L.P., Blackstone Rose Hills Offshore Capital Partners
L.P., and Blackstone Family Investment Partnership II L.P. The address for
the Blackstone entities is c/o Blackstone Group L.P., 345 Park Avenue, New
York, N.Y. 10154.
(2) The address for LGII is 50 River Center Boulevard, Covington, Kentucky
41011. LGII is a directly and indirectly wholly-owned subsidiary of LWN.
(3) Messrs. Chu, Foley and Lipson are affiliated with Blackstone in the
capacities described under 'Management--Executive Officers and Directors.'
Each such person's business address is c/o The Blackstone Group L.P., 345
Park Avenue, New York, NY 10154.
(4) Mr. McKinnon is affiliated with Loewen in the capacity described under
'Management--Executive Officers and Directors.' Mr. McKinnon's business
address is c/o The Loewen Group Inc., 4126 Norland Avenue, Burnaby, British
Columbia, V5G 358. Canada.
(5) Mr. Miller is affiliated with Loewen in the capacity described under
'Management--Executive Officers and Directors.' Mr. Miller's business
address is c/o The Loewen Group Inc., 3190 Tremont Avenue, Trevose, PA
19053.
(6) Mr. Nungesser owns no shares of RH Holdings common stock. Certain officers
of the Issuer will hold a limited partnership interest in RHIMD, which will
be the holder of 10.2273 shares (approximately 1.02%) of RH Holdings common
stock; however, such officers will not have voting or dispositive power with
respect to such shares.
(7) Mr. Poulsen's business address is c/o Rose Hills Company, 3888 South Workman
Mill Road, Whittier, CA 90601.
In the event that Management is permitted and elects to invest in shares of
RH Holdings common stock as described under 'Certain Related
Transactions--Formation of RHIMD; Loans to Management,' the number and
percentage set forth above for the Blackstone entities will be proportionately
reduced.
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<PAGE>
CERTAIN RELATED TRANSACTIONS
The summaries set forth below of the Acquisition Transaction agreements
referred to below, the Shareholders' Agreement, the Put/Call Agreement and the
Administrative Services Agreement do not purport to be complete and are
qualified in their entirety by reference to all the provisions of the Merger
Agreement, the Asset Purchase Agreement, the Shareholders' Agreement, the
Put/Call Agreement and the Administrative Services Agreement, respectively,
copies of which are available upon request from the Issuer.
ACQUISITION TRANSACTION
On September 19, 1996, the Issuer entered into an Agreement and Plan of
Merger with Roses, Inc. (the 'Merger Agreement') providing for the acquisition
of the Mortuary through the merger of the Issuer with and into Roses, Inc., with
Roses, Inc. (to be renamed RH Mortuary Corporation) being the surviving
corporation in the merger. At the Acquisition Closing Date, the Issuer assigned
all of its rights and obligations under the Merger Agreement to a newly-created
subsidiary of the Issuer, so that following the merger, the Mortuary became a
wholly-owned subsidiary of the Issuer).
On September 19, 1996, the Issuer and the Association also entered into an
Asset Purchase Agreement (the 'Asset Purchase Agreement') pursuant to which the
Issuer agreed to purchase from the Association the assets and assume the
liabilities constituting the Cemetery. At the Acquisition Closing Date, the
Issuer's rights under such Agreement were assigned to a newly created
wholly-owned subsidiary of the Issuer, and, accordingly, on the Acquisition
Closing Date, the Cemetery became a wholly-owned subsidiary of the Issuer.
In connection with the Acquisition, RH Holdings, Blackstone, a subsidiary
of Loewen ('LN Sub'), LGII and LWN entered into a subscription agreement (the
'Subscription Agreement') pursuant to which (i) Blackstone subscribed for common
stock of RH Holdings in exchange for a cash contribution to RH Holdings, (ii)
LGII subscribed for common stock and preferred stock of RH Holdings in exchange
for a cash contribution to RH Holdings and (iii) LN Sub subscribed for shares of
preferred stock of RH Holdings in exchange for the contribution by LN Sub of the
Satellite Properties.
In connection with the Acquisition Transaction, (i) Blackstone and Loewen
contributed to RH Holdings and RH Holdings contributed to the Company $106.6
million ($107.0 million less $0.4 million to be advanced by the Company to RHIMD
to finance its purchase of common stock of RH Holdings) in cash; (ii) the
Company acquired the Mortuary in consideration of the payment of $59.9 million
in cash (subject to downward adjustment under certain circumstances) after
giving effect to the repayment of outstanding debt of the Mortuary; (iii) the
Company paid a cash purchase price for the Cemetery in the amount of $166.3
million in cash (subject to downward adjustment under certain circumstances);
(iv) LN Sub contributed the Satellite Properties to RH Holdings which
contributed such properties to the Company; (v) the Bank Credit Agreement was
entered into (see 'Description of Bank Credit Facilities'); and (vi) the sale of
the Notes was consummated.
SHAREHOLDERS' AGREEMENT
In connection with the Acquisition Transaction, Blackstone, LGII and LN Sub
entered into an agreement (the 'Shareholders' Agreement') setting forth certain
of their rights and obligations as shareholders of RH Holdings.
The Shareholders' Agreement provides that, subject to the Put/Call
Agreement referred to below, none of the shareholders is permitted to transfer
any of its respective shares of common or preferred stock of RH Holdings ('RH
Holdings Common Stock') without the others' prior written consent, subject to
certain exceptions.
Under the terms of the Shareholders' Agreement, Blackstone and LGII have
the right to designate five and three nominees as directors, respectively, to
the Board of Directors of RH Holdings (the 'Board'). Each of Blackstone and LGII
further agreed (i) to vote all of its shares of RH Holdings Common Stock to
ratify and adopt any and all actions adopted or approved by the Board and (ii)
subject to certain exceptions related to the election and removal of directors,
not to vote any of its shares of RH Holdings Common Stock in favor of any
resolution, give any consent with respect to any matter or take any other action
as a stockholder of RH Holdings unless such resolution, matter or other action
first shall have been adopted or approved by the Board and recommended by it for
adoption, approval or consent by the shareholders. In addition, the By-Laws of
RH Holdings provide that
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<PAGE>
certain actions by or with respect to RH Holdings will require the unanimous
consent of the Board. See '--Certain Matters Subject to Supermajority Vote.'
In addition, in the event that Loewen owns, operates or controls any
funeral home or cemetery within 20 miles of any other funeral home or cemetery
owned by the Company, Loewen has an option, exercisable for the succeeding 12
months, to either sell such properties to a third party or transfer such
properties to the Company (free of indebtedness for borrowed money) in exchange
for additional equity in RH Holdings.
The Shareholders' Agreement will terminate following the exercise by either
Blackstone or LGII of its option pursuant to the Put/Call Agreement or on such
other date as the parties may agree.
PUT/CALL ARRANGEMENT
Pursuant to a separate agreement among Blackstone, LWN, LGII and LN Sub
(the 'Put/Call Agreement'), (i) LGII has a call option, exercisable from and
after the fourth anniversary of the Acquisition Closing Date until but excluding
the sixth anniversary of the Acquisition Closing Date, to purchase all of
Blackstone's shares of RH Holdings Common Stock (the 'Call Option') and (ii)
Blackstone has a put option, exercisable from and after the sixth anniversary of
the Acquisition Closing Date until but excluding the eighth anniversary of the
Acquisition Closing Date, to require LGII to purchase Blackstone's shares of RH
Holdings Common Stock (the 'Put Option'). The option price in either case is
derived from a formula based on EBITDA. The performance by LGII of its
obligations under the Put/Call Agreement is guaranteed by LWN.
By virtue of the Put/Call Agreement, it is likely that the Company will
eventually become a wholly-owned subsidiary of Loewen. See 'Risk
Factors--Control by Blackstone; Possible Future Control by Loewen: Potential
Conflicts of Interest.' There can be no assurance, however, that either the Call
Option or the Put Option will be exercised.
The exercise of either the Call Option or the Put Option will not give rise
to a Change of Control under the Indenture. See 'Description of Notes.'
CERTAIN MATTERS SUBJECT TO SUPERMAJORITY VOTE
The By-Laws of RH Holdings provide that the following matters require the
unanimous approval of the Board of Directors: (1) amendments to the Certificate
of Incorporation or By-Laws of RH Holdings; (2) transactions involving the
merger, consolidation or sale of substantially all of the assets of RH Holdings;
(3) the declaration or payment of any cash dividend or other distribution to the
shareholders of RH Holdings (other than payments pursuant to the Administrative
Services Agreement or payment of the monitoring fee to Blackstone described
below under '--Payment of Certain Fees and Expenses;'); and (4) issuances of
additional shares of capital stock, except for issuances to third parties and
issuances of additional shares of capital stock to the extent they are required
to be issued to cure or prevent an event of default or failure of any financial
covenants under the Bank Credit Agreement.
ADMINISTRATIVE SERVICES AGREEMENT
In connection with the Acquisition, the Company engaged Loewen to provide
certain administrative services and share certain resources (Loewen, in such
capacity, being the 'Administrative Services Provider') pursuant to the
Administrative Services Agreement. Pursuant to the Administrative Services
Agreement, Loewen has undertaken some of the Company's administrative functions,
including: accounting services, computer, telecommunications, general operations
support, legal services, environmental compliance, regulatory compliance,
employee training and corporate development. In addition, Loewen currently
provides management expertise in planning MIS, sales, tax, and fund management
strategy. The Company also benefits under the Administrative Services Agreement
from access to some of Loewen's vendor agreements.
As compensation for services provided under the Administrative Services
Agreement, the Administrative Services Provider is entitled to receive from the
Company, a fee (the 'Administrative Services Fee') payable monthly in arrears
and in an aggregate annual amount equal to $334,000 for the first year following
the Acquisition Closing Date and $250,000 for the second year following the
Acquisition Closing Date, to be increased by 2.5% for each year thereafter until
the termination of the Administration Services Agreement. The Company is also
generally required to reimburse the Administrative Services Provider for all
out-of-pocket costs
50
<PAGE>
and expenses incurred by it from third parties in connection with performing the
administrative services described in the Administrative Services Agreement.
The Administrative Services Agreement is subject to termination
automatically upon closing following the exercise of the Call Option or the Put
Option and at the option of the Company under certain other circumstances,
including the failure of Loewen to fully exercise the options set forth in the
fourth paragraph under 'Shareholders' Agreement' above.
PAYMENT OF CERTAIN FEES AND EXPENSES
In connection with the Acquisition, on the Acquisition Closing Date, an
affiliate of Blackstone received a fee of approximately $3.0 million and the
Company reimbursed Loewen and Blackstone for all out-of-pocket expenses incurred
in connection with the Acquisition. In addition, from the Acquisition Closing
Date until the date on which Loewen or Blackstone exercises the Call Option or
the Put Option, respectively, pursuant to the Put/Call Agreement, an affiliate
of Blackstone will receive a monitoring fee equal to $250,000 per annum (as such
fee may be increased to account for inflation) from the Company.
FORMATION OF RHIMD; LOANS TO MANAGEMENT
In connection with the Acquisition, on the Acquisition Closing Date, RHIMD
purchased approximately 1.02% of the RH Holdings common stock (the 'RHIMD-Owned
Stock'). Limited partnership interests in RHIMD will subsequently be allocated
to Messrs. Nungesser and Helmintoller and certain other officers of the Issuer
(and 'RHIMD Limited Partners').
In order to effect such purchase, on the Acquisition Closing Date, the
Issuer will make a loan to RHIMD which will be evidenced by a note bearing
interest at an annual rate of 9% and secured by the RHIMD-Owned Stock. RHIMD
will be deemed to have made loans to each of the RHIMD Limited Partners in
connection with their subscription for limited partnership interests in RHIMD.
The loan to each of Messrs. Nungesser and Helmintoller and certain other
officers of the Issuer will be evidenced by a note bearing interest at an annual
rate of 9% and secured by his limited partnership interest in RHIMD.
DESCRIPTION OF BANK CREDIT FACILITIES
The summary of the Bank Credit Facilities set forth below does not purport
to be complete and is qualified in its entirety by reference to all the
provisions of the credit agreement governing the Bank Credit Facilities, which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
General. Contemporaneously with the consummation of the Acquisition, the
Company entered into a credit agreement (the 'Bank Credit Agreement') with the
Bank Lenders and the Bank of Nova Scotia, as administrative agent (in such
capacity, the 'Bank Agent'), in order to effect the Bank Credit Facilities,
under which GSCP acted as arranging agent and Goldman Sachs as syndication agent
and under which the Company is the sole borrower.
Commitments. The Bank Credit Facilities provided the Company with senior
secured amortization extended term loan facilities in an aggregate principal
amount of $75.0 million, the proceeds of which were used to finance the
Acquisition 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 in an aggregate principal amount of $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. In addition, the
Company has the right, subject to certain conditions and performance tests, to
increase the amount of term loan borrowings by up to $25.0 million.
Maturities; Amortization. The Bank Term Facility will mature seven years
after the Acquisition Closing Date, and the Bank Revolving Facility will mature
five years after the Acquisition Closing Date. The Bank Term Facility is subject
to amortization, subject to certain conditions, in semi-annual installments in
the amounts of $1 million in each of the first three years after the Acquisition
Closing Date; $3 million in the fourth year after the Acquisition Closing Date;
$7 million in the fifth year after the Acquisition Closing Date; $9 million in
the sixth year after the Acquisition Closing Date; and $53 million in the
seventh year after the Acquisition Closing Date. The Revolving Credit Facility
is payable in full at maturity, with no prior amortization.
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Interest. Borrowings (i) under the Bank Term Facility bear interest at a
rate per annum equal to, at the option of the Company (subject to certain
conditions), either (A) the Bank Agent's customary Base Rate (the 'Base Rate')
plus 2.00% or (B) a reserve-adjusted Eurodollar Rate (the 'Adjusted Eurodollar
Rate') plus 3.00% and (ii) under the Revolving Credit Facility bear interest at
a rate per annum equal to, at the option of the Company (subject to certain
conditions), either (A) the Base Rate plus 1.75% or (B) the Adjusted Eurodollar
Rate plus 2.75%; provided, in each case, that, at the end of any quarter
commencing with the quarter ending June 30, 1997, the applicable margin over the
Base Rate or Adjusted Eurodollar Rate, as the case may be, is subject to an
increase of .25%, in the event that the ratio of EBITDA to interest for the four
quarters (or, if less, the period from the Acquisition Closing Date) then ended
is less than 1.50:1.00. The applicable margins are subject to reduction of 0.25%
per annum after the first anniversary of the Acquisition Closing Date and 0.50%
per annum after the second anniversary of the Acquisition Closing Date, in each
case, based on certain performance criteria. Overdue principal and interest bear
interest at the applicable rate on loans bearing interest at the rate determined
by reference to the Base Rate plus 2.00% per annum.
Fees. The Bank Lenders under the Bank Revolving Facility are paid
commitment fees at a rate of 0.50% per annum on unused commitments. In addition,
the Bank Agent and the Bank Lenders received and/or will receive such other fees
as have been separately agreed upon.
Mandatory Prepayments. The Company is required to prepay the loans made to
it under the Bank Credit Facilities, in the amounts and as otherwise set forth
in the Bank Credit Agreement, in the event of certain asset sales, certain
issuances of equity securities of (or capital contributions made to) the Company
or RH Holdings or the generation of excess cash flow, proceeds from pension plan
revisions or certain proceeds of insurance or condemnation awards.
Call Premium. In the event that all or any portion of the Bank Term
Facility is repaid for any reason within two years following the Acquisition
Closing Date (other than pursuant to a scheduled amortization payment, certain
acceleration events or a mandatory prepayment from excess cash flow), the
Company will be required to make any such repayment (i) on or before the first
anniversary of the Acquisition Closing Date, at 102.75% of the amount of loans
so repaid and (ii) after the first anniversary of the Acquisition Closing Date
but on or before the second anniversary of the Acquisition Closing Date, at
101.75% of the amount of loans so repaid.
Guarantees. All obligations under the Bank Credit Facilities and any
interest rate hedging agreements entered into with the Bank Lenders or their
affiliates in connection therewith are unconditionally guaranteed, jointly and
severally, by RH Holdings and each of the Company's existing and future domestic
subsidiaries.
Security. All obligations of the Company and the Bank Guarantors under the
Bank Credit Facilities and the Bank Guarantees are secured by first priority
security interests in substantially 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 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.
Covenants. The Bank Credit Agreement contains a number of affirmative
covenants, and negative covenants that, among other things, restrict the ability
of RH Holdings, the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness (including the Notes), pay
dividends or make other payments on subordinated debt or on equity, create liens
on assets, make investments, capital expenditures or guarantees, engage in
mergers or acquisitions, enter into leases or transactions with affiliates, and
otherwise restrict corporate activities. In addition, the Company is required to
maintain a minimum fixed charge coverage ratio, a minimum interest coverage
ratio and a minimum net worth and to meet maximum senior and total debt leverage
tests.
Events of Default. Events of default under the Bank Credit Agreement
include, among other things: (i) failure to make payment when due; (ii) breaches
of representations and warranties; (iii) default in the performance of
covenants; (iv) default under certain other agreements governing indebtedness
(including the Indenture); (v) certain events of bankruptcy; (vi) failure to
satisfy certain material ERISA requirements; (vii) certain material impairments
of security interests in collateral; (viii) invalidity of the guarantees; and
(ix) the occurrence of a Change of Control (as defined therein) of the Company.
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DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under an indenture dated as of November
15, 1996 (the 'Indenture') between the Issuer and United States Trust Company of
New York as trustee (the 'Trustee'). The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Indenture
(which is incorporated herein by reference and a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part),
including the definitions of certain terms contained therein and those terms
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the 'TIA') as in effect on the date of the Indenture. The definitions
of certain capitalized terms used in the following summary are set forth below
under '--Certain Definitions.'
GENERAL
The Exchange Notes will be unsecured senior subordinated obligations of the
Issuer limited to $80,000,000 aggregate principal amount. Except for the
restrictions on registrations and transfers, all untendered Notes and the
Exchange Notes will be treated as one class of securities for purposes of the
covenants and the other terms contained in the Indenture.
Except as described under the heading 'Book Entry; Delivery and Form,' the
Exchange Notes initially will be represented by a single, permanent global
certificate in definitive, fully registered form (the 'Global Note'). The Global
Note will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York ('DTC'), and registered in the name of a nominee of DTC or will
remain in the custody of the Trustee pursuant to the FAST Balance Certificate
Agreement between the Depository and the Trustee.
MATURITY, INTEREST AND PRINCIPAL
The Exchange Notes will mature on November 15, 2004. Interest on the
Exchange Notes will accrue at the rate of 9 1/2% per annum and will be payable
semiannually on each May 15 and November 15, commencing May 15, 1997, to the
holders of record of Exchange Notes at the close of business on the May 1 or
November 1 immediately preceding such interest payment date. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the original date of issuance (the
'Issue Date'). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
Optional Redemption. The Exchange Notes will be redeemable at the option
of the Issuer, in whole or in part, at any time on or after November 15, 2000,
on not less than 30 nor more than 60 days' prior notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest, if any, to the redemption date, if redeemed during
the 12-month period beginning on or after November 15 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------- ----------
<S> <C>
2000.................. 104.750%
2001.................. 103.167%
2002.................. 101.583%
2003 and thereafter... 100.000%
</TABLE>
Purchase at Option of Holders. As described below, the Issuer is obligated
(a) upon the occurrence of a Change of Control, to make an offer to purchase all
outstanding Exchange Notes at a purchase price of 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase, and
(b) upon the occurrence of certain sales or dispositions of assets, to make an
offer to purchase Exchange Notes with a portion of the net cash proceeds
thereof, at a purchase price of 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase. See '--Certain
Covenants--Change of Control' and '--Disposition of Proceeds of Asset Sales.'
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SUBORDINATION
The indebtedness evidenced by the Exchange Notes will be subordinated in
right of payment to the prior payment in full in cash or Cash Equivalents of all
existing and future Senior Indebtedness of the Issuer. The Indenture contains
certain limitations with respect to the amount of additional Indebtedness
(including Indebtedness which may rank senior in right of payment to or pari
passu in right of payment with the Exchange Notes) that may be incurred by the
Issuer and/or any of its Subsidiaries.
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Issuer or
its assets, or any liquidation, dissolution or other winding-up of the Issuer,
whether voluntary or involuntary, and whether or not involving insolvency or
bankruptcy, or any assignment for the benefit of creditors or other marshalling
of assets or liabilities of the Issuer, all Senior Indebtedness of the Issuer
(including, in the case of Designated Senior Indebtedness, any interest accruing
subsequent to the filing of a petition for bankruptcy whether or not such
interest is an allowed claim) must be paid in full in cash or Cash Equivalents
before any payment or distribution (excluding certain permitted equity or
subordinated securities) is made on account of the principal of, premium, if
any, or interest on, or any other obligations to the holders of the Exchange
Notes in respect of, the Exchange Notes.
During the continuance of any default in the payment of principal, premium,
if any, or interest on any Senior Indebtedness, when the same becomes due, no
direct or indirect payment (other than payments previously made pursuant to the
provisions described under '--Defeasance or Covenant Defeasance of Indenture')
by or on behalf of the Issuer of any kind or character (excluding certain
permitted equity or subordinated securities) may be made on account of the
principal of, premium, if any, or interest on, or other obligations to the
holders of the Exchange Notes in respect of, or the purchase, redemption or
other acquisition of, the Exchange Notes unless and until such default has been
cured or waived or has ceased to exist or such Senior Indebtedness shall have
been discharged or paid in full in cash or Cash Equivalents.
In addition, during the continuance of any other default with respect to
any Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated (a 'Non-payment Default') and upon the earlier to occur of (a)
receipt by the Trustee from the representatives of holders of such Designated
Senior Indebtedness of a written notice of such Non-payment Default or (b) if
such Non-payment Default results from the acceleration of the Exchange Notes,
the date of such acceleration, no payment (other than payments previously made
pursuant to the provisions described under '--Defeasance or Covenant Defeasance
of Indenture') of any kind or character (excluding certain permitted equity or
subordinated securities) may be made by the Issuer on account of the principal
of, premium, if any, or interest on, or the purchase, redemption, or other
acquisition of, the Exchange Notes for the period specified below (the 'Payment
Blockage Period').
The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee from the representatives of holders of
Designated Senior Indebtedness or the date of the acceleration referred to in
clause (b) of the preceding paragraph, as the case may be, and shall end on the
earliest to occur of the following events: (i) 179 days has elapsed since the
receipt of such notice or the date of such acceleration (provided such
Designated Senior Indebtedness shall not theretofore have been accelerated),
(ii) such default is cured or waived or ceases to exist or such Designated
Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents,
or (iii) such Payment Blockage Period shall have been terminated by written
notice to the Issuer or the Trustee from the representatives of holders of
Designated Senior Indebtedness initiating such Payment Blockage Period, after
which the Issuer shall promptly resume making any and all required payments in
respect of the Exchange Notes, including any missed payments. Notwithstanding
anything in the foregoing to the contrary, a Payment Blockage Notice may only be
given and therefore shall only be effective in respect of the Issuer and the
Trustee if given by, (i) the Bank Agent as long as any Senior Indebtedness
remains outstanding under the Bank Credit Agreement and (ii) if no Senior
Indebtedness remains outstanding under the Bank Credit Agreement, any other
representative of outstanding Designated Senior Indebtedness. Only one Payment
Blockage Period with respect to the Exchange Notes may be commenced within any
365 consecutive day period. No Non-payment Default with respect to Designated
Senior Indebtedness that existed or was continuing on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period will be, or can be,
made the basis for the commencement of a second
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Payment Blockage Period, whether or not within a period of 365 consecutive days,
unless such default has been cured or waived for a period of not less than 180
consecutive days. In no event will a Payment Blockage Period extend beyond 179
days from the receipt by the Trustee of the notice or the date of the
acceleration initiating such Payment Blockage Period and there must be a 186
consecutive day period in any 365 day period during which no Payment Blockage
Period is in effect.
If the Issuer fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Exchange Notes
to accelerate the maturity thereof. See '--Events of Default.'
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Issuer who are holders of Senior Indebtedness may recover more,
ratably, than the holders of the Exchange Notes and funds which would be
otherwise payable to the holders of the Exchange Notes will be paid to the
holders of the Senior Indebtedness to the extent necessary to pay the Senior
Indebtedness in full, and the Issuer may be unable to meet its obligations fully
with respect to the Exchange Notes.
The Issuer had $75 million of Senior Indebtedness outstanding as of March
31, 1997 and had $25 million available to be borrowed under the Revolving Credit
Facility. The Indenture limits, but does not prohibit, the incurrence by the
Issuer of additional Indebtedness which is senior to the Exchange Notes, and
limits the incurrence by the Issuer of Indebtedness which is subordinated in
right of payment to any other Indebtedness of the Issuer.
HOLDING COMPANY STRUCTURE
The Issuer is a holding company for its Subsidiaries, with no material
operations of its own and only limited assets. Accordingly, the Issuer is
dependent upon the distribution of the earnings of its Subsidiaries, whether in
the form of dividends, advances or payments on account of intercompany
obligations, to service its debt obligations. In addition, the claims of the
holders of the Exchange Notes are subject to the prior payment of all
liabilities (whether or not for borrowed money) and to any preferred stock
interest of such Subsidiaries. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets available from the Issuer
and its Subsidiaries to satisfy the claims of the holders of the Exchange Notes.
See 'Risk Factors--Holding Company Structure; Reliance on Subsidiaries to
Service Indebtedness; Exchange Notes Subordinated to Subsidiary Liabilities.'
CERTAIN COVENANTS
The Indenture contains the following covenants, among others:
Limitation on Indebtedness. The Issuer will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or in any manner become directly or indirectly liable, contingently or
otherwise, for the payment of (in each case, to 'incur') any Indebtedness
(including, without limitation, any Acquired Indebtedness); provided, however,
that the Issuer and any of its Subsidiaries will be permitted to incur
Indebtedness (including, without limitation, Acquired Indebtedness) if at the
time of such incurrence, and after giving pro forma effect thereto, the
Consolidated Fixed Charge Coverage Ratio of the Issuer is at least equal to
2.00:1.
Notwithstanding the foregoing, the Issuer and its Subsidiaries may, to the
extent specifically set forth below, incur each and all of the following:
(a) Indebtedness of the Issuer evidenced by the Notes and the Exchange
Notes;
(b) Indebtedness of the Issuer and its Subsidiaries outstanding on the
Issue Date;
(c) Indebtedness of the Issuer and its Subsidiaries (i) under the Bank
Term Facility, (ii) under the Revolving Credit Facility (including with
respect to letters of credit issued thereunder), (iii) under any other
revolving credit facility, or (iv) under any other credit facility provided
by a bank or other financial institution in an aggregate principal amount
for clauses (i) through (iv) at any one time outstanding not to exceed
$125,000,000;
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(d) (i) Interest Rate Protection Obligations of the Issuer covering
Indebtedness of the Issuer or a Subsidiary of the Issuer and (ii) Interest
Rate Protection Obligations of any Subsidiary of the Issuer covering
Indebtedness of the Issuer or such Subsidiary; provided, however, that, in
the case of either clause (i) or (ii), (x) any Indebtedness to which any
such Interest Rate Protection Obligations relate bears interest at
fluctuating interest rates and is otherwise permitted to be incurred under
this covenant and (y) the notional principal amount of any such Interest
Rate Protection Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Rate Protection Obligations relate;
(e) Indebtedness of a Wholly-Owned Subsidiary owed to and held by the
Issuer or another Wholly-Owned Subsidiary, in each case which is not
subordinated in right of payment to any Indebtedness of such Subsidiary
(other than Indebtedness under its guaranty of the Bank Credit Facilities),
except that (i) any transfer of such Indebtedness by the Issuer or a
Wholly-Owned Subsidiary (other than to the Issuer or to a Wholly-Owned
Subsidiary) and (ii) the sale, transfer or other disposition by the Issuer
or any Subsidiary of the Issuer of Capital Stock of a Wholly-Owned
Subsidiary which is owed Indebtedness of another Wholly-Owned Subsidiary
such that it ceases to be a Wholly-Owned Subsidiary of the Issuer shall, in
each case, be an incurrence of Indebtedness by such Subsidiary subject to
the other provisions of this covenant;
(f) Indebtedness of the Issuer owed to and held by a Wholly-Owned
Subsidiary of the Issuer which is unsecured and subordinated in right of
payment to the payment and performance of the Issuer's obligations under
the Bank Credit Facilities and the Indenture, the Notes and the Exchange
Notes except that (i) any transfer of such Indebtedness by a Wholly-Owned
Subsidiary of the Issuer (other than to another Wholly-Owned Subsidiary of
the Issuer) and (ii) the sale, transfer or other disposition by the Issuer
or any Subsidiary of the Issuer of Capital Stock of a Wholly-Owned
Subsidiary which holds Indebtedness of the Issuer such that it ceases to be
a Wholly-Owned Subsidiary shall, in each case, be an incurrence of
Indebtedness by the Issuer, subject to the other provisions of this
covenant;
(g) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Issuer and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(h) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(i) Indebtedness of the Issuer or any of its Subsidiaries represented
by letters of credit for the account of the Issuer or such Subsidiary, as
the case may be, in order to provide security for workers' compensation
claims, payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business;
(j) Indebtedness of the Issuer or any Subsidiary of the Issuer in
addition to that described in clauses (a) through (i) above, in an
aggregate principal amount outstanding at any time not exceeding
$5,000,000; provided, that if, at the time of incurrence of Indebtedness,
the ratio of the aggregate principal amount of Indebtedness on a pro forma
basis after giving effect to the Indebtedness then being incurred to
Consolidated Cash Flow for the four full fiscal quarters immediately
preceding the date of such incurrence is less than or equal to 6.00:1, then
such amount shall be an aggregate principal amount not exceeding
$10,000,000; and
(k) (i) Indebtedness of the Issuer (including any Indebtedness
incurred in connection with a Sale-Leaseback Transaction permitted pursuant
to the covenant described under '--Limitation on Sale-- Leaseback
Transactions') the proceeds of which are used solely to refinance (whether
by amendment, renewal, extension or refunding) Indebtedness of the Issuer
or any of its Subsidiaries and (ii) Indebtedness of any Subsidiary of the
Issuer the proceeds of which are used solely to refinance (whether by
amendment, renewal, extension or refunding) Indebtedness of such
Subsidiary, in each case other than the Indebtedness refinanced, redeemed
or retired as described under 'Use of Proceeds' herein; provided, however,
that (x) the principal amount of Indebtedness incurred pursuant to this
clause (k) (or, if such Indebtedness
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provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness) shall not exceed the sum of the
principal amount of Indebtedness so refinanced, plus the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of such Indebtedness or the amount of any premium reasonably
determined by the Board of Directors of the Issuer as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated purchase, plus the amount of expenses in connection therewith,
(y) in the case of Indebtedness incurred by the Issuer pursuant to this
clause (k) to refinance Subordinated Indebtedness, such Indebtedness (A)
does not have a Stated Maturity prior to the Maturity of the Subordinated
Indebtedness being refinanced, (B) has an Average Life to Stated Maturity
equal to or greater than the remaining Average Life to Stated Maturity of
the Subordinated Indebtedness being refinanced and (C) is subordinated to
the Exchange Notes in the same manner and to the same extent that the
Subordinated Indebtedness being refinanced is subordinated to the Exchange
Notes and (z) in the case of Indebtedness incurred by the Issuer pursuant
to this clause (k) to refinance Pari Passu Indebtedness, such Indebtedness
(A) does not have a Stated Maturity prior to the Stated Maturity of the
Pari Passu Indebtedness being refinanced, (B) has an Average Life to Stated
Maturity equal to or greater than the remaining Average Life to Stated
Maturity of the Pari Passu Indebtedness being refinanced and (C)
constitutes Pari Passu Indebtedness or Subordinated Indebtedness.
Limitation on Restricted Payments. The Issuer will not, and will not
permit any of its Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Issuer or any of its
Subsidiaries or any payment made to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Issuer or any of its
Subsidiaries (other than (x) dividends or distributions payable solely in
Capital Stock of the Issuer (other than Redeemable Capital Stock) or in
options, warrants or other rights to purchase Capital Stock of the Issuer
(other than Redeemable Capital Stock), (y) the declaration or payment of
dividends or other distributions to the extent declared or paid to the
Issuer or any Subsidiary of the Issuer and (z) the declaration or payment
of dividends or other distributions by any Subsidiary of the Issuer to all
holders of Common Stock of such Subsidiary on a pro rata basis);
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Issuer or any of its Subsidiaries (other than any
such Capital Stock owned by the Issuer or a Wholly-Owned Subsidiary of the
Issuer (in each case other than in exchange for its Capital Stock (other
than Redeemable Capital Stock));
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness or Pari Passu Indebtedness
other than any such Indebtedness owed by the Issuer or a Wholly-Owned
Subsidiary of the Issuer; or
(d) make any Investment (other than any Permitted Investment) in any
Person
(such payments or Investments described in the preceding clauses (a), (b), (c)
and (d) are collectively referred to as 'Restricted Payments'), unless, at the
time of and after giving effect to the proposed Restricted Payment (the amount
of any such Restricted Payment, if other than cash, shall be the Fair Market
Value on the date of such Restricted Payment of the asset(s) proposed to be
transferred by the Issuer or such Subsidiary, as the case may be, pursuant to
such Restricted Payment), (A) no Default or Event of Default shall have occurred
and be continuing, (B) immediately prior to and after giving effect to such
Restricted Payment, the Issuer would be able to incur $1.00 of additional
Indebtedness pursuant to the first paragraph of the covenant described under
'--Limitation on Indebtedness' above (assuming a market rate of interest with
respect to such additional Indebtedness) and (C) the aggregate amount of all
Restricted Payments declared or made from and after the Issue Date would not
exceed the sum of (1) 50% of the aggregate Consolidated Net Income of the Issuer
accrued on a cumulative basis during the period beginning on the first day of
the fiscal quarter of the Issuer following the fiscal quarter during which the
Issue Date occurs and ending on the last day of the fiscal quarter of the Issuer
immediately preceding the date of such proposed Restricted Payment, which period
shall be treated as a single accounting period (or, if such aggregate cumulative
Consolidated Net Income of the Issuer for such period shall be a deficit, minus
100% of such deficit) plus (2) the aggregate net cash proceeds received by the
Issuer either (x) as capital contributions
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to the Issuer after the Issue Date from any Person (other than a Subsidiary of
the Issuer) or any dividend or distribution from an Unrestricted Subsidiary to
the Issuer to the extent not otherwise included in Consolidated Net Income of
the Issuer or (y) from the issuance or sale of Capital Stock (excluding
Redeemable Capital Stock, but including Capital Stock issued upon the conversion
of convertible Indebtedness or from the exercise of options, warrants or rights
to purchase Capital Stock (other than Redeemable Capital Stock)) of the Issuer
to any Person (other than to a Subsidiary of the Issuer) after the Issue Date
plus (3) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date (excluding any
Investment described in clause (v) of the following paragraph), including the
redesignation of an Unrestricted Subsidiary as a Subsidiary in accordance with
the definition thereof, an amount equal to the lesser of the return of capital
with respect to such Investment and the cost of such Investment, in either case,
less the cost of the disposition of such Investment, or, in the case of a
redesignation of an Unrestricted Subsidiary as a Subsidiary, an amount equal to
the lesser of the amount of the Investment previously deemed to have been made
in connection with the designation of such Subsidiary as an Unrestricted
Subsidiary and the Fair Market Value of the assets of such Unrestricted
Subsidiary at the time it is redesignated as a Subsidiary. For purposes of the
preceding clause (C)(2), the value of the aggregate net proceeds received by the
Issuer upon the issuance of Capital Stock upon the conversion of convertible
Indebtedness or upon the exercise of options, warrants or rights will be the net
cash proceeds received upon the issuance of such Indebtedness, options, warrants
or rights plus the incremental cash amount received by the Issuer upon the
conversion or exercise thereof.
None of the foregoing provisions will prohibit (i) the payment of any
dividend within 60 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph; (ii) so
long as no Default or Event of Default shall have occurred and be continuing,
the redemption, repurchase or other acquisition or retirement of any shares of
any class of Capital Stock of the Issuer or any Subsidiary of the Issuer in
exchange for, or out of the net cash proceeds of, a substantially concurrent (x)
capital contribution to the Issuer from any Person (other than a Subsidiary of
the Issuer) or (y) issue and sale of other shares of Capital Stock (other than
Redeemable Capital Stock) of the Issuer to any Person (other than to a
Subsidiary of the Issuer); provided, however, that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase or other
acquisition or retirement shall be excluded from clause (C)(2) of the preceding
paragraph; (iii) so long as no Default or Event of Default shall have occurred
and be continuing, any redemption, repurchase or other acquisition or retirement
of Subordinated Indebtedness by exchange for, or out of the net cash proceeds of
a substantially concurrent (x) capital contribution to the Issuer from any
Person (other than a Subsidiary of the Issuer) or (y) issue and sale of (1)
Capital Stock (other than Redeemable Capital Stock) of the Issuer to any Person
(other than to a Subsidiary of the Issuer); provided, however, that the amount
of any such net cash proceeds that are utilized for any such redemption,
repurchase or other acquisition or retirement shall be excluded from clause
(C)(2) of the preceding paragraph; or (2) Indebtedness of the Issuer issued to
any Person (other than a Subsidiary of the Issuer), so long as such Indebtedness
is Subordinated Indebtedness which (x) has no Stated Maturity earlier than the
Stated Maturity of the Subordinated Indebtedness so purchased, exchanged,
redeemed, acquired or retired, (y) has an Average Life to Stated Maturity equal
to or greater than the remaining Average Life to Stated Maturity of the
Subordinated Indebtedness so purchased, exchanged, redeemed, acquired or
retired, and (z) is subordinated to the Exchange Notes in the same manner and at
least to the same extent as the Subordinated Indebtedness so purchased,
exchanged, redeemed, acquired or retired; (iv) so long as no Default or Event of
Default shall have occurred and be continuing, any redemption, repurchase or
other acquisition or retirement of Pari Passu Indebtedness by exchange for, or
out of the net cash proceeds of, a substantially concurrent (x) capital
contribution to the Issuer from any Person (other than a Subsidiary of the
Issuer) or (y) issue and sale of (1) Capital Stock (other than Redeemable
Capital Stock) of the Issuer to any Person (other than to a Subsidiary of the
Issuer); provided, however, that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase or other acquisition or
retirement is excluded from clause (C)(2) of the preceding paragraph; or (2)
Indebtedness of the Issuer issued to any Person (other than a Subsidiary of the
Issuer), so long as such Indebtedness is Subordinated Indebtedness or Pari Passu
Indebtedness which (x) has no Stated Maturity earlier than the Stated Maturity
of the Pari Passu Indebtedness so purchased, exchanged, redeemed, acquired or
retired and (y) has an Average Life to Stated Maturity equal to or greater than
the remaining Average Life to Stated Maturity of the Pari Passu Indebtedness so
purchased, exchanged, redeemed, acquired or retired; (v) Investments
constituting Restricted Payments made as a result of the receipt of non-cash
consideration from any Asset Sale made pursuant to and in compliance with the
covenant described under
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'--Disposition of Proceeds of Asset Sales' below or any transaction excepted
from the definition of Asset Sale pursuant to the last sentence of such
definition; (vi) so long as no Default or Event of Default has occurred and is
continuing, repurchases by the Issuer, or the declaration and payment of a
dividend to RH Holdings, the proceeds of which are to be used for the purchase
of, Common Stock of RH Holdings (or of limited partnership interests in a
partnership holding such Common Stock) from employees of the Issuer or any of
its Subsidiaries or their authorized representatives upon the death, disability
or termination of employment of such employees, in an aggregate amount not
exceeding $500,000 in any calendar year; (vii) other Restricted Payments not to
exceed $2,500,000; provided that at the time such Restricted Payment is made,
the ratio of the aggregate principal amount of Indebtedness on a pro forma basis
after giving effect to any Indebtedness incurred in connection with such
Restricted Payment to Consolidated Cash Flow for the four full fiscal quarters
immediately preceding the date of such Restricted Payment shall be less than or
equal to 6.00:1; (viii) any payments permitted to be made pursuant to clauses
(ii) through (vi) of the proviso set forth in the covenant described under
'--Limitation on Transactions with Interested Persons' below; (ix) payments to
RH Holdings in an amount sufficient to pay (a) director's fees and the
reasonable expenses of directors, (b) accounting, legal or other administrative
expenses incurred by RH Holdings relating to the operations of the Issuer in the
ordinary course of business and (c) so long as RH Holdings files consolidated
income tax returns which include the Issuer, payments to RH Holdings in an
amount equal to the amount of income tax that the Issuer would have paid if it
had filed consolidated tax returns on a separate-company basis or (x) payments
to RH Holdings in an amount sufficient to consummate the Acquisition
Transaction. In computing the amount of Restricted Payments previously made for
purposes of clause (C) of the preceding paragraph, Restricted Payments made
under the preceding clauses (v) and (vi) shall be included and clauses (i),
(ii), (iii), (iv), (vii), (viii), (ix) and (x) shall not be so included.
Limitation on Liens. The Issuer will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Liens of any kind
against or upon any of its property or assets, or any proceeds therefrom, unless
(x) in the case of Liens securing Subordinated Indebtedness, the Exchange Notes
are secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (y) in all other cases, the Exchange Notes are
equally and ratably secured, except for (a) Liens existing as of the Issue Date;
(b) Liens securing the Exchange Notes; (c) Liens on assets of the Issuer
securing Senior Indebtedness and Liens on assets of Subsidiaries of the Issuer
securing indebtedness permitted to be incurred by them under the Indenture; (d)
Liens in favor of the Issuer; (e) Liens securing Indebtedness which is incurred
to refinance Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens do not extend to or cover any
property or assets of the Issuer or any of its Subsidiaries not securing the
Indebtedness so refinanced; and (f) Permitted Liens.
Change of Control. Upon the occurrence of a Change of Control, the Issuer
shall be obligated to make an offer to purchase (a 'Change of Control Offer'),
and shall purchase all Notes and Exchange Notes properly tendered into the
Change of Control Offer and not withdrawn, on a business day (the 'Change of
Control Purchase Date') not more than 60 nor less than 30 days following the
date the notice described below is mailed to holders of the Notes and Exchange
Notes, all of the then outstanding Notes and Exchange Notes at a purchase price
(the 'Change of Control Purchase Price') equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Purchase Date. The Issuer shall be required to purchase all Notes and Exchange
Notes properly tendered into the Change of Control Offer and not withdrawn. The
Change of Control Offer is required to remain open for at least 20 business days
and until the close of business on the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Issuer shall, not
later than the 30th day after the occurrence of the Change of Control, mail to
each holder of Notes and Exchange Notes notice of the Change of Control Offer,
which notice shall govern the terms of the Change of Control Offer and shall
state, among other things, the procedures that holders of Notes and Exchange
Notes must follow to accept the Change of Control Offer.
The occurrence of the events constituting a Change of Control under the
Indenture will result in an event of default under the Bank Credit Agreement
and, thereafter, the Bank Lenders will have the right to require repayment of
the borrowings thereunder in full. The Issuer's obligations under the Bank
Credit Facilities will constitute Designated Senior Indebtedness and will
represent obligations senior in right of payment to the Notes and Exchange
Notes. Consequently, the subordination provisions of the Indenture will have the
effect of
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precluding the purchase of the Notes and Exchange Notes by the Issuer in the
event of a Change of Control, absent consent of the Bank Lenders under the Bank
Credit Facilities or repayment of all amounts outstanding thereunder (although
the failure by the Issuer to comply with its obligations in the event of a
Change of Control will constitute a default under the Notes and Exchange Notes).
There can be no assurance that the Issuer will have adequate resources to repay
or refinance all Indebtedness owing under the Bank Credit Facilities or to fund
the purchase of the Notes and Exchange Notes upon a Change of Control.
The Issuer shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases all
Exchange Notes validly tendered and not withdrawn under such Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the Change of Control provisions under the Indenture, the Issuer
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the Indenture by virtue
thereof.
The determination of whether a particular sale of less than all of RH
Holdings' assets would constitute a sale of 'substantially all' of RH Holdings'
assets resulting in a change of control would be a factual matter subject to
interpretation by a trier of fact and, as such the ability of holder to exercise
the rights described above would, under certain circumstances, be subject to
some uncertainty.
Disposition of Proceeds of Asset Sales. The Issuer will not, and will not
permit any of its Subsidiaries to, make any Asset Sale unless (a) the Issuer or
such Subsidiary, as the case may be, receives consideration at the time of such
Asset Sale at least equal to the Fair Market Value of the shares or assets sold
or otherwise disposed of and (b) at least 75% of such consideration consists of
cash or Cash Equivalents. To the extent the Net Cash Proceeds of any Asset Sale
are not applied to repay the Bank Term Facility or any other Senior Indebtedness
or permanently reduce the commitments under the Revolving Credit Facility, the
Issuer or such Subsidiary, as the case may be, may, within 365 days from the
receipt of the Net Cash Proceeds, apply such Net Cash Proceeds to an investment
in properties and assets that replace the properties and assets that were the
subject of such Asset Sale or in properties and assets that will be used in
the business of the Issuer and its Subsidiaries existing on the Issue Date or
in businesses reasonably related thereto ('Replacement Assets'). Any Net Cash
Proceeds from any Asset Sale that are neither used to repay the Bank Term
Facility or any other Senior Indebtedness, or permanently reduce the
commitments under the Revolving Credit Facility, nor invested in Replacement
Assets within the 365-day period described above constitute 'Excess Proceeds'
subject to disposition as provided below.
When the aggregate amount of Excess Proceeds equals or exceeds $5,000,000,
the Issuer shall not more than 40 Business Days thereafter make an offer to
purchase (an 'Asset Sale Offer'), from all holders of the Notes and Exchange
Notes, not less than 20 Business Days nor more than 40 Business Days after the
date of notice of such Asset Sale Offer, an aggregate principal amount of Notes
and Exchange Notes equal to such Excess Proceeds, at a price in cash equal to
100% of the outstanding principal amount thereof plus accrued and unpaid
interest, if any, to the purchase date. To the extent that the aggregate
principal amount of Notes and Exchange Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Issuer may use such deficiency for
general corporate purposes. If the aggregate principal amount of Notes and
Exchange Notes validly tendered and not withdrawn by holders thereof exceeds the
Excess Proceeds, Notes and Exchange Notes to be purchased will be selected on a
pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset to zero.
The Issuer will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that an Asset Sale occurs and the
Issuer is required to purchase Notes and Exchange Notes as described above.
Limitation on Issuances and Sale of Preferred Stock by Subsidiaries. The
Issuer (a) will not permit any of its Subsidiaries to issue any Preferred Stock
(other than to the Issuer or a Wholly-Owned Subsidiary of the Issuer) and (b)
will not permit any Person (other than the Issuer or a Wholly-Owned Subsidiary
of the Issuer) to own any Preferred Stock of any Subsidiary of the Issuer;
provided, however, that this covenant shall not prohibit the issuance and sale
of (x) all, but not less than all, of the issued and outstanding Capital Stock
of any Subsidiary of the Issuer owned by the Issuer or any of its Subsidiaries
in compliance with the other provisions of the Indenture, (y) directors'
qualifying shares or investments by foreign nationals mandated by applicable law
or
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(z) issuances of Preferred Stock to former owners of funeral homes acquired by
the Issuer or any Subsidiary of the Issuer; provided that the sum of (i) the
aggregate Fair Market Value of such Preferred Stock and (ii) the aggregate Fair
Market Value of all Investments permitted under clause (vi) of the definition of
'Permitted Investments' shall not exceed $5,000,000 at any time outstanding.
Limitation on Transactions with Interested Persons. The Issuer will not,
and will not permit any of its Subsidiaries to, directly or indirectly, enter
into or suffer to exist any transaction or series of related transactions
(including, without limitation, the sale, transfer, disposition, purchase,
exchange or lease of assets, property or services) with, or for the benefit of,
any Affiliate of the Issuer or any beneficial owner (determined in accordance
with the Indenture) of 5% or more of RH Holdings' Common Stock at any time
outstanding ('Interested Persons'), unless (a) such transaction or series of
related transactions is on terms that are no less favorable to the Issuer or
such Subsidiary, as the case may be, than those which could have been obtained
in a comparable transaction at such time from Persons who are not Affiliates of
the Issuer or Interested Persons, (b) with respect to a transaction or series of
transactions (other than commercial arrangements with any limited partner of
Blackstone Capital Partners II Merchant Banking Fund L.P. or any Affiliate of
such limited partners) involving aggregate payments or value equal to or greater
than $5,000,000, the Issuer has obtained a written opinion from an Independent
Financial Advisor stating that the terms of such transaction or series of
transactions are fair to the Issuer or its Subsidiary, as the case may be,
from a financial point of view and (c) with respect to a transaction
or series of transactions (other than commercial arrangements with any
limited partner of Blackstone Capital Partners II Merchant Banking Fund L.P.
or any Affiliate of such limited partners) involving aggregate payments
or value equal to or greater than $1,000,000, the Issuer shall have
delivered an officer's certificate to the Trustee certifying that such
transaction or series of transactions complies with the preceding clause
(a) and, if applicable, certifying that the opinion referred to in the
preceding clause (b) has been delivered and that such transaction or series of
transactions has been approved by a majority of the Board of Directors of the
Issuer; provided, however, that this covenant will not restrict the Issuer from
(i) paying dividends in respect of its Capital Stock permitted under the
covenant described under '--Limitation on Restricted Payments' above, (ii)
paying reasonable and customary fees and indemnities to directors of the Issuer
who are not employees of the Issuer, (iii) making loans or advances to, or
providing indemnities of, officers, employees or consultants of the Issuer and
its Subsidiaries (including travel and moving expenses) in the ordinary course
of business for bona fide business purposes of the Issuer or such Subsidiary not
in excess of $1,000,000 in the aggregate at any one time outstanding, (iv)
making loans to officers (or a partnership comprised of such officers) for the
purpose of purchasing common stock of RH Holdings and making any payment
required or specifically permitted by the terms of the Administrative Services
Agreement, (v) paying an annual monitoring fee of $250,000 (plus any increase
thereof which may be made to account for inflation) to Blackstone Management
Partners L.P. or any of its Affiliates designated by Blackstone Management
Partners L.P., (vi) making any payment to RH Holdings permitted by the covenant
described under '--Limitations on Restricted Payments' above or (vii) entering
into any transaction with any of its Wholly-Owned Subsidiaries or restricting
any Subsidiary from entering into any transaction with any other Wholly-Owned
Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Issuer will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Subsidiary
of the Issuer to (a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock or any other interest or
participation in, or measured by, its profits, (b) pay any Indebtedness owed to
the Issuer or any other Subsidiary of the Issuer, (c) make loans or advances to,
or any investment in, the Issuer or any other Subsidiary of the Issuer, (d)
transfer any of its properties or assets to the Issuer or any other Subsidiary
of the Issuer or (e) guarantee any Indebtedness of the Issuer or any other
Subsidiary of the Issuer, except for such encumbrances or restrictions existing
under or by reason of (i) applicable law, (ii) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of the
Issuer or any Subsidiary of the Issuer, (iii) customary restrictions on
transfers of property subject to a Lien permitted under the Indenture, (iv) any
agreement or other instrument of a Person acquired by the Issuer or any
Subsidiary of the Issuer (or a Subsidiary of such Person) in existence at the
time of such acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the properties or assets of the
Person, so acquired, (v) provisions contained in agreements or instruments
relating to Indebtedness which prohibit the transfer of all or substantially all
of the assets of the obligor thereunder unless
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the transferee shall assume the obligations of the obligor under such agreement
or instrument, (vi) any restriction with respect to a Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary pending the
closing of such sale or disposition, (vii) any encumbrance or restriction
arising or agreed to in the ordinary course of business and that does not,
individually or in the aggregate, detract from the value of the property or
assets of the Issuer or any Subsidiary in any manner material to the Issuer or
such Subsidiary and (viii) encumbrances and restrictions under agreements in
effect on the Issue Date, including the Bank Credit Agreement, and encumbrances
and restrictions in permitted refinancings or replacements of Indebtedness
evidenced by the agreements referred to in this clause (viii) which are no less
favorable to the holders of the Exchange Notes than those contained in the
Indebtedness so refinanced or replaced.
Limitation on the Issuance of Other Senior Subordinated Indebtedness. The
Issuer will not, directly or indirectly, incur any Indebtedness (including
Acquired Indebtedness) that is subordinate in right of payment to any
Indebtedness of the Issuer, unless such Indebtedness (x) is pari passu with or
(y) is subordinate in right of payment to the Exchange Notes in the same manner
and at least to the same extent as the Exchange Notes are subordinated to Senior
Indebtedness.
Limitation on Sale-Leaseback Transactions. The Issuer will not, and will
not permit any of its Subsidiaries to, enter into any Sale-Leaseback Transaction
with respect to any property of the Issuer or any of its Subsidiaries.
Notwithstanding the foregoing, the Issuer and its Subsidiaries may enter into
Sale-Leaseback Transactions; provided that (a) the Attributable Value of such
Sale-Leaseback Transaction shall be deemed to be Indebtedness of the Issuer or
such Subsidiary, as the case may be, and (b) either (i) after giving pro forma
effect to any such Sale-Leaseback Transaction and the foregoing clause (a), the
Issuer would be able to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described under '--Limitation on Indebtedness'
above (assuming a market rate of interest with respect to such additional
Indebtedness) or (ii) the proceeds of such Sale-Leaseback Transaction are
applied to repay existing Indebtedness (other than Indebtedness outstanding
under any revolving credit facility).
Reporting Requirements. The Issuer will file with the Commission or if not
permitted, deliver to the Trustee, the annual reports, quarterly reports and
other documents required to be filed with the Commission pursuant to Sections 13
and 15(d) of the Exchange Act, whether or not the Issuer has a class of
securities registered under the Exchange Act. In the event that The Loewen Group
Inc. fully and unconditionally guarantees the obligations of the Issuer under
the Exchange Notes, the reporting requirements may be satisfied through the
filing and provisions of the annual reports, quarterly reports and other
documents in respect of The Loewen Group Inc. Such requirements may also be
satisfied prior to the 180th day after the Closing Date, with the filing with
the Commission of the Exchange Offer Registration Statement. The Issuer will be
required to file with the Trustee and provide to each Noteholder within 15 days
after it files them with the Commission (or if any such filing is not permitted
under the Exchange Act, 15 days after the Issuer would have been required to
make such filing) copies of such reports and documents.
MERGER, SALE OF ASSETS, ETC.
The Issuer will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets as an entirety
to, any Person or Persons, and the Issuer will not permit any of its
Subsidiaries to enter into any such transaction or series of transactions if
such transaction or series of transactions, in the aggregate, would result in a
sale, assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Issuer or the Issuer and
its Subsidiaries, taken as a whole, to any other Person or Persons, unless at
the time of and after giving effect thereto (a) either (i) if the transaction or
series of transactions is a merger or consolidation, the Issuer shall be the
surviving Person of such merger or consolidation, or (ii) the Person formed by
such consolidation or into which the Issuer or such Subsidiary is merged or to
which the properties and assets of the Issuer or such Subsidiary, as the case
may be, are transferred (any such surviving Person or transferee Person being
the 'Surviving Entity') shall be a corporation organized and existing under the
laws of the United States of America, any state thereof, the District of
Columbia, Canada or any province thereof and shall expressly assume by a
supplemental indenture executed and delivered to the Trustee, in form reasonably
satisfactory to the Trustee, all the obligations of the Issuer under the
Exchange Notes and the Indenture, and in each case, the
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Indenture shall remain in full force and effect; (b) immediately before and
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), no Default or Event of Default shall have occurred
and be continuing; (c) the Issuer or the Surviving Entity, as the case may be,
after giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in connection with or in respect of such transaction or series of
transactions), could incur $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described under '--Certain Covenants--Limitation
on Indebtedness' above (assuming a market rate of interest with respect to such
additional Indebtedness); and (d) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Consolidated Net Worth of the Issuer or the Surviving Entity, as the case
may be, is at least equal to the Consolidated Net Worth of the Issuer
immediately before such transaction or series of transactions.
Notwithstanding the foregoing clauses (b), (c) and (d), (i) any Subsidiary
may consolidate with, merge into or transfer all or part of its properties and
assets to the Issuer and (ii) the Issuer may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Issuer in another
jurisdiction to realize tax or other benefits.
In connection with any consolidation, merger, transfer, lease, assignment
or other disposition contemplated hereby, the Issuer shall deliver, or cause to
be delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officer's certificate and an opinion of counsel, each stating
that such consolidation, merger, transfer, lease, assignment or other
disposition and the supplemental indenture in respect thereof comply with the
requirements under the Indenture; provided, however, that solely for purposes of
computing amounts described in subclause (C) of the covenant described under
'--Certain Covenants--Limitation on Restricted Payments' above, any such
successor Person shall only be deemed to have succeeded to and be substituted
for the Issuer with respect to periods subsequent to the effective time of such
merger, consolidation or transfer of assets.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing, in which the
Issuer is not the continuing corporation, the successor corporation formed by
such a consolidation or into which the Issuer is merged or to which such
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Issuer under the Indenture with the same effect as
if such successor corporation had been named as the Issuer therein.
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EVENTS OF DEFAULT
The following are 'Events of Default' under the Indenture:
(i) default in the payment of the principal of or premium, if any, on
any Exchange Note when the same becomes due and payable (upon Stated
Maturity, acceleration, optional redemption, required purchase, scheduled
principal payment or otherwise); or
(ii) default in the payment of an installment of interest on any of
the Exchange Notes, when the same becomes due and payable, which default
continues for a period of 30 days; or
(iii) failure to perform or observe any other term, covenant or
agreement contained in the Exchange Notes or the Indenture (other than a
default specified in clause (i) or (ii) above) and such default continues
for a period of 30 days after written notice of such default requiring the
Issuer to remedy the same shall have been given (x) to the Issuer by the
Trustee or (y) to the Issuer and the Trustee by holders of 25% in aggregate
principal amount of the Notes and Exchange Notes then outstanding; or
(iv) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Issuer or any Subsidiary of the Issuer then has outstanding
Indebtedness in excess of $5,000,000, individually or in the aggregate, and
either (a) such Indebtedness has not been paid at final maturity or (b)
such default or defaults have resulted in the acceleration of the maturity
of such Indebtedness; or
(v) one or more judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the
payment of money in excess of $5,000,000, either individually or in the
aggregate, shall be entered against the Issuer or any Subsidiary of the
Issuer or any of their respective properties and shall not be discharged or
fully bonded and there shall have been a period of 60 days after the date
on which any period for appeal has expired and during which a stay of
enforcement of such judgment, order or decree shall not be in effect; or
(vi) certain events of bankruptcy, insolvency or reorganization with
respect to the Issuer or any Significant Subsidiary of the Issuer shall
have occurred.
If an Event of Default (other than as specified in clause (vi) above with
respect to the Issuer) shall occur and be continuing, the Trustee, by notice to
the Issuer, or the holders of at least 25% in aggregate principal amount of the
Notes and Exchange Notes then outstanding, by written notice to the Trustee and
the Issuer, may declare the principal of, premium, if any, and accrued and
unpaid interest, if any, on all of the outstanding Notes and Exchange Notes due
and payable immediately, upon which declaration, all amounts payable in respect
of the Notes and Exchange Notes shall be immediately due and payable; provided,
however, that so long as the Bank Credit Agreement shall be in force and effect,
if an Event of Default shall have occurred and be continuing (other than an
Event of Default under clause (vi) with respect to the Issuer), any such
acceleration shall not be effective until the earlier to occur of (x) five
business days following delivery of a notice of such acceleration to the Bank
Agent under the Bank Credit Agreement and (y) the acceleration of any
Indebtedness under the Bank Credit Facilities. If an Event of Default specified
in clause (vi) above with respect to the Issuer occurs and is continuing, then
the principal of, premium, if any, and accrued and unpaid interest, if any, on
all of the outstanding Notes and Exchange Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes or Exchange Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes and Exchange Notes, by written notice to the Issuer and the
Trustee, may rescind such declaration if (a) the Issuer has paid or deposited
with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Notes and Exchange Notes, (iii) the principal of and
premium, if any, on any Notes and Exchange Notes which have become due otherwise
than by such declaration of acceleration and interest thereon at the rate borne
by the Notes and Exchange Notes, and (iv) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and Exchange Notes which has become due otherwise than
by such declaration of
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acceleration; (b) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction; and (c) all Events of Default, other than
the non-payment of principal of, premium, if any, and interest on the Notes and
Exchange Notes that have become due solely by such declaration of acceleration,
have been cured or waived.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes and Exchange Notes may by notice to the Trustee on behalf
of the holders of all the Notes and Exchange Notes waive any defaults under the
Indenture, except a default in the payment of the principal of, premium, if any,
or interest on any Note or Exchange Note, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each Note and Exchange Note outstanding.
No holder of any of the Exchange Notes has any right to institute any
proceeding with respect to the Indenture or the Exchange Notes or any remedy
thereunder, unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes and Exchange Notes have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee
under the Exchange Notes and the Indenture, the Trustee has failed to institute
such proceeding within 30 days after receipt of such notice and the Trustee,
within such 30-day period, has not received directions inconsistent with such
written request by holders of a majority in aggregate principal amount of the
outstanding Notes and Exchange Notes. Such limitations do not apply, however, to
a suit instituted by a holder of an Exchange Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Exchange Note
on or after the respective due dates expressed in such Exchange Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders unless such holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, the holders of not less than a majority in aggregate principal
amount of the outstanding Notes and Exchange Notes have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee under the
Indenture.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each holder of the Exchange Notes
notice of the Default or Event of Default within 30 days after obtaining
knowledge thereof (or as earlier required under Section 11.01 of the Indenture
and Section 315(b) of the TIA). Except in the case of a Default or an Event of
Default in payment of principal of, premium, if any, or interest on any Exchange
Notes, the Trustee may withhold the notice to the holders of such Exchange Notes
if a committee of its board of directors or trust officers in good faith
determines that withholding the notice is in the interest of the holders of the
Exchange Notes.
The Issuer is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Issuer of its obligations under the
Indenture and as to any default in such performance. The Issuer is also required
to notify the Trustee within ten days after the Issuer becomes aware of any
event which is, or after notice or lapse of time or both would become, an Event
of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Issuer may, at its option and at any time, terminate the obligations of
the Issuer with respect to the outstanding Exchange Notes ('defeasance'). Such
defeasance means that the Issuer shall be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Exchange Notes, except for
(i) the rights of holders of outstanding Exchange Notes to receive payment in
respect of the principal of, premium if any, and interest on such Exchange Notes
when such payments are due, (ii) the Issuer's obligations to issue temporary
Exchange Notes, register the transfer or exchange of any Exchange Notes, replace
mutilated, destroyed, lost or stolen Exchange Notes, to maintain an office or
agency for payments in respect of the Exchange Notes and to compensate the
Trustee, (iii) the rights, powers, trusts, duties and immunities of the Trustee,
and (iv) the defeasance provisions of the Indenture. In addition, the Issuer
may, at its option and at any
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time, elect to terminate the obligations of the Issuer with respect to certain
covenants that are set forth in the Indenture, some of which are described under
'--Certain Covenants' above (including the covenant described under '--Certain
Covenants--Change of Control' above) and any subsequent failure to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Exchange Notes ('covenant defeasance').
In order to exercise either defeasance or covenant defeasance, (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Exchange Notes, cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding Exchange Notes to redemption or maturity
(except lost, stolen or destroyed Exchange Notes which have been replaced or
paid); (ii) the Issuer shall have delivered to the Trustee an opinion of counsel
to the effect that the holders of the outstanding Exchange Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance or covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such defeasance or covenant defeasance had not occurred (in the case
of defeasance, such opinion must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable federal income tax laws);
(iii) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit; (iv) such defeasance or covenant defeasance shall not
cause the Trustee to have a conflicting interest with respect to any securities
of the Issuer; (v) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument to which the Issuer is a party or by which it is bound; (vi) the
Issuer shall have delivered to the Trustee an opinion of counsel to the effect
that (A) after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally and (B) the trust funds
will not be subject to the rights of holders of Senior Indebtedness, including,
without limitation, those rights arising under the Indenture; and (vii) the
Issuer shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent under the
Indenture to either defeasance or covenant defeasance, as the case may be, have
been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the Indenture) as to all
outstanding Exchange Notes when (i) either (a) all the Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes which have been replaced or repaid and Exchange Notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Issuer and thereafter repaid to the Issuer or discharged from such
trust) have been delivered to the Trustee for cancellation or (b) all Exchange
Notes not theretofore delivered to the Trustee for cancellation (except lost,
stolen or destroyed Exchange Notes which have been replaced or paid) have been
called for redemption pursuant to the terms of the Exchange Notes or have
otherwise become due and payable and the Issuer has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire Indebtedness on the Exchange Notes not theretofore
delivered to the Trustee for cancellation, for principal of, premium, if any,
and interest on the Exchange Notes to the date of deposit together with
irrevocable instructions from the Issuer directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Issuer has paid all other sums payable under the Indenture by the Issuer;
(iii) there exists no Default or Event of Default under the Indenture; and (iv)
the Issuer has delivered to the Trustee an officers' certificate and an opinion
of counsel stating that all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Issuer, when authorized by a resolution of its Board
of Directors, and the Trustee may, without the consent of the holders of any
outstanding Exchange Notes, amend, waive or supplement the Indenture or the
Exchange Notes for certain specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies, qualifying, or maintaining the
qualification of, the Indenture under the
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Trust Indenture Act of 1939, evidencing the acceptance and appointment of a
successor trustee, providing for the guarantee of the Exchange Notes by The
Loewen Group Inc. or making any other change that does not adversely affect the
rights of any holder of Exchange Notes; provided, however, that, in the case of
certain of such amendments, waivers or supplements, the Issuer has delivered to
the Trustee an opinion of counsel stating that such change does not adversely
affect the rights of any holder of Exchange Notes. Other amendments and
modifications of the Indenture or the Exchange Notes may be made by the Issuer
and the Trustee with the consent of the holders of not less than a majority of
the aggregate principal amount of the outstanding Notes and Exchange Notes;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Exchange Note affected thereby, (i)
reduce the principal amount of, extend the fixed maturity of or alter the
redemption provisions of, the Exchange Notes, (ii) change the currency in which
any Exchange Note or any premium or the interest thereon is payable or make the
principal of, premium, if any, or interest on any Exchange Note payable in money
other than that stated in the Exchange Note, (iii) reduce the percentage in
principal amount of outstanding Notes and Exchange Notes that must consent to an
amendment, supplement or waiver or consent to take any action under the
Indenture or the Exchange Notes, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to the Exchange Notes, (v) waive a
default in payment with respect to the Exchange Notes, (vi) amend, change or
modify the obligations of the Issuer to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate the offer with
respect to any Asset Sale or modify any of the provisions or definitions with
respect thereto, (vii) reduce or change the rate or time for payment of interest
on the Exchange Notes or (viii) modify or change any provision of the Indenture
affecting the subordination or ranking of the Exchange Notes in a manner adverse
to the holders of the Exchange Notes.
REGISTRATION RIGHTS AGREEMENT
Pursuant to a Registration Rights Agreement between the Issuer and the
Initial Purchaser, the Issuer agreed to file with the Commission and use its
best efforts to cause to become effective a registration statement (the
'Exchange Offer Registration Statement') with respect to the Exchange Notes and,
upon becoming effective, to offer the holders of the Notes the opportunity to
exchange their Notes for the Exchange Notes of the corresponding series (the
'Exchange Offer'). Under existing Commission interpretations contained in
no-action letters to third parties, the Exchange Notes would in general be
freely transferable after the Exchange Offer by the holders thereof, other than
affiliates of the Issuer, without further registration under the Securities Act
(subject to certain representations required to be made by each such holder);
provided that in the case of broker-dealers ('Participating Broker-Dealers'), a
prospectus meeting the requirements of the Securities Act is delivered as
required. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Rights Agreement, the Issuer is
required to allow Participating Broker-Dealers and any other persons, if any,
with similar prospectus delivery requirements, to use the prospectus contained
in the Exchange Offer Registration Statement in connection with the resale of
the Exchange Notes. A Participating Broker-Dealer or any other person that
delivers such a prospectus to purchasers in connection with such resales will be
subject to certain of the civil liability provisions under the Securities Act
and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations thereunder).
The Registration Statement of which this Prospectus is a part constitutes
the Exchange Offer Registration Statement for the Exchange Offer.
In the event that (i) due to a change in current interpretations by the
Commission, the Issuer is not permitted to effect the Exchange Offer, (ii) the
Exchange Offer is not for any other reason consummated within 210 days after the
later of (x) the date on which the Issuer delivers the Notes to the Initial
Purchaser and (y) the Acquisition Closing Date (hereinafter, such later date
shall be referred to as the 'Closing Date') or (iii) under certain
circumstances, if the Initial Purchaser shall so request, it is contemplated
that the Issuer will file a registration statement (a 'Shelf Registration
Statement') covering resales (a) by the holders of the Notes in the event the
Issuer is not permitted to effect the Exchange Offer pursuant to the foregoing
clause (i) or the Exchange Offer is not consummated within 210 days after the
Closing Date pursuant to the foregoing clause (ii) or (b) by the
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holders of Notes with respect to which the Issuer receives notice pursuant to
the foregoing clause (iii), and will use its best efforts to cause any such
Shelf Registration Statement to become effective and to keep such Shelf
Registration Statement effective for 180 days from the effective date thereof.
The Issuer shall, if it files a Shelf Registration Statement, provide to each
holder of the Notes copies of the prospectus and notify each such holder when
the Shelf Registration Statement has become effective. A holder that sells Notes
pursuant to a Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
current prospectus to purchasers, and will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales.
Under the Registration Rights Agreement, the Issuer has agreed to: (i) file
the Exchange Offer Registration Statement or a Shelf Registration Statement with
the Commission within 60 days after the Closing Date, (ii) use its best efforts
to have such Exchange Offer Registration Statement or Shelf Registration
Statement declared effective by the Commission within 180 days after the Closing
Date, and (iii) use its best efforts to consummate the Exchange Offer within 210
days after the Closing Date. Each holder of Notes, by virtue of becoming so,
will be bound by the provisions of the Registration Rights Agreement that may
require the holder to furnish notice or other information to the Issuer as a
condition to certain obligations of the Issuer to file a Shelf Registration
Statement by a particular date or to maintain its effectiveness for the
prescribed 180-day period.
If the Issuer fails to comply with the above provisions, additional
interest (the 'Additional Interest') shall be assessed on the Notes as follows:
(i) (A) if an Exchange Offer Registration Statement or, in the event
that due to a change in current interpretations by the Commission the
Issuer is not permitted to effect the Exchange Offer, a Shelf Registration
Statement is not filed within 60 days following the Closing Date or (B) in
the event that within the time period prescribed in the Registration Rights
Agreement, any holder or holders of Notes shall notify the Issuer that such
holders (x) are prohibited by applicable law or Commission policy from
participating in the Exchange Offer, (y) may not resell Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and that the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by
such holder or (z) are broker-dealers and hold Notes acquired directly from
the Issuer or an 'affiliate' of the Issuer, if a Shelf Registration
Statement is not filed within 45 days after expiration of the prescribed
time period, then commencing on the 61st day after the Closing Date or the
46th day after expiration of the prescribed time period, as the case may
be, Additional Interest shall be accrued on the Notes (or, in the case of
clause (B), those Notes held by holders within the scope of subclause (x),
(y) or (z)) over and above the accrued interest at a rate of .50% per annum
for the first 90 days immediately following the 61st day after the Closing
Date or the 46th day after expiration of the prescribed time period, as the
case may be, such Additional Interest rate increasing by an additional .25%
per annum at the beginning of each subsequent 90-day period;
(ii) if an Exchange Offer Registration Statement or a Shelf
Registration Statement is filed pursuant to clause (i) of the preceding
full paragraph and is not declared effective within 180 days following
either the Closing Date or the expiration of the prescribed time period, as
the case may be, then commencing on the 181st day after either the Closing
Date or the expiration of the prescribed time period, as the case may be,
Additional Interest shall be accrued on the Notes affected by such failure
over and above the accrued interest at a rate of .50% per annum for the
first 90 days immediately following the 181st day after either the Closing
Date or the expiration of the prescribed time period, as the case may be,
such Additional Interest rate increasing by an additional .25% per annum at
the beginning of each subsequent 90-day period; and
(iii) if either (A) the Issuer has not exchanged Exchange Notes for
all Notes validly tendered and not withdrawn in accordance with the terms
of the Exchange Offer on or prior to 30 days after the date on which the
Exchange Offer Registration Statement was declared effective, or (B) if
applicable, a Shelf Registration Statement has been declared effective and
such Shelf Registration Statement ceases to be effective prior to 180 days
from its original effective date, then Additional Interest shall be accrued
on the Notes affected thereby over and above the accrued interest at a rate
of .50% per annum for the first 60 days immediately following the (x) 31st
day after such effective date, in the case of (A) above, or (y) the day
such Shelf Registration Statement ceases to be effective in the case of (B)
above, such Additional Interest rate increasing by an additional .25% per
annum at the beginning of each subsequent 60-day period;
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provided, however, that the Additional Interest rate on the Notes may not exceed
1.5% per annum; and provided further that (1) upon the filing of the Exchange
Offer Registration Statement or a Shelf Registration Statement (in the case of
(i) above), (2) upon the effectiveness of the Exchange Offer Registration
Statement or a Shelf Registration Statement (in the case of (ii) above), or (3)
upon the exchange of Exchange Notes for all Notes validly tendered in the
Exchange Offer or upon the effectiveness of the Shelf Registration Statement
which had ceased to remain effective prior to 180 days from its original
effective date (in the case of (iii) above), Additional Interest on the Notes as
a result of such clause (i), (ii) or (iii) shall cease to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the interest payment dates of the Notes.
The amount of Additional Interest will be determined by multiplying the
applicable Additional Interest rate by the principal amount of the Notes,
multiplied by a fraction, the numerator of which is the number of days such
Additional Interest rate was applicable during such period, and the denominator
of which is 360.
If the Issuer effects the Exchange Offer, the Issuer will be entitled to
close the Exchange Offer provided that it has accepted all Notes theretofore
validly tendered in accordance with the terms of the Exchange Offer. Notes not
tendered in the Exchange Offer shall bear interest at the same rate as in effect
at the time of issuance of the Notes.
The foregoing summary of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Registration Rights
Agreement, which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Notes pursuant to the terms of, the Exchange Offer, the Company
will have fulfilled certain of its obligations under the Registration Rights
Agreement and, accordingly, there will be no increase in the interest rate on
the Notes and the holders of the Notes will have no further registration or
other rights under such agreement.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent Person would exercise under the circumstances in the conduct of such
Person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee thereunder, should it become a creditor of the Issuer, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined in such Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture is, and the Exchange Notes will be, governed by the laws of
the State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
'Acquisition Transaction' means, collectively, the acquisition of Roses,
Inc. and its Subsidiaries through the merger of a Subsidiary of the Issuer with
and into Roses, Inc., the acquisition of the cemetery related assets and
liabilities of Rose Hills Memorial Park Association by a Subsidiary of the
Issuer, the contribution by a Subsidiary of LGII to RH Holdings, by RH Holdings
to the Issuer, and by the Issuer to certain of its Subsidiaries, of 14
additional funeral homes and two combination funeral home and cemetery
properties previously owned or leased by LGII or its affiliates, the initial
borrowing under the Bank Credit Facilities and the issuance and sale of the
Notes.
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'Acquired Indebtedness' means Indebtedness of a Person (a) assumed in
connection with an Asset Acquisition from such Person or (b) existing at the
time such Person becomes a Subsidiary of any other Person.
'Administrative Services Agreement' means the Administrative Services
Agreement, dated as of November 19, 1996, between the Issuer and LGII as the
same may be amended, supplemented or otherwise modified from time to time.
'Affiliate' means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person.
'Asset Acquisition' means (a) an Investment by the Issuer or any Subsidiary
of the Issuer in any other Person pursuant to which such Person shall become a
Subsidiary of the Issuer or any Subsidiary of the Issuer, or shall be merged
with or into the Issuer or any Subsidiary of the Issuer, (b) the acquisition by
the Issuer or any Subsidiary of the Issuer of the assets of any Person (other
than a Subsidiary of the Issuer) which constitute all or substantially all of
the assets of such Person or (c) the acquisition by the Issuer or any Subsidiary
of the Issuer of any division or line of business of any Person (other than a
Subsidiary of the Issuer).
'Asset Sale' means any direct or indirect sale, issuance, conveyance,
transfer, lease or other disposition to any Person other than the Issuer or a
Subsidiary of the Issuer, in one or a series of related transactions, of (a) any
Capital Stock of any Subsidiary of the Issuer (other than in respect of
director's qualifying shares or investments by foreign nationals mandated by
applicable law); (b) all or substantially all of the properties and assets of
any division or line of business of the Issuer or any Subsidiary of the Issuer;
or (c) any other properties or assets of the Issuer or any Subsidiary of the
Issuer other than in the ordinary course of business. For the purposes of this
definition, the term 'Asset Sale' shall not include (i) any sale, transfer or
other disposition of equipment, tools or other assets (including Capital Stock
of any Subsidiary of the Issuer) by the Issuer or any of its Subsidiaries in one
or a series of related transactions in respect of which the Issuer or such
Subsidiary receives cash or property with an aggregate Fair Market Value of
$10,000,000 or less; (ii) a disposition by a Subsidiary to the Issuer or a
Wholly-Owned Subsidiary of the Issuer; and (iii) any sale, issuance, conveyance,
transfer, lease or other disposition of properties or assets that is governed by
the provisions described under '--Merger, Sale of Assets, Etc.' above.
'Attributable Value' means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period after
excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the case
of any lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the amount of such penalty, but no rent shall
be considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated. 'Attributable Value' means, as to a
Capitalized Lease Obligation under which any Person is at the time liable and at
any date as of which the amount thereof is to be determined, the capitalized
amount thereof that would appear on the face of a balance sheet of such Person
in accordance with GAAP.
'Average Life to Stated Maturity' means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years (or any fraction thereof) from such
date to the date or dates of each successive scheduled principal payment
(including, without limitation, any sinking fund requirements) of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
'Bank Agent' means The Bank of Nova Scotia, as administrative agent under
the Bank Credit Agreement and any successor agent.
'Bank Credit Agreement' means the Credit Agreement, dated as of November
19, 1996, among the Issuer, as borrower, RH Holdings, as guarantor, the Bank
Lenders referred to therein, the Bank Agent, and GSCP, as arranging agent, and
Goldman, Sachs & Co., as syndication agent, and all promissory notes,
guarantees, security
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agreements, pledge agreements, deeds of trust, mortgages, letters of credit and
other instruments, agreements and documents executed pursuant thereto or in
connection therewith, in each case as the same may be amended, supplemented,
restated, renewed, refinanced, replaced or otherwise modified (in whole or in
part and without limitation as to amount, terms, conditions, covenants or other
provisions) from time to time.
'Bank Credit Facilities' means collectively, the Bank Term Facility and the
Revolving Credit Facility under the Bank Credit Agreement.
'Bank Term Facility' means the $75.0 million senior secured term loan
facility under the Bank Credit Agreement, which may be increased by up to $25.0
million in accordance with the terms of the Bank Credit Agreement.
'Capital Stock' means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such Person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
'Capitalized Lease Obligation' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
'Cash Equivalents' means, at any time, (i) any evidence of Indebtedness
with a maturity of 365 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptances with a
maturity of 365 days or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500,000,000; (iii) certificates of deposit with a
maturity of 365 days or less of any financial institution that is not organized
under the laws of the United States, any state thereof or the District of
Columbia that are rated at least A-2 by S&P or at least P-2 by Moody's or at
least an equivalent rating category of another nationally recognized securities
rating agency; (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the government of the United States of America or issued by any agency
thereof and backed by the full faith and credit of the United States of America,
in each case maturing within 365 days from the date of acquisition; provided
that the terms of such agreements comply with the guidelines set forth in the
Federal Financial Agreements of Depository Institutions With Securities Dealers
and Others, as adopted by the Comptroller of the Currency on October 31, 1985;
and (v) other than with respect to the subordination provisions set forth above,
notes held by the Issuer or any Subsidiary which were obtained by the Issuer or
such Subsidiary in connection with Asset Sales (x) in the ordinary course of its
funeral home, cemetery or cremation businesses or (y) which were required to be
made pursuant to applicable federal or state law.
'Change of Control' means the occurrence of any of the following events:
(a) any 'person' or 'group' (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), excluding Permitted Holders, is or becomes the 'beneficial
owner' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have 'beneficial ownership' of all securities that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time, upon the happening of an event or
otherwise), directly or indirectly, of more than 35% of the total Voting Stock
of RH Holdings, under circumstances where the Permitted Holders (i)
'beneficially own' (as so defined) in the aggregate a lower percentage of the
Voting Stock than such other Person or 'group' and (ii) do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of RH Holdings; (b) RH Holdings
consolidates with, or merges with or into, another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to another Person, or another Person consolidates with, or merges
with or into, RH Holdings, in any such event pursuant to a transaction in which
the outstanding Voting Stock of RH Holdings is converted into or exchanged for
cash, securities or other property, other than any such transaction where (i)
the outstanding Voting Stock of RH Holdings is converted into or exchanged for
(1) Voting Stock (other than Redeemable Capital Stock) of the surviving or
transferee corporation or (2) cash, securities and other property in an amount
which could then be paid by the Issuer as a Restricted Payment under the
Indenture, or a combination thereof, and (ii) immediately after such transaction
no 'person'
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or 'group' (as such terms are used in Sections 13(d) and 14(d) of the Exchange
Act), excluding Permitted Holders, is the 'beneficial owner' (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have 'beneficial ownership' of all securities that such Person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time, upon the happening of an event or otherwise), directly or
indirectly, of more than 50% of the total Voting Stock of the surviving or
transferee corporation; (c) at any time during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of RH Holdings (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of RH
Holdings was approved by a vote of 66-2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of RH Holdings then in office;
or (d) RH Holdings is liquidated or dissolved or adopts a plan of liquidation.
'Common Stock' means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such Person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
'Consolidated Cash Flow' means, with respect to any Person for any period,
the sum of, without duplication, the amounts for such period, taken as a single
accounting period, of (a) Consolidated Net Income, (b) Consolidated Non-cash
Charges, (c) Consolidated Interest Expense and (d) Consolidated Income Tax
Expense.
'Consolidated Fixed Charge Coverage Ratio' means, with respect to any
Person, the ratio of the aggregate amount of Consolidated Cash Flow of such
Person for the four full fiscal quarters immediately preceding the date of the
transaction (the 'Transaction Date') giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (such four full fiscal quarter period
being referred to herein as the 'Four Quarter Period') to the aggregate amount
of Consolidated Fixed Charges of such Person for the Four Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition, 'Consolidated Cash Flow' and 'Consolidated Fixed Charges' shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence of any Indebtedness of
such Person or any of its Subsidiaries (and the application of the net proceeds
thereof) during the period commencing on the first day of the Four Quarter
Period to and including the Transaction Date (the 'Reference Period'),
including, without limitation, the incurrence of the Indebtedness giving rise to
the need to make such calculation (and the application of the net proceeds
thereof), as if such incurrence (and application) occurred on the first day of
the Reference Period, and (b) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness) occurring during
the Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Reference Period. In calculating the incremental 'Consolidated
Cash Flow' attributable to Asset Acquisitions occurring during the Reference
Period, pro forma effect will be given to (i) adjustments which, on the basis of
written advice provided to the Issuer by a 'big six' accounting firm, should be
permitted by Article 11 of Regulation S-X of the Commission and (ii) incremental
revenue resulting from changes in the investment strategy with respect to any
related endowment care fund which, in the case of both clause (i) and (ii), are
part of the Issuer's good faith business plan for such Asset Acquisition.
Furthermore, in calculating 'Consolidated Fixed Charges' for purposes of
determining the denominator (but not the numerator) of this 'Consolidated Fixed
Charge Coverage Ratio,' (i) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date (taking into account any Interest Rate Protection Agreement applicable to
such Indebtedness if such Interest Rate Protection Agreement has a remaining
term in excess of 12 months); and (ii) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Reference
Period. If such Person or any of its Subsidiaries directly or indirectly
guarantees Indebtedness of a
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third Person, the above clause shall give effect to the incurrence of such
guaranteed Indebtedness as if such Person or such Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness.
'Consolidated Fixed Charges' means, with respect to any Person for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense and (ii) the product of (a) the aggregate amount
of dividends and other distributions paid or accrued during such period in
respect of Preferred Stock and Redeemable Capital Stock (other than dividends
and distributions on Preferred Stock and Redeemable Capital Stock that are
non-cash through the Final Maturity Date) of such Person and its Subsidiaries on
a consolidated basis times (b) a fraction, the numerator which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal; provided,
however, that the denominator in clause (b) shall be one if such dividend or
other distribution is fully tax deductible.
'Consolidated Income Tax Expense' means, with respect to any Person for any
period, the provision for federal, state, local and foreign income taxes of such
Person and its Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP.
'Consolidated Interest Expense' means, with respect to any Person for any
period, without duplication, the sum of (i) the interest expense of such Person
and its Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations, (c)
the interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and (e) all accrued interest and (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such Person and its Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
'Consolidated Net Income' means, with respect to any Person, for any
period, the consolidated net income (or loss) of such Person and its
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses or any unusual or
nonrecurring noncash charge which is not, under GAAP, an extraordinary item,
(ii) the portion of net income (but not losses) of such Person and its
Subsidiaries allocable to minority interests in unconsolidated Persons to the
extent that cash dividends or distributions have not actually been received by
such Person or one of its Subsidiaries, (iii) net income (or loss) of any Person
combined with such Person or one of its Subsidiaries on a 'pooling of interests'
basis attributable to any period prior to the date of combination, (iv) any gain
or loss realized upon the termination of any employee pension benefit plan, on
an after-tax basis, (v) gains or losses in respect of any Asset Sales by such
Person or one of its Subsidiaries, (vi) the net income of any Subsidiary of such
Person to the extent that the declaration of dividends or similar distributions
by that Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its shareholders and (vii) any closing costs
associated with the Acquisition Transaction and the financing thereof,
restructuring costs and costs related to the closing of facilities.
'Consolidated Net Worth' means, with respect to any Person at any date, the
consolidated shareholders' equity of such Person less the amount of such
shareholders' equity attributable to Redeemable Capital Stock of such Person and
its Subsidiaries, as determined in accordance with GAAP.
'Consolidated Non-cash Charges' means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries reducing Consolidated Net Income of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an extraordinary
item or loss or any such charge which required an accrual of or a reserve for
cash charges for any future period).
'Currency Agreement' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer or any of its Subsidiaries against fluctuations in currency values.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
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'Designated Senior Indebtedness' means (i) all Senior Indebtedness under
the Bank Credit Agreement and (ii) any other Senior Indebtedness which (a) at
the time of the determination exceeds $5,000,000 in aggregate principal amount
and (b) is specifically designated in the instrument evidencing such Senior
Indebtedness as 'Designated Senior Indebtedness' by the Issuer.
'Event of Default' has the meaning set forth under 'Events of Default'
herein.
'Fair Market Value' means, with respect to any assets, the price, as
determined by the Issuer, acting in good faith which could be negotiated in an
arm's-length free market transaction, for cash, between a willing seller and a
willing buyer, neither of which is under pressure or compulsion to complete the
transaction; provided, however, that, with respect to any transaction which
involves an asset or assets in excess of $250,000, such determination shall be
evidenced by resolutions of the Board of Directors of the Issuer delivered to
the Trustee.
'Final Maturity Date' means November 15, 2004.
'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable on the date of
the Indenture and are consistently applied.
'Guarantee' means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
'Indebtedness' means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred in the ordinary course of business and which are
not overdue by more than 90 days, and excluding all obligations, contingent or
otherwise, of such Person in connection with any undrawn letters of credit,
banker's acceptance or other similar credit transaction, (b) all obligations of
such Person evidenced by bonds, notes, debentures or other similar instruments,
(c) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person (even
if the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade accounts payable arising in the ordinary course of business, (d)
all Capitalized Lease Obligations of such Person, (e) all Indebtedness referred
to in the preceding clauses of other Persons and all dividends of other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the Fair Market value of such property or asset or the amount of
the obligation so secured), (f) all guarantees of Indebtedness referred to in
this definition by such Person, (g) all Redeemable Capital Stock of such Person
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued dividends, (h) all obligations under or in respect of
Currency Agreements and Interest Rate Protection Obligations of such Person, (i)
any Preferred Stock of any Subsidiary of such Person valued at the sum of
(without duplication) (A) the liquidation preference thereof, (B) any mandatory
redemption payment obligations in respect thereof and (C) accrued cash dividends
thereon, and (j) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses (a)
through (i) above. For purposes hereof, the 'maximum fixed repurchase price' of
any Redeemable Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Capital Stock as
if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value shall be determined in good
faith by the board of directors of the issuer of such Redeemable Capital Stock.
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'Independent Financial Advisor' means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Issuer and (ii) which, in the judgment of the
Board of Directors of the Issuer, is otherwise independent and qualified to
perform the task for which it is to be engaged.
'Interest Rate Protection Agreement' means, with respect to any person, any
arrangement with any other Person whereby, directly or indirectly, such Person
is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
'Interest Rate Protection Obligations' means the obligations of any Person
pursuant to an Interest Rate Protection Agreement.
'Investment' means, with respect to any Person, any direct or indirect loan
or other extension of credit or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition by
such Person of any Capital Stock, bonds, notes, debentures or other securities
or evidences of Indebtedness issued by, any other Person. In addition, the Fair
Market Value of the assets of any Subsidiary of the Issuer at the time that such
Subsidiary is designated as an Unrestricted Subsidiary shall be deemed to be an
Investment made by the Issuer in such Unrestricted Subsidiary at such time.
'Investments' shall exclude extensions of trade credit by the Issuer and its
Subsidiaries in the ordinary course of business in accordance with normal trade
practices of the Issuer or such Subsidiary, as the case may be.
'Issue Date' means the date on which the Notes are originally issued.
'Lien' means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A Person shall be deemed to own subject to a Lien any property which such
Person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
'Maturity Date' means, with respect to any security, the date on which any
principal of such security becomes due and payable as therein or herein
provided, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
'Moody's' means Moody's Investors Service, Inc. and its successors.
'Net Cash Proceeds' means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Issuer or any Subsidiary of the Issuer) net of (i)
brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (iii) amounts required to be paid to any Person (other than the
Issuer or any Subsidiary of the Issuer) owning a beneficial interest in the
assets subject to the Asset Sale, (iv) all payments made on any Indebtedness
which is secured by any assets subject to such Asset Sale, in accordance with
the terms of any Lien upon such assets, or which must by its terms, or in order
to obtain a necessary consent to such Asset Sale, or by applicable law, be
repaid out of the proceeds from such Asset Sale and (v) appropriate amounts to
be provided by the Issuer or any Subsidiary of the Issuer, as the case may be,
as a reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale and retained by the Issuer or any Subsidiary of the Issuer,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an officers' certificate
delivered to the Trustee.
'Pari Passu Indebtedness' means Indebtedness of the Issuer which ranks pari
passu in right of payment with the Exchange Notes.
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'Permitted Holder' means Blackstone Capital Partners II Merchant Banking
Fund L.P. or Loewen Group International, Inc., or any Affiliate of either.
'Permitted Investments' means any of the following:
(i) Investments in any Wholly-Owned Subsidiary of the Issuer
(including any Person that pursuant to such Investment becomes a
Wholly-Owned Subsidiary of the Issuer) and any Person that is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, the Issuer or any Wholly-Owned Subsidiary of the Issuer
at the time such Investment is made and thereafter remains a Subsidiary;
(ii) Investments in Cash Equivalents;
(iii) loans or advances to officers, employees or consultants of the
Issuer and its Subsidiaries in the ordinary course of business for bona
fide business purposes of the Issuer and its Subsidiaries (including travel
and moving expenses) not in excess of $1,000,000 in the aggregate at any
one time outstanding;
(iv) Investments in evidences of Indebtedness, securities or other
property received from another Person by the Issuer or any of its
Subsidiaries in connection with any bankruptcy proceeding or by reason of a
composition or readjustment of debt or a reorganization of such Person or
as a result of foreclosure, perfection or enforcement of any Lien in
exchange for evidences of Indebtedness, securities or other property of
such Person held by the Issuer or any of its Subsidiaries, or for other
liabilities or obligations of such other Person to the Issuer or any of its
Subsidiaries that were created, in accordance with the terms of the
Indenture;
(v) Investments of funds received by the Issuer or its Subsidiaries in
the ordinary course of business, which funds are required to be held in
trust for the benefit of others by the Issuer or such Subsidiary, as the
case may be, and which funds do not constitute assets or liabilities of the
Issuer or such Subsidiary;
(vi) Investments in Related Businesses; provided that the sum of (i)
the aggregate Fair Market Value of all such Investments and (ii) the
aggregate Fair Market Value of all Preferred Stock permitted to be issued
pursuant to clause (z) of the covenant described under '--Certain
Covenants--Limitation on Issuances and Sale of Preferred Stock by
Subsidiaries' shall not exceed $5,000,000 at any time outstanding;
(vii) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Issuer or any
Subsidiary or in satisfaction of judgments;
(viii) Investments in Persons to the extent such Investment represents
the non-cash consideration otherwise permitted to be received by the Issuer
or its Subsidiaries in connection with an Asset Sale or in connection with
a transaction excepted from the definition of Asset Sale pursuant to the
last sentence of such definition; and
(ix) Investments existing on the Issue Date.
'Permitted Liens' means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Issuer or any of its Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(c) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, governmental
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
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(d) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(e) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Issuer or
any of its Subsidiaries;
(f) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(g) purchase money Liens to finance the acquisition of property or
assets of the Issuer or any Subsidiary of the Issuer acquired in the
ordinary course of business; provided, however, that (i) the related
purchase money Indebtedness shall not be secured by any property or assets
of the Issuer or any Subsidiary of the Issuer other than the property and
assets so acquired and (ii) the Lien securing such Indebtedness either (x)
exists at the time of such acquisition or (y) shall be created within 90
days of such acquisition;
(h) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods; and
(i) Liens with respect to Acquired Indebtedness incurred in accordance
with the covenant described under '--Certain Covenants--Limitation on
Indebtedness'.
'Person' means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
'Preferred Stock' means, with respect to any Person, any Capital Stock of
such Person that has preferential rights to any other Capital Stock of such
Person with respect to dividends or redemptions or upon liquidation.
'Redeemable Capital Stock' means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is or
upon the happening of an event or passage of time would be, required to be
redeemed prior to the Stated Maturity with respect to the principal of any
Exchange Note or is redeemable at the option of the holder thereof at any time
prior to any such Stated Maturity Date, or is convertible into or exchangeable
for debt securities at any time prior to any such Stated Maturity.
'Related Business' means any business, the majority of whose revenues are
derived from providing funeral or cemetery products or services or any business
or activity that is reasonably similar thereto or a reasonable extension,
development or expansion thereof or ancillary thereto.
'Revolving Credit Facility' means the $25 million senior secured revolving
credit facility under the Bank Credit Agreement.
'RH Holdings' means Rose Hills Holdings Corp., a Delaware corporation and
the parent of the Issuer.
'Sale-Leaseback Transaction' of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person after the acquisition
thereof or the completion of construction or commencement of operation thereof
to such lender or investor or to any Person to whom funds have been or are to be
advanced by such lender or investor on the security of such property or asset.
The stated maturity of such arrangement shall be the date of the last payment of
rent or any other amount due under such arrangement prior to the first date on
which such arrangement may be terminated by the lessee without payment of a
penalty.
'S&P' means Standard & Poor's Ratings Group and its successors.
'Senior Indebtedness' means the principal of, premium, if any, and interest
on any Indebtedness of the Issuer, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, 'Senior Indebtedness' shall include all obligations of the
Issuer
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now or hereafter existing under the Bank Credit Agreement, including without
limitation principal of, premium, and interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to the Issuer whether or not such post-petition interest is allowed as a claim
in such proceeding) on Indebtedness outstanding under the Bank Credit Agreement,
reimbursement obligations of the Issuer with respect to any letters of credit
outstanding under the Bank Credit Agreement and any obligation for fees,
expenses and indemnities. Notwithstanding the foregoing, 'Senior Indebtedness'
shall not include (a) Indebtedness evidenced by the Notes and Exchange Notes,
(b) Indebtedness that is expressly subordinate or junior in right of payment to
any Indebtedness of the Issuer, (c) Indebtedness which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United States
Code, is without recourse to the Issuer, (d) Indebtedness which is represented
by Redeemable Capital Stock, (e) Indebtedness for goods, materials or services
purchased in the ordinary course of business or Indebtedness consisting of trade
payables or other current liabilities (other than any current liabilities owing
under the Bank Credit Facilities or the current portion of any long-term
Indebtedness which would constitute Senior Indebtedness but for the operation of
this clause (e)), (f) Indebtedness of or amounts owed by the Issuer for
compensation to employees or for services rendered to the Issuer, (g) any
liability for federal, state, local or other taxes owed or owing by the Issuer,
(h) Indebtedness of the Issuer to a Subsidiary of the Issuer or any other
Affiliate of the Issuer or any of such Affiliate's Subsidiaries, (i) that
portion of any Indebtedness which is incurred by the Issuer in violation of the
Indenture and (j) amounts owing under leases (other than Capitalized Lease
Obligations).
'Significant Subsidiary' shall mean a Subsidiary which is a 'Significant
Subsidiary' as defined in Rule 1.02(w) of Regulation S-X under the Securities
Act.
'Stated Maturity' means, when used with respect to any Exchange Note or any
installment of interest thereon, the date specified in such Exchange Note as the
fixed date on which the principal of such Exchange Note or such installment of
interest is due and payable, and when used with respect to any other
Indebtedness, means the date specified in the instrument governing such
Indebtedness as the fixed date on which the principal of such Indebtedness, or
any installment of interest thereon, is due and payable.
'Subordinated Indebtedness' means Indebtedness of the Issuer or a
Subsidiary which is expressly subordinated in right of payment to the Exchange
Notes.
'Subsidiary' means, with respect to any Person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof and (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions). For purposes of this definition, any directors' qualifying
shares or investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Subsidiary. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be deemed a Subsidiary of the
Issuer under the Indenture, other than for purposes of the definition of an
Unrestricted Subsidiary, unless the Issuer shall have designated an Unrestricted
Subsidiary as a 'Subsidiary' by written notice to the Trustee under the
Indenture, accompanied by an Officers' Certificate as to compliance with the
Indenture; provided, however, that the Issuer shall not be permitted to
designate any Unrestricted Subsidiary as a Subsidiary unless, after giving pro
forma effect to such designation, (i) the Issuer would be permitted to incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
first paragraph of the covenant described under '--Certain Covenants--
Limitation on Indebtedness' above (assuming a market rate of interest with
respect to such Indebtedness) and (ii) all Indebtedness and Liens of such
Unrestricted Subsidiary would be permitted to be incurred by a Subsidiary of the
Issuer under the Indenture. A designation of an Unrestricted Subsidiary as a
Subsidiary may not thereafter be rescinded.
'Unrestricted Subsidiary' means a Subsidiary of the Issuer (i) none of
whose properties or assets were owned by the Issuer or any of its Subsidiaries
prior to the Issue Date, other than any such assets as are transferred to such
Unrestricted Subsidiary in accordance with the covenant described under
'--Certain Covenants-- Limitation on Restricted Payments' above, (ii) whose
properties and assets, to the extent that they secure Indebtedness, secure only
Non-Recourse Indebtedness and (iii) which has no Indebtedness other than Non-
78
<PAGE>
Recourse Indebtedness. As used above, 'Non-Recourse Indebtedness' means
Indebtedness as to which (i) neither the Issuer nor any of its Subsidiaries
(other than the relevant Unrestricted Subsidiary or another Unrestricted
Subsidiary) (1) provides credit support (including any undertaking, agreement or
instrument which would constitute Indebtedness), (2) guarantees or is otherwise
directly or indirectly liable or (3) constitutes the lender (in each case, other
than pursuant to and in compliance with the covenant described under '--Certain
Covenants--Limitation on Restricted Payments') and (ii) no default with respect
to such Indebtedness (including any rights which the holders thereof may have to
take enforcement action against the relevant Unrestricted Subsidiary or its
assets) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Issuer or its Subsidiaries (other than Unrestricted
Subsidiaries) to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
Subject to the foregoing, a Subsidiary may be designated as an Unrestricted
Subsidiary by written notice to the Trustee under the Indenture accompanied by
an Officers' Certificate as to compliance with the Indenture.
'Voting Stock' means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, Capital
Stock of any other class or classes shall have, or might have, voting power by
reason of the happening of any contingency).
'Wholly-Owned Subsidiary' means any Subsidiary of the Issuer of which 100%
of the outstanding Capital Stock is owned by one or more Wholly-Owned
Subsidiaries of the Issuer or by the Issuer and one or more Wholly-Owned
Subsidiaries of the Issuer. For purposes of this definition, any directors'
qualifying shares or investments by foreign nationals mandated by applicable law
shall be disregarded in determining the ownership of a Subsidiary.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Exchange Notes initially
will be represented by one or more permanent global certificates in definitive,
fully registered form (each a 'Global Exchange Note'). Each Global Exchange Note
will be deposited on the date of original issuance thereof with, or on behalf
of, The Depository Trust Company, New York, New York ('DTC') and registered in
the name of a nominee of DTC.
Exchange Notes held by persons who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(and which are thus ineligible to trade through DTC) (collectively referred to
herein as the 'Non-Global Purchasers') will be issued in registered certificated
form ('Certificated Exchange Notes'). Upon the transfer of any Certificated
Exchange Note initially issued to a Non-Global Purchaser, such Certificated
Exchange Note will, unless the transferee requests otherwise or the Global
Exchange Note has previously been exchanged in whole for Certificated Exchange
Notes, be exchanged for an interest in the Global Exchange Note.
The Exchange Notes issued to Non-Global Purchasers will be issued only in
registered form without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of and premium, if any, and interest on such
Exchange Notes will be payable, and such Notes will be transferable, at the
office of the Issuer's agent in the City of New York located at the corporate
trust office of the Trustee. In addition, interest may be paid, at the option of
the Issuer, by check mailed to the person entitled thereto as shown on the
security register. No service charge will be made for any transfer or exchange
of such Exchange Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
THE GLOBAL EXCHANGE NOTE
The Issuer expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Exchange Note, DTC or its custodian will credit, on
its internal system, the principal amount of Exchange Notes of the individual
beneficial interests represented by such Global Exchange Note to the respective
accounts for persons who have accounts with DTC and (ii) ownership of beneficial
interest in the Global Exchange Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of persons who have accounts with DTC
('participants')) and the records of participants (with respect to interests of
persons other than participants). Ownership of beneficial interests in the
79
<PAGE>
Global Exchange Note will be limited to persons who have accounts with DTC
participants or persons who hold interests through participants.
So long as DTC or its nominee is the registered owner or holder of Exchange
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Exchange Notes represented by such Global Exchange Note
for all purposes under the Indenture. No beneficial owner of an interest in the
Global Exchange Note will be able to transfer that interest except in accordance
with DTC's procedures, in addition to those provided for under the Indenture
with respect to the Exchange Notes.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on, the Global Exchange Note will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Issuer, the Trustee or any paying agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising, or reviewing any records relating
to such beneficial ownership interest.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Exchange Note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the Global Exchange Note as shown on the records of DTC
or its nominee. The Issuer also expects that payments by participants to owners
of beneficial interest in the Global Exchange Note held through such
participants will be governed by standing instructions and customary practice,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Exchange Note for any
reason, including to sell Exchange Notes to persons in states that require
physical delivery of the Certificated Exchange Notes, or to pledge such
securities, such holder must transfer its interest in the Global Exchange Note
in accordance with the normal procedures of DTC and with the procedures set
forth in the Indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants, to whose account the DTC interests in the Global Exchange Note are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such participant or participants has or have given
such direction. However, if there is continuing an Event of Default under the
Indenture and a holder so requests, DTC will exchange the Global Exchange Note
for Certificated Exchange Notes, which it will distribute to its participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the
Uniform Commercial Code and a 'clearing agency' registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants through electronic book entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ('indirect
participants').
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the Global Exchange Note among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuer nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
80
<PAGE>
CERTIFICATED EXCHANGE NOTES
If (i) the Issuer notifies the Trustee in writing that DTC is at any time
unwilling or unable to continue as a depository for the Global Exchange Note and
a successor depository is not appointed by the Issuer within 90 days or (ii) the
Issuer, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Exchange Notes in definitive form under the Indenture, then,
upon surrender by DTC of the Global Exchange Note, Certificated Exchange Notes
will be issued to each person that DTC identifies as the beneficial owner of the
Exchange Notes represented by the Global Exchange Note.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York, relating to
certain United States federal income tax consequences of the exchange of Notes
for Exchange Notes as of the date hereof. The discussion below is based upon the
provisions of the Internal Revenue Code of 1986, as amended, and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in federal
income tax consequences different from those discussed below.
The exchange of Notes for Exchange Notes in the Exchange Offer will not
constitute a taxable event to holders for United States federal income tax
purposes. Consequently, no gain or loss will be recognized by a holder upon
receipt of an Exchange Note, the holding period of the Exchange Note will
include the holding period of the Note and the basis of the Exchange Note will
be the same as the basis of the Note immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF NOTES FOR EXCHANGE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a period
of 180 days after the Expiration Date, it will make this Prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until , 1997, all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an 'underwriter' within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
'underwriter' within the meaning of the Securities Act.
For a period of 180 days after the Exchange Date the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer
81
<PAGE>
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Issuer by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
EXPERTS
The consolidated balance sheet of Roses, Inc. as of December 31, 1995, and
the related consolidated statements of income, shareholders' equity (deficit)
and cash flows for each of the two years in the period ended December 31, 1995
included in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The (i) consolidated financial statements of Rose Hills Company as of
December 31, 1996 and for the period from November 19, 1996 to December 31,
1996; (ii) the combined financial statements of Rose Hills Memorial Park
Association and Workman Mill Investment Company as of December 31, 1995 and
November 18, 1996, and for each of the years in the two-year period ended
December 31, 1995 and for the period from January 1, 1996 to November 18, 1996;
and (iii) the consolidated financial statements of Roses, Inc., as of November
18, 1996 and for the period January 1, 1996 to November 18, 1996 have been
included herein and in the registration statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The combined financial statements of Certain Subsidiaries of the Loewen
Group International, Inc. as of December 31, 1995 and November 18, 1996 and for
the year ended December 31, 1995 and for the period from January 1, 1996 to
November 18, 1996 have been included herein and in the registration statement in
reliance upon the report of KPMG, chartered accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
82
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ROSE HILLS COMPANY CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report............................................. F-2
Consolidated balance sheet as of December 31, 1996....................... F-3
Consolidated statement of operations for the period from November 19,
1996 to December 31, 1996.............................................. F-4
Consolidated statement of cash flows for the period from November 19,
1996 to December 31, 1996.............................................. F-5
Consolidated statement of stockholder's equity........................... F-6
Notes to consolidated financial statements............................... F-7
Unaudited consolidated balance sheet as of March 31, 1997................ F-22
Unaudited consolidated statement of operations for the three months ended
March 31, 1997 and 1996................................................ F-23
Unaudited consolidated statement of cash flows for the three months ended
March 31, 1997 and 1996................................................ F-24
Unaudited consolidated statement of stockholder's equity for the three
months ended March 31, 1997............................................ F-25
Notes to unaudited consolidated financial statements..................... F-26
ROSES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report - KPMG Peat Marwick LLP..................... F-27
Report of independent public accountants - Arthur Andersen LLP........... F-28
Consolidated balance sheets as of December 31, 1995 and November 18,
1996................................................................... F-29
Consolidated statements of income for the years ended December 31, 1994
and 1995 and the period from January 1, 1996 to November 18, 1996...... F-30
Consolidated statements of cash flows for the years ended December 31,
1994 and 1995 and the period from January 1, 1996 to November 18,
1996................................................................... F-31
Consolidated statements of shareholders' equity (deficit) for the years
ended December 31, 1994 and 1995 and the period from January 1, 1996 to
November 18, 1996...................................................... F-32
Notes to consolidated financial statements............................... F-33
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY COMBINED FINANCIAL STATEMENTS
Independent auditors' report............................................. F-44
Combined statements of financial position as at December 31, 1995 and
November 18, 1996...................................................... F-45
Combined statements of activities for the years ended December 31, 1994
and 1995 and the period from January 1, 1996 to November 18, 1996...... F-46
Combined statements of changes in net assets for the years ended December
31, 1994 and 1995 and the period from January 1, 1996 to November 16,
1996................................................................... F-47
Combined statements of cash flows for the years ended December 31, 1994
and 1995 and the period from January 1, 1996 to November 18, 1996...... F-48
Notes to combined financial statements................................... F-49
COMBINED FINANCIAL STATEMENTS OF CERTAIN SUBSIDIARIES OF LOEWEN GROUP
INTERNATIONAL, INC.
Auditors' report......................................................... F-61
Combined balance sheet as at December 31, 1995 and November 18, 1996..... F-62
Combined statement of operations for the year ended December 31, 1995 and
the period from January 1, 1996 to November 18, 1996................... F-63
Combined statement of cash flows for the year ended December 31, 1995 and
the period from January 1, 1996 to November 18, 1996................... F-64
Notes to combined financial statements................................... F-65
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Rose Hills Company:
We have audited the accompanying consolidated balance sheet of Rose Hills
Company (a wholly owned subsidiary of Rose Hills Holding Corp.) and subsidiaries
as of December 31, 1996 and the related consolidated statements of operations,
stockholder's equity and cash flows for the period from November 19, 1996 to
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statments are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rose
Hills Company (a wholly owned subsidiary of Rose Hills Holding Corp.) and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the period from November 19, 1996 to December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
June 12, 1997
F-2
<PAGE>
ROSE HILLS COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 7,900
Accounts receivable, net of allowances........................... 8,344
Inventories...................................................... 1,186
Prepaid expenses and other current assets........................ 2,666
Deferred tax asset............................................... 1,176
--------
Total current assets........................................... 21,272
--------
Long-term receivables, net of allowances........................... 5,153
Cemetery property, at cost......................................... 71,389
Property and equipment, net........................................ 73,283
Goodwill........................................................... 129,294
Deferred finance charges........................................... 11,891
Other assets....................................................... 5,552
--------
Total assets................................................... $317,834
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................. $ 2,383
Accrued expenses................................................. 7,857
Accrued interest................................................. 1,815
Other current liabilities........................................ 1,487
Current portion of long-term debt................................ 1,968
--------
Total current liabilities...................................... $ 15,510
--------
Retirement plan liabilities........................................ 7,616
Deferred tax liability............................................. 4,373
Subordinated Notes payable......................................... 80,000
Bank Senior Term Loan.............................................. 74,000
Other long-term debt............................................... 3,764
Other liabilities.................................................. 3,545
--------
Total liabilities.............................................. 188,808
--------
Commitments and contingencies
Stockholder's equity:
Common stock; par value of $0.01; 1,000 shares authorized; 1,000
shares outstanding --
Additional paid-in capital....................................... 129,554
Accumulated deficit.............................................. (528)
--------
Total stockholder's equity..................................... 129,026
--------
Total liabilities and stockholder's equity..................... $317,834
--------
--------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Sales and services:
Funeral sales and services.......................................... $3,131
Cemetery sales and services......................................... 3,001
Insurance commissions and other..................................... 868
------
Total sales and services......................................... 7,000
------
Cost of sales and services:
Funeral sales and services.......................................... 802
Cemetery sales and services......................................... 823
------
Total cost of sales and services................................. 1,625
------
Gross profit..................................................... 5,375
------
Selling, general and administrative expenses.......................... 3,757
Amortization of purchase price in excess of net
assets acquired and other intangibles............................... 372
------
Income from operations........................................... 1,246
------
Other income expense:
Interest expense.................................................... 2,031
Other income........................................................ 97
------
Total other expense.............................................. 1,934
------
Loss before income taxes......................................... (688)
Income tax benefit.................................................... 160
------
Net (loss)....................................................... $(528)
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss......................................................... $ (528)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 1,013
Provision for bad debts and sales cancellation................. 62
Provision for deferred taxes................................... (161)
Changes in assets and liabilities, net of effects of Acquisition
Transaction:
Increase in accounts receivable................................ (96)
Decrease in inventories........................................ 256
Increase in prepaid expenses and other current assets.......... (1,927)
Increase in accounts payable and accrued expenses.............. 8,303
Decrease in retirement plan liabilities........................ (992)
Decrease in other liabilities.................................. (792)
---------
Total adjustments........................................... (5,666)
---------
Net cash provided by operating activities................... 5,138
---------
Cash flow from investing activities:
Capital expenditures............................................. (279)
Cash paid for acquisitions, net of cash received................. (246,345)
---------
Net cash provided by (used in) investing activities......... (246,624)
---------
Cash flow from financing activities:
Proceeds from issuance of common stock to Parent................. $ 106,554
Proceeds from borrowings under Bank Credit Agreement............. 75,000
Proceeds from Subordinated Notes Payable......................... 80,000
Deferred finance charges......................................... (12,074)
Principal payments of capital lease obligations.................. (94)
---------
Net cash provided by financing activities................... 249,386
---------
Net increase in cash and cash equivalents.......................... 7,900
Cash and cash equivalents at beginning of period................... --
---------
Cash and cash equivalents at end of year........................... $ 7,900
---------
---------
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest....................................................... $ 35
Income taxes................................................... $ --
Noncash financing activities
Equipment, capital leases........................................ $ --
Acquisition of Affiliate Properties, contributed capital......... $ 23,000
Acquisition of businesses:
Cash paid for Acquisitions....................................... $ 247,968
Cash acquired from Acquisitions.................................. (1,623)
---------
Cash paid for Acquisitions, net of cash received............ $ 246,345
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM NOVEMBER 19, 1996 TO DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/ TOTAL
SHARES PAID IN (ACCUMULATED STOCKHOLDER'S
OUTSTANDING CAPITAL DEFICIT) EQUITY
----------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, November 19, 1996..... -- $ -- -- $ --
Issuance of common stock..... 1,000 106,554 -- 106,554
Capital contributions........ -- 23,000 -- 23,000
Net loss..................... -- -- (528) (528)
----------- ---------- ------------ --------------
Balance, December 31, 1996..... 1,000 $ 129,554 (528) $129,026
----------- ---------- ------------ --------------
----------- ---------- ------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The December 31, 1996 consolidated financial statements of Rose Hills
Company and subsidiaries ('collectively the Company') (a wholly owned subsidiary
of Rose Hills Holding Corp. 'RH Holdings') include the accounts of RH Mortuary
Corporation (the Mortuary), RH Satellite Properties Corporation (the Satellite
Properties) and RH Cemetery Corporation (the Cemetery). The Company is the
successor to the operations of the Mortuary, the Cemetery and the Satellite
Properties, as described below under Acquisition Transaction. The Company had no
prior operations. RH Holdings was formed by Blackstone Capital Partners II
Merchant Banking Fund L.P. and affiliates (Blackstone), RHI Management Direct
L.P. ('RHIMD') and the Loewen Group Inc. and affiliates (Loewen) (collectively
the Buyers,) in order to purchase certain mortuary and cemetery operations (the
'Acquisition Transaction') as discussed below.
The Company operates three cemetery and funeral home combinations as well
as fourteen funeral home properties in the Southern California area. Services
offered at the locations include, cemetery interment and professional mortuary
services, both of which include pre-need and at-need sales. In addition, the
Company offers for sale caskets, memorials, vaults, flowers, and the sale of
pre-need funeral insurance from which commissions are earned.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles ('GAAP') and the prevailing practices within the
cemetery and mortuary industry. All significant inter-company accounts and
transactions have been eliminated.
Acquisition Transaction
In connection with the Acquisition Transaction, Blackstone, RHIMD and
Loewen contributed to RH Holdings and RH Holdings contributed to the Company
$106.6 million in cash ($107 million less $.4 million to be advanced by the
Company to RHIMD to finance its purchase of common stock of RH Holdings).
Additionally effective November 19, 1996 to finalize the capitalization and
structure of the Company, Loewen contributed to RH Holdings 14 funeral homes and
two combination funeral home and cemetery properties located in the Southern
California area (the Satellite Properties) which were valued at the date of the
Acquisition Transaction at $23 million. RH Holdings in turn contributed these
properties to the Company effective November 19, 1996. Finally, the Company
entered into the Bank Credit Agreement (see note 10) and the sale of the Senior
Subordinated Notes was consummated (see note 10).
Effective November 19, 1996, per terms of the merger agreement 'the Merger
Agreement' the Company, through its subsidiary RH Mortuary Corporation, acquired
the common stock of Roses, Inc., ('Roses') the predecessor mortuary, in
consideration of the payment of $59.9 million in cash (subject to downward
adjustment under certain circumstances) after giving effect to the repayment of
outstanding indebtedness of Roses, Inc. Upon consummation of the Merger
Agreement, RH Mortuary Corporation was merged with and into Roses.
The Company also paid a cash purchase price for certain assets, net of
certain liabilities (the 'Asset Purchase Agreement') of Rose Hills Memorial Park
Association, the predecessor cemetery, (the Association) in the amount of $166.3
million (subject to downward adjustment under certain circumstances).
In connection with the Acquisition Transaction described above, Roses
entered into a 'Settlement Agreement' dated November 19, 1996 with the
Association to resolve amounts due/owed between Roses and the Association as of
November 18, 1996. The final resolution of such amounts under the Settlement
Agreement has not been determined.
As of December 31, 1996, the Company, as successor to Roses, has accrued a
$1.6 million liability to the Association which it believes will fully satisfy
the terms of the Settlement Agreement. The Company believes that the selling
shareholders of Roses are obligated to pay approximately $1.4 million of the
balance accrued. Upon final resolution of such amounts under the Settlement
Agreement Goodwill will be adjusted accordingly.
F-7
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION--(CONTINUED)
The assets acquired by the Company have been recorded at cost and in the
case of the Satellite Properties, at fair value at the date of contribution. A
summary of the allocation of the acquisition is as follows:
<TABLE>
<CAPTION>
AS AT NOVEMBER 19, 1996
--------------------------------------------
SATELLITE
MORTUARY CEMETERY PROPERTIES TOTAL
-------- -------- ---------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Purchase Price.......................... $ 59.9 $166.3 $ 23.0 $249.2
Direct acquisition costs.............. 1.9 5.3 0.7 7.9
-------- -------- ---------- ------
Total consideration and direct
acquisition costs................ 61.8 171.6 23.7 257.1
Less: historical cost of (net assets)
shareholders' deficit acquired........ 3.9 (50.9) (14.9) (61.9)
-------- -------- ---------- ------
Net adjustment.......................... $ 65.7 $120.7 $ 8.8 $195.2
-------- -------- ---------- ------
-------- -------- ---------- ------
Allocation of net adjustment:
Due from Cemetery..................... $ (1.6) $ -- $ -- $ (1.6)
Due to Cemetery....................... 2.4 -- -- 2.4
Due to RH Foundation.................. 1.2 -- -- 1.2
Covenants not to compete.............. 1.3 -- -- 1.3
Goodwill.............................. 64.2 56.6 8.8 129.6
Cemetery properties................... -- 65.2 -- 65.2
Other assets.......................... -- (.1) -- (.1)
Due to Mortuary....................... -- 1.6 -- 1.6
Due from Mortuary..................... -- (2.4) -- (2.4)
Retirement plan liabilities........... (.5) (.2) -- (.7)
Obligations under covenants not to
compete:
Current............................ (.4) -- -- (.4)
Noncurrent......................... (.9) -- -- (.9)
-------- -------- ---------- ------
Total allocated.................... $ 65.7 $120.7 $ 8.8 $195.2
-------- -------- ---------- ------
-------- -------- ---------- ------
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and short-term certificates
of deposit, with original maturities of three months or less.
Cemetery Operations
Pre-need sales of cemetery interment rights and other related products and
services are recorded as revenue when the customer contracts are signed with
concurrent recognition of related costs. Allowances for anticipated customer
cancellations and refunds are provided as 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. A
F-8
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
portion of the proceeds from the sale of interment rights is required by state
law to be paid into the Endowment Care Fund to provide for the perpetual care of
the associated properties. Cemetery revenue is recorded net of these amounts.
Earnings of the Endowment Care Fund are used to defray the maintenance costs of
cemeteries. Additionally, pursuant to state law, a portion of the proceeds from
the sale of pre-need merchandise and services may also be required to be paid
into trust funds which are recorded as long-term receivables.
Prearranged Funeral Services
Prearranged funeral services provide for future funeral services generally
determined by prices prevailing at the time the contract is signed. The payments
made under the contract are either placed in trust or are used to pay the
premiums of life insurance policies under which the 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 based on a combination of factors, such as the
amount of funeral cost coverage sold, the age of the insured and the volume of
monthly sales activity. In addition, an annual profit sharing commission is
received based upon the number of policies written. Insurance commissions earned
on individual policies, as well as commissions based on monthly volume activity
and annual profit-sharing arrangements, are recognized as income when the
policies are accepted by the insurance company. Except for insurance commissions
and amounts not required to be trusted which are used to defray the initial
costs of administration, no income is recognized until the performance of a
specific funeral.
Trust fund principal amounts and insurance contract amounts, together with
trust fund investment earnings retained in trust and annual insurance benefits,
are deferred until the service is performed. The Company estimates that trust
fund investment earnings and annual insurance benefits exceed the increase in
cost over time of providing the related services. Upon performance of the
specific funeral service, the Company will recognize the trust fund principal
amount or insurance contract amount together with the accumulated trust earnings
and annual insurance benefits as funeral revenues. Indirect obtaining costs
relating to the sale of prearranged funeral services are expensed in the period
incurred.
Receivables
Receivables due from customers are generally due at the time services are
rendered. However, financing arrangements are available over a period of three
to five years. Such financial contracts bear interest at the rate of 12% per
annum. An allowance for doubtful accounts has been established to recognize that
a portion of these receivables may not be collectible.
Receivables due from customers for cemetery property sold in advance of
need are generally collected over one to seven years and bear interest at the
rate of 9.6% per annum. An allowance for sales cancellations has been
established to recognize that cemetery property sold in advance of need, for
which a minimum down payment is received, may be subsequently canceled.
Accordingly, as of December 31, 1996 allowance for sales cancellations totalled
$1,043,000. A provision of $52,000 was charged to cemetery sales to provide for
estimated future cancellations for the period from November 19, 1996 to December
31, 1996.
In addition to the receivable due from customers for cemetery property,
receivables from customers for cemetery goods and services sold and provided in
funeral arrangements as well as mortuary services and merchandise are generally
collected over a period of one to three years bearing interest at the rate of
12.0% 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, 1996, the allowance for doubtful accounts
totaled $1,127,000.
F-9
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
Cemetery Property
Cemetery property consists of developed and undeveloped cemetery property
and is valued at average cost, which is not in excess of market value. Amounts
are expensed to costs and expenses as sales of cemetery plots occur.
Property, Plant and Equipment
Property, plant and equipment are valued at its fair market value at the
acquisition date, with additions subsequent to the acquisition date are recorded
at cost and are depreciated on a straight line basis over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Building and improvements............ 10-40 years
Automobiles.......................... 6 years
Furniture, fixtures and equipment.... 6 to 10 years
Computer hardware and software....... 6 to 10 years
Leasehold improvements............... over the term of
the lease
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and betterment are capitalized.
Goodwill
The excess of purchase price over the fair value of indentifiable net
assets acquired (goodwill), is being amortized by use of the straight-line
method over a 40 year period. As of December 31, 1996, accumulated amortization
was $333,000.
Covenants not to Compete
Covenants not to compete on the consolidated balance sheet represent
amounts prepaid or the present value of future payments under non-competition
agreements with certain key management personnel of acquired operations.
Amortization of such covenants not to compete is provided by use of the straight
line method over the terms of the relevant agreements, typically ten years. As
of December 31, 1996, accumulated amortization of covenants not to compete was
$38,000.
Deferred Financing Cost
Deferred financing costs relating to the Bank Senior Term Loan and the
senior subordinated notes are being amortized over the life of the loan and the
notes, respectively based on the effective interest method. As of December 31,
1996, accumulated amortization of these costs was $182,000.
Derivative Instruments
The Company enters into derivative transactions with financial institutions
only as hedges of other financial transactions and not for speculative purposes.
The Company's policies do not allow leveraged transactions and are designed to
minimize credit and concentration risk with counter-parties.
F-10
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company has entered into an interest rate collar agreement to manage
interest rate exposure on its long-term debt. The difference between the amounts
paid and received is accrued and accounted for as an adjustment to interest
expense each quarter over the life of such agreements. The amount paid for the
collar is included in other assets is being amortized over the life of the
collar agreement.
Income Taxes
The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109). The asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying value of the Company's debt instruments approximates fair
value which is based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same remaining
maturities.
The fair value of the Company's accounts and notes receivable in excess of
one year approximate carrying values and are 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.
Impairment of Long-Lived Assets
The Company follows SFAS No. 121, 'Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ' (SFAS No. 121),
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted
operating cash flows are not sufficient to recover the assets' carrying amount.
The impairment loss is measured by comparing the fair value of the assets to its
carrying amount.
Earnings (Loss) Per Share
Earnings (loss) per share have not been included as the Company is a wholly
owned subsidiary.
(3) ACQUISITIONS
The acquisitions of the Satellite Properties, Roses, Inc. and the
Association have been recorded under the purchase method of accounting; and
accordingly, the results of operations of the companies have been included in
the accompanying consolidated financial statements from the date of acquisition,
November 19, 1996 through December 31, 1996. The purchase price has been
allocated to assets acquired and liabilities assumed based on fair market value
at the dates of acquisition as described in Note 1.
The following table reflects, on an unaudited pro-forma basis, the
consolidated results of the operations for the period from January 1, 1996 to
December 31, 1996 as if the Satellite Properties, Roses, Inc. and Association
acquisitions had taken place at January 1, 1996. Appropriate adjustments have
been made to reflect the
F-11
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) ACQUISITIONS--(CONTINUED)
accounting basis used in recording these acquisitions. This pro-forma
information does not purport to be indicative of the results of operations that
would have resulted had the acquisitions been in effect for the entire year
presented, and is not intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
(000'S)
---------
<S> <C>
Revenues (unaudited).... $59,500
---------
Net loss (unaudited).... $ 7,300
---------
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(000'S)
<S> <C>
Land....................................... $ 16,577
Buildings and improvements................. 30,653
Furniture, fixtures and equipment.......... 3,748
Vehicles................................... 431
Computers and computer software............ 5,074
Construction in progress................... 17,076
------------
Total property, plant and equipment...... 73,559
Less: accumulated depreciation............. 276
------------
Property, plant and equipment, net......... $ 73,283
------------
------------
</TABLE>
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company's policy is not to use derivative instruments for speculation.
The Company does not trade in financial instruments and is not a party to
leveraged derivatives.
The Company has entered into interest rate collar agreements which
effectively set maximum and minimum interest rates on the $75 million notional
principal amount of Senior Debt (Note 10), ranging from a floor of 5.5% (the
Company would pay 5.5% even if rates fall below that level) to a maximum or cap
of 6.5% for the period commencing January 2, 1997 through December 1, 2000. The
collar agreement is based on 3-month LIBOR.
The Company is exposed to credit losses in the event of non-performance by
the other parties to the interest rate collar agreements. However, the Company
does not anticipate non-performance by the counterparties.
(6) ENDOWMENT CARE FUND
The Company, pursuant to state law, has placed the cemeteries under
endowment care. Therefore, when cemetery property is sold, an endowment care
charge is made for which a minimum amount is statutory. Charges are payable to
the Endowment Care Fund (the Fund), a separate 501(c)(13) organization, when the
total sales contract amount has been collected. Since a substantial portion of
pre-need cemetery property sales is made on an installment basis, many of the
charges are not due currently. Generally, the installment receivables, including
late charges, are collectible within one to seven years. As of December 31,
1996, amounts owed to the Fund but not yet due or collected from customers
amounted to $1,789,000. The Fund's assets are invested under the direction of
the Trustees of the Fund. The change in net assets of the Fund, net of amounts
required to be withheld under state law, is paid by the Fund to the Company and
is used for the care, maintenance, and embellishment of the cemetery. As
allowable by state law, a portion of the undistributed capital gains of the Fund
have been reserved
F-12
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) ENDOWMENT CARE FUND--(CONTINUED)
and are available to the Company at the discretion of the Trustees for future
maintenance, repair or restoration of property or embellishment. The amounts
earned by the Fund and transferred to the Company are reported in the combined
statements of activities and amounted to $353,000 for the period from November
19, 1996 to December 31, 1996.
Total assets of the Fund are $58,132,000 at December 31, 1996 and consist
primarily of cash and investments carried at fair market value. Total
liabilities of the Fund are $703,000 at December 31, 1996 and consist of amounts
payable to the Company. Total net assets of $57,429,000 at December 31, 1996
resulted primarily from Fund deposits received or receivable from customers,
capital gains (net of transfers to reserves) and holding losses experienced by
the Fund.
(7) PRE-NEED FUNERAL SERVICE DEBENTURES
From 1960 to 1975, the Association, (the predecessor cemetery), sold
pre-need funeral service debentures at face amounts under subscription
agreements which provided for the collection of the amount on an installment
basis. Debentures were issued in denominations of $125 each when installments of
the amount were collected. As of December 31, 1996, 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, 1996 mature as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DATE AMOUNT
- ----------------------------- ------
<S> <C>
Prior to February 1, 1996.... $ 610
February 1, 1997............. 112
February 1, 1998............. 82
February 1, 1999............. 106
February 1, 2000............. 96
------
Total...................... $1,006
------
------
</TABLE>
F-13
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) INCOME TAXES
The provision for income tax (benefit) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Federal current.............................. $
State current................................ 18
------------
Total current.............................. 18
------------
Federal deferred............................. (121)
State deferred............................... (57)
------------
Total deferred............................. (178)
------------
Total income tax expense (benefit)......... $ (160)
------------
------------
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory Federal income tax rate are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996 TO
NOVEMBER 18,
1996
------------
<S> <C>
Expected Federal benefit..................... $ (234)
Net tax effects of:
Goodwill amortization...................... 102
State taxes, net of Federal benefit........ (26)
Nondeductible expenses..................... (2)
------------
Actual income tax benefit............... $ (160)
------------
------------
</TABLE>
The components of the net deferred tax balances are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Operating reserves......................... $ 452
Retirement benefits........................ 1,474
Other Reserve.............................. 611
Amortization............................... 56
State taxes................................ 259
Other...................................... 113
--------------
Total deferred tax assets............... 2,965
--------------
Deferred tax liabilities:
Acquisition step ups....................... (4,552)
Depreciation............................... (738)
Land....................................... (872)
--------------
Total deferred tax liability............ (6,162)
--------------
Net deferred tax liability.............. $ (3,197)
--------------
--------------
</TABLE>
F-14
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) RELATED PARTY TRANSACTIONS
Administrative Services Agreement. In connection with the Acquisition
Transaction, as described in Note 1, the Company engaged Loewen to provide
certain administrative services and share certain resources pursuant to an
Administrative Services Agreement. Pursuant to the Administrative Services
Agreement, Loewen is to provide accounting services, computer systems and
support, telecommunications support, general operations support, legal services,
environmental compliance, regulatory compliance, as well as expertise in
management information systems, sales, tax and fund management. As compensation
for services provided under the Administrative Services Agreement, Loewen is
entitled to receive from the Company, a minimum fee (the 'Administrative
Services Fee') payable monthly in arrears and in an aggregate amount equal to
$334,000 for the first year following the Acquisition, and a minimum of $250,000
for the second year and subsequent years subject to specified annual increases
for each year thereafter until the termination of the Administrative Services
Agreement. The Company is also required to reimburse Loewen for all
out-of-pocket costs and expenses incurred from third parties in connection with
services performed pursuant to the Administrative Services Agreement. For the
period ended December 31, 1996, the Company had recorded approximately $42,000
for Administrative Services Fee.
Monitoring Fee. The Company is required to pay annually a monitoring fee
(the 'Monitoring Fee') equal to $250,000 (subject to increases for inflation) to
an affiliate of a shareholder of the Parent company. The Company had paid the
Monitoring Fee as of December 31, 1996, and had amortized approximately $31,000
as a charge against earnings for the period ended December 31, 1996.
(10) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Borrowings outstanding under Bank Credit Agreement, due
2002...................................................... $ 75,000
Senior Subordinated Notes at 9.5%, due November 15, 2004.... 80,000
Notes payable and liabilities under noncompete agreements
and bear interest at rates ranging from 7.46% to 9%. The
notes and noncompete agreements have variable maturities
ranging from 1999 through 2007............................ 3,825
Other....................................................... 907
-----------------
159,732
Less current portion...................................... (1,968)
-----------------
Long-term debt......................................... $ 157,764
-----------------
-----------------
</TABLE>
At December 31, 1996, annual maturities of long-term debt consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ----------------------------------------
<S> <C>
1997.................................... $ 1,968
1998.................................... 2,262
1999.................................... 1,919
2000.................................... 3,415
2001.................................... 7,272
Thereafter.............................. 142,896
--------
$159,732
--------
--------
</TABLE>
F-15
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) LONG-TERM DEBT--(CONTINUED)
Bank Credit Agreement. Concurrent with the consummation of the
Acquisition, the Company entered into a credit agreement (the 'Bank Credit
Agreement') with a group of financial institutions in Canada and the United
States, which provides for (1) a senior secured amortization extended term loan
facility (the 'Bank Term Facility') in an aggregate principal amount of $75.0
million used to partially finance the Acquisition Transaction, as described in
Note 1, to pre-fund certain capital expenditures, and to refinance existing
indebtedness of the Mortuary, and (2) a senior secured revolving credit facility
(the 'Revolving Credit Facility') in an aggregate principal amount of $25.0
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.
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 its Parent. All such guarantees are secured by a first
priority security interest of the capital stock of the Company and each
subsidiary and all intercompany receivables. The Company is required to maintain
certain defined financial ratios. The Company was in compliance with all such
requirements or has obtained appropriate waivers at December 31, 1996.
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 2.00%, or under a Eurodollar option, at a
reserve-adjusted Eurodollar rate (the 'Adjusted Eurodollar Rate') plus 3.00%.
The Bank Term Facility will mature seven years after the Acquisition, and
requires semi-annual installments aggregating $1 million in each of the first
three years after the Acquisition, $3 million in the fourth year after the
Acquisition, $7 million in the fifth year after the Acquisition, $9 million in
the sixth year after the Acquisition, and $53 million in the seventh year after
the Acquisition.
As of December 31, 1996, the Company was paying interest at the Adjusted
Eurodollar Rate (5.6%) plus 3.00% 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, 1996, the Company had no borrowings under the
Revolving Credit Facility.
Concurrent with the consummation of the Acquisition, the Company issued $80
million of 9.5% senior subordinated notes payable due November 15, 2004 (the
'Notes'). There are no sinking fund requirements on the Notes and they may not
be redeemed until November 2000. At such date, they are redeemable at 104.750%
of principal amount, plus accrued and unpaid interest, if any to the redemption
date, and thereafter at an annually declining premium over par until November
2003 when they are redeemable at par. The Indenture limits the payment of
dividends and repurchase of capital stock, and includes certain other
restrictions on indebtedness and limitations customary with subordinated
indebtedness of this type.
The Company assumed liabilites under notes payable and noncompete
agreements from the Satellite Properties. The notes payable are secured by land
and bear interest at rates ranging from 7.46% to 8.00%. The noncompete
agreements consist of the net present value of future payments discounted at 9%.
F-16
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) RETIREMENT PLANS
Defined Benefit Plan
As a result of the Acquisition Transaction, the Retirement Plan for
Employees of Rose Hills Mortuary, L.P. (the Plan) was frozen as of December 31,
1996 and will be formally terminated at June 30, 1997. Prior to the Acquisition
Transaction, all employees of the Mortuary which employed all cemetery and
mortuary employees were participants in the Plan. Participants became fully
vested upon the freezing of the Plan. Employees may elect to receive their
pension benefits in the form of a single-life annuity or a qualified joint and
contingent annuity.
The Company has funded or accrued the present value of these benefits. The
Company Plan is subject to and in compliance with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA). During 1995, the Company plan
received a favorable letter of determination from the IRS.
The net pension cost included the following components:
<TABLE>
<S> <C>
Service cost-benefits earned during
the period......................... $ 91
Interest cost on projected benefit
obligations........................ 109
Actual (earnings) loss on company plan
assets............................. (41)
Net amortization and deferral......... (68)
--------
Total net periodic pension cost.... $ 91
--------
--------
</TABLE>
The following table sets forth the Company Plan's funded status and the
amounts recognized in the accompanying financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $10,917 for 1996.................................... $ (10,917)
------------
Projected benefit obligation for services rendered to
date...................................................... (10,917)
Plan assets at fair market value, primarily listed stocks,
bonds and U.S. Government obligations..................... 10,887
------------
Plan assets less than projected benefit obligations......... (30)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions........ --
Unrecognized net assets being recognized over 15 years...... --
Additional liability........................................ --
------------
Accrued pension costs.................................. $ (30)
------------
------------
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.55%.
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
conducted 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
F-17
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) RETIREMENT PLANS--(CONTINUED)
defer up to 15% of their compensation (subject to certain limitations). In
addition to the amount of compensation deferred by participants, the Company
matches up 100% of the first $300 contributed and 50% of the next $3,400
contributed per year per participant. Additionally, the Company may contribute
to the trust for each Plan year beginning with the Plan year beginning January
1, 1997, such amounts as the Board of Directors shall determine in its sole
discretion. For the period from November 19, 1996 to December 31, 1996, the
Company's contribution to this Savings Plan on behalf of the participants
amounted to $48,000.
Supplemental Employee Retirement Plan
Three senior officers of Roses, the predecessor mortuary, had employment
agreements, which obligated Roses to provide these three employees with a
supplemental employee retirement plan (SERP). This nonqualified supplemental
pension plan covering certain employees provides for incremental pension
payments from Rose's funds so that the total pension payments would more
realistically approximate amounts that would have been payable from the Rose's
principal pension plan if it were not for limitations imposed by income tax
regulations. In conjunction with the Acquisition Transaction, the SERP liability
was assumed by the Company. The annual lifetime benefit is based upon a
percentage of salary during the final five years of employment, offset by
several other sources of income, up to age 62 at which time the benefit becomes
payable to the participant.
The SERP net pension cost included the following components:
<TABLE>
<S> <C>
Service cost-benefits earned during the
period..................................... $ --
Interest cost on projected benefit
obligation.............................. --
Net amortization and deferral.............. 46
------------
Total net periodic pension cost......... $ 46
------------
------------
</TABLE>
The following table sets forth the SERP funded status and the amounts
recognized in the accompanying financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $3,005 for 1996......... $ (3,005)
------------
------------
Projected benefit obligation for services
rendered to date........................... (4,244)
Plan assets at fair market value............. --
------------
Plan assets in less than projected
benefit obligations................... (4,244)
Unrecognized net (gain) loss from past
experience different from that assumed and
effects of changes in assumptions.......... (577)
Unrecognized net assets being amortized over
15 years................................... --
------------
Accrued pension cost.................... (4,821)
------------
------------
</TABLE>
The weighted average discount and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.75% and 4.00%, respectively. The expected long-term rate of
return on assets was 8.00%.
To fund the SERP obligations, the Company has procured whole life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7 million. The cash surrender value of
F-18
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) RETIREMENT PLANS--(CONTINUED)
the Company's share of the policies is reflected in the balance sheet under
other assets and amounted to $407 as of December 31, 1996.
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 will assume this
liability. Concurrent with the closing of the Asset Purchase Agreement, the
Trustees' Plan was fully funded and the accrual of future benefits ceased. At
December 31, 1996, the Company's liability for the Trustees' plan totaled
$2,362,000.
In addition certain retired senior executives of the Association
participated in a nonqualified supplemental deferred compensation program. Per
terms of the Asset Purchase Agreement, the Company has assumed this liability.
At December 31, 1996, the Company's liability for this program totaled $443,000.
(12) FUNERAL SERVICE TRUST AGREEMENTS
The Company sells, on a limited basis, Funeral Service Trust Agreements.
These trust agreements are sold generally on an installment basis and funds
derived therefrom earn income subject to certain limitations. Trusts may be
terminated at any time with all principal and accumulated net income being
distributed to the Trustor. 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 not included in the
accompanying financial statements, however, administration fees earned by the
Company are reflected in the statements of income.
(13) COMMITMENTS UNDER LEASE AGREEMENTS
As of December 31, 1996, the future minimum lease obligation pursuant to
operating lease agreements is summarized as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
1997.................................. $ 465
1998.................................. 267
1999.................................. 123
2000.................................. 81
2001.................................. 62
Thereafter............................ 89
---------
Total minimum lease obligations.... 1,087
---------
---------
</TABLE>
Rental expense under operating lease agreements for the period from
November 19, 1996 to December 31, 1996 was $25,000.
(14) PURCHASE COMMITMENTS
In September 1992, the predecessor cemetery (the Association) and the local
County Sanitation District (the District) entered into an agreement (the
Agreement) whereby the Association agreed to construct a reclaimed water storage
reservoir (the Reservoir) with a capacity of 1.2 million gallons, one-half of
which would be made available to the District for its use at a site located
adjacent to the cemetery. The cost of the Reservoir, which was completed during
1994, totaled $471,000. The Company is obligated under this Agreement, as
successor to the Association.
F-19
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) PURCHASE COMMITMENTS--(CONTINUED)
Similarly, 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. It is anticipated that the reclaimed water transmission
system will be completed in 1997.
In connection with this Agreement, the Company is obligated to purchase
initially 500 acre feet per year of reclaimed water from the District, with such
amount increasing by 50 acre feet per year, up to a maximum of 3,200 acre feet
per year. The annual price to be paid by the Company for the reclaimed water
shall be the greater of (a) one-half of the unit price in effect at the
beginning of the applicable fiscal year, currently estimated at $220 per acre
foot per year, multiplied by the amount of reclaimed water delivered to the
Company, less one-half of the annual payment made by the Company for the
reclaimed water transmission system, as discussed further below, and (b)
one-fifth of the unit cost of operation and maintenance of the Inland
Reclamation Plants multiplied by the amount of reclaimed water delivered. Such
costs are currently estimated at $105 per acre foot.
The 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 was
initially estimated to total approximately $1,500,000. The Company's share may
exceed this estimate since such costs are based on current anticipated demand
for transporting reclaimed water. Actual costs and demand could vary
significantly from these estimates.
The Company's annual payment of such costs is to be equal to 1/20th of its
proportionate share of the capital costs or approximately $108,000, as
originally estimated.
The District has agreed to pay its proportionate share of the capital costs
associated with the 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 Company and the District have also agreed to reimburse the other for
operating and maintenance costs associated with the Reservoir and the reclaimed
water transmission system based on criteria outlined in the Agreement.
(15) COMMITMENTS AND OTHER MATTERS
Transaction with the International Buddhist Progress Society
During 1994, the predecessor cemetery sold the exclusive interment rights
on an undeveloped parcel of land located on the property to the International
Buddhist Progress Society (IBPS), an unrelated organization. In exchange for the
interment rights, IBPS agreed to pay the predecessor cemetery $1,375,000, of
which $160,000 was received as a deposit during 1994. Sales commissions totaled
$206,000 in connection with this transaction. It was determined that because,
among other matters, an adequate down payment was not received and the interment
rights were not sold on a parcel of land that was not ready for the purpose for
which it was sold, the earnings process was not complete and revenue and expense
recognition relating to the transaction should be deferred until such time IBPS
has completed a significant portion of the project.
IBPS plans to build a columbarium on the developed parcel and IBPS will
sell the niches therein on an at-need and pre-need basis. The remaining unpaid
portion of the sales price is to be repaid after construction of the Temple is
completed, based on a percentage of niches sales, but in no event later than
January 1, 2003. IBPS has agreed to reimburse the Company up to $1,150,000 for
the costs it will incur to ready the undeveloped parcel of land for construction
of the columbarium. Pursuant to the agreement with IBPS, the Company will hold
title to land improvements and the completed building. These costs are expected
to total approximately $2,000,000. As of December 31, 1996, costs expended by
the Company in connection with this project totaled $2,000,000 and are included
in construction in progress at December 31, 1996.
F-20
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF THE ROSE HILLS HOLDING CORP.)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) COMMITMENTS AND OTHER MATTERS--(CONTINUED)
Sky Rose Chapel
During 1995, the predecessor cemetery entered into an agreement with a
building contractor for the construction of a new funeral chapel, which has
become known as Sky Rose Chapel. The project was completed for a cost of $15.7
million, and was completed on May 30, 1997. As of December 31, 1996, costs
incurred in connection with this project totaled approximately $14.5 million.
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.
(16) CONTINGENCIES
The Company is involved in certain matters of litigation, none of which, in
the judgment of management, will have a material impact on its consolidated
financial position or results of operations.
The State of California Department of Consumer Affairs ('DCA') is currently
reviewing the funding levels of the endowment care trust fund at A.L. Cemetery,
one of the Satellite Properties. The amount of the additional funding, if any,
to the above noted trust, has not been determined.
Management is aware that some of the Satellite Properties may have been
contaminated from former or adjacent underground storage tanks. Management
believes that these environmental contingencies and liabilities to be immaterial
individually and in aggregate.
Two liens totaling approximately $500,000 are registered against the
property of A.L. Cemetery. The holders of the liens have not exercised rights,
if any, they may have under these liens.
In the opinion of the management of the Company, the ultimate resolution of
this lien will not have a material effect on its consolidated financial position
or results of operations. Accordingly no accrual for such lien has been recorded
at December 31, 1996.
F-21
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and equivalents................................................. $7,977
Accounts receivables, net of allowances.............................. 7,430
Prepaid expenses and other current assets............................ 2,650
Inventory............................................................ 1,164
Deferred tax asset................................................... 1,176
--------
Total current assets............................................... 20,397
Long-term receivables, net of allowances............................. 8,169
Cemetery Property.................................................... 70,719
Property, plant and equipment, net................................... 73,408
Goodwill............................................................. 128,339
Deferred finance charge.............................................. 11,604
Other assets......................................................... 5,405
--------
Total assets.................................................... $318,041
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $2,956
Accrued expenses................................................... 5,958
Accrued interest................................................... 3,161
Other current liabilities.......................................... 1,325
Current portion of other long-term debt............................ 1,700
--------
Total current liabilities....................................... 15,100
--------
Retirement plan liabilities.......................................... 7,538
Deferred tax liability............................................... 4,373
Subordinated Notes Payable........................................... 80,000
Bank Senior term loan................................................ 74,000
Other long-term debt................................................. 3,949
Other liabilities.................................................... 3,545
--------
Total liabilities............................................... 188,505
--------
Commitment and contingencies.........................................
Stockholder's equity:
Common stock par value $.01; 1,000 authorized; 1,000 shares
outstanding..................................................... --
Additional paid in capital......................................... 129,554
Accumulated deficit................................................ (18)
--------
Total stockholder's equity...................................... 129,536
--------
Total liabilities and stockholder's equity...................... $318,041
--------
--------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-22
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
(NOTE 1)
Sales and services:
<S> <C> <C>
Funeral sales and services................................ $ 7,709 $ 5,470
Cemetery sales and services............................... 8,702 5,032
Insurance commissions and other........................... 1,430 1,341
--------- --------
Total sales and services............................... 17,841 11,843
--------- --------
Cost of sales and services:
Funeral sales and services................................ 2,027 1,716
Cemetery sales and services............................... 1,751 1,112
--------- --------
Total costs of sales and services...................... 3,778 2,828
--------- --------
Gross profit........................................... 14,063 9,015
Selling, general and administrative expense................. 8,176 7,372
Amortization of purchase price in excess of net assets
acquired and other intangibles............................ 1,116 50
--------- --------
Income from operations................................. 4,771 1,593
Other income expense:
Interest expense.......................................... 3,933 412
Other income.............................................. 143 144
--------- --------
Total other expense.................................... 3,790 268
--------- --------
Income before income tax............................... 981 1,325
--------- --------
Provision for income tax.................................... 471 581
--------- --------
Net income............................................. $ 510 $ 744
--------- --------
--------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-23
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
(NOTE 1)
<S> <C> <C>
Cash flow from operating activities:
Net income................................................ $ 510 $ 744
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of purchase related assets................ 2,058 50
Depreciation........................................... 506 674
Changes in assets and liabilities associated with
operating activities:
Increase in customer accounts receivable............. (2,101) (382)
Increase in inventories.............................. 22 233
Decrease in other current assets..................... 16 804
Increase in accounts payable and accrued expenses.... 20 499
Decrease in other current liabilities................ (162) (158)
Other, net........................................... (78) (27)
--------- --------
Net cash provided by operating activities......... 791 2,437
Cash flow from investing activities--capital expenditures... (631) (3,101)
Cash flow from financing activities--Reduction in long term
debt (83) (684)
--------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 77 (1,348)
Adjustments for exclusion of cash and cash equivalents
pursuant to the Asset Purchase Agreement.................. -- 1,173
Cash and cash equivalents at beginning of period............ 7,900 1,869
--------- --------
Cash and cash equivalents at end of period.................. $ 7,977 $ 1,694
--------- --------
--------- --------
Supplemental cash flow information:
Interest paid............................................. 3,645 25
Taxes paid................................................ 14 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-24
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(000'S EXCEPT SHARES OUTSTANDING)
<TABLE>
<CAPTION>
(RETAINED
EARNING TOTAL
SHARES ADDITIONAL PAID ACCUMULATED STOCKHOLDER'S
OUTSTANDING IN CAPITAL DEFICIT) EQUITY
----------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996......... 1,000 $ 129,554 $ (528) $ 129,026
Net income....................... -- -- 510 510
----------- --------------- ------ -------------
Balance, March 31, 1997............ 1,000 $ 129,554 $ (18) $ 129,536
----------- --------------- ------ -------------
----------- --------------- ------ -------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-25
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF ROSE HILLS HOLDING CORP.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The accompanying March 31, 1997 unaudited consolidated financial statements
of Rose Hills Company and subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and footnote
disclosures necessary for complete financial statements in conformity with
generally accepted accounting principles. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included herein.
In the opinion of management, the accompanying unaudited consolidated
financial statements as of and for the three months ended March 31, 1997 contain
all adjustments considered necessary for a fair presentation of the financial
condition as of March 31, 1997 and the results of operations and cash flows for
the three months ended March 31, 1997.
Earnings (loss) per share have not been included as the Company is a wholly
owned subsidiary.
As a result of the Acquisition Transaction, as described elsewhere herein,
the Company is the successor to the operations of the predecessor Mortuary and
Cemetary and the Satellite Properties. As of November 19, 1996, the Company's
assets and liabilities were adjusted to their estimated fair values under
purchase accounting. In addition, the Company entered into new financing
arrangements and changed its capital structure. Accordingly, financial position
and results of operations subsequent to November 18, 1996 are not comparable to
prior periods. Operations of the Company since November 18, 1996 reflect
increased depreciation, amortization, and interest expense. Accordingly,
comparative financial information as of and for the three months ended March 31,
1996 have been included on a historical basis for the predecessor Mortuary and
Cemetary and are not comparable. Such combined financial data for the
predecessor operations has been included solely to facilitate a discussion of
the operations from period to period. Such presentation of the 1996 data is pro
forma in that generally accepted accounting principles would not allow such
combination due to the lack of common ownership of the predecessor operations.
The operations of the Satellite Properties for 1996 have been omitted from the
presentation on the basis of immateriality.
2. SETTLEMENT AGREEMENT
In connection with the Acquisition Transaction described elsewhere herein,
Roses entered into a 'Settlement Agreement' dated November 19, 1996 with the
Association to resolve amounts due/owed between Roses and the Association as of
November 18, 1996. The final resolution of such amounts under the Settlement
Agreement has not been determined at March 31, 1997.
The Company, as successor to Roses, has accrued a $1.6 million liability to
the Association which it believes will fully satisfy the terms of the Settlement
Agreement. The Company believes that the selling shareholders of Roses are
obligated to pay approximately $1.4 million of the balance accrued. Upon final
resolution of such amounts under the Settlement Agreement Goodwill will be
adjusted accordingly.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Roses, Inc.:
We have audited the accompanying consolidated balance sheet of Roses, Inc. and
subsidiaries as of November 18, 1996 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the period from
January 1, 1996 to November 18, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Roses,
Inc. and subsidiaries as of November 18, 1996, and the results of their
operations and their cash flows for the period from January 1, 1996 to November
18, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK, LLP
Orange County, California
June 12, 1997
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Roses, Inc.:
We have audited the accompanying consolidated balance sheet of Roses, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income, shareholders' equity (deficit) and cash flows for each of the two years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Roses, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
October 25, 1996
F-28
<PAGE>
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Cash and marketable securities:
Cash and cash equivalents............................ $ 1,269 $ 892
Marketable securities (market value of $142 at
December 31, 1995)................................. 112 --
------- -------
Total cash and marketable securities............... 1,381 892
------- -------
Receivables:
Customer accounts receivable, net.................... 1,831 1,686
Due from Rose Hills Memorial Park Association........ 3,786 248
Other................................................ 1,328 114
------- -------
Total receivables.................................. 6,945 2,048
------- -------
Other current assets:
Prepaid expenses, deferred charges and deposits...... 237 239
Prepaid taxes........................................ 726 --
Casket and other inventories......................... 472 449
Other................................................ 207 407
Deferred tax asset................................... -- 624
------- -------
Total other current assets......................... 1,642 1,719
------- -------
Total current assets................................... 9,968 4,659
------- -------
Property, plant and equipment, net..................... 13,784 12,791
------- -------
Intangible assets:
Goodwill............................................. 2,732 2,655
Other................................................ 121 21
------- -------
Total intangible assets............................ 2,853 2,676
------- -------
Total assets....................................... $26,605 $20,126
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable and accrued liabilities:
Accounts payable and accrued expenses................ $ 1,815 $ 774
Accrued compensation................................. 1,468 1,238
Other current liabilities............................ 372 410
Current portion of Bank senior term loan............. 2,500 15,100
Current portion of Rose Hills Memorial Park
Association--computer note......................... 313 220
Current portion of Obligation under financing
lease.............................................. 91 130
Current portion of Rose Hills Memorial Park
Association promissory note........................ -- 835
------- -------
Total current liabilities.......................... 6,559 18,707
Other long-term liabilities:
Accrued pension cost of supplemental employee
retirement plan.................................... 3,528 3,910
Accrued pension cost of defined benefit plan......... 1,452 1,183
Retirement plan liability............................ 366 --
Deferred tax liability............................... 260 --
------- -------
Total other long-term liabilities.................. 5,606 5,093
Long-term debt:
Bank senior term loan................................ 16,975 --
Rose Hills Memorial Park Association loans:
Promissory note.................................... 835 --
Computer note...................................... 300 --
Obligation under financing lease..................... 250 202
------- -------
Total long-term liabilities........................ 23,966 5,295
------- -------
Commitments and contingencies.......................... -- --
------- -------
Total liabilities.................................. 30,525 24,002
------- -------
Shareholders' deficit:
Common stock--($1 par value, authorized 1,000,000
shares, issued 100,000 shares)..................... 100 100
Accumulated deficit.................................. (4,020) (3,976)
------- -------
Total shareholders' deficit........................ (3,920) (3,876)
------- -------
Total liabilities and shareholders' deficit........ $26,605 $20,126
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Sales and services:
Caskets.................................... $ 8,693 $ 8,757 $ 8,014
Funeral services........................... 7,958 8,183 8,224
Insurance commissions...................... 2,922 2,857 2,337
Flowers.................................... 1,717 1,796 1,502
Management fee and other................... 768 841 345
------- ------- -------
Total sales and services................ 22,058 22,434 20,422
------- ------- -------
Cost of sales and services:
Caskets.................................... 2,699 2,488 2,424
Funeral services........................... 2,548 2,765 2,413
Flowers.................................... 715 758 664
------- ------- -------
Total cost of sales and services........ 5,962 6,011 5,501
------- ------- -------
Gross profit............................ 16,096 16,423 14,921
------- ------- -------
Selling, general and
administrative expenses.................... 10,719 11,229 12,331
Amortization of purchase related assets...... 1,211 518 87
Settlement of intercompany balances.......... -- -- 1,853
------- ------- -------
Income from operations.................. 4,166 4,676 650
------- ------- -------
Interest income (expense):
Interest income............................ 64 39 378
Interest expense........................... (2,053) (2,429) (1,439)
------- ------- -------
Total net interest expense.............. (1,989) (2,390) (1,061)
------- ------- -------
Income (loss) before tax provision...... 2,177 2,286 (411)
Tax provision................................ 34 1,094 545
------- ------- -------
Net income (loss)....................... $ 2,143 $ 1,192 $ (956)
------- ------- -------
------- ------- -------
Net income (loss) per common share........... $ 21.43 $ 11.92 $ (9.56)
------- ------- -------
------- ------- -------
Weighted number of outstanding shares... 100,000 100,000 100,000
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................... $ 2,143 $ 1,192 $ (956)
Adjustments to reconcile net income to net cash
provided by operating activities:.................
Amortization of purchase related assets........... 1,211 518 87
Depreciation...................................... 930 1,075 1,065
Net loss (gain) on disposal of property, plant and
equipment....................................... 2 -- (1)
Provision for bad debts........................... 200 100 53
Provision for deferred income taxes............... -- 260 (883)
Changes in assets and liabilities associated with
operating activities:
(Increase) decrease in customer accounts
receivable...................................... (204) 8 92
(Increase) decrease in due from Rose Hills
Memorial Park Association....................... (1,405) 929 3,537
(Increase) decrease in other receivables.......... (369) (183) 1,213
Increase in other current assets.................. (111) (600) 660
Increase in accounts payable and accrued
expenses........................................ 449 522 (2,042)
Increase (decrease) in other current
liabilities..................................... 1,486 (1,066) 808
Other, net........................................ 304 119 90
-------- -------- ------------
Net cash provided by operating activities....... 4,636 2,874 3,723
-------- -------- ------------
Cash flow from investing activities--capital
expenditures......................................... (681) (432) (71)
-------- -------- ------------
Cash flow from financing activities:
Financing costs...................................... (244) -- --
Dividend distributions............................... (9,320) -- --
Reduction of long-term debt.......................... (18,372) (1,924) (4,776)
Proceeds from issuance of long-term debt............. 23,000 -- --
Capital Contribution................................. -- -- 1,000
Increase (decrease) in other long-term liabilities... 59 (176) (253)
-------- -------- ------------
Net cash used in financing activities........... (4,877) (2,100) (4,029)
-------- -------- ------------
Net increase (decrease) in cash and cash equivalents... (922) 342 (377)
Cash and cash equivalents at beginning of period....... 1,849 927 1,269
-------- -------- ------------
Cash and cash equivalents at end of period...... $ 927 $ 1,269 $ 892
-------- -------- ------------
-------- -------- ------------
Supplemental cash flow information:
Interest paid........................................ $ 2,053 $ 2,429 2,544
-------- -------- ------------
-------- -------- ------------
Taxes paid........................................... $ 49 $ 1,565 565
-------- -------- ------------
-------- -------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
ROSES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED EARNINGS/ TOTAL
SHARES COMMON (ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK DEFICIT) EQUITY (DEFICIT)
----------- ------- ------------------ ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................ 1000 $ 1 $ 1,835 $ 1,836
Net income...................................... -- -- 809 809
Distributions to shareholders................... -- -- (679) (679)
----------- ------- ---------- ----------------
Balance, December 31, 1993........................ 1000 1 1,965 1,966
Net income...................................... -- -- 2,143 2,143
Distributions to shareholders................... -- -- (2,401) (2,401)
Issuance of stock............................... 99,000 99 -- 99
Special distribution to shareholders............ -- -- (6,919) (6,919)
----------- ------- ---------- ----------------
Balance, December 31, 1994........................ 100,000 100 (5,212) (5,112)
Net income...................................... -- -- 1,192 1,192
----------- ------- ---------- ----------------
Balance, December 31, 1995........................ 100,000 100 (4,020) (3,920)
Net loss for the period from January 1, 1996 to
November 18, 1996............................ -- -- (956) (956)
Capital Contribution............................ -- -- 1,000 1,000
----------- ------- ---------- ----------------
Balance, November 18, 1996........................ 100,000 $ 100 $ (3,976) $ (3,876)
----------- ------- ---------- ----------------
----------- ------- ---------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The December 31, 1995 and November 18, 1996 consolidated financial
statements of Roses, Inc. and subsidiaries (collectively 'Roses' or the
'Company') include the accounts of Roses, Inc., Rose Hills Mortuary, Inc.
('RHMI') and Rose Hills Mortuary, L.P. ('RHMLP'). Effective January 1, 1995 the
consolidated financial statements include tax accounts as if Roses, Inc. adopted
Statement of Financial Accounting Standards No. 109 ('SFAS No. 109'), Accounting
for Income Taxes, on that date. The December 31, 1994 consolidated financial
statements of Roses, Inc. and subsidiaries include the accounts of RHMI and
RHMLP only, as predecessor companies. Through December 31, 1994, RHMI, the
general partner of RHMLP, had elected treatment as an S-Corporation, accordingly
RHMI's income, whether distributed or not, was taxed at the shareholder level
for income tax purposes. Therefore, the accompanying consolidated financial
statements as of December 31, 1994 and 1993 do not include a provision for
income taxes. For California franchise tax purposes, S-Corporations were taxed
at 2.5% of taxable income through 1993 and 1.5% of taxable income in 1994.
Deferred taxes are not provided for these years as the amounts were immaterial.
The accounting and reporting policies of Roses conform to generally
accepted accounting principles ('GAAP') and the prevailing practices within the
mortuary industry. All significant inter-company accounts and transactions have
been eliminated.
On September 19, 1996, Roses entered into a purchase agreement (the
Purchase Agreement) whereby all shares of the common stock of Roses will be sold
to a new company formed by Blackstone Capital Partners II Merchant Banking Fund
L.P. and The Loewen Group Inc. (the Buyers) for approximately $75 million (the
Acquisition). In addition, in connection with this transaction, selected assets
of Rose Hills Memorial Park Association and Workman Mill Investment Company (the
Association) are being sold to the Buyers. The sale of Roses was consummated on
November 19, 1996.
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Roses, Inc., a California corporation, was formed in December 1994 and,
effective January 1, 1995, became the limited partner of RHMLP, replacing the
predecessor limited partner, and parent corporation of RHMI, California
corporation, (collectively 'Roses' or the 'Company'). As part of this
restructuring, the predecessor limited partner exchanged its partnership
interest in RHMLP for shares of stock in the newly formed Roses, Inc.
Additionally, the three shareholders of RHMI, the general partner of RHMLP, all
exchanged their share holdings for shares in the newly formed Roses, Inc. As a
result of this exchange, Roses, Inc. became both the parent corporation to RHMI
and the new limited partner of RHMLP.
Roses, Inc. has no other business interests or operations other than to
manage a 12.5% limited partnership interest in RHMLP and a 100% wholly owned
subsidiary RHMI, which as the general partner, has an 87.5% partnership interest
in RHMLP.
RHMLP was formed in 1990 for the purpose of owning and managing the funeral
operations and managing the cemetery operations of Rose Hills Memorial Park
Association (the 'Association').
RHMLP's business is segmented into five main areas which include
professional mortuary services, casket sales, flower shop sales, sales of
pre-need funeral insurance products from which commissions are earned, and
management services from which fees are earned in accordance with an agreement
with the Association.
Use of Estimates
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and short term certificates
of deposit.
F-33
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Receivables
Receivables due from customers for mortuary services and merchandise are
generally due at the time services are rendered. However, financing arrangements
are available over a period of three to five years. Such financial contracts
bear interest at the rate of 12% per annum. An allowance for doubtful accounts
has been established to recognize that a portion of these receivables may not be
collectible. As of November 18, 1996 and December 31, 1995, the allowance for
doubtful accounts was $216,000 and $287,000, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are valued at its fair market value at the
acquisition date. Additions subsequent to the acquisition date are recorded at
cost.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method
over the estimated useful life of the asset, ranging from 5 to 25 years.
Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and betterments are capitalized.
Goodwill
Goodwill is being amortized using the straight-line method over a 40 year
period. As of November 18, 1996 and December 31, 1995, accumulated amortization
of goodwill was $536,000 and $459,000, respectively.
Deferred Financing Costs
Deferred financing costs relating to the Bank Senior Term Loan entered into
in July 1994 and amended in December 1994 (see Note 6) are being amortized over
the life of the loan based on the effective interest method. As of November 18,
1996 and December 31, 1995, accumulated amortization of these costs was $231,000
and $142,000, respectively.
Income Taxes
Effective January 1, 1995, RHMI became a C-Corporation, which together with
its parent, Roses, Inc., also a C-Corporation, became obligated to file
consolidated federal and state tax returns. Beginning in 1995, RHMLP makes cash
distributions to Roses and RHMI in their respective interests for the payment of
federal and state taxes.
During 1993, the IRS began an examination of federal income tax returns
filed for the tax year ended 1990 by both RHMI and RHMI's predecessor and its
subsidiaries, whose liabilities generally were assumed by RHMI. The IRS also
commenced examinations of the Association and its affiliated entities for 1990.
In December 1994, the Company agreed to certain adjustments proposed by the
IRS relating to both RHMLP and RHMLP's predecessor and its subsidiaries for the
tax years through December 31, 1992. In connection with this agreement RHMLP
paid approximately $294,000, consisting of tax and interest in the approximate
amounts of $201,000 and $93,000, respectively. Of the amount paid, approximately
$212,000 was allocated to the Association, for its share of the tax adjustments.
In June 1995, the Association reached an agreement (the 'Closing Agreement')
with the IRS relating to its outstanding tax issues. The Closing Agreement
required the Association to pay $1.2 million to the IRS. Due to the resolution
of the Association's tax issues with the IRS and in accordance with an agreement
between the Company and the Association executed in
F-34
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
May 1990, the Company incurred an obligation to pay the Association additional
consideration for the covenant not to compete in the amount of $1.1 million. The
net result of the obligations, arising from these IRS audits to RHMLP was
financed by the Association as explained in Note 6.
Special Distribution
In December 1994, RHMLP redeemed one-half of the predecessor's limited
partner's interest and their priority capital account for $6.9 million. In
accordance with the Partnership Agreement, this redemption and distribution to
the predecessor limited partner eliminated their priority capital account, the
accruing of a guaranteed return and changed the net income allocation to the
limited partner from 25% to 12.5% effective January 1, 1995. In addition, the
predecessor limited partner exchanged its partnership interest in RHMLP for
shares of stock in newly formed Roses, which became the new limited partner on
January 1, 1995.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, receivables and payable
approximate carrying value because of the short maturity of these instruments.
Impairment of Long-Lived Assets
In 1995, Roses adopted SFAS No. 121, 'Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121),
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. The adoption of SFAS No. 121 did not have a material impact on the
Company's financial position or results of operations.
Earnings Per Share
Earnings per share are computed based on the weighted average number of
shares outstanding during each year. The Company has no stock options or
warrants outstanding at November 18, 1996. Weighted average shares outstanding
at November 18, 1996 are 100,000 shares on a historical basis, weighted average
shares outstanding during 1994 are presented on a pro forma basis as if Roses,
Inc. were in existence during that year.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
<S> <C> <C>
Land.................................... $ 3,275 $ 3,275
Buildings and improvements.............. 9,419 9,463
Furniture, fixtures and equipment....... 2,141 2,048
Vehicles................................ 398 406
Computer software....................... 3,375 3,464
Construction in progress................ 81 48
------------ ------------
Total property, plant and equipment..... 18,689 18,704
Less: accumulated depreciation.......... (4,905) (5,913)
------------ ------------
Property, plant and equipment, net...... $ 13,784 $ 12,791
------------ ------------
------------ ------------
</TABLE>
F-35
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRE-NEED FUNERAL INSURANCE
The pre-need funeral insurance policies sold by the Company are whole-life
policies sold on a pre-need basis to pay for the cost of funeral services.
Commissions earned varies based on a combination of factors, such as the amount
of funeral cost coverage sold, the age of the insured and the volume of monthly
sales activity. In addition, an annual profit-sharing commission is received
based upon the number of policies written. Insurance commissions earned on
individual policies, as well as commissions based on monthly volume activity and
annual profit-sharing arrangements, are recognized as income when the policies
are accepted by the insurance company.
RHMI, the general partner of RHMLP, holds the license to sell the pre-need
insurance as the general agent for RHMLP. However, pursuant to an assignment
agreement with RHMLP and RHMI, RHMLP receives the insurance commissions as
income for its efforts for managing, operating and employing the personnel
involved with the pre-need funeral insurance program.
5. INCOME TAXES
The provision for income taxes follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
<S> <C> <C>
Federal current......................... $ 653 $1,085
State current........................... 181 343
------------ ------------
Total current...................... 834 1,428
------------ ------------
Federal deferred........................ 190 (665)
State deferred.......................... 70 (218)
------------ ------------
Total deferred..................... 260 (883)
------------ ------------
Total income tax expense...... $1,094 $ 545
------------ ------------
------------ ------------
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
<S> <C> <C>
Federal tax at statutory rates.......... $ 777 $ (140)
Net tax effects of:
Goodwill amortization................. 22 28
State taxes, net of federal benefit... 160 82
Acquisition costs..................... 45 601
Other permanent differences........... 90 (26)
------------ ------
Actual tax expense...................... $1,094 $ 545
------------ ------
------------ ------
</TABLE>
As discussed in Note 1, Roses adopted SFAS No. 109 on January 1, 1995.
Under SFAS No. 109, deferred income tax assets or liabilities are computed based
on temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period. The effect of adopting SFAS No. 109 was
not material to the financial position of Roses.
F-36
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES--(CONTINUED)
The components of the net deferred tax balances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
<S> <C> <C>
Deferred tax assets:
Operating reserves.................... $ 231 $ 318
Retirement benefits................... 197 161
Supplemental employee retirement
plan............................... 892 1,067
Amortization.......................... 16 8
State taxes........................... 61 68
Other................................. 84 4
Settlement of intercompany balances... -- 611
------------ ------------
Total deferred tax assets.......... 1,481 2,237
------------ ------------
Deferred tax liabilities:
Depreciation.......................... (876) (738)
Land.................................. (809) (873)
Other................................. (56) (2)
------------ ------------
Total deferred tax liability....... (1,741) (1,613)
------------ ------------
Net deferred tax asset
(liability)...................... $ (260) $ 624
------------ ------------
------------ ------------
</TABLE>
6. LONG TERM DEBT
In July 1994, the Company entered into a loan agreement, which provided for
a new senior term loan in the amount of $16.5 million, a revolving facility
available up to $1 million and an acquisition facility available up to $2.5
million. The proceeds from the senior term loan coupled with cash from
operations were used to repay the outstanding balance due under an existing
senior term loan with another bank in the amount of $11 million and the
outstanding balance due under the Association's subordinated note, which
included accrued interest, in the amount of $6.6 million.
In December 1994, the Company negotiated a modification to the existing
senior term loan agreement for an additional borrowing of $6.5 million. These
proceeds provided the funds to enable RHMLP to redeem one-half of the limited
partner interest in RHMLP and make the redemption and distribution payment in
the amount of $6.9 million. As a condition of this incremental borrowing, the
bank eliminated the availability of the revolving and acquisition facilities
previously approved by them in July 1994.
The maturity date on the loan was June 30, 1997. Interest on the
outstanding balance as of November 18, 1996 is calculated at various rates
ranging from fixed rates of 7.50% and 7.75% to a maximum variable rate of prime
plus .25%. Interest expense on the senior term loan for the period from January
1, 1996 to November 18, 1996 and for the year ended December 31, 1995 was
$1,235,000 and $2,000,000, respectively. The senior term loan agreement contains
certain financial covenants, the most significant of this is the maintenance of
minimum levels of partnership equity, a cash flow coverage ratio and a leverage
ratio. At November 18, 1996, the Company was in compliance with all of these
covenants.
In connection with the Purchase Agreement, the senior term loan will be
repaid upon consummation of the Acquisition, accordingly the balance of the loan
has been reflected as a current obligation of the Company.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the long-term debt
approximates its carrying value as of November 18, 1996.
During 1993, as described in Note 11, the Company executed an unsecured
promissory note made payable to the Association for its share of computer
software. The promissory note, in the original amount of $1.2 million, matures
on June 30, 1997, and interest accrues at the rate of eight percent (8%) per
annum. The
F-37
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG TERM DEBT--(CONTINUED)
balance due on this note at November 18, 1996 and December 31, 1995 was $219,000
and $613,000, respectively. An installment payment of $28,000 including
principal and interest is made monthly. Interest expense for 1996, 1995 and 1994
with respect to the promissory note was $24,000, $51,000 and $73,000,
respectively.
As referred to in Note 2 and resulting from the settlement and Closing
Agreement between the Association and the IRS, the Association agreed to pay
$1.2 million to the IRS. Due to previous agreements between the Company and the
Association, the Company's net share of the settlement was $835,000. The
Association agreed to finance this amount in the form of an unsecured promissory
note due November 30, 2000, bearing interest at eight percent (8%) per annum.
Only the interest is payable monthly through June 1997. Beginning on July 31,
1997 the Company shall pay monthly installments of $28,000 until the maturity
date at which time any remaining interest and principal shall be due and
payable.
7. OPERATION AND MANAGEMENT AGREEMENTS
The businesses of the Company and the Association are complementary.
Effective October 1, 1989, and in conjunction with the Acquisition, the Company
and the Association entered into an Operation and Management Agreement ('O & M
Agreement'), whereby RHMLP manages the Association's cemetery operations for a
ten-year term, subject to two additional five-year periods at the option of
either the Company or the Association. Under the terms of the O & M Agreement,
common costs, including but not limited to general and administrative payroll,
advertising, utilities and selling expenses, are allocated between the Company
and the Association at agreed upon percentages. In the opinion of Roses
management, these allocation percentages are reasonable. Although most of the
common costs are paid by the Company, the accompanying Statements of Income
reflect the net expenses of the Company. However, the accompanying Balance
Sheets include accounts payable and accrued liabilities associated with the
common costs and as of November 18, 1996 and December 31, 1995 and 1994 reflect
a net receivable from the Association in the amount of $248,000 and $3,800,000,
respectively. A portion of the amount due from the Association reflects the
Association's share of the common costs payable at year end. General and
administrative payroll and other employee benefit expenses such as retirement
plan costs, as noted in Note 8, are generally paid by the Company and then
allocated and shared between RHMLP and the Association.
Effective January 1, 1993, RHMI, employed the senior managers of RHMLP.
Accordingly, RHMI has adopted the retirement plan, the 401(k) savings plan, and
the various other welfare and benefit plans for this group of administrative
employees, for whom the accrued benefits are guaranteed by RHMLP. The wages and
benefits for these senior managers are charged to RHMLP and a portion then
allocated to the Association as they are for all other employees.
In connection with the Purchase Agreement, described more fully in note 1
and the Settlement Agreement between the Company and the Association, dated
November 19, 1996, all intercompany accounts related to operating transactions
between the Company and the Association as of November 18, 1996 were to be
settled. The Settlement Agreement sets forth a methodology by which such
intercompany obligations due and owing among the Company and the Association
pursuant to the operation and management agreement are to be settled. As a
result, the Company has recorded a charge of approximately $1.9 million in the
period ended November 18, 1996 which represents the Company's estimate of the
adjustment required to arrive at the actual cash amount to be paid to the
Association by the Company pursuant to the Settlement Agreement. The actual
amounts paid to the Association may differ from the amounts recorded at November
18, 1996 and such differences would ultimately be the liability of the selling
shareholders of the Company. Management of the Company is of the opinion that
the amount recorded at November 18, 1996 is sufficient to satisfy the cash
amount ultimately due to the Association in settlement of the intercompany
accounts.
F-38
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS
Defined Benefit Plan
As a result of the formation of the Company, all employees of the
Association became employees of the Company on or before October 1, 1990. Prior
to the Acquisition, all employees of the Association were participants in the
Retirement Plan for Employees of Rose Hills Memorial Park Association (the
'Association Plan'). In conjunction with the Acquisition, however, the
Association Plan was terminated in September 1990 and assets sufficient to cover
the projected benefit obligations for all currently active participants in the
Association Plan were transferred to the Retirement Plan for Employees of Rose
Hills Mortuary, L.P. (the 'Company Plan'). As more fully explained in Note 7,
the expense of the Company Plan is shared between the Company and the
Association. Although the information presented below represents the net pension
cost and funded status for the Company Plan, the accompanying Income Statements
of the Company reflect RHMLP's expenses only, whereas the Balance Sheets reflect
the total Company Plan obligation as well as the receivable attributable to the
Company Plan due from the Association.
Participants are entitled to monthly pension benefits beginning at normal
retirement after age 65 equal to the product of the number of years of credited
service times a percentage of the employee's highest five-year monthly
compensation of the last ten years, computed in accordance with the provisions
of the Company Plan. Participants are fully vested after completing five years
of service. Employees may elect to receive their pension benefits in the form of
a single-life annuity or a qualified joint and contingent annuity.
Employees with ten or more years of credited service are permitted early
retirement at age 55. However, if such participants terminate their employment
before completing ten years of service, they forfeit the right to receive early
retirement benefits.
Roses has funded or accrued the present value of these benefits. The
Company Plan is subject to, and in compliance with, the provisions of the
Employee Retirement Income Security Act of 1974 ('ERISA'). During 1995, the
Company Plan received a favorable letter of determination from the IRS.
The net pension cost included the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995 1996
---- ------ -----------
(000'S)
<S> <C> <C> <C>
Service cost--benefits earned during the
period................................ $622 $ 647 $ 623
Interest cost on projected benefit
obligation............................ 662 735 710
Actual (earnings) loss on company plan
assets................................ 286 (2,353) (1,429)
Net amortization and deferral........... (793) 1,878 701
---- ------ -----------
Total net periodic pension cost.... $777 $ 907 $ 605
---- ------ -----------
---- ------ -----------
</TABLE>
F-39
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS--(CONTINUED)
The following table sets forth the Company Plan's funded status and the
amounts recognized in the accompanying financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
<S> <C> <C>
Actual present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of $9,236
for 1996, $8,925 for 1995 and
$7,706 for 1994.................... $ (9,328) $ (9,554)
------------ ------------
------------ ------------
Projected benefit obligation for
services rendered to date.......... $(10,660) $(11,320)
Plan assets at fair market value,
primarily listed stocks, bonds and
U.S. Government obligations........... 9,266 10,918
------------ ------------
Plan assets less than projected benefit
obligations........................... (1,394) (402)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in
assumptions........................... 225 (553)
Unrecognized net asset being recognized
over 15 years......................... (283) (228)
------------ ------------
Accrued pension costs.............. $ (1,452) $ (1,183)
------------ ------------
------------ ------------
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.75% and 4.50%, respectively. The expected
long-term rate of return on assets was 8.00%.
As stated in Note 7 above, the common costs are shared between the
Association and Roses. The amounts for the Company Plan noted above are for all
participants before such costs are allocated between the Association and Roses.
However, the accompanying Statements of Income reflect only the net pension plan
expenses for Roses share of such expenses. Although the accompanying Balance
Sheets reflect the total Plan's assets and liabilities, the total amount of
these assets and liabilities is offset by the Association's share of such
amounts, including the expense of the Plan, which are included in the net
receivable from the Association. The Company's share of the net periodic pension
cost was $346,000, $254,000 and $487,000 for the period ended November 18, 1996
and the years ended December 31, 1995 and 1994, respectively. The Company's
share of the accumulated benefit obligation was $5.4 million and $4.4 million
for the period ended November 18, 1996 and the year ended December 31, 1995,
respectively and its share of the projected benefit obligation was $6.5 million,
$5.0 million and $4.4 million for the period ended November 18, 1996 and the
years ended December 31, 1995 and 1994, respectively.
The balance between the amounts disclosed above in the tables and the
amounts noted in the foregoing two sentences represent the amounts allocated to
the Association and included along with prior years' corresponding amounts, in
the net receivable due from the Association.
Defined Contribution Plan
The Company also has a defined contribution plan, which has been qualified
under section 401(k) of the Internal Revenue Service Code (the 'Savings Plan').
During 1995 RHMLP received a favorable letter of determination from the Internal
Revenue Service regarding the Savings Plan. The Savings Plan permits
participation by all employees of the Company who have completed six months of
continuous service, subject also to their entry into the Savings Plan on
enrollment dates of January 1 or July 1 of each year. Participants may defer up
to 15% of their compensation (subject to certain limitations). In addition to
the amount of compensation deferred by participants, the Company matches up to a
maximum of $2,000 per year per participant. During 1996, 1995 and 1994, the
Company's contribution to this Savings Plan on behalf of the participants
amounted to $294,000 $270,000 and $292,000, respectively. Of these amounts
$112,000, $98,000 and $105,000 reflected the
F-40
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS--(CONTINUED)
amount expensed by the Company for its share of the total contributions in 1996,
1995 and 1994, respectively, and the balance of the expense was borne by the
Association.
Supplemental Employee Retirement Plan
At the time of the Acquisition, the three senior officers executed
employment agreements, which obligated the Company to provide these three
employees with a supplemental employee retirement plan ('SERP'). This
non-qualified supplemental pension plan covering certain employees provides for
incremental pension payments from the Company's funds so that the total pension
payments would more realistically approximate amounts that would have been
payable from the Company's principal pension plans if it were not for
limitations imposed by income tax regulations. The annual lifetime benefit is
based upon a percentage of salary during the final five years of employment,
offset by several other sources of income, up to age 62 at which time the
benefit becomes payable to the participant. The expenses of the SERP are
allocated between Roses and the Association as discussed in Note 7.
The SERP net pension cost included the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995 1996
---- ---- ------------
(000'S)
<S> <C> <C> <C>
Service cost-benefits earned during the
period................................ $234 $248 $ --
Interest cost on projected benefit
obligation............................ 234 266 312
Net amortization and deferral........... 62 62 70
---- ---- ------
Total net periodic pension cost......... 530 576 382
Less: Association's share of net
periodic pension cost................. 196 213 141
---- ---- ------
Roses share of net periodic pension
cost............................. $334 $363 $241
---- ---- ------
---- ---- ------
</TABLE>
The following table sets forth the SERP funded status and the amounts
recognized in the accompanying financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
(000'S)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of $2,920
for 1995 and $2,166 for 1994....... $ (2,920) $ (2,978)
------------ ------------
------------ ------------
Projected benefit obligation for
services rendered to date.......... $ (4,703) $ (4,775)
Plan assets at fair market value...... -- --
------------ ------------
Plan assets less than projected
benefit obligations................ (4,703) (4,775)
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in
assumptions........................... 411 (46)
Unrecognized prior service cost....... -- 201
Unrecognized net asset being amortized
over 15 years...................... 764 710
------------ ------------
Accrued pension costs................... (3,528) (3,910)
Less: Association's share of accrued
pension cost.......................... 1,305 1,447
------------ ------------
Roses share of accrued pension
cost............................. $ (2,223) $ (2,463)
------------ ------------
------------ ------------
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.25% and 4.00%, at December 31, 1995 and
7.75% and 4.0% at November 18, 1996 respectively. The expected long term rate of
return on assets was 8.00%.
F-41
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLANS--(CONTINUED)
To fund the SERP obligations the Company has procured whole life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7 million. The insurance premiums, like other common
costs, are allocated between the Company and the Association and are charged to
expense, net of the annual increase in the cash surrender value of the policies.
The net premiums expensed by the Company for 1996, 1995 and 1994 amounted to
$136,000, $75,000 and $68,000, respectively. The cash surrender value of the
Company's share of the policies is reflected in the Balance Sheets under Other
Current Assets and amounted to $420,000, $207,000 as of November 18, 1996 and
December 31, 1995, respectively. The Association's share of the premiums and
cash surrender value of the policies is reflected in the net receivable due from
the Association.
9. FUNERAL SERVICE TRUST AGREEMENTS
The Company sells, on a limited basis, Funeral Service Trust Agreements.
These trust agreements are sold generally on an installment basis and funds
derived therefrom earn income subject to certain limitations. Trusts may be
terminated at any time with all principal and accumulated net income being
distributed to the Trustor. Trustors may at any time apply the trust amount to
the purchase price of funeral services and arrangements furnished by the Company
and/or to cemetery property, services and commodities provided by the
Association. The amounts relating to these trusts are not included in the
accompanying financial statements, however, administration fees earned by the
Company are reflected in the Statements of Income.
10. COMMITMENTS UNDER LEASE AGREEMENTS
The Company and the Association jointly operate computer hardware and
software, which are used in the operation of their businesses. The understanding
of this joint ownership is captured in a separate agreement, which was executed
at the time of the Acquisition. Under this separate agreement, the Company
agreed to assume 32% of the liability for both the computer hardware and
software. The computer hardware is leased under a capital lease, which was
amended in 1994 and now extends to April 1999. The computer software was leased
under a financing lease until April 1993 at which time the Association paid off
the remaining balance. The Association and the Company then executed a
promissory note for the Company's remaining share of the software financing
lease, as described in Note 6. Roses interest in the assets relating to these
agreements is included in property, plant and equipment and the related
liability for the hardware is reflected as obligations under financing leases.
As of November 18, 1996, the future minimum lease obligation pursuant to
the joint and several operating lease agreement is summarized as follows:
<TABLE>
<CAPTION>
COMPUTER HARDWARE
OPERATING LEASE
-----------------
(000'S)
<S> <C>
Period from November 19, 1996 to
December 31,
1996.................................. $ 28
Year ending December 31,
1997.................................. 102
1998.................................. 159
1999.................................. 61
2000.................................. 22
------
Total minimum lease obligations.... 372
Less: interest........................ 40
------
Total present value of lease
obligations...................... $ 332
------
------
</TABLE>
F-42
<PAGE>
ROSES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Roses is involved in certain matters of litigation, none of which, in the
judgment of management, will have a material impact on its financial position or
results of operations.
During 1995, Roses along with the Association settled all outstanding tax
issues that had arisen in connection with audits conducted by the IRS of RHMLP,
its predecessor and the predecessor's subsidiary companies, the Association and
its affiliated entities for the tax year ended 1990. Roses maintains a reserve
for future taxes and interest that may arise in relation to the Acquisition of
RHMLP in May 1990. In the opinion of management, this reserve is adequate to
cover any future tax liability related to the Acquisition.
Subsequent to the issuance of RHMLP's 1995 financial statements it was
determined that the actuarial report for the SERP used incorrect amounts for the
service period, salary rates of the senior officers and discount rate. A
corrected actuarial report was obtained from the actuary and these calculations
are reflected in Note 8. The effect of these corrections results in an overall
increase in the Accumulated Benefit Obligation ('ABO') from $3.7 million to $4.7
million at December 31, 1995 and an increase in pension cost from approximately
$800,000 to $3,500,000 over the period of May 1990 through December 31, 1995.
Accordingly, these increases are shared between Roses and the Association as
defined in the O&M Agreement. To date, the Association has not disputed the
existence and related liability for their share of the plan obligation and
costs. Management of Roses has asserted that the revised actuarial calculations
are appropriate and the allocations to the Association are in accordance with
the O&M Agreement. If the Association was to dispute the existence of the SERP,
the Company would be fully liable for the benefit obligation and related plan
costs, the effect of which would increase liabilities of Roses by approximately
$3.2 million and increase plan costs to Roses of approximately $2.3 million
since SERP's inception in May 1990.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Rose Hills Memorial Park Association:
We have audited the accompanying combined statements of financial position of
Rose Hills Memorial Park Association and Workman Mill Investment Company as of
December 31, 1995 and November 18, 1996 and the related combined statements of
activities, changes in net assets and cash flows for the years ended December
31, 1994 and 1995, and for the period from January 1, 1996 to November 18, 1996.
These combined financial statements are the responsibility of the Association's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined financial statements were prepared to present the
combined assets and liabilities and related operations of Rose Hills Memorial
Park Association and Workman Mill Investment Company that are to be sold and
assumed, respectively, pursuant to the purchase agreement described in note 1,
and are not intended to be a complete presentation of the consolidated financial
statements of Rose Hills Memorial Park Association and its wholly owned
subsidiary, Murrieta Hills Holding Company, or its subsidiaries, Murietta Hills,
Inc. and Workman Mill Investment Company.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Rose Hills
Memorial Park Association and Workman Mill Investment Company as of December 31,
1995 and November 18, 1996 and the changes in their net assets and their cash
flows for the years ended December 31, 1994 and 1995, and for the period from
January 1, 1996 to November 18, 1996, pursuant to the purchase agreement
described in note 1, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 9, 1997
F-44
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------- -------
<S> <C> <C>
Cash and cash equivalents.............................. $ 488 $ 731
Receivables:
Customer accounts receivable, net.................... 5,266 6,149
Due from Endowment Care Fund......................... 280 539
Notes receivable from Rose Hills Company............. 311 1,055
Other receivables.................................... 129 46
------- -------
Total current receivables.................... 5,986 7,789
------- -------
Inventories:
Cemetery property.................................... 5,439 4,904
Interment funeral and other inventories.............. 72 165
------- -------
Total inventories............................ 5,511 5,069
------- -------
Due from Rose Hills Company............................ 859 1,038
------- -------
Total current assets......................... 12,844 14,627
------- -------
Other assets:
Notes receivable from Rose Hills Company:
Unsecured note.................................... 835 --
Computer note..................................... 192 --
Customer accounts receivable, net.................... 4,138 3,655
Prepaid expenses and other assets.................... 501 42
------- -------
Total other assests.......................... 5,666 3,697
------- -------
Property, plant and equipment, net..................... 32,020 39,491
------- -------
Total assets................................. $50,530 $57,815
------- -------
------- -------
LIABILITIES AND NET ASSETS
Accounts payable....................................... $ 518 $ 372
Accrued expenses....................................... 964 1,116
Due to Endowment Care Fund............................. 63 31
Other current liabilities.............................. 1,011 1,002
------- -------
Total current liabilities.................... 2,556 2,521
Retirement plan and other liabilities.................. 3,368 3,514
Obligations under capital leases, net.................. 782 766
Pre-need funeral service debentures:
Issued and outstanding............................... 1,180 1,019
Less amounts on deposit with Trustee................. (1,180) (1,019)
------- -------
Net pre-need funeral service debentures...... -- --
------- -------
Total liabilities............................ 6,706 6,801
------- -------
Commitment and contingencies........................... -- --
Net assets............................................. 43,824 51,014
------- -------
Total liabilities and net assets............. $50,530 $57,815
------- -------
------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-45
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF ACTIVITIES
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Sales and services:
Cemetery property, net of cancellations.... $10,984 $13,042 $10,929
Other cemetery sales and services.......... 8,756 9,104 8,299
------- ------- -------
Total sales and services................ 19,740 22,146 19,228
------- ------- -------
Cost of sales and services:
Cemetery property.......................... 805 749 658
Other cemetery sales and services.......... 3,997 3,609 3,257
------- ------- -------
Total cost of sales and services........ 4,802 4,358 3,915
------- ------- -------
Gross profit............................ 14,938 17,788 15,313
------- ------- -------
Other revenue:
Endowment Care Fund income................. 1,439 1,451 1,833
Finance income............................. 1,167 1,169 934
------- ------- -------
Total other revenue..................... 2,606 2,620 2,767
------- ------- -------
17,544 20,408 18,080
Selling, general and administrative expenses
(including retirement plan curtailment loss
of $421 in 1996)........................... 18,595 18,342 15,998
------- ------- -------
Operating income (loss)................. (1,051) 2,066 2,082
Other income (expense):
Covenant not to compete.................... 1,955 266 --
Income tax expense resulting from IRS
settlements............................. (1,226) -- --
Interest expense........................... (155) (201) (93)
Other income, net.......................... 671 113 97
------- ------- -------
Net income.............................. $ 194 $ 2,244 $ 2,086
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-46
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net assets at beginning of year (period)..... $38,844 $36,571 $43,824
Net income................................... 194 2,244 2,086
Adjustments for exclusion of certain cash and
cash equivalents pursuant to the Asset
Purchase Agreement......................... (2,467) 5,009 (1,192)
Distributions received from Endowment Care
Fund for capital expenditures.............. -- -- 6,296
------- ------- -------
Net assets at end of year (period)........... $36,571 $43,824 $51,014
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-47
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION AND
WORKMAN MILL INVESTMENT COMPANY
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994
AND 1995 AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 194 $ 2,244 $ 2,086
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 1,676 1,668 1,494
Net gain on sale of property, plant and
equipment.............................. -- (18) --
Provision for sales cancellations....... 2,122 1,647 852
Provision for bad debts................. 120 60 53
Covenant not to compete................. (1,955) (266) --
Changes in operating assets and
liabilities:
Customer accounts receivable.......... (1,619) (1,851) (1,306)
Other receivables..................... (22) (14) 84
Due from Endowment Care Fund, net..... (537) (114) (291)
Inventories........................... (825) (2,535) 331
Prepaid expenses and other assets..... (385) 397 460
Interest receivable on note from Rose
Hills Company........................ (537) -- --
Accounts payable, accrued expenses and
other liabilities.................... 3,730 (1,727) 6
Due from Rose Hills Company........... (241) (284) (179)
Retirement plan liabilities........... (686) 100 145
------- ------- -------
Net cash provided by (used in)
operating activities............ 1,035 (693) 3,735
Cash flows from investing activities:
Purchases of property, plant and
equipment............................... (4,833) (4,240) (8,872)
Proceeds from dispositions of property,
plant and equipment..................... 152 99 18
Distributions received from Endowment Care
Fund for capital expenditures........... -- -- 6,296
------- ------- -------
Net cash used in investing
activities...................... (4,681) (4,141) (2,558)
------- ------- -------
Cash flows from financing activities:
Payments received on notes receivable from
Rose Hills Company...................... 6,949 265 284
Issuance of unsecured note to Rose Hills
Company................................. (835) -- --
Increase (decrease) in obligations under
capital leases, net..................... 59 (318) (26)
------- ------- -------
Net cash provided by (used in)
financing activities............ 6,173 (53) 258
------- ------- -------
Increase (decrease) in cash and
cash equivalents................ 2,527 (4,887) 1,435
Adjustments for exclusion of certain cash and
cash equivalents pursuant to the Asset
Purchase Agreement discussed in note 1..... (2,467) 5,009 (1,192)
Cash and cash equivalents at beginning of
year (period).............................. 306 366 488
------- ------- -------
Cash and cash equivalents at end of year
(period)................................... $ 366 $ 488 $ 731
------- ------- -------
------- ------- -------
Cash paid during the year (period) for
interest................................... $ 163 $ 202 $ 97
------- ------- -------
------- ------- -------
Non-cash investing activities:
Purchases of software financed by capital
leases.................................. $ 349 $ -- $ 256
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-48
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND NOVEMBER 18, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Rose Hills Memorial Park Association (the Association) is a California
nonprofit mutual benefit corporation which is exempt from Federal and state
income taxes. The Association owns property located in Los Angeles County, near
Whittier, California which it develops as cemetery plots and in which it sells
rights to inter remains to the surrounding community. The operations of the
Association are managed on a day-to-day basis by Rose Hills Mortuary, L.P. (Rose
Hills Company or the Company) pursuant to a Management Agreement as discussed in
note 8.
The Association has a wholly owned subsidiary, Murrieta Hills Holdings,
Inc. (Holdings), which owns Murrieta Hills, Inc. (Hills) and Workman Mill
Investment Company (Workman Mill). All three companies have been organized under
the laws of the state of California. Holdings and Hills were formed for the
purpose of holding the investment in and managing the entitlement and future
development of approximately 1,000 acres of real property located in Riverside
County, California. Workman Mill was formed for the purpose of holding water
rights and the operation of water distribution systems used primarily by the
Association in its cemetery operations.
Sale of Cemetery Business
On September 19, 1996, the Association entered into an Asset Purchase
Agreement (the Agreement) with an unrelated buyer to sell certain assets which
it uses in the conduct of the Association's business of managing, operating,
developing and selling of cemetery plots and related services and the seller
also agreed to assume certain liabilities related to the cemetery business. The
purchase price for the assets and operations of the business was $166.3 million
and liabilities assumed were $6.8 million, and the closing of the transaction
occurred November 19, 1996. Settlement of the accounts with Rose Hills Company
was not included in the purchase price. In addition, the Association entered
into a settlement agreement (Settlement Agreement) with the Company on November
19, 1996, and it is anticipated that there will be certain closing and other
adjustments as a result of the Settlement Agreement (see notes 3 and 8). Based
on current information, it is anticipated that such adjustments that are not
recorded in the accompanying combined financial statements will result in a gain
to the Association. The assets and operations of the Association that were not
sold and the liabilities that were not assumed in this transaction have remained
with the Association and together with the proceeds of the sale of the Cemetery
business will be used to fund the operations of a charitable foundation which
was formed during November, 1996.
Basis of Presentation
The accompanying combined financial statements were prepared to present the
combined assets and liabilities and related operations of Rose Hills Memorial
Park Association and Workman Mill Investment Company (collectively referred to
herein as the Association) that are to be sold and assumed, respectively,
pursuant to the Agreement. Certain assets of the Association which are not used
in the conduct of the Association's business, such as cash, investments,
undeveloped property, all assets of Holdings and Hills, with the exception of
certain of Workman Mill's assets, and other such assets not being sold, have
been excluded from the assets presented in the accompanying combined financial
statements. Similarly, pursuant to the Agreement, liabilities of the Association
arising out of assets that are not being sold and other liabilities related to
completion of certain of the Association's construction projects, as more fully
described in note 13, have been excluded from the accompanying combined
financial statements. Revenue and expense items that relate to any of the
Association's assets or liabilities that have been excluded from sale or
assumption have likewise been excluded from the accompanying combined financial
statements. As further discussed in note 4, the accounts of the Endowment Care
Fund are not included in the accompanying combined financial statements. All
significant intercompany accounts and transactions among and between the
Association and Workman Mill have been eliminated.
F-49
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue related to cemetery interment rights is recognized when the
contract is signed by the customer and a minimum deposit is received, with
concurrent recognition of all related costs. Allowances for anticipated customer
cancellations are provided for at the date of sale at estimated amounts based on
historical trends. A portion of the proceeds from the sale of interment rights
is required by state law to be paid into the Endowment Care Fund to provide for
the perpetual care of the Association properties. Cemetery revenue is recorded
net of these amounts. Revenue from the sale of cemetery goods and services is
recognized at the time of interment.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of 3 months or less. Certain amounts of cash are on deposit in trust
for the purpose of servicing preneed funeral obligations, and are therefore
restricted for such use.
Receivables
Receivables resulting principally from pre-need sales of cemetery property
are generally due in monthly installments over periods of one to seven years and
bear interest at the rate of 9.6% per annum. An allowance for sales
cancellations has been established to recognize that cemetery property sold in
advance of need, for which a minimum down payment is received, may be
subsequently canceled. Accordingly, as of December 31, 1995 and November 18,
1996, the allowance for sales cancellations totaled $1,480,000 and $1,130,000,
respectively. A provision of $2,122,000, $1,647,000 and $852,000 was charged to
cemetery sales to provide for estimated future cancellations for the years ended
December 31, 1994, and 1995 and the period from January 1, 1996 to November 18,
1996, respectively. An allowance for doubtful accounts has been established to
recognize that a portion of receivables arising from preneed cemetery property
sales and sales of cemetery goods and services may not ultimately be
collectible. As of December 31, 1995 and November 18, 1996, the allowance for
doubtful accounts totaled $312,000 and $370,000 respectively.
Inventories
Cemetery property is stated at average cost and consists of historical land
cost plus all charges incurred in readying the property for its intended use.
Interment, funeral and other inventories are stated at the lower of actual cost
(determined on a first-in, first-out basis) or market value.
Property, Plant and Equipment
Property is recorded at historical cost, net of accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of 5 to 30 years for buildings, improvements and
water systems, 5 to 12 years for furniture, fixtures, equipment, and assets
under capital lease (not to exceed the lease term) for computer hardware and
software. Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and improvements are capitalized.
F-50
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
Management of the Association has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these combined financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from these estimates.
Impairment of Long-Lived Assets
The Association adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the
Association's financial position, results of operations, or liquidity.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with
classifications used in 1996.
3. NOTES RECEIVABLE
In May 1990, the Association sold its wholly owned mortuary subsidiary
company to the Company (see note 8). Of the total original consideration,
$4,000,000 related to a Covenant Not to Compete (Covenant). The Covenant was
increased to $5,155,000 during 1994 in connection with the IRS settlement
discussed in note 11. The original amount received relating to the Covenant was
recognized as income on a straight-line basis over its five-year term. Income
related to the Covenant recognized for the years ended December 31, 1994 and
1995 totaled $1,955,000 and $266,000, respectively.
As payment for the sale of the Mortuary, the Association received primarily
cash and assumed a secured but subordinated note receivable amounting to
$8,000,000 from the Company. In July 1994, the Company paid off its note
receivable to the Association in the amount of $6,670,000 which constituted the
balance due, including accrued but unpaid interest.
As described further in note 7, during 1993, the Association paid off a
financing lease relating to computer software used in operations. Due to its
cost-sharing arrangement with the Company, the Association received a promissory
note from the Company for its share of the financing lease. This promissory note
in the original amount of $1,200,000 matures on June 30, 1997 and interest
accrues at the rate of 8% per annum. The outstanding principal on this note at
December 31, 1995 and November 18, 1996 totaled $503,000 and $220,000,
respectively. An installment payment of $28,000 including principal and interest
is due monthly.
As described further in note 11, in June 1995, the Association and the
Company settled their outstanding affairs with the Internal Revenue Service and
the Association received a promissory note from the Company for the Company's
additional consideration for the Covenant reduced by $320,000 tax settlement
paid for by the Company on behalf of the Association. This promissory note in
the original amount of $835,000 matures on
F-51
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. NOTES RECEIVABLE--(CONTINUED)
November 30, 2000 and interest accrues at the rate of 8% per annum. Interest is
payable monthly until July 1997, at which time monthly principal and interest
payments of $28,000 begin.
Concurrent with the sale of the Cemetery business, these notes receivable
were paid in full by the Company on November 19, 1996.
4. ENDOWMENT CARE FUND
The Association, pursuant to state law, has placed the cemetery under
endowment care. Therefore, when cemetery property is sold by the Association, an
endowment care charge is made for which a minimum amount is statutory. Charges
are payable to the Endowment Care Fund (the Fund), a separate 501(c)(13)
organization, when the total sales contract amount has been collected. Since a
substantial portion of pre-need cemetery property sales is made on an
installment basis, many of the charges are not due currently. Generally, the
installment receivables, including late charges, are collectible within one to
seven years. As of December 31, 1995 and November 18, 1996, amounts owed to the
Fund but not yet due or collected from customers amounted to $1,778,000 and
$1,824,000, respectively. The Fund's assets are invested under the direction of
the Board of Trustees of the Association, who also serve as Trustees of the
Fund. The change in net assets of the Fund, net of amounts permitted to be
withheld under state law, is paid by the Fund to the Association and is used for
the care, maintenance and embellishment of the cemetery. As allowable by state
law, a portion of the undistributed capital gains of the Fund have been reserved
and are available to the Association at the discretion of the Trustees to fund
certain capital expenditures. During 1996, distributions of net capital gains
totalling $6,296,000 have been recorded as an increase to net assets in the
accompanying combined statements of financial position. The amounts earned by
the Fund and transferred to the Association are reported in the combined
statements of activities and amounted to $1,439,000, $1,451,000 and $1,833,000
for the years ended December 31, 1994 and 1995 and the period from January 1,
1996 through November 18, 1996, respectively.
Total assets of the Fund are $54,948,000 and $58,239,000 at December 31,
1995 and November 18, 1996, respectively, and consist primarily of cash and
investments carried at cost. Total liabilities of the Fund are $180,000 and
$538,000 at December 31, 1995 and November 18, 1996, respectively, and consist
of amounts payable to the Association. Total net assets of $54,768,000 and
$57,701,000, at December 31, 1995 and November 18, 1996, respectively, resulted
primarily from Fund deposits received or receivable from customers and capital
gains (net of transfers to reserves) earned by the Fund.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 124, 'Accounting for Certain Investments Held
by Not-for-Profit Organizations.' This standard requires that investments in
equity securities with readily determinable fair value and all investments in
debt securities be measured at fair value in the statements of financial
position. This statement is effective for the year ended December 31, 1996, but
earlier application is permitted. If the Fund had implemented this standard
during 1996 assets and net assets as of January 1, 1996 would have increased by
$5,344,000, and would not be materially different as of November 18, 1996.
The American Institute of Certified Public Accountants issued Statement of
Position 94-3, 'Reporting of Related Entities by Not-for-Profit Organizations,'
which is effective for fiscal years beginning after December 15, 1994. This
statement requires consolidation of affiliated organizations when the
not-for-profit reporting entity has both control of such organization and an
economic interest therein. Since the Fund and the Association meet these
criteria, it would be required that the activities and financial position of the
Fund be included in the consolidated financial statements of Rose Hills Memorial
Park Association and its wholly owned subsidiary. However, in connection with
the sale of certain assets and operations of the Association, discussed in note
1, management considers these special purpose combined financial statements to
be that of a commercial
F-52
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. ENDOWMENT CARE FUND--(CONTINUED)
enterprise. In accordance with commercial cemetery industry practice and given
that the accompanying combined financial statements have been prepared in
connection with the sale of certain assets, as discussed in note 1, such
combined financial statements are not intended to present a complete
presentation of the combined financial position or changes in net assets of the
Association as a not-for-profit organization, and accordingly, management has
not consolidated the Endowment Care Fund with the accompanying combined
financial statements.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 18,
1995 1996
------------ ------------
<S> <C> <C>
Land and improvements........................ $ 7,520 $ 7,520
Buildings and improvements................... 11,857 12,645
Furniture, fixtures and equipment............ 4,292 4,349
Vehicles..................................... 1,269 1,261
Water systems................................ 1,935 1,938
Streets, roads and parking lots.............. 2,178 2,192
Computers and software....................... 5,212 5,242
Construction in progress..................... 8,727 16,713
Other........................................ 3,183 3,201
Assets under capital leases (computer
hardware and software)..................... 1,451 1,624
------------ ------------
Total property, plant and equipment........ 47,624 56,685
Less accumulated depreciation, including
accumulated amortization of assets under
leases of $896 and $1,095 respectively..... (15,604) (17,194)
------------ ------------
Property, plant and equipment, net......... $ 32,020 $ 39,491
------------ ------------
------------ ------------
</TABLE>
Construction-in-progress encompasses various projects not yet completed,
including land and related development costs for cemetery property being
developed for inventory. See further discussion at note 13.
6. PRE-NEED FUNERAL SERVICE DEBENTURES
From 1960 to 1975, the Association sold pre-need funeral service debentures
at face amounts under subscription agreements which provided for the collection
of the amount on an installment basis. Debentures were issued in denominations
of $125 each when installments of the amount were collected. As of December 31,
1995 and November 18, 1996 the debentures subscribed pursuant to the
subscription agreements amounted to less than $10,000. The Association may
redeem the debentures at any time prior to maturity at the face amount or the
holders thereof may at any time apply the debentures to the purchase price of
funeral services and arrangements furnished by the Association or the Company.
Additionally, the subscription agreements may be canceled at any time by
either the Association or the subscriber. Interest on the debentures is
calculated at the rate of 3% per annum, is payable semiannually and continues to
accrue on debentures not presented for payment on their maturity date.
Under the indenture and supplemental indentures, as amended, the
Association is required to make payments to a trustee of the fund to be used for
the retirement of the debentures at maturity or upon their application to the
purchase price of funeral services. Initial funding payments in amounts equal to
25% of the face amount of debentures being issued were required at the time of
issuance. Approximately $231,000 and
F-53
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. PRE-NEED FUNERAL SERVICE DEBENTURES--(CONTINUED)
$474,000 of cash in excess of amounts required to service the principal amount
of such debentures is reflected in the accompanying combined statements of
financial position as cash and cash equivalents as of December 31, 1995 and
November 18, 1996, respectively.
In addition, the Funeral Service Trust (FST) was established in 1978 by
certain cemetery and/or mortuary companies that had sold pre-need funeral
service debentures to California residents. FST was formed by these companies to
provide a means by which the purchasers of the debentures be compensated toward
payment for funeral expenses if the entity issuing their debentures is unable by
reason of insolvency to perform such services at the time of need. The
Association's proportionate share of the funds in FST, which are reflected as
cash and cash equivalents in the accompanying statements of financial position,
amount to $257,000 at December 31, 1995 and November 18, 1996 and are restricted
from use until such time as substantially all of the debentures are paid,
retired or used for payment of funeral-related costs.
The issued and outstanding debentures at November 18, 1996 mature as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DATE AMOUNT
- ------------------------------ ------
<S> <C>
Prior to February 1, 1996..... $ 623
February 1, 1997.............. 112
February 1, 1998.............. 82
February 1, 1999.............. 106
February 1, 2000.............. 96
------
Total $1,019
------
------
</TABLE>
7. LEASE AGREEMENTS
During 1990, the Association initiated a plan to modernize its computer
equipment, convert old software programs and automate systems that were
previously handled manually. As a result of this plan, several customized
computer software developmental projects were completed. The Association and the
Company jointly made arrangements with a lessor for the financing of these
software developmental projects and for computer hardware equipment over
seven-year terms. The Association's interest in the assets relating to these
lease agreements is included in property, plant and equipment (see note 5) and
the related liability is reflected in the combined statements of financial
position as obligations under capital leases.
In April 1993, the Association paid off the remaining balance of the
financing lease relating to the computer software. The Association and the
Company then executed a promissory note for the Company's remaining share of the
software financing lease, as described in note 3.
Under a separate agreement executed at the time of the 1990 sale of the
mortuary operations, the Company agreed to assume the liability for 32% of the
commitments under these leases. Under terms of the agreement, the Company and
the Association will jointly own the software at the termination of the lease.
With respect to the computer hardware equipment, the companies have the option
at the end of the equipment lease to purchase or release the same equipment or
terminate the lease. The Association has included its 68% share of the software
costs and computer hardware equipment costs in property, plant and equipment.
The Company's share of all related lease commitments including reimbursements of
interest as of December 31, 1995 and November 18, 1996 is $859,000 and
$1,038,000, respectively and is included in 'Due from Rose Hills Company' in the
accompanying combined statements of financial position.
F-54
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE AGREEMENTS--(CONTINUED)
As of November 18, 1996, the future minimum lease obligation pursuant to
the joint and several capital lease agreement is summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEARS (PERIOD) ENDED DECEMBER 31
---------------------------------
<S> <C>
1996.................................... $ 72
1997.................................... 435
1998.................................... 475
1999.................................... 139
2000.................................... 69
-------
Total of all lease payments........... 1,190
Less amounts representing interest...... (151)
-------
Present value of minimum lease
payments........................... 1,039
Less current portion of obligations
under capital leases included in other
liabilities........................... (273)
-------
$ 766
-------
-------
</TABLE>
8. OPERATION AND MANAGEMENT AGREEMENT AND RELATED MATTERS
The Operation and Management Agreement (Management Agreement) executed by
the Association with the Company in connection with the 1990 sale of the
mortuary operations provides for the on-site management of the cemetery
operations by the Company for a ten-year term expiring September 30, 1999. The
Management Agreement further provides for two renewal options of five years
each, exercisable by either the Association or the Company.
Under the terms of the Management Agreement, the Association receives
reimbursement from the Company for certain allocated costs and expenses, such as
utilities, insurance, operating supplies and other expenses based on
contractually agreed upon percentages, which vary according to the nature of the
cost or expense incurred. Likewise, the Association must reimburse the Company
pursuant to that same contractually agreed upon percentage formula for similarly
allocable costs and expenses, including payroll and related payroll costs. The
selling, general and administrative expenses presented in the combined
statements of activities reflect the net allocated expenses between the
Association and the Company. As of December 31, 1995 and November 18, 1996, the
Association was indebted to Rose Hills Company in the amount of $4,005,000 and
$1,571,000 respectively, for unpaid expenses allocated pursuant to the
Management Agreement (the 'Intercompany Account'). Such amounts have been
excluded from the accompanying combined statements of financial position as of
Decmber 31, 1995 and November 18, 1996 pursuant to the terms of the Agreement as
they are not an assumed liability. Additionally, the Association made payments
totalling $1,786,000 on November 19, 1996 to the Company, resulting in an
overpayment of the intercompany account, prior to any settlement adjustments.
The final determination of the intercompany account as of November 18, 1996 is
subject to the terms of the Settlement Agreement entered into between the
Association and the Company. In connection with the Settlement Agreement the
Company performed a detailed analysis of the intercompany account and it is
anticipated that certain noncash and other adjustments will be made to this
account resulting in a significant gain to the Association.
For services provided to the Association, the Association has agreed to pay
a management fee comprised of three elements. The three elements include: (1)
the reimbursement of compensation, including fringe benefits, of certain
management personnel at 110%; (2) an incentive sales fee based upon and to the
extent of achievement of targeted levels of total cemetery sales above threshold
levels; and (3) an expense savings fee based upon the achievement of managing
the Association's selling, general and administrative expenses as a percent of
total
F-55
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. OPERATION AND MANAGEMENT AGREEMENT AND RELATED MATTERS--(CONTINUED)
sales below a specified percentage. The expense savings fee also provides for a
reduction in the total management fee liability, if management causes the
selling, general and administrative expenses to exceed a specified percentage of
sales calculated as described above. During the years ended December 31, 1994
and 1995 and the period from January 1, 1996 through November 18, 1996, the
Association incurred management fees totaling $613,000 and $183,000 and
$159,000, respectively.
The Shared Facilities Agreement executed by the Association with the
Company in connection with the 1990 sale of the mortuary operations sets forth
the terms for the mutual use of certain property, plant and equipment at no cost
to either party and the allocations of certain ongoing costs related thereto
such as repairs and maintenance expenditures.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
As a result of the sale of the Company and execution of the Management
Agreement, all employees of the Mortuary and the Association became employees of
the Company on or before October 1, 1990. Prior to the sale, all employees of
the Mortuary and the Association were participants in the Retirement Plan for
Employees of Rose Hills Memorial Park Association (the Association Plan).
The Association Plan was terminated in September 1990. Assets sufficient to
cover the projected benefit obligations for all currently active participants in
the Association Plan totaling $4,743,000 were transferred to the Retirement Plan
for Employees of Rose Hills Mortuary, L.P. (the Company Plan).
The Company has funded or accrued the present value of these benefits, a
portion of which has been allocated to and funded by the Association. The
Company Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA) and the funding of the pension costs complies with
ERISA. During the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 through November 18, 1996, the Association recognized the
allocated expense amounts totaling $334,000, $390,000 and $259,000,
respectively, in connection with this plan.
Defined Contribution Plan
The Company also has a defined contribution plan, which has been qualified
under Section 401(k) of the Internal Revenue Service Code (the Savings Plan).
The appropriate percentage costs of the Savings Plan are allocated to and funded
by the Association. During 1995, the Company received a favorable letter of
determination from the Internal Revenue Service regarding the Savings Plan. The
Savings Plan permits participation by all employees of the Company who have
completed six months of continuous service, subject also to their entry into the
Savings Plan on enrollment dates of January 1 or July 1 of each year.
Participants may defer up to 15% of their compensation allowing participants a
pretax savings on their deferrals. The Company matches 100% of a participant's
first $300 deferred and 50% thereafter up to a maximum Company match of $2,000
per year. All participants become vested upon entry into the Savings Plan. Each
participant directs his own investments among a variety of up to six options,
which are managed by professional investment managers. During 1994, 1995 and the
period from January 1, 1996 through November 18, 1996, the amounts expensed by
the Association for its share of contributions totaled $200,000, $187,000 and
$178,000, respectively.
Board of Trustees' Retirement Plan
The Association has a retirement plan (Trustees' Retirement Plan) covering
each eligible member of the Association's Board of Trustees (Trustee). A Trustee
is eligible to participate in this plan if such Trustee has completed at least
five years of service on the Board. Each eligible Trustee is entitled to receive
an annual retirement benefit equivalent to the annual Board meeting fees. The
benefit is paid for a period equal to the number of years that the eligible
Trustee served on the Board. Upon the death of an eligible Trustee, the
benefits, to which the eligible Trustee had been entitled, shall be payable to
such eligible Trustee's spouse, until receipt of
F-56
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS--(CONTINUED)
the maximum benefit to which the eligible Trustee would have been entitled, had
he or she survived, or until the death of the spouse, whichever first occurs,
has been paid.
The Trustees' Retirement Plan is a noncontributory, nonqualified and
unfunded plan and represents only an unsecured general obligation of the
Association. The Board of Trustees has full and final authority to interpret the
plan and to make determinations which it believes advisable for the
administration of the plan, and all such determinations and decisions by the
Board are binding upon all parties. Net pension cost included the following
components for the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 through November 18, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the period........ $ 78 $ 84 $ 83
Interest cost on projected benefit obligation.......... 161 161 141
Net amortization and deferral.......................... 126 162 197
---- ---- ----
Net periodic pension cost............................ $365 $407 $421
---- ---- ----
---- ---- ----
</TABLE>
The following table sets forth the Trustees' Retirement Plan's funded
status and amounts recognized in the Association's combined statements of
financial position at December 31, 1995 and November 18, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $ 2,217 $ 2,440
------- -------
------- -------
Accumulated benefit obligation.................. $ 2,217 $ 2,440
------- -------
------- -------
Projected benefit obligation.................... $ 2,217 $ 2,440
------- -------
------- -------
Plan assets at fair value....................... -- --
------- -------
------- -------
Projected benefit obligation in excess of plan
assets.......................................... $(2,217) $(2,440)
Unrecognized net loss............................. 551 468
Prior service cost not yet recognized in net
periodic pension cost........................... 143 --
Adjustment required to recognize additional
liability....................................... (847) (468)
Unrecognized net obligation at January 1, 1986
being recognized over 15 years.................. 153 --
------- -------
Accrued pension liability....................... (2,217) (2,440)
Less current portion included in other
liabilities..................................... 554 569
------- -------
$(1,663) $(1,871)
------- -------
------- -------
</TABLE>
The present value of the projected benefit obligation and related pension
cost was determined using an assumed discount rate of 8.0% for the years ended
December 31, 1994 and 1995 and 7.75% for the period ended November 18, 1996,
with no assumed pay increases due to certain Plan provisions. Since the
Trustees' Retirement Plan is unfunded, the Association is required, under the
provisions of Statement of Financial Accounting Standards No. 87 (SFAS 87), to
reflect an additional retirement plan liability of $847,000 and $468,000 as of
December 31, 1995 and November 18, 1996, respectively. This additional liability
is offset by an intangible asset of $296,000 at December 31, 1995, which is
included in other assets in the combined statements of financial position. In
addition, any excess of the pension liability over the intangible pension asset
is recorded as a component and reduction in net assets. Such amounts were
$551,000 and $468,000 at December 31, 1995 and November 18, 1996, respectively.
Concurrent with the sale of the cemetery operations, the Trustees'
Retirement Plan ceased accrual of future benefits and vesting was accelerated
for all participants. The provisions of Statement of Financial Accounting
F-57
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS--(CONTINUED)
No. 88 consider such an event a curtailment and require that any related gain or
loss is recognized in the current period. Accordingly, the Association has
recorded a curtailment loss of $421,000, which is included in selling, general
and administrative expenses in the accompanying combined statement of activities
for the period ended November 18, 1996.
The pension liabilities related to the Trustees Retirement Plan have been
assumed by the buyer pursuant to the Asset Purchase agreement.
Supplemental Deferred Compensation
In addition, certain retired executives of the Association participate in a
supplemental deferred compensation program which went into effect in 1988, at
which time the present value of the related liability was established. The
Association's liability related to this program totaled $527,000 and $443,000 at
December 31, 1995 and November 18, 1996, respectively, which is included in
retirement plan and other liabilities in the accompanying combined statements of
financial position.
The liabilities related to this program have been assumed by the buyer
pursuant to the Asset Purchase Agreement.
Supplemental Employee Retirement Plan
The Senior Executive officers of the Company have a Supplemental Employee
Retirement Plan (SERP). The Association expenses its share of the costs
associated with the SERP based on predetermined allocation percentages. The
liability of the SERP is actuarially determined under the provisions of
Statement of Financial Accounting Standards No. 87 (SFAS 87). Amounts allocated
to the Association totaled $196,000, $214,000 and $141,000 for the years ended
December 31, 1994 and 1995 and the period from January 1, 1996 through November
18, 1996, respectively.
The Association's portion of the unfunded liability at December 31, 1995
and November 18, 1996 amounted to $1,305,000 and $1,447,000, respectively, and
such amounts have been included in retirement plan and other liabilities in the
accompanying combined statements of financial position, net of the allocated
portion of the cash surrender value of life insurance policies, which amounted
to $127,000 and $247,000, respectively.
To ultimately fund the SERP obligation, the Company has procured whole life
insurance policies on the key executives which have an aggregate face amount of
$7 million. The cash surrender value of such policies has been allocated to the
Association, like other common costs; but since the Association is not the owner
of such policies, such cash surrender values have been shown as a reduction of
the SERP liability.
This SERP liability has been assumed by the buyer pursuant to the Asset
Purchase Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK
The carrying value of the Association's debt instruments (capital leases)
approximates fair value which is based on the quoted market prices for the same
or similar issues or on the current rates offered to the Company for debt of the
same remaining maturities.
The fair values of the Association's accounts and notes receivable in
excess of one year approximate carrying values and are determined as the present
value of expected future cash flows discounted at the interest rate currently
offered by the Association, which approximates rates currently offered for loans
with similar terms and collateral to borrowers with comparable credit risk.
The carrying amounts of the remaining current assets and liabilities
approximate fair value because of the short-term nature of those accounts.
11. INCOME TAX SETTLEMENTS
During 1993, the Internal Revenue Service (IRS) began an examination of
Federal tax returns filed by the Association, the Company and the Company's
predecessor and its subsidiaries for the 1990 tax year. The IRS proposed
multiple positions and tax adjustments for all of these entities. In December
1994, the Company, with
F-58
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAX SETTLEMENTS--(CONTINUED)
the consent of the Association, agreed to certain adjustments proposed by the
IRS relating to both the Company and the Company's predecessor and its
subsidiaries for the tax years through December 31, 1992. A portion of this
settlement amount totaling $320,000 was agreed to in December 1994 and was
attributable to the Association in accordance with an Indemnity Agreement
between the Association and the Company executed in May 1990. Such amount was
paid by the Company on behalf of the Association.
In June 1995, the Association and the IRS entered into a Closing Agreement
settling all outstanding issues of the Association and the Endowment Care Fund
for $1,155,000. In accordance with the Indemnity Agreement, the settlement made
by the Association is reimbursable by the Company as additional covenant not to
compete consideration. After offsetting the Association's liability to the
Company for the $320,000 settlement of tax issues with the IRS in 1994, the
Association agreed to finance the Company's share of the settlement, which
financing terms are further described in note 3. Such adjustments are reflected
in the 1994 accompanying combined financial statements.
12. PURCHASE COMMITMENT
In September 1992, the Association and the local County Sanitation District
(the District) entered into an agreement (the Agreement) whereby the Association
agreed to construct a reclaimed water storage reservoir (the Reservoir) with a
capacity of 1.2 million gallons, one-half of which would be made available to
the District for its use at a site located adjacent to the cemetery. The cost of
the Reservoir, which was completed during 1994, totaled $471,000.
Similarly, the District agreed to construct a reclaimed water transmission
system to transport reclaimed water from its existing water reclamation plant to
the Association's Reservoir. It is anticipated that the reclaimed water
transmission system will be completed in 1997.
In connection with this Agreement, the Association is obligated to purchase
initially 500 acre feet per year of reclaimed water from the District, with such
amount increasing by 50 acre feet per year, up to a maximum of 3,200 acre feet
per year. The annual price to be paid by the Association for the reclaimed water
shall be the greater of (a) one-half of the unit price in effect at the
beginning of the applicable fiscal year, currently estimated at $220 per acre
foot per year, multiplied by the amount of reclaimed water delivered to the
Association, less one-half of the annual payment made by the Association for the
reclaimed water transmission system, as discussed further below, and (b)
one-fifth of the unit cost of operation and maintenance of the Inland
Reclamation Plants multiplied by the amount of reclaimed water delivered. Such
costs are currently estimated at $105 per acre foot.
The Association has agreed to pay its proportionate share of the capital
costs incurred by the District in constructing the reclaimed water transmission
system. Such proportionate share will be determined based on the percentage of
peak flow design capacity required by the Association to the total peak flow
design capacity of the transmission facilities. The Association's proportionate
share of these costs is estimated to total approximately $1,500,000. The
Association's share may exceed this estimate since such costs are based on
current anticipated demand for transporting reclaimed water. Actual costs and
demand could vary significantly from these estimates.
The Association's annual payment of such costs is to be equal to 1/20th of
its proportionate share of the capital costs or approximately $108,000, as
originally estimated.
The District has agreed to pay its proportionate share of the capital costs
associated with the Association's construction of the Reservoir. The District's
share of such costs is based on the proportion of the Reservoir's designed
capacity required for the Association to provide reclaimed water storage for the
District. Annual payment of such amounts will be equal to 1/20th of the
District's share and will reduce the annual payment made by the Association to
the District for its share of the reclaimed water transmission system described
above.
The Association and the District have also agreed to reimburse the other
for operating and maintenance costs associated with the Reservoir and the
reclaimed water transmission system based on criteria outlined in the Agreement.
F-59
<PAGE>
ROSE HILLS MEMORIAL PARK ASSOCIATION
AND WORKMAN MILL INVESTMENT COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND OTHER MATTERS
Transaction with the International Buddhist Progress Society
During 1994, the Association sold the exclusive interment rights on an
undeveloped parcel of land located on the Association's property to the
International Buddhist Progress Society (IBPS), an unrelated organization. In
exchange for the interment rights, IBPS agreed to pay the Association
$1,375,000, of which $160,000 was received as a deposit during 1994 and is
included in other current liabilities in the accompanying 1995 and 1996
statements of financial position. Sales commissions totaled $206,000 in
connection with this transaction. It was determined that because, among other
matters, an adequate down payment was not received and the interment rights were
sold on a parcel of land that was not ready for the purpose for which it was
sold, the earnings process was not complete and revenue and expense recognition
relating to the transaction should be deferred until such time IBPS has
completed a significant portion of the project.
IBPS plans to build a columbarium on the developed parcel and IBPS will
sell the niches therein on an at-need and pre-need basis. The remaining unpaid
portion of the sales price is to be repaid after construction of the Temple is
completed, based on a percentage of niches sales, but in no event later than
January 1, 2003. IBPS has agreed to reimburse the Association up to $1,150,000
for the costs it will incur to ready the undeveloped parcel of land for
construction of the columbarium. Pursuant to the agreement with IBPS, the
Association will hold title to land and improvements and the completed building.
As of November 18, 1996, development of this project was substantially complete,
and development costs expended by the Association in connection with this
project totaled $2,100,000 and are included in construction in progress at
November 18, 1996, reduced by cash collections of $931,000.
Sky Rose Chapel
During 1995, the Association entered into an agreement with a building
contractor for the construction of a new funeral chapel, which has become known
as Sky Rose Chapel. The project is currently expected to cost $15.7 million and
is scheduled for completion in Spring 1997. As of November 18, 1996, costs
incurred in connection with this project totaled approximately $14.9 million.
Pursuant to the terms of the Asset Purchase Agreement discussed in Note 1, the
association agreed to fund the remaining amounts necessary to complete the
project as specified at November 19, 1996, and therefore, amounts payable at
December 31, 1995 and November 18, 1996 relating to this project have been
excluded from the accompanying combined financial statements.
14. ENVIRONMENTAL AND LITIGATION MATTERS
The Association's operations are subject to various Federal, state and
local environmental laws, regulations and guidelines, including those related to
the remediation of hazardous substances and protection of endangered or
threatened species. In connection with the sale of the Association's properties,
environmental audits were conducted and it has been determined that certain
solid waste disposal areas will require remediation. Pursuant to an
environmental compliance agreement between the Association and the Company, the
Association has agreed to pay for such remediation costs or indemnify the buyer
for such costs. Accordingly, the Association has recorded a provision of
$325,000 at November 18, 1996, which amount is included in accrued expenses in
the accompanying combined statement of financial position as of that date. Such
provision was based on the existing facts and circumstances and after
consultation with engineers; however, given the inherent uncertainties in
evaluating environmental exposures, actual costs to be incurred at the sites
might exceed current estimates. Management does not anticipate that such excess,
if any, will have a material adverse effect on its financial position.
In addition, two of the Association's properties in or near areas of
groundwater contamination. Although information has been submitted to the
authorities in connection with the contamination of one of these areas, the
Association believes it has not contributed to the groundwater contamination in
either of the areas.
The Association is involved in certain matters of routine litigation, none
of which, in the opinion of management, will have a material adverse effect on
its combined financial position or results of operation.
F-60
<PAGE>
AUDITORS' REPORT
The Board of Directors
Rose Hills Company:
We have audited the accompanying combined balance sheet of certain subsidiaries
(as defined in note 1) of Loewen Group International, Inc. as of December 31,
1995 and November 18, 1996 and the combined statements of operations and cash
flows for the year ended December 31, 1995 and for the period from January 1,
1996 to November 18, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of certain subsidiaries of Loewen
Group International, Inc. as of December 31, 1995 and November 18, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1995 and for the period from January 1, 1996 to November 18, 1996. in accordance
with generally accepted accounting principles in the United States.
KPMG
Chartered Accountants
Vancouver, Canada
March 21, 1997
F-61
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1995 AND NOVEMBER 18, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 36,757 $ 223,490
Receivables, net of allowances (note 4)......... 1,343,438 1,189,731
Inventories..................................... 457,025 377,275
Prepaid expenses................................ 132,472 160,538
----------- -----------
1,969,692 1,951,034
Long-term receivables, net of allowances (note
4).............................................. 641,432 901,520
Prearranged funeral services (note 5)............. 3,562,801 2,955,338
Cemetery property, at cost (note 6)............... 1,776,926 1,914,966
Property and equipment (note 7)................... 12,101,134 13,490,769
Covenants not to compete (note 8)................. 949,104 826,568
Names and reputations (note 9).................... 4,064,811 4,095,310
----------- -----------
$25,065,900 $26,135,505
----------- -----------
----------- -----------
LIABILITIES AND PARENT COMPANY'S INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities........ $ 401,716 163,262
Long-term debt, current portion (note 11)....... 133,151 150,019
Other liabilities, current portion (note 12).... 93,482 130,753
----------- -----------
628,349 444,034
Deferred prearranged funeral service revenue (note
5).............................................. 3,712,801 3,105,338
Long-term debt (note 11).......................... 1,600,014 1,537,559
Other liabilities (note 12)....................... 569,382 585,505
Cemetery long-term liabilities.................... 444,527 591,680
Deferred income taxes (note 13)................... 763,141 606,323
Parent company's investment (note 15)............. 17,347,686 19,265,066
Commitments and contingencies (note 16)........... -- --
----------- -----------
$25,065,900 $26,135,505
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-62
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Revenue:
Funeral......................................... $ 9,763,992 $ 8,472,964
Cemetery........................................ 1,462,932 1,780,743
----------- -----------
11,226,924 10,253,707
Cost and expenses:
Funeral......................................... 6,860,088 6,312,914
Cemetery........................................ 1,251,972 1,560,299
----------- -----------
8,112,060 7,873,213
----------- -----------
3,114,864 2,380,494
Expenses:
General and administrative...................... 1,094,510 806,116
Depreciation and amortization................... 688,608 735,136
----------- -----------
1,783,118 1,541,252
----------- -----------
Earnings from operations.......................... 1,331,746 839,242
Interest expense.................................. 905,479 754,326
----------- -----------
Earnings before income taxes...................... 426,267 84,916
Income taxes (note 13):
Current......................................... 213,543 220,934
Deferred........................................ (10,869) (156,818)
----------- -----------
202,674 64,116
----------- -----------
Net earnings...................................... $ 223,593 $ 20,800
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-63
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 TO NOVEMBER 18, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operations
Net earnings.................................... $ 223,593 $ 20,800
Item not affecting cash
Depreciation and amortization................ 688,608 735,136
Deferred income taxes........................ (10,869) (156,818)
Changes in operating assets and liabilities
Receivables.................................. (321,431) (106,381)
Inventories.................................. (102,402) 79,750
Prepaid expenses............................. (7,101) (28,066)
Accounts payable and accrued liabilities..... 79,448 (238,454)
Other........................................ 16,768 147,153
----------- -----------
566,614 453,120
Investments
Business acquisitions........................... (2,900,518) (138,040)
Purchase of property and equipment.............. (391,255) (1,881,440)
Development of cemetery property................ (92,206) (46,365)
----------- -----------
(3,383,979) (2,065,845)
Financing
Contributions from parent and affiliates........ 2,612,438 1,896,580
Decrease in long-term debt...................... (84,175) (150,516)
Decrease (increase) in other liabilities........ (86,454) 53,394
----------- -----------
2,441,809 1,799,458
----------- -----------
Decrease in cash during the year.................. (375,556) 186,733
Cash, beginning of year........................... 412,313 36,757
----------- -----------
Cash, end of year................................. $ 36,757 $ 223,490
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-64
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. GENERAL
These financial statements present the combined financial position and
results of operations and cash flows of certain direct or indirect subsidiaries
('Companies') of Loewen Group International, Inc. ('Parent Company') which have
been sold (see Note 18). The companies that are combined in the preparation of
these statements are:
<TABLE>
<S> <C>
Harbor Lawn Memorial Park, Inc. A.L. Cemetery
Dimond Service Corporation Custer Christiansen Covina Mortuary, Inc.
Neel Funeral Directors, Inc. Colton Funeral Chapel, Inc.
Richardson-Peterson Mortuary, Inc. Glasband-Willen Mortuaries
Grove Colonial Funeral Chapel, Inc. San Fernando Mortuary, Inc.
White Funeral Home, Inc.
</TABLE>
The Combined Statements of Operations and Cash Flows reflect the operations
of the Companies from their dates of acquisition and incorporate push-down
accounting. All significant intercompany balances and transactions have been
eliminated in the combined financial statements. The Companies are principally
engaged in the operation of cemetery facilities and funeral services.
2. BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in
accordance with principles of accounting generally accepted in the United
States.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Prearranged funeral services
Prearranged funeral services provide for future funeral services generally
determined by prices prevailing at the time the contract is signed. The payments
made under the contract are either placed in trust or are used to pay the
premiums of life insurance policies under which the Companies will be designated
as beneficiary. Except for amounts not required to be trusted which are used to
defray costs of administration, no income is recognized until the performance of
a specific funeral.
Trust fund principal amounts and insurance contract amounts, together with
trust fund investment earnings retained in trust and annual insurance benefits,
are deferred until the service is performed. The Companies estimate that trust
fund investment earnings and annual insurance benefits exceed the increase in
cost over time of providing the related services. Upon performance of the
specific funeral service, the Companies will recognize the trust fund principal
amount or insurance contract amount together with the accumulated trust earnings
and annual insurance benefits as funeral revenues. Indirect obtaining costs
relating to the sale of prearranged funeral services are expensed in the period
incurred.
(b) Cemetery operations
Pre-need sales of cemetery interment rights and other related products and
services are recorded as revenue when customer contracts are signed with
concurrent recognition of estimated related costs. Allowances for customer
cancellations and refunds are provided at the date of sale based on management's
estimates of expected cancellations. Actual cancellation rates in the future may
result in a change in estimate.
A portion of the proceeds from cemetery sales is generally required by law
to be paid into perpetual or endowment care trust funds. Cemetery revenue is
recorded net of the amount to be deposited to perpetual or endowment care trust
funds. Earnings of perpetual or endowment care trust funds are used to defray
the maintenance costs of cemeteries. Additionally, pursuant to state law, a
portion of the proceeds from the sale of pre-need merchandise and services may
also be required to be paid into trust funds which are recorded as long-term
receivables.
F-65
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) Inventories
Inventories are valued at the lower of cost, determined primarily on a
specific identification basis or a first in first out basis, and net realizable
value.
(d) Property and equipment
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements 10 to 40 years
Automobiles 6 years
Computer hardware and software 6 to 10 years
Leasehold improvements over the term of the lease plus one
renewal
Furniture, fixtures and equipment 6 to 10 years
</TABLE>
(e) Covenants not to compete
Covenants not to compete carried on the combined balance sheet represent
amounts prepaid or the present value of future payments under non-competition
agreements between the parent company directly or indirectly and certain key
management personnel of the Companies. For financial statement presentation
purposes, covenants not to compete have been recorded in these combined
financial statements. Amortization of such covenants not to compete is provided
on a straight-line basis over the terms of the relevant agreements, typically
ten years.
(f) Names and reputations
The amount paid by the parent company, directly or indirectly, for the
names and reputations of operations acquired is equivalent to the excess of the
purchase price over the fair value of identifiable net assets of the Companies
acquired, as determined by management. For financial statement presentation
purposes, names and reputations have been recorded in these combined financial
statements. Amortization is provided on a straight-line basis over 40 years.
(g) Deferred income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Temporary differences are
tax effected at current rates. There was no effect of changes in tax rates
during 1995 or 1996.
(h) Parent Company's investment
Parent Company's investment consists of contributions to the Companies
directly or indirectly by the parent company plus current earnings and losses of
the Companies from the date of their acquisition.
(i) Impairment of long-lived assets
Effective December 15, 1995, the Companies adopted FAS121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
FAS121 requires the recognition of impairment losses on long-lived assets used
in operations and intangible assets whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable. The
Companies monitor the recoverability of long-lived assets based upon projections
of future undiscounted cash flows and recognize losses if carrying value is in
excess of future cash flows.
(j) Use of Estimates
Management of the Companies has made a number of estimates and assumptions
that affect the amounts reported in the accompanying combined financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from these estimates.
F-66
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. RECEIVABLES, NET OF ALLOWANCES
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Receivables, net of allowances
Trade accounts.................................. $1,361,887 $1,108,256
Instalment contracts............................ 209,565 249,440
Notes receivable and other...................... 69,267 321,088
Unearned finance income......................... (41,472) (100,053)
Allowance for contract cancellation and doubtful
accounts..................................... (255,809) (389,000)
---------- ----------
$1,343,438 $1,189,731
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Long-term receivables, net of allowances
Instalment contracts............................ $ 596,456 $1,049,554
Notes receivable and other...................... 337,114 263,501
Unearned finance income......................... (199,421) (269,978)
Allowance for contract cancellation and doubtful
accounts..................................... (92,717) (141,557)
---------- ----------
$ 641,432 $ 901,520
---------- ----------
---------- ----------
</TABLE>
5. PREARRANGED FUNERAL SERVICES
Prearranged funeral services are amounts in short-term interest bearing
deposits made in accordance with state trusting laws with various financial
institutions together with accrued earnings. The Companies will receive the
prearranged funeral trust amounts when the funeral services are performed.
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Short-term investments............................ $ 922,455 $ 823,707
Fixed maturities.................................. 2,640,346 2,131,631
---------- ----------
Prearranged funeral trust assets.................. $3,562,801 $2,955,338
Prearranged funeral trust liabilities............. 3,712,801 3,105,338
---------- ----------
Net prearranged funeral trust liabilities......... $ 150,000 $ 150,000
---------- ----------
---------- ----------
</TABLE>
As at November 18, 1996 and December 31, 1995, the total carrying value of
prearranged funeral trust assets were approximately equal to market value. The
weighted average rate of return on the above prearranged funeral trust assets
for the period January 1, 1996 to November 18, 1996 was 3.97% and for the year
ended December 31, 1995 was 4.18%.
6. CEMETERY PROPERTY, AT COST
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Cemetery undeveloped land......................... $ 400,560 $ 404,330
Developed land and lawn crypts.................... 1,376,366 1,510,636
---------- ----------
$1,776,926 $1,914,966
---------- ----------
---------- ----------
</TABLE>
F-67
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Land.............................................. $ 4,059,991 $ 4,856,297
Building and improvements......................... 6,506,638 7,659,515
Automobiles....................................... 637,329 613,652
Computer hardware and software.................... 132,976 166,531
Leasehold improvements............................ 157,449 193,136
Furniture, fixtures and equipment................. 1,985,668 1,865,693
----------- -----------
$13,480,051 $15,354,824
Less, accumulated depreciation.................... (1,378,917) (1,864,055)
----------- -----------
$12,101,134 $13,490,769
----------- -----------
----------- -----------
</TABLE>
8. COVENANTS NOT TO COMPETE
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Covenants not to compete.......................... $ 1,627,806 $ 1,638,028
Less: accumulated amortization.................... (678,702) (811,460)
----------- -----------
$ 949,104 $ 826,568
----------- -----------
----------- -----------
</TABLE>
9. NAMES AND REPUTATIONS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Names and reputations............................. $ 4,319,059 4,458,354
Less: accumulated amortization.................... 254,248 (363,044)
----------- -----------
$ 4,064,811 $ 4,095,310
----------- -----------
----------- -----------
</TABLE>
On August 8, 1996, the parent company acquired an individual's name to be
used in the future operation of certain combined subsidiaries for a total cost
of approximately $105,000.
10. RELATED PARTY TRANSACTIONS
General and administrative expenses of the parent representing accounting,
treasury, regulatory compliance and management advisory services which are not
specifically identifiable to a particular subsidiary, have been allocated to
subsidiaries proportionately using revenue as the base. During the period
through November 18, 1996, the parent company charged the Companies
approximately $806,116 and in 1995 such charges were $1,094,000. Such charges
are included in general and administrative expenses in these combined financial
statements.
An employee of Glasband-Willen Mortuaries subscribed for a 5% interest in
the issued and outstanding common shares of Glasband-Willen Mortuaries in return
for a $150,000 promissory note to the Parent Company. For financial statement
presentation purposes, this note has been netted against the cost of
subscription in the combined financial statements. As of March 21, 1997, these
shares have not been issued.
Included in interest expense is approximately $719,000 and $575,865 in
interest charges on intercompany loans and advances from the parent company and
affiliates for the year ended December 31, 1995 and the period ended November
18, 1996, respectively.
During the periods the Companies obtained automobile, general liability and
other insurance through an affiliated company.
11. LONG-TERM DEBT
The notes payable relating to White Funeral Home, Inc. totalling
approximately $1,630,000 at December 31, 1995 and $1,494,000 at November 18,
1996, are secured by land and are guaranteed by an affiliated company. The notes
bear interest at rates ranging from 7.46% to 8.00% per annum and are repayable
in equal annual
F-68
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. LONG-TERM DEBT--(CONTINUED)
instalments. The notes payable agreements are between the sellers and the parent
company or a subsidiary of the parent company. For financial statement
presentation purposes, these notes have been recorded in these combined
financial statements.
Principal repayments are to be made as follows:
<TABLE>
<S> <C>
1997......... $ 150,019
1998......... 161,331
1999......... 173,501
2000......... 186,588
2001......... 200,664
Thereafter... 815,475
----------
$1,687,578
----------
----------
</TABLE>
12. OTHER LIABILITIES
Other liabilities consist of the net present value of future covenant not
to compete payments discounted at 9% per annum. Payments under agreements may be
made variously at closing or over future periods.
Future payments under these agreements are to be made as follows:
<TABLE>
<S> <C>
1997......... $ 130,753
1998......... 143,193
1999......... 166,598
2000......... 150,045
2001......... 62,102
Thereafter... 63,567
----------
$ 716,258
----------
----------
</TABLE>
13. INCOME TAXES
The Companies' parent files consolidated federal and state income tax
returns and pays all related income taxes on behalf of the Companies. The
Companies' income tax expense and income taxes are computed as if the Companies
joined in filing consolidated federal, and to the extent applicable, state
income tax returns and reported only the Companies' taxable income.
A reconciliation between the Companies' income tax expense and income taxes
computed by applying the statutory federal income tax rate to earnings before
income taxes is as follows for the period from January 1, 1996 to November 18,
1996 and the year ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Expected federal income tax at statutory rate..... $144,931 $28,871
Increase in taxes resulting from:
Non-deductible goodwill amortization arising
from acquisitions............................ 26,962 25,192
State income tax expense, net of federal
taxes........................................ 26,130 5,205
Other, net...................................... 4,651 4,848
-------- -------
Income tax expense.............................. $202,674 $64,116
-------- -------
-------- -------
</TABLE>
F-69
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES--(CONTINUED)
The Companies' net deferred tax liability at November 18, 1996 and at
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities
Property and equipment and cemetery
property................................... $ 863,350 $ 820,985
----------- -----------
Deferred tax assets
Allowance for contract cancellation and
doubtful accounts.......................... 55,343 90,031
Intangibles.................................. 44,866 124,631
----------- -----------
Total deferred tax assets....................... 100,209 $ 214,662
----------- -----------
Net deferred tax liability........................ $ 763,141 $ 606,323
----------- -----------
----------- -----------
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Financial Asset
Long-term receivables
Practicable to
estimate fair
market............ $ 337,114 $ 329,329 $ 263,501 $ 261,913
Not practicable..... 304,318 -- 638,019 --
Financial Liability
Long-term debt......... $1,733,165 $ 1,513,917 $1,687,578 $ 1,642,626
Other liabilities...... 662,864 686,090 716,258 722,208
</TABLE>
The carrying amount of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to the short-term maturities of these
instruments. The fair value of long-term debt subject to fixed interest rates is
estimated by discounting the future cash flows, including interest payments,
using rates currently available for debt of similar terms and maturity, based
upon credit standing and other market factors. Similarly, the fair value of
other liabilities is estimated by discounting the cash flows using the current
borrowing rate. The long-term receivables for which it is not practicable to
estimate fair value comprise primarily of instalment contracts receivable on
cemetery sales which generally have terms of three to seven years and bear
interest ranging from 7% to 11%.
15. PARENT COMPANY'S INVESTMENT
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Balance, beginning of year............................. $14,511,655
Net earnings for the year.............................. 223,593
Net contributions from parent company and affiliates... 2,612,438
-----------
Balance, end of year................................... $17,347,686
Net earnings for the period............................ 20,800
Net contributions from parent company and affiliates... 1,896,580
-----------
Balance, November 18, 1996............................. $19,265,066
-----------
-----------
</TABLE>
For financial statement presentation purposes, the intercompany loans and
advances from the Parent Company and affiliates have been classified as an
investment in the Companies pursuant to the terms of the definitive sale
agreement referred to in Note 18.
F-70
<PAGE>
CERTAIN SUBSIDIARIES OF LOEWEN GROUP INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
(a) Leases
At December 31, 1995, the Companies were committed to operating lease
payments under agreements with terms ranging from 3 to 10 years for premises,
automobiles and office equipment in the following approximate amounts:
<TABLE>
<S> <C>
1997......... $ 465,000
1998......... 267,000
1999......... 123,000
2000......... 81,000
2001......... 89,000
Thereafter... 62,000
----------
$1,087,000
----------
----------
</TABLE>
(b) Other
The Companies are party to legal proceedings in the ordinary course of
their business but they do not expect the outcome of any such proceedings to
have a material adverse effect on the Companies' financial condition.
The State of California Department of Consumer Affairs ('DCA') is currently
reviewing the funding levels of the endowment care trust fund at A.L. Cemetery.
As of March 21, 1997, the amount of additional funding, if any, to the above
noted trust, has not been determined.
Management is aware that some of their properties may have been
contaminated from former or adjacent underground storage tanks. Management
believes that these environmental contingencies and liabilities to be immaterial
individually and in aggregate.
Two liens totalling approximately $500,000 are registered against the
property of A.L. Cemetery. The holders of these liens have not exercised any
right, if any, they may have on these liens.
17. RETIREMENT PLAN
Certain employees are members of the parent company's 401(k) defined
contribution retirement plan. There are no required future contributions under
these plans in respect of past or current service.
18. SUBSEQUENT EVENTS
(a) On September 20, 1996, the Companies' parent entered into a definitive
agreement to sell its interest in the Companies to an entity in which the parent
company will retain an equity investment in. The transaction was consummated on
November 19, 1996. These combined financial statements are on a historical cost
basis and therefore do not reflect decisions and activities of their new owners.
F-71
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER MADE HEREBY, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE EXCHANGE
NOTES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE EXCHANGE NOTES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................................ 3
Disclosure Regarding Forward-Looking Statements....................... 3
Summary............................................................... 4
Risk Factors.......................................................... 17
Use of Proceeds....................................................... 20
The Exchange Offer.................................................... 20
Capitalization........................................................ 28
Unaudited Pro Forma Financial Information............................. 29
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 34
Business.............................................................. 39
Management............................................................ 46
Principal Shareholders................................................ 48
Certain Related Transactions.......................................... 49
Description of Bank Credit Facilities................................. 51
Description of Exchange Notes......................................... 53
Book Entry; Delivery and Form......................................... 79
United States Federal Income Tax Consequences......................... 81
Plan of Distribution.................................................. 81
Legal Matters......................................................... 82
Experts............................................................... 82
Index to Consolidated Financial Statements............................ F-1
</TABLE>
------------------------
Until , 1997 (90 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
PROSPECTUS
ROSE HILLS COMPANY
(FORMERLY KNOWN AS ROSE HILLS
ACQUISITION CORP.)
OFFER TO EXCHANGE
$80,000,000 OF ITS 9 1/2%
SENIOR SUBORDINATED NOTES DUE
2004 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES
ACT FOR $80,000,000 OF ITS
OUTSTANDING 9 1/2% SENIOR
SUBORDINATED NOTES DUE 2004
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the 'DGCL') provides
for, among other things:
a. permissive indemnification for expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by designated
persons, including directors and officers of a corporation, in the event
such persons are parties to litigation other than stockholder derivative
actions if certain conditions are met;
b. permissive indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are parties to stockholder
derivative actions if certain conditions are met;
c. mandatory indemnification for expenses actually and reasonably
incurred by designated persons, including directors and officers of a
corporation, in the event such persons are successful on the merits or
otherwise in litigation covered by a. and b. above; and
d. that the indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights which may be provided under any
by-law, agreement, stockholder or disinterested director vote, or
otherwise.
The Company's By-Laws provide that:
'Section 1. Indemnity Undertaking. To the fullest extent permitted by
law (including, without limitation, Section 145 of the General Corporation
Law of the State of Delaware (as amended from time to time, the 'General
Corporation Law')), the Corporation shall indemnify any person who is or
was made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding (a 'Proceeding'), whether civil,
criminal, administrative or investigative, including, without limitation,
an action by or in the right of the Corporation to procure a judgment in
its favor, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a Director or officer of the
Corporation, or is or was serving in any capacity at the request of the
Corporation for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an 'Other Entity'), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and
costs, charges and expenses (including attorneys' fees and disbursements).
Persons who are not Directors or officers of the Corporation may be
similarly indemnified in respect of service to the Corporation or to an
Other Entity at the request of the Corporation to the extent the Board of
Directors at any time specifies that such persons are entitled to the
benefits of this [Article].
Section 2. Advancement of Expenses. The Corporation shall, from time
to time, reimburse or advance to any Director or officer or other person
entitled to indemnification hereunder the funds necessary for payment of
expenses, including attorneys' fees and disbursements, incurred in
connection with any Proceeding, in advance of the final disposition of such
Proceeding; provided, however, that, if required by the General Corporation
Law, such expenses incurred by or on behalf of any such Director, officer
or other person may be paid in advance of the final disposition of a
Proceeding only upon receipt by the Corporation of an undertaking, by or on
behalf of such Director, officer or other person indemnified hereunder, to
repay any such amount so advanced if it shall ultimately be determined by
final judicial decision from which there is no further right of appeal that
such Director, officer or other person is not entitled to be indemnified
for such expenses.
Section 3. Rights Not Exclusive. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant
to, this [Article] shall not be deemed exclusive of any other rights which
a person seeking indemnification or reimbursement or advancement of
expenses may have or to which such person hereafter may be entitled under
any statute, the Restated Certificate of Incorporation, these By-Laws, any
agreement, any vote of stockholders or disinterested Directors or
otherwise, both as to action in his or her official capacity and as to
action in another capacity while holding such office.
II-1
<PAGE>
Section 4. Continuation of Benefits. The rights to indemnification
and reimbursement or advancement of expenses provided by, or granted
pursuant to, this [Article] shall continue as to a person who has ceased to
be a Director or officer (or other person indemnified hereunder) and shall
inure to the benefit of the executors, administrators, legatees and
distributees of any such person.
Section 5. Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a Director, officer, employee
or agent of an Other Entity, against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power to indemnify such person against such liability under the provisions
of this [Article] or the Restated Certificate of Incorporation or under
Section 145 of the General Corporation Law or any other provision of law.
Section 6. Binding Effect. The provisions of this [Article] shall be
a contract between the Corporation, on the one hand, and each Director and
officer who serves in such capacity at any time while this [Article] is in
effect and/or any other person indemnified hereunder, on the other hand,
pursuant to which the Corporation and each such Director, officer or other
person intend to be legally bound. No repeal or modification of this
[Article] shall affect any rights or obligations with respect to any state
of facts then or theretofore existing or thereafter arising or any
proceeding theretofore or thereafter brought or threatened based in whole
or in part upon any such state of facts.
Section 7. Procedural Rights. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant
to, this [Article] shall be enforceable by any person entitled to such
indemnification or reimbursement or advancement of expenses in any court of
competent jurisdiction. The burden of providing that such indemnification
or reimbursement or advancement of expenses is not appropriate shall be on
the Corporation. Neither the failure of the Corporation (including its
Board of Directors, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that
such indemnification or reimbursement or advancement of expenses is proper
in the circumstances nor an actual determination by the Corporation
(including its Board of Directors, its independent legal counsel and its
stockholders) that such person is not entitled to such indemnification or
reimbursement or advancement of expenses shall constitute a defense to the
action or create a presumption that such person is not so entitled. Such a
person shall also be indemnified for any expenses incurred in connection
with successfully establishing his or her right to such indemnification or
reimbursement or advancement of expenses, in whole or in part, in any such
proceeding.
Section 8. Service Deemed at Corporation's Request. Any Director or
officer of the Corporation serving in any capacity (a) another corporation
of which a majority of the shares entitled to vote in the election of its
directors is held, directly or indirectly, by the Corporation or (b) any
employee benefit plan of the Corporation or any corporation referred to in
clause (a) shall be deemed, in each case, to be doing so at the request of
the Corporation.
Section 9. Election of Applicable Law. Any person entitled to be
indemnified or to receive reimbursement or advancement of expenses as a
matter of right pursuant to this [Article] may elect to have the right to
indemnification or reimbursement or advancement of expenses interpreted on
the basis of the applicable law in effect at the time of the occurrence of
the event or events giving rise to the applicable Proceeding, to the extent
permitted by law, or on the basis of the applicable law in effect at the
time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made, by a notice in writing to the
Corporation, at the time indemnification or reimbursement or advancement of
expenses is sought; provided, however, that if not such notice is given,
the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.'
The directors and officers of the Company are insured against certain civil
liabilities, including liabilities under federal securities laws, which might be
incurred by them in such capacity.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------------------------------------------------------- ----------
<S> <C> <C>
2.1* -- Asset Purchase Agreement, dated as of September 19,
1996, by and between Rose Hills Memorial Park
Association and Tudor Acquisition Corp. (now known as
the Rose Hills Company).
2.2* -- Agreement and Plan of Merger, dated as of September 19,
1996, by and among the Stockholders of Roses, Inc. and
Tudor Acquisition Corp. (now known as the Rose Hills
Company).
2.3* -- Amendment to the Agreement and Plan of Merger dated as
of November 18,1996 by and among Rose Hills Acquisition
Corp. (now known as Rose Hills Company), Roses Inc., the
Stockholders of Roses Inc., and RH Mortuary Corporation.
3.1* -- Restated Certificate of Incorporation of Tudor
Acquisition Corp. changing its name to Rose Hills
Acquisition Corp.
3.2* -- Certificate of Amendment of Certificate of Incorporation
of Rose Hills Acquisition Corp. changing its name to
Rose Hills Company.
3.3* -- Amended and Restated By-Laws of Rose Hills Company.
4.1* -- Indenture dated as of November 15, 1996 between Rose
Hills Acquisition Corp. and United States Trust Company
of New York, as Trustee.
4.2* -- Form of 9 1/2% Senior Subordinated Note due 2004
(included in Exhibit 4.1).
5* -- Opinion of Simpson Thacher & Bartlett regarding the
legality of the Exchange Notes.
8* -- Opinion of Simpson Thacher & Bartlett regarding certain
tax matters.
10.1* -- Stockholders' Agreement dated as of November 19, 1996
among Rose Hills Holdings Corp., Blackstone Capital
Partners II Merchant Banking Fund L.P., Blackstone Rose
Hills Offshore Capital Partners L.P., Blackstone Family
Investment Partnership II L.P., Roses Delaware, Inc.,
Loewen Group International, Inc., and RHI Management
Direct L.P.
10.2* -- Administrative Services Agreement dated as of November
19, 1996 between Rose Hills Acquisition Corp. (now known
as Rose Hills Company), The Loewen Group, Inc., and
Loewen Group International Inc.
10.3* -- Credit Agreement dated as of November 19, 1996 among
Rose Hills Company, Rose Hills Holdings Corp., Goldman,
Sachs & Co., as syndication agent and arranging agent,
the financial institutions from time to time parties
thereto as lenders and The Bank of Nova Scotia, as
administrative agent for such lenders.
10.4* -- Put/Call Agreement, dated as of November 19, 1996 among
Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Rose Hills Offshore Capital Partners
L.P., Blackstone Family Investment Partnership II L.P.,
Roses Delaware, Inc., Loewen Group International, Inc.,
The Loewen Group Inc., and RHI Management Direct L.P.
10.5* -- Buddhist Memorial Complex Development and Use Agreement
dated as of March 1, 1994 between Rose Hills Memorial
Park Association and International Buddhist Progress
Society.
10.6* -- First Amendment to Buddhist Memorial Complex Development
and Use Agreement, dated as of September 1, 1994 between
Rose Hills Memorial Park Association and International
Buddhist Progress Society.
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------------------------------------------------------- ----------
<S> <C> <C>
10.7* -- Second Amendment to Buddhist Memorial Complex
Development and Use Agreement, dated as of March 15,
1995 between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
10.8* -- Third Amendment to Buddhist Memorial Complex Development
and Use Agreement, dated as of May 15, 1995 between Rose
Hills Memorial Park Association and International
Buddhist Progress Society.
10.9* -- Fourth Amendment to Buddhist Memorial Complex
Development and Use Agreement, dated as of October 15,
1995 between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
10.10* -- Memorandum of Understanding, dated as of March 22, 1996
between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
10.11* -- Amended and Restated Employment Agreement dated December
, 1996 by and between Rose Hills Company and Kendall
E. Nungesser.
10.12* -- Employment Agreement dated November 19, 1996 by and
between RH Mortuary Corporation and Dennis C. Poulsen.
10.13* -- Employment Confirmation dated November 18, 1996 by and
between Rose Hills Company and Mark Helmintoller.
10.14* -- Employment Letter Agreement, dated April 22, 1997 by and
between Rose Hills Company and Kenton C. Woods.
10.15* -- Addendum to Employment Letter Agreement, dated April 28,
1997 by and between Rose Hills Company and Kenton C.
Woods.
10.16* -- Non-Competition Agreement dated as of November 19, 1996,
between RH Mortuary Corporation and Kendall E.
Nungesser.
10.17* -- Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Dennis C. Poulsen.
10.18* -- Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Sandy V. Durko.
12* -- Computation of Ratio of Earnings to Fixed Charges.
21* -- Subsidiaries of Rose Hills Company (formerly known as
Rose Hills Acquisition Corp.).
23.1* -- Consent of Simpson Thacher & Bartlett (included in
Exhibits 5 and 8).
23.2** -- Consent of KPMG Peat Marwick LLP.
23.3** -- Consent of KPMG Peat Marwick LLP.
23.4** -- Consent of Arthur Andersen LLP.
23.5** -- Consent of KPMG Peat Marwick LLP.
23.6** -- Consent of KPMG Chartered Accountants.
24* -- Power of Attorney (included on page II-4 of the
Registration Statement).
25* -- Statement of Eligibility on Form T-1 of United States
Trust Company of New York.
27* -- Financial Data Schedule.
99.1* -- Registration Rights Agreement dated as of November 15,
1996 between Rose Hills Acquisition Corp. and Smith
Barney Inc.
99.2* -- Form of Letter of Transmittal.
99.3* -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
II-4
<PAGE>
(b) All schedules are omitted as the required information is presented in
the registrants' consolidated financial statements or related notes or such
schedules are not applicable.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offer or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the 'Securities Act');
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the 'Calculation of Registration
Fee' in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request; and
(5) To supply by means of a post-effective amendment all information
concerning the Exchange Offer that was not the subject of and included in
the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Whittier, California, on August 11, 1997.
ROSE HILLS COMPANY
(formerly known as Rose Hills
Acquisition Corp.)
By: /s/ Kendall E. Nungesser
------------------------------------
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
<S> <C> <C>
/s/ Kendall E. Nungesser President, Chief Executive August 11, 1997
- ------------------------------ Officer (principal executive
Kendall E. Nungesser officer) and Director
* Senior Vice President, Chief August 11, 1997
- ------------------------------ Financial Officer (principal
Kenton C. Woods financial officer; principal
accounting officer)
* Secretary, Director August 11, 1997
- ------------------------------
Chinh E. Chu
* Director August 11, 1997
- ------------------------------
David I. Foley
* Director August 11, 1997
- ------------------------------
Howard A. Lipson
* Director August 11, 1997
- ------------------------------
Douglas McKinnon
* Director August 11, 1997
- ------------------------------
Lawrence Miller
* Chairman, Director August 11, 1997
- ------------------------------
Dennis C. Poulsen
*By: /s/Kendall E. Nungesser
-------------------------
Kendall E. Nungesser
Attorney-In-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------------------------------------------------------- ----------
<S> <C> <C>
2.1* -- Asset Purchase Agreement, dated as of September 19,
1996, by and between Rose Hills Memorial Park
Association and Tudor Acquisition Corp. (now known as
the Rose Hills Company).
2.2* -- Agreement and Plan of Merger, dated as of September 19,
1996, by and among the Stockholders of Roses, Inc. and
Tudor Acquisition Corp. (now known as the Rose Hills
Company).
2.3* -- Amendment to the Agreement and Plan of Merger dated as
of November 18, 1996 by and among Rose Hills Acquisition
Corp. (now known as Rose Hills Company), Roses Inc., the
Stockholders of Roses Inc., and RH Mortuary Corporation.
3.1* -- Restated Certificate of Incorporation of Tudor
Acquisition Corp. changing its name to Rose Hills
Acquisition Corp.
3.2* -- Certificate of Amendment of Certificate of Incorporation
of Rose Hills Acquisition Corp. changing its name to
Rose Hills Company.
3.3* -- Amended and Restated By-Laws of Rose Hills Company.
4.1* -- Indenture dated as of November 15, 1996 between Rose
Hills Acquisition Corp. and United States Trust Company
of New York, as Trustee.
4.2* -- Form of 9 1/2% Senior Subordinated Note due 2004
(included in Exhibit 4.1).
5* -- Opinion of Simpson Thacher & Bartlett regarding the
legality of the Exchange Notes.
8* -- Opinion of Simpson Thacher & Bartlett regarding certain
tax matters.
10.1* -- Stockholders' Agreement dated as of November 19, 1996
among Rose Hills Holdings Corp., Blackstone Capital
Partners II Merchant Banking Fund L.P., Blackstone Rose
Hills Offshore Capital Partners L.P., Blackstone Family
Investment Partnership II L.P., Roses Delaware, Inc.,
Loewen Group International, Inc., and RHI Management
Direct L.P.
10.2* -- Administrative Services Agreement dated as of November
19, 1996 between Rose Hills Acquisition Corp. (now known
as Rose Hills Company), The Loewen Group, Inc., and
Loewen Group International Inc.
10.3* -- Credit Agreement dated as of November 19, 1996 among
Rose Hills Company, Rose Hills Holdings Corp., Goldman,
Sachs & Co., as syndication agent and arranging agent,
the financial institutions from time to time parties
thereto as lenders and The Bank of Nova Scotia, as
administrative agent for such lenders.
10.4* -- Put/Call Agreement, dated as of November 19, 1996 among
Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Rose Hills Offshore Capital Partners
L.P., Blackstone Family Investment Partnership II L.P.,
Roses Delaware, Inc., Loewen Group International, Inc.,
The Loewen Group Inc., and RHI Management Direct L.P.
10.5* -- Buddhist Memorial Complex Development and Use Agreement
dated as of March 1, 1994 between Rose Hills Memorial
Park Association and International Buddhist Progress
Society.
10.6* -- First Amendment to Buddhist Memorial Complex Development
and Use Agreement, dated as of September 1, 1994 between
Rose Hills Memorial Park Association and International
Buddhist Progress Society.
10.7* -- Second Amendment to Buddhist Memorial Complex
Development and Use Agreement, dated as of March 15,
1995 between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------------------------------------------------------- ----------
<S> <C> <C>
10.8* -- Third Amendment to Buddhist Memorial Complex Development
and Use Agreement, dated as of May 15, 1995 between Rose
Hills Memorial Park Association and International
Buddhist Progress Society.
10.9* -- Fourth Amendment to Buddhist Memorial Complex
Development and Use Agreement, dated as of October 15,
1995 between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
10.10* -- Memorandum of Understanding, dated as of March 22, 1996
between Rose Hills Memorial Park Association and
International Buddhist Progress Society.
10.11* -- Amended and Restated Employment Agreement dated December
, 1996 by and between Rose Hills Company and Kendall
E. Nungesser.
10.12* -- Employment Agreement dated November 19, 1996 by and
between RH Mortuary Corporation and Dennis C. Poulsen.
10.13* -- Employment Confirmation dated November 18, 1996 by and
between Rose Hills Company and Mark Helmintoller.
10.14* -- Employment Letter Agreement, dated April 22, 1997 by and
between Rose Hills Company and Kenton C. Woods.
10.15* -- Addendum to Employment Letter Agreement, dated April 28,
1997 by and between Rose Hills Company and Kenton C.
Woods.
10.16* -- Non-Competition Agreement dated as of November 19, 1996,
between RH Mortuary Corporation and Kendall E.
Nungesser.
10.17* -- Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Dennis C. Poulsen.
10.18* -- Non-Competition Agreement dated as of November 19, 1996
between RH Mortuary Corporation and Sandy V. Durko.
12* -- Computation of Ratio of Earnings to Fixed Charges.
21* -- Subsidiaries of Rose Hills Company (formerly known as
Rose Hills Acquisition Corp.).
23.1* -- Consent of Simpson Thacher & Bartlett (included in
Exhibits 5 and 8).
23.2** -- Consent of KPMG Peat Marwick LLP.
23.3** -- Consent of KPMG Peat Marwick LLP.
23.4** -- Consent of Arthur Andersen LLP.
23.5** -- Consent of KPMG Peat Marwick LLP.
23.6** -- Consent of KPMG Chartered Accountants.
24* -- Power of Attorney (included on page II-4 of the
Registration Statement).
25* -- Statement of Eligibility on Form T-1 of United States
Trust Company of New York.
27* -- Financial Data Schedule.
99.1* -- Registration Rights Agreement dated as of November 15,
1996 between Rose Hills Acquisition Corp. and Smith
Barney Inc.
99.2* -- Form of Letter of Transmittal.
99.3* -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
<PAGE>
EX-23.2
The Board of Directors
Rose Hills Company:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
----------------------------
KPMG Peat Marwick LLP
Orange County, California
August 6, 1997
<PAGE>
EX-23.3
The Board of Directors
Rose Hills Company:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Summary Historical Financial Information--The
Mortuary and the Company" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
----------------------------
KPMG Peat Marwick LLP
Orange County, California
August 6, 1997
<PAGE>
EX-23.4
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated October 25, 1996 (and to the reference to our Firm as experts) included in
or made a part of Amendment No. 4 to the S-4 registration statement.
/s/ Arthur Andersen LLP
----------------------------
Los Angeles, California
August 11, 1997
<PAGE>
EX-23.5
The Board of Directors
Rose Hills Company:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" and "Summary Historical Financial
Information--The Cemetery" in the prospectus.
/s/ KPMG Peat Marwick LLP
-----------------------------
Los Angeles, California
August 6, 1997
<PAGE>
EX-23.6
The Board of Directors
Rose Hills Company:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG
-------------------
Chartered Accountants
Vancouver, Canada
August 6, 1997
