<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 333-21411
________________________________
ROSE HILLS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3915765
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3888 SOUTH WORKMAN MILL ROAD
WHITTIER, CALIFORNIA 90601
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(562) 692-1212
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
__________________
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
The number of outstanding Common shares as of November 5, 1998 was 1,000.
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS
as of September 30, 1998 and December 31, 1997 1
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three and Nine Months Ended September 30, 1998 and 1997 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1998 and 1997 3
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the Nine Months Ended September 30, 1998 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6 - 11
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION 11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
INDEX OF EXHIBITS 12
EXHIBIT 27 13
</TABLE>
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1997 1998
-------- ----------
Current assets: (Unaudited)
<S> <C> <C>
Cash and equivalents $ 3,462 $ 3,882
Accounts receivable, net of allowances 5,870 7,995
Inventory 875 979
Prepaid expenses and other current assets 2,299 2,609
Deferred tax asset 4,658 4,658
-------- --------
Total current assets 17,164 20,123
-------- --------
Long-term receivables, net of allowances 10,082 17,357
Cemetery property 76,778 75,143
Property, plant and equipment, net 64,101 66,066
Goodwill 128,200 125,701
Deferred finance charges 10,672 9,443
Other assets 5,101 5,446
-------- --------
Total assets $312,098 $319,279
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 2,052 $ 2,062
Accrued expenses 8,156 11,005
Accrued interest 1,291 3,111
Other current liabilities 1,459 865
Current portion of long-term debt 2,368 2,265
-------- --------
Total current liabilities 15,326 19,308
Retirement plan liabilities 7,389 7,103
Deferred tax liability 5,122 5,122
Subordinated notes payable 80,000 80,000
Bank senior term loan 72,500 72,000
Other long-term debt 2,415 2,271
Other liabilities 2,088 4,615
-------- --------
Total liabilities 184,840 190,419
-------- --------
Commitment and contingencies
Stockholder's equity:
Common stock par value $.01; 1,000 authorized; 1,000 shares outstanding -- --
Additional paid in capital 129,554 129,554
Accumulated earnings (deficit) (2,296) (694)
Total stockholder's equity 127,258 128,860
-------- --------
Total liabilities and stockholder's equity $312,098 $319,279
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(1)
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ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -----------------
September 30 September 30
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
Sales and services:
<S> <C> <C> <C> <C>
Funeral sales and services $ 6,904 $ 6,774 $ 22,076 $ 22,520
Cemetery sales and services 7,959 10,444 25,096 33,203
Insurance commissions and other 2,127 1,987 5,914 5,730
------- ------- -------- --------
Total sales and services 16,990 19,205 53,086 61,453
------- ------- -------- --------
Cost of sales and services:
Funeral sales and services 1,258 1,062 4,117 3,442
Cemetery sales and services 1,446 2,097 3,860 6,361
------- ------- -------- --------
Total costs of sales and services 2,704 3,159 7,977 9,803
------- ------- -------- --------
Gross profit 14,286 16,046 45,109 51,650
Selling, general and administrative expenses 10,485 10,943 30,500 33,382
Amortization of purchase price in excess of
net assets acquired and other intangibles 968 931 2,608 2,820
------- ------- -------- --------
Income from operations 2,833 4,172 12,001 15,448
Other expense - Interest expense (4,201) (4,105) (12,211) (12,359)
------- ------- -------- --------
Income before income tax (1,368) 67 (210) 3,089
Provision for income tax (241) 34 310 1,487
------- ------- -------- --------
Net income (1,127) 33 (520) 1,602
======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(2)
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30
1997 1998
------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ (520) $ 1,602
------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,399 6,371
Amortization of cemetery property 1,972 1,665
Provision for bad debts and sales cancellation 1,167 2,418
Loss on disposal of property, plant and equipment -- 5
Changes in assets and liabilities:
Increase in accounts receivable (4,190) (11,818)
Decrease (increase) in inventories 34 (104)
Increase in prepaid expenses and in other current assets (754) (310)
Increase (decrease) in accounts payable and accrued expenses (3,350) 4,669
Decrease in retirement plan liabilities (332) (286)
Net decrease (increase) in other assets and liabilities (492) 1,578
------- --------
Total adjustments (546) 4,188
------- --------
Net cash provided by (used in) operating activities (1,066) 5,790
------- --------
Cash flows from investing activities:
Capital expenditures (1,750) (3,297)
Proceeds from disposal of PPE 0 31
Additions to goodwill (503) --
------- --------
Net cash used in investing activities (2,253) (3,266)
------- --------
Cash flows from financing activities:
Repayments of borrowings under Bank Credit Agreement (1,000) (1,000)
Additions to deferred finance charges (809) --
Decrease in other long-term debt (497) (415)
Principal payments of capital lease obligations (230) (689)
Net cash used in financing activities (2,536) (2,104)
Net increase (decrease) in cash and cash equivalents (5,855) 420
Cash and cash equivalents at beginning of period 7,900 3,462
------- --------
Cash and cash equivalents at end of period $ 2,045 $ 3,882
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 8,754 $ 9,242
Taxes paid $ 449 $ 859
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(3)
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ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
SHARES ADDITIONAL EARNINGS STOCKHOLDER'S
OUTSTANDING PAID IN CAPITAL (DEFICIT) EQUITY
-------- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 1,000 129,554 (2,296) 127,258
Net income -- -- 1,602 1,602
------ ------- ------ -------
Balance, September 30, 1998 1,000 129,554 (694) 128,860
===== ======= ===== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(4)
<PAGE>
ROSE HILLS COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ROSE HILLS HOLDINGS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying September 30, 1998 interim 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 and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
necessary for complete financial statements in conformity with generally
accepted accounting principles. In the opinion of management, the accompanying
interim consolidated financial statements contain all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the financial condition, results of operations and cash flows
for the periods presented. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
Earnings (loss) per share have not been included, as the Company is a
wholly-owned subsidiary of Rose Hills Holdings Corp. ("RH Holdings").
The Company was formed in 1996 for purposes of acquiring Roses, Inc. (the
"Mortuary" or "Roses") and purchasing certain assets and assuming certain
liabilities of Rose Hills Memorial Park Association and Workman Mill Investment
Company (the "Cemetery" or the "Association"). Also, in connection with the
acquisition, one of RH Holdings' shareholders contributed 14 funeral homes and 2
funeral home cemetery combination properties. As a result of these acquisitions
(collectively "Acquisition Transaction"), the Company is the successor to the
operations of the predecessor Mortuary and Cemetery.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and the prevailing practices within the cemetery
and mortuary industry. All significant intercompany accounts and transactions
have been eliminated.
Reclassification
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation.
2. SETTLEMENT AGREEMENT
In connection with the Acquisition Transaction, Roses entered into a
"Settlement Agreement" dated November 19, 1996 with the Association to resolve
amounts due/owed between Roses and the Association as of November 18, 1996. As
of September 30, 1998, the Company and the Association have not reached a final
agreement with respect to amounts owed under the terms of the Settlement
Agreement. However, in the opinion of management of the Company, amounts accrued
at September 30, 1998 are adequate to satisfy amounts that may be due the
Association under the Settlement Agreement.
(5)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Rose Hills Company (the "Company"), a Delaware corporation, is a wholly-owned
subsidiary of Rose Hills Holdings Corp. ("RH Holdings"). The Company was formed
in 1996 for purposes of acquiring Roses, Inc. (the "Mortuary") and purchasing
certain assets and assuming certain liabilities of Rose Hills Memorial Park
Association and Workman Mill Investment Company (the "Association" and the
assets and liabilities purchased therefrom, the "Cemetery"). Also, in
connection with the acquisition, a subsidiary of The Loewen Group, Inc. (The
Loewen Group, Inc. collectively with its affiliates, "Loewen"), a shareholder of
RH Holdings, contributed 14 funeral homes and 2 funeral home cemetery
combination properties (the "Satellite Properties"). As a result of these
acquisitions (collectively the "Acquisition Transaction"), the Company is the
successor to the operations of the predecessor Mortuary and Cemetery.
The Cemetery and the Mortuary (collectively, "Rose Hills") are located on the
grounds of the Cemetery, Rose Hills Memorial Park. Rose Hills is the largest
single location cemetery funeral home combination in the United States and the
Cemetery is the largest single location cemetery in the United States. Rose
Hills is situated less than 14 miles from downtown Los Angeles on approximately
1,418 acres of permitted cemetery land near Whittier, California. The Cemetery
and Mortuary have been continuously operating since 1914 and 1956, respectively.
As a result of the Acquisition Transaction, the Company owns a strategic
assembly of cemeteries and funeral homes in the greater Los Angeles area.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of total sales for the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
------ ---- ----- -----
<S> <C> <C> <C> <C>
Sales and services:
Funeral sales and services 40.6% 35.3% 41.6% 36.7%
Cemetery sales and services 46.9% 54.4% 47.3% 54.0%
Insurance commissions and other 12.5% 10.3% 11.1% 9.3%
Total sales and services 100.0% 100.0% 100.0% 100.0%
Gross profit:
Funeral sales and services 81.8% 84.3% 81.4% 84.7%
Cemetery sales and services 81.8% 79.9% 84.6% 80.8%
Total gross profit 84.1% 83.6% 85.0% 84.0%
Selling, general and administrative
Expenses 61.7% 57.0% 57.5% 54.3%
Amortization 5.7% 4.8% 4.9% 4.6%
Interest expense 24.7% 21.4% 23.0% 20.1%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Consolidated revenues for the quarter ended September 30, 1998 increased 12.9%
to $19.2 million from $17.0 million for the quarter ended September 30, 1997.
Consolidated gross profit increased 11.9% to $16.0 million from $14.3 million in
1997. As a percentage of revenue, consolidated gross margin percentage
decreased to 83.6% in 1998 from 84.1% in the same quarter 1997.
Cemetery revenue for the quarter increased $2.5 million or 31.2% to $10.4
million. Pre-need cemetery revenue was $7.3 million compared to $5.8 million
for the prior year. Substantially all of the increase in pre-need cemetery
revenue came from property sales. At-need cemetery revenue for the quarter
increased 24.0% to $3.1 million due primarily to increase sales of merchandise
and services. The lower cemetery gross margin (79.9% this year compared to 81.8%
last year) is a direct result of the increased proportion of pre-need
merchandise and service revenue with its associated lower gross margins. This
sales mix shift is in line with the Company's strategic plan, which calls for
greater emphasis on sales of pre-need cemetery merchandise and services.
(6)
<PAGE>
Funeral revenue for the quarter decreased to $6.8 million from $6.9 million in
the same quarter for the prior year, a decrease of 1.4%. The number of total
calls decreased 3.2% from 1997 to 1,987.
Insurance commissions and other revenue decreased to $2.0 million from $2.1
million in the same quarter in 1997. Pre-need insurance commissions decreased
from $0.7 million in 1997 to $0.4 million this year. In April 1998, the Company
changed its pre-need insurance product from Forethought to Mayflower, a
subsidiary of Loewen. The training of the sales force in the new product and
other administrative requirements of this changeover contributed to a reduction
in insurance volume for the quarter and a corresponding drop in commission
revenue.
Selling, general and administrative expenses, which includes variable sales
commission expense, increased to $10.9 million from $10.5 million in 1997. As a
percentage of total sales, selling, general and administrative expenses was
57.0% compared to 61.7% for the third quarter of 1997.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $6.3 million for the quarter ended September 30, 1998 from $5.1 million for
the quarter ended September 30, 1997. The increase was primarily a result of
the increase in pre-need sales and an increase in leverage of existing corporate
overhead. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Consolidated revenues for the nine months ended September 30, 1998 increased
15.8% to $61.5 million from $53.1 million for the same period in 1997.
Consolidated gross profit increased 14.6% to $51.7 million from $45.1 million in
1997. As a percentage of revenue, consolidated gross margin percentage
decreased to 84.0% in 1998 from 85.0% in 1997.
Cemetery revenue for the nine months increased $8.1 million to $33.2 million.
Pre-need cemetery property sales at Rose Hills increased by $3.3 million (28.0%)
and pre-need cemetery merchandise and services were $3.6 million greater than in
the first nine months of 1997, a 90% increase. This increase in pre-need sales
was attributable to an increase in the number of products offered on pre-need
contracts and the addition of over 120 new sales counselors compared to 1997.
The number of interments increased by 0.4% over the prior year. The overall
cemetery gross margin percentage decreased due to the sales mix shift to a
higher proportion of pre-need merchandise and services.
Selling, general and administrative expenses increased to $33.4 million from
$30.1 million in 1997. An increase in sales commission expense of approximately
$2.3 million was the primary reason for this increase. As a percentage of total
sales, selling, general and administrative expenses was 54.3% compared to 57.5%
for the first nine months of 1997.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales), increased
to $22.1 million for the nine months ended September 30, 1998 from $18.3 million
for the nine months ended September 30, 1997. The increase was primarily a
result of the increase in pre-need sales and an increase in leverage of existing
corporate overhead. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that, based upon current levels of operations and
anticipated growth and the availability of the Bank Revolving Facility (see
description below), it can meet working capital and short-term liquidity
requirements for current operations and to service its indebtedness. As of
September 30, 1998 the Company had net working capital of $0.8 million and a
current ratio of 1.04 as compared to $1.8 million of net working capital and
current ratio of 1.12 at December 31, 1997.
Net cash provided by operating activities was $5.8 million for the nine months
ended September 30, 1998. For the same period last year, net cash used in
operating activities was $1.1 million.
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 $4.5 million will be used primarily to develop and improve the
existing infrastructure and cemetery grounds, as well as the
(7)
<PAGE>
addition of rolling stock. In addition to principal payments on outstanding
long-term debt and capital expenditures, cash will be used to finance
installment contracts receivable during the ramp up of pre-need sales.
Contemporaneously with the consummation of the Acquisition Transaction, the
Company entered into senior secured amortization extended term loan facilities
(the "Bank Term Facility") in an aggregate principal amount of $75 million, the
proceeds of which were used to finance the Acquisition Transaction and related
transaction costs, to pre-fund certain capital expenditures and to refinance
existing indebtedness of the Company, and a senior secured revolving credit
facility (the "Bank Revolving Facility") in an aggregate principal amount of up
to $25 million, the proceeds of which are available for general corporate
purposes and a portion of which may be extended (as agreed upon) in the form of
swing line loans or letters of credit for the account of the Company. In
addition, the Company has the right, subject to certain conditions and
performance tests, to increase the Bank Term Facility by up to $25.0 million.
The Bank Term Facility and the Bank Revolving Facility will mature on November
1, 2003. 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 anniversary of the closing date of the Bank Term
Facility (the "Bank Closing"); $3 million in the fourth year after the Bank
Closing; $7 million in the fifth year after the Bank Closing; $9 million in the
sixth year after the Bank Closing and $53 million upon maturity of the Bank Term
Facility. The Revolving Credit Facility is payable in full at maturity, with no
prior amortization.
All obligations under the Bank Credit Facilities and any interest rate hedging
agreements entered into with the lenders or their affiliates in connection
therewith are unconditionally guaranteed (the "Bank Guarantees"), jointly and
severally, by Rose Hills Holdings, Corp. and each of the Company's existing and
future domestic subsidiaries (the "Bank Guarantors"). All obligations of the
Company and the Bank Guarantees are secured by first priority security interests
in all existing and future assets (including real property located at Rose Hills
but excluding other real property and vehicles covered by certificates of title)
of the Company and the Bank Guarantors. In addition, the Bank Credit Facilities
are secured by a first priority security interest in 100% of the capital stock
of the Company and each subsidiary thereof and all intercompany receivables.
In connection with the Acquisition Transaction, the Company also issued $80
million of 9-1/2% Senior Subordinated Notes due 2004, which were exchanged in
September 1997 for $80 million of 9-1/2% Senior Subordinated Notes due 2004 (the
"Notes") that were registered under the Securities Act of 1933. The Notes
mature on November 15, 2004. Interest on the Notes is payable semi-annually on
May 15 and November 15 at the annual rate of 9-1/2%. The Notes are redeemable in
cash at the option of the Company, in whole or in part, at any time on or after
November 15, 2000, at prices ranging from 104.75% with annual reductions to 100%
in 2003 plus accrued and unpaid interest, if any, to the redemption date. The
proceeds of the Notes were used, in part, to finance the Acquisition
Transaction.
As a result of the Acquisition Transaction and the application of proceeds
therefrom, the Company's total outstanding indebtedness was approximately $153.0
million as of September 30, 1998. As of September 30, 1998, the Company also
had $25.0 million of borrowing capacity available under the Bank Revolving
Facility. Management believes that, based upon current levels of operations and
anticipated growth and the availability under the Bank Revolving Facility, it
can adequately service its indebtedness. If the Company cannot generate
sufficient cash flow from operations or borrow under the Bank Revolving Facility
to meet such obligations, the company may be required to take certain actions,
including reducing capital expenditures, restructuring its debt, selling assets
or seeking additional equity in order to avoid an Event of Default. There can
be no assurance that such actions could be effected or would be effective in
allowing the Company to meet such obligations.
The Company and its Subsidiaries are subject to certain restrictive covenants
contained in the indenture to the Notes, including, but not limited to,
covenants imposing limitations on the incurrence of additional indebtedness;
certain payments, including dividends and investments; the creation of liens;
sales of assets and preferred stock; transactions with interested persons;
payment restrictions affecting subsidiaries; sale-leaseback transactions; and
mergers and consolidations. In addition, the Bank Credit Facilities contain
certain restrictive covenants that, among other things, limit the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, prepay other indebtedness (including the Exchange Notes), pay
dividends or make certain restricted payments, create liens on assets, engage in
mergers or acquisitions or enter into leases or transactions with affiliates. At
September 30, 1998 the company was in compliance with the terms of the indenture
and the bank audit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". For the three month periods ended September 30, 1998 and
1997 the Company did not have any applicable comprehensive income.
(8)
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 uses
a "management approach" concept as the basis for identifying reportable
segments. The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization. Furthermore, the management approach
facilitates consistent descriptions of an enterprise in its annual report and
various other published information. It focuses on financial information that
an enterprise's decision makers use to make decisions about the enterprise's
operating matters.
Statement 131 is effective for financial statements for periods beginning
after December 15, 1997. Earlier application is encouraged. In the initial
year of application, comparative information for earlier years is to be
restated, unless it is impracticable to do so. Statement 131 need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods in the
second year of application. Management has not determined the impact of SFAS
No. 131 on its consolidated financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". The new statement is
effective for fiscal years beginning after December 15, 1997. Statement 132
need not be applied to interim financial statements. Management has not
determined the impact of SFAS No. 132 on its consolidated financial statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5 in April 1998. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Management has not determined the impact of SOP 98-5 on its consolidated
financial statements.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. This statement is effective for all fiscal years
beginning after June 15, 1999. Management has not determined the impact of SFAS
No. 133 on its consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
OVERVIEW
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or other disruption of
operations and impede normal business activities.
THE COMPANY'S STATE OF READINESS
During the past year, the Company has been evaluating and assessing its
existing informational computer systems, as well as non-informational systems,
and determined that it will be necessary to modify or replace certain portions
of its software and hardware so that its systems will function properly beyond
December 31, 1999. In particular, certain of the Company's financial reporting
and information gathering systems, such as general ledger, fixed assets,
payroll, commissions, accounts receivable and payable, etc., required
modification or replacement. Continued accurate and timely information
processing and reporting is critical to the ongoing operations of the Company.
Similarly, non-informational systems, such as communications systems, security
systems, etc., are critical to the safe and uninterrupted performance of the
Company. The evaluation of the non-informational systems determined that all
significant areas are or will be Year 2000 compliant and pose no significant
risks.
(9)
<PAGE>
As systems were evaluated and assessed, a detailed work plan was developed to
ensure that each area requiring modification or replacement is adequately and
timely addressed. At this time, the Company's work plan continues to indicate
that most significant areas have been or are scheduled to be remedied by mid-
1999. Such work plan includes adequate time for remediation of the area, as well
as testing to ensure the remediation efforts were complete. Additionally, the
Company has established an Executive Steering Committee to monitor remaining
implementation plans and to determine whether all remaining areas have been
assessed and evaluated, resources identified and remediation completed on a
timely basis.
A summary of the Company's work plan and status is as follows:
<TABLE>
<CAPTION>
EVALUATION YEAR 2000 COMPLETION
FUNCTION COMPLETE COMPLIANT DATE
- ------------------------------------------ --------------------------------------------------------------------
<S> <C> <C> <C>
Financial Accounting and Reporting Yes No 2Q 1999
Funeral Home Operations Yes No 2Q 1999
Cemetery Operations Yes No 2Q 1999
</TABLE>
In addition, systems improvements and benefits beyond solution of the Year
2000 Issues are expected to be realized as a result of the above initiatives.
The Company has also made formal communications with its significant vendors
to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. The Company is
currently gathering information requested from third parties to complete its
evaluation and assessment of what, if any, material relationships exist and
whether or not such relationships present significant risks to the continued
operations of the Company beyond 1999. This evaluation and assessment is to be
completed at the end of the first quarter of 1999. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on a timely basis, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, management estimates that the total cost (including hardware,
software and services) incurred by the Company to evaluate, assess and remedy
Year 2000 Issues has been less than $0.5 million. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to be less than $1.0 million.
The cost and the date on which the Company plans to complete the Year 2000
Issue modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Company's total Year 2000 Issue project cost and estimates to complete exclude
the estimated costs and time associated with the impact of a third party's Year
2000 Issue, which are not yet determinable.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts are
not completed by either the Company or significant third parties. In such an
event, it is likely that the ability to maintain accurate and complete financial
records of the Company's activities and transactions, and possibly the timely
and cost-effective procurement of merchandise, may be impaired. Such events,
should they occur, would be likely to significantly impair the Company's ability
to operate as it does today, creating business interruption, potential loss of
business, and earnings and liquidity difficulties. The Company presently
believes that with current and planned modifications to existing software and
conversions to new software, the risk of potential loss associated with the Year
2000 Issue can be mitigated.
(10)
<PAGE>
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material impact on
the operations of the Company.
THE COMPANY'S CONTINGENCY PLANS
Though the Company's Year 2000 Issue work plan is believed to be adequate to
achieve full system compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company has designed
its work plan to address this potential occurrence. First, the work plan has
been designed to ensure that the most critical systems and areas are addressed
first, and in a manner that provides adequate time to remediate and test
thoroughly. Second, the Company has secured external expert resources to assist
in evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. Third, in the event the Company is unable to
completely remediate a system, the Company has sought to develop, where
necessary, an alternative solution as a back-up plan, such as developing a
"parallel" remediation effort (i.e., modifying an existing system to ensure it
is Year 2000 compliant at the same time such system is being completely
replaced). The Company will continue to monitor and adjust its contingency plan
needs in conjunction with the progress made on the primary work plan.
PART II
ITEM 5 - OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q include "forward-
looking statements" as defined in Section 21E of the Securities Exchange Act of
1934. All statements other than statements of historical facts included herein,
including, without limitation, the statements under Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, plans to increase revenues and
ability to meet its financial obligations are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the qualifications in the preceding paragraph.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit, as shown in the "Index of Exhibits", attached hereto as page 12,
is filed as a part of this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSE HILLS COMPANY
/s/ KENTON C. WOODS
-------------------
Kenton C. Woods
Senior Vice President Finance and Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
November 5, 1998
(11)
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
(a)
27* __Financial Data Schedule
10.19* __Employment Agreement dated July 10, 1998 by and between Rose Hills
Company and Dillis R. Ward.
10.20* __Employment Agreement dated November 3, 1998 by and between Rose Hills
Company and Kenton C. Woods.
(b) Reports on Form 8-K
None
________________
*Filed Herewith.
(12)
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made this 10th day of July, 1998 by and between Rose Hills
Company ("the Company") and Dillis Ward ("Ward").
WHEREAS, it is the mutual intent of the parties hereto that Ward be employed as
the President and Chief Operating Officer of the Company, and
WHEREAS, it is the intent to set forth in this Agreement the terms and
conditions of said employment.
In consideration of these premises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. Employment
----------
1.1 During the term of this Agreement, and subject to its terms and
conditions, Ward shall be employed as President and Chief Operating Officer of
the Company. In said capacity, Ward shall report to the Chief Executive Officer
of the Company or to such other person(s) as the Board of Directors of the
Company ("the Board") may, from time to time direct, and shall have such powers,
responsibilities and authorities as may be, from time to time, assigned to him
by the Board.
1.2 This Agreement shall continue in effect without interruption until
terminated according to its terms.
1.3 During the term hereof, Ward shall devote his full working time and
efforts, to the best of his ability, experience and talent, to the performance
of services, duties and responsibilities as an officer of the Company.
2. Compensation
------------
2.1 During the term hereof, Ward shall be paid by the Company a base
salary ("Base Salary") at the rate of $250,000 per annum, provided that said
Base Salary shall be reviewed annually. Any increase in the Base Salary shall
be at the sole discretion of the Board. In the event that the Board, in the
exercise of said discretion, increases the Base Salary, the Base Salary, as so
increased, shall thereafter be the "Base Salary" for the purposes of this
Agreement.
2.2 In addition to his Base Salary, Ward shall be paid an annual bonus
("the Bonus") based upon the Company's performance in each fiscal year as
measured against EBITDA targets established for the Company. The amount of the
Bonus will be in the range of 0%-100% of the Base Salary according to the
schedule set forth in Exhibit A. The EBITDA target for 1998 shall be as set
forth in Exhibit A. EBITDA targets for years after 1998 shall be determined by
the Board, in its sole discretion. For the purposes of this Agreement the term
"EBITDA" shall be defined as in the Put/Call Agreement dated November 19, 1996
("the Put/Call Agreement"), among Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Rose Hills Offshore Capital Partners II L.P., and
Blackstone Family Investment Partnership II L.P. (collectively "Blackstone")
Loewen Group International Inc. and The Loewen Group Inc. (collectively
"Loewen"), Roses Delaware, Inc. and RHI Management Direct L.P.
<PAGE>
2
2.3 In the event that (i) there is a sale of all of Blackstone's stock in RH
Holdings Inc. to Loewen or its affiliates prior to the termination of this
Agreement, and (ii) through the end of the year most recently completed prior to
the closing of said sale, the Company has achieved cumulative EBITDA of at least
95% of the cumulative EBITDA Target as set forth in Exhibit B hereto, Ward shall
receive, within 30 days of such sale, a payment ("the Long Term Incentive
Payment") as calculated according to Exhibit B.
3. Employee Benefits
-----------------
3.1 The Company shall provide Ward, during the term of this Agreement,
coverage under employee pension and welfare benefit programs, plans and
practices consistent with such benefits as are made available from time to time
to other senior executives of the Company ("Benefits").
3.2 Ward shall be entitled to no less than twenty business days paid
vacation in each calendar year, which shall be taken at such time as is
consistent with Ward's responsibilities hereunder. Unless otherwise approved by
the Board, any vacation days not taken in any calendar year shall be forfeited
without pay therefor.
4. Termination
-----------
4.1 Ward shall have the right to terminate this Agreement at any time upon
90 days notice to the Company. In the event that Ward so terminates, he shall
be entitled, at the time the termination becomes effective, to a lump sum
payment from the Company (i) in respect of vacation accrued, but not used
("Vacation Payment") and (ii) for compensation earned under the terms of
paragraphs 2.1 and 2.2 hereof, but not paid ("Compensation Payment") as of the
effective date of the termination. Said Compensation Payment shall not include
all or any part of the Long Term Incentive Payment or any Bonus in respect of
the year in which said termination occurs. If Ward terminates this Agreement,
he shall not be entitled to receive any payment, benefit, or compensation from
the Company, by way of Base salary, Bonus, Long Term Incentive Payment,
benefits, severance payment or otherwise, except as expressly set forth in this
paragraph.
4.2 The Company shall have the right to terminate this Agreement and
Ward's employment with the Company for cause at any time. As used herein, the
term "Cause" shall include (i) willful malfeasance or willful misconduct by Ward
in connection with his employment, (ii) any failure or refusal by Ward to
perform his duties hereunder or to follow any lawful direction from the Board
which refusal or failure continues after Ward has been given notice by the
Company that it deems that such failure or refusal has occurred, (iii) any
breach by Ward of Section 5 herein or any other material breach of this
Agreement, or (iv) the commission by Ward of any violation of law in connection
with the performance of his duties hereunder, any misdemeanor involving moral
turpitude or any felony. Except as explicitly provided in this paragraph, the
Company shall not be required to provide Ward with advance notice of termination
for cause.
4.3 In the event that Ward is terminated for cause under the terms of
paragraph 4.2, he shall be entitled to receive a lump sum payment from the
Company in respect of the Vacation Payment and the Compensation Payment. Said
Compensation Payment shall not include all or any part of the Long Term
Incentive Payment or any Bonus in respect of the year in which said termination
occurs. If Ward is terminated for cause under paragraph 4.2, he shall not be
entitled to receive any payment, benefit, or compensation from the Company, by
way of Base salary, Bonus, Long Term Incentive Payment, benefits, severance
payment or otherwise, except as expressly set forth in this paragraph 4.3.
<PAGE>
3
4.4 The Company shall have the right to terminate this Agreement at any
time, with or without reason, or for any reason, upon 24 months notice to Ward.
In the event of a termination under this paragraph, Ward shall be entitled to
receive:
(a) his Base Salary through the effective date of the termination ("the
Termination Date"),
(b) Benefits, as defined in paragraph 3.1 hereof, through the Termination Date,
(c) Bonus, to the extent payable under paragraph 2.2 hereof, in respect of any
year completed prior to the Termination Date,
(d) if the termination becomes effective at any time in a year ("the Termination
Year") other than at year-end, a pro rated portion of the Bonus in respect of
the Termination Year, based upon the number of months completed in the
Termination Year as of the Termination Date (the "Termination Bonus"). Said
Termination Bonus shall be calculated, after the close of the Termination Year,
by multiplying (i) the Bonus to which Ward would have been entitled for the
entire year, as per Exhibit A, if he had not been terminated before the end of
the year, by (ii) 0.083 for each complete calendar month during which Ward was
employed by the Company during that year. For example, if this Agreement were
to be terminated during the sixth month of a year, the Termination
Bonus payable to Ward for that year would be calculated as:
TB = B x 5(.083)
where TB = The Termination Bonus to be paid,
B = The Bonus that Would have been payable if this Agreement had not
been terminated before year-end, and
5 = The number of complete months of employment prior to
termination, and
(e) if, as at the end of the last complete year prior to the Termination Date,
the Company's Cumulative EBITDA has been in excess of 95 % of the applicable
Cumulative EBITDA Target, as per Exhibit B hereto, a pro rated portion of the
Long Term Incentive Payment ("the Pro Rated LTIP") which shall be calculated by
multiplying (i) the number of calendar months completed, as of the Termination
Date, since January 1, 1998, by $ 10,400, provided that, in no event, shall the
Pro Rated LTIP exceed $ 900,000.
If this Agreement is terminated by the Company other than for cause, Ward shall
not be entitled to receive any payment, benefit, or compensation from the
Company, by way of Base salary, Bonus, Long Term Incentive Payment, benefits,
severance payment or otherwise, except as expressly set forth in this paragraph
4.4.
5. Confidential Information; Non-Competition
-----------------------------------------
5.1 Ward shall not, without the prior written consent of the Company, use ,
divulge, disclose or make accessible to any other person, firm, partnership,
corporation or other entity any Confidential Information pertaining to the
business of the Company, Loewen, Blackstone, or any of their respective
affiliates, except (i) while employed by the Company, in the business of and for
the benefit of the Company, or (ii) when required to do so by a court of
competent jurisdiction, by any governmental agency having supervisory authority
over the business of the Company, or by any administrative agency
<PAGE>
4
or legislative body ( including a committee thereof) with jurisdiction to order
Ward or the Company to divulge, disclose or make accessible such information.
For the purposes of this paragraph 5. 1, "Confidential Information" shall mean
all non-public information concerning the financial data, strategic business
plans, product development (or other proprietary product data), customer lists,
marketing plans and other nonpublic, proprietary and confidential information of
the Company, Blackstone, Loewen, or any of their parent, subsidiary or
affiliated companies, or customers that is not otherwise available to the public
(other than by Ward's breach of this Agreement).
5.2 During the period of his employment hereunder and for two years
thereafter, Ward agrees that, without the prior written consent of the Company,
(a) he will not, either directly or indirectly, either as principal, manager,
agent consultant, officer, stockholder, partner, investor, lender, or employee,
or in any other capacity, carry on, be engaged in or have any financial interest
in, any business which is in competition with the business of the Company or
Loewen or any of their parent, subsidiary or affiliated companies, and (b) he
will not, on his own behalf or on behalf of any person , firm or company other
than the Company, directly or indirectly, solicit or offer employment to any
person who has been employed by the Company, Loewen, Blackstone or any of their
parent, subsidiary or affiliated companies at any time during the 12 months
immediately preceding such solicitation.
5.3 For the purposes of paragraph 5.2, a business shall be deemed to be in
competition with the Company or Loewen if it owns, operates or manages a funeral
home or cemetery property that is located within 25 miles of any funeral home or
cemetery property owned, operated or managed by the Company or Loewen within the
State of California, or if it is engaged as the material part of its business in
the consolidation of funeral home or cemetery properties as a national or North
America wide basis. Ward further agrees that he will not compete within a 25
mile radius of any funeral home or cemetery property owned, operated or managed
by Loewen, that Ward had management responsibilities for on October 1, 1998.
Nothing in this Agreement shall be construed to bar Ward from accepting
employment with a funeral home or cemetery property or in any other geographic
region.
5.4 Ward and the Company agree that the covenant of paragraphs 5.2 and 5.3
are reasonable under the circumstances, and further agree that if in the opinion
of any court of competent jurisdiction such restraint is not reasonable in any
respect, that, without further action by the parties, said covenant shall be
deemed modified so as to have the broadest possible scope, consistent with the
opinion of said court, and shall be enforceable as so modified.
5.5 Ward agrees that any breach of the covenants of this section 5 would
cause irreparable injury to the Company, Loewen and Blackstone for which
monetary damages would not be an adequate remedy. Accordingly, Ward agrees
that, in the event of such breach, the Company, Loewen or Blackstone, in
addition to pursuing any other remedies that they may have in law or in equity,
(i) may cease making any payments otherwise required by this Agreement, and (ii)
shall be entitled to a temporary iiijlinction and permanent injunction
restraining any further violation of this Agreement by Ward.
6. Arbitration
-----------
6.1 Any and all disputes and claims arising from or in relation to this
Agreement, with the exception of (i) an action by the Company, Loewen or
Blackstone for injunctive relief under section 5 of this Agreement, or (ii) an
action by Ward under federal or state laws against discrimination in employment,
shall be resolved through arbitration in Los Angeles California under the
auspices and rules of the American Arbitration Association. Any action for
injunctive relief under section 5 hereof or under
<PAGE>
5
federal or state anti-discrimination laws may be brought in any court of
competent jurisdiction.
6.2 ln the event that either party to this Agreement, or Loewen or
Blackstone brings a claim or action for enforcement of this Agreement, or
otherwise relating to or arising from this Agreement, the prevailing party shall
be entitled to recover his or its costs of suit including a reasonable
attorney's fee.
7. Successors and Assigns
----------------------
7.1 This Agreement shall inure to the benefit of and be binding upon the
undersigned parties hereto and their respective successors and assigns.
7.2 Ward may not assign his performance of this Agreement without the
prior, expressed written, consent of the Company.
8. Survival of Covenants
---------------------
8.1 The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations. Without limiting the
generality of the foregoing, the provisions of section 5 hereof shall remain in
effect as long as necessary to give effect thereto, notwithstanding the
termination of this Agreement.
9. Governing Law
-------------
9.1 This Agreement shall be construed, interpreted and governed in
accordance with the laws of the state of California without reference to rules
relating to conflicts of laws.
10. Effect on Prior Agreements
--------------------------
10.1 This Agreement contains the entire understanding between the parties
relating TO THE subject matter hereof and supersedes in all respects any prior
or other agreement OR understanding between the Company, Blackstone, Loewen or
any of their affiliates and Ward relating TO the subject matter.
11. Counterparts
------------
11.1 This Agreement may be executed in two or more counterparts, each of
which will be deemed an original.
ROSE HILLS COMPANY
By: /s/ DENNIS C. POULSEN
---------------------
Its CHAIRMAN
---------------------
DILLIS WARD
/s/ DILLIS R. WARD
------------------
<PAGE>
SCHEDULE A
Annual Incentive Bonus
- ----------------------
For the fiscal year ended December 31, 1998, and, for each succeeding year
during the term of the Employment Agreement, a bonus payment will be made based
on the relationship between the audited EBITDA (as defined in tile Put/Call
Agreement) for the, year in question and the Projected EBITDA (as described
below) for that year. For the purposes of this comparison, the audited EBITDA
will be adjusted to take into account an accrual for these bonus payments.
Projected EBITDA for the year ended December3l, 1998 (before adjustments for
acquisitions) shall be $32.7 million. EBITDA targets for 1999 and later years,
will be set by the Board of Directors, on or before February 1 of the bonus
year. For the purposes of determining the amount of any annual bonus, the
Projected FBITDA for the year will be adjusted by adding, to the Projected
EBITDA initially established by the Board of Directors, the budgeted EBITDA for
any acquisition during the year.
The realization matrix for the annual bonus will be:
Percent Projected Percent Salary
EBITD Attained Paid as Bonus
-------------- -------------
Less than 90% .0%
90% 25.0%
91% 27.5%
92% 30.0%
93% 32.5%
94% 35.0%
95% 37.5%
96% 40.0%
97% 42.5%
98% 45.0%
99% 47.5%
100% 50.0%
101% 55.0%
102% 60.0%
103% 65.0%
104% 70.0%
105% 75.0%
106% 90.0%
107% 85.0%
108% 90.0%
109% 95.0%
110% or greater 100.0%
<PAGE>
SCHEDULE B
Cumulative EBITDA Targets
- -------------------------
For the purpose of calculating the Long Term Incentive Payment to Ward under
paragraph 2.3 of the Employment Agreement, the following cumulative EBITDA
targets shall apply, provided that, in the event of acquisitions during the term
of said Agreement, the cumulative EBITDA targets shall be increased by the
budget EBITDA of said acquisitions:
<TABLE>
<CAPTION>
<S> <C>
January 1, 1998 through December 31, 1998 $ 32,700,000
through December 31, 1999 $ 70,600,000
through December 31, 2000 $113,500,000
through December 31, 2001 $161,500,000
through December 31, 2002 $212,800,000
through December 31, 2003 $267,600,000
through December 31, 2004 $326,200,000
through December 31, 2005 $388,900,000
</TABLE>
Long Term Incentive Bonus
- -------------------------
In order for Ward to earn the Long Term Inventive Bonus, the Company must have
achieved, through the Exercise Date (as that term is defined in the Put/Call
Agreement) 95% of the cumulative EBITDA target as set forth above (adjusted for
acquisitions). In the event that the Exercise Date is not the last day of a
calendar year, the cumulative EBITDA target will be prorated based on the
portion of the calendar year completed as of the Exercise Date.
If 95% of the applicable cumulative EBITDA target has been achieved at the
Exercise Date, the Long Term Incentive Bonus shall be calculated as follows:
<TABLE>
<CAPTION>
EXERCISE DATE AMOUNT
<S> <C>
Prior to January 1, 2002 $500,000
January 1, 2002 to December 31, 2002 $600,000
January 1, 2003 to December 31, 2003 $700,000
January 1, 2004 to December 31, 2004 $800,000
January 1, 2005 or thereafter $900,000
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made this 3rd day of November 1998 by and between Rose Hills
Company ("the Company") and Kenton C. Woods.
WHEREAS, it is the mutual intent of the parties hereto that Woods be employed as
Senior Vice President and Chief Financial Officer of the Company, and
WHEREAS, it is the intent to set forth in this Agreement the terms and
conditions of said employment.
In consideration of these premises and other good and valuable consideration,
the receipt
and sufficiency of which are hereby acknowledged, the parties hereby covenant
and agree as follows:
1. EMPLOYMENT
----------
1.1 During the term of this Agreement and subject to its terms and conditions,
Woods shall be employed as Senior Vice President and Chief Financial
Officer of the Company. In said capacity, Woods shall report to the Chief
Executive Officer of the Company or to such person(s) as the Board of
Directors of the Company ("the Board") may, from time to time direct, and
shall have such powers, responsibilities and authorities as may be, from
time to time, assigned to him by the Board.
1.2 This Agreement shall continue in effect without interruption until
terminated according to its terms.
1.3 During the term hereof, Woods shall devote his full working time and
efforts, to the best of his ability, experience and talent, to the
performance of services, duties and responsibilities as an Officer of the
Company.
2. COMPENSATION
------------
2.1 During the term hereof, Woods shall be paid by the Company a base salary
("Base Salary") at the rate of $155,182 per annum, provided that said Base
Salary shall be reviewed annually. Any increase in the Base Salary shall be
at the sole discretion of the Company. In the event that the Company, in
the exercise of said discretion, increases the Base Salary, the Base
Salary, as so increased, shall thereafter be the "Base Salary" for the
purposes of this Agreement.
2.2 In addition to his Base Salary, Woods shall be paid an annual bonus ("the
Bonus") based upon the Company's performance in each fiscal year as
measured against EBITDA targets established for the Company. The amount of
Bonus will be in the range of 0% -50% of the Base Salary according to the
schedule set forth in Exhibit A. The EBITDA target for 1998 shall be $32.7
Million. EBlTDA targets for years after 1998 shall be determined by the
Board, in its sole discretion. For the purposes of this Agreement the term
"EBITDA" shall be defined as in the Put/Call
-1-
<PAGE>
Agreement dated November 19, 1996 ("the Put/Call Agreement"), among
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Rose
Hills Offshore Capital Partners 11 L.P., and Blackstone Family Investment
Partnership 11 L.P. (collectively "Blackstone") Loewen Group International
Inc, and The Loewen Group Inc. (collectively "Loewen"), Roses Delaware,
Inc. and RHI Management Direct L.P.
3. EMPLOYEE BENEFITS
-----------------
3.1 The Company shall provide Woods, during the term of this Agreement,
coverage under employee pension and welfare benefit programs, plans and
practices consistent with such benefits as are made available from time to
time to other senior executives of the Company ("Benefits").
3.2 Woods shall be entitled to no less than fifteen business days paid vacation
in each calendar year, which shall be taken at such time as Is consistent
with Woods' responsibilities hereunder. Unless otherwise approved by the
Company, any vacation days not taken in any calendar year shall be
forfeited without pay therefor.
4. TERMINATION
-----------
4.1 Woods shall have the right to terminate this Agreement at any time at upon
90 days notice to the Company. In the event that Woods so terminates, he
shall be entitled, at the time the termination becomes effective, to a lump
sum payment from the Company,-(i) in respect of vacation accrued, but not
used ("Vacation Payment") and (ii) for compensation earned under the terms
of paragraph 2.1 hereof, but not paid ("Compensation Payment") as of the
effective date of the termination. Said Compensation Payment shall not
include all or any part of any Bonus in respect of the year in which said
termination occurs. If Woods terminates this Agreement, he shall not be
entitled to receive any payment, benefit, or compensation from the Company,
by way of Base salary, Bonus, benefits, severance payment or otherwise,
except as expressly set forth in this paragraph.
4.2 The Company shall have the right to terminate this Agreement and Woods'
employment with the Company for cause at any time. As used herein, the term
"Cause" shall include (I) willful malfeasance or willful misconduct by
Woods in connection with his employment, (ii) any failure or refusal by
Woods to perform his duties hereunder or to follow any lawful direction
from the Company which refusal or failure continues after Woods has been
given notice by the Company that it deems that such failure or refusal has
occurred, (iii) any breach by Woods of Section 5 herein or any other
material breach of this Agreement, or (iv) the commission by Woods of any
violation of law in connection with the performance of his duties
hereunder, any misdemeanor involving moral turpitude or any felony. Except
as explicitly provided in this paragraph, the Company shall not be required
to provide Woods with advance notice of termination for cause.
-2-
<PAGE>
4.3 In the event that Woods is terminated for cause under the terms of
paragraph 4.2, he shall be entitled to receive a lump sum payment from the
Company in respect of the Vacation Payment and the Compensation Payment.
Said Compensation Payment shall not include all or any part of the Bonus in
respect of the year in which said termination occurs. If Woods is
terminated for cause under paragraph 4.2, he shall not be entitled to
receive any payment, benefit, or compensation from the Company, by way of
Base salary, Bonus, benefits, severance payment or otherwise, except as
expressly set forth in this paragraph 4.3.
4.4 The Company shall have the right to terminate this Agreement at any time,
with or without reason, or for any reason, upon 12 months notice to Woods.
In the event of a termination under this paragraph, Woods shall be entitled
to receive:
(a) his Base Salary through the effective date of the termination
("the Termination Date"),
(b) Benefits, as defined in paragraph 3.1 hereof, through the Termination
Date,
(c) Bonus, to the extent payable under paragraph 2.2 hereof, in respect
of any year completed prior to the Termination Date,
(d) if the termination becomes effective at any time in a year ("the
Termination Year") other than at year-end, a pro rated portion of the
Bonus in respect of the Termination Year, based upon the number of
months completed in the Termination Year as of the Termination Date
(the "Termination Bonus"). Said Termination Bonus shall be
calculated, after the close of the Termination Year, by multiplying
(I) the Bonus to which Woods would have been entitled for the entire
year, as if he had not been terminated before the end of the year, by
(ii) 0.083 for each complete calendar month during which Woods was
employed by the Company during that year. For example, if this
Agreement were to be terminated during the sixth month of a year, the
Termination Bonus payable to Woods for that year would be calculated
as:
TB B x 5(.083)
where TB = The Termination Bonus to be paid,
B = The Bonus that Would have been payable if
this Agreement had not been terminated
before year-end, and
5 = The number of complete months of employment
prior to termination, and
If this Agreement is terminated by the Company other than for
cause, Woods shall not be entitled to receive any payment,
benefit, or compensation from the Company, by way of Base salary,
Bonus, benefits, severance payment or otherwise, except as
expressly set forth in this paragraph 4.4.
-3-
<PAGE>
5. CONFIDENTIAL INFORMATION NON-COMPETITION
----------------------------------------
5.1 Woods shall not, without the prior written consent of the Company,
use, divulge, disclose or make accessible to any other person, firm,
partnership, corporation or other entity any Confidential Information
pertaining to the business of the Company, Loewen, Blackstone, or any
of their respective affiliates, except (I) while employed by the
Company, in the business of and for the benefit of the Company, or
(ii) when required to do so by a court of competent jurisdiction, by
any governmental agency having supervisory authority over the business
of the Company, or by any administrative agency or legislative body
(including a committee thereof) with jurisdiction to order Woods or
the Company to divulge, disclose or make accessible such information.
For the purposes of this paragraph 5.1, "Confidential Information"
shall mean all non-public information concerning the financial data,
strategic business plans, product development (or other proprietary
product data), customer lists, marketing plans and other non public,
proprietary and confidential information of the Company, Blackstone,
Loewen, or any of their parent, subsidiary or affiliated companies, or
customers that is not otherwise available to the public (other than by
Woods' breach of this Agreement).
5.2 During the period of his employment hereunder and for two years
thereafter, Woods agrees that, without the prior written consent of
the Company, (a) he will not, either directly or indirectly, either as
principal, manager, agent, consultant, officer, stockholder, partner,
investor, lender, or employee, or in any other capacity, carry on, be
engaged in or have any financial interest in, any business which is in
competition with the business of the Company or Loewen or any of their
parent, subsidiary or affiliated companies, and (b) he will not, on
his own behalf or on behalf of any person, firm or company other than
the Company, directly or indirectly, solicit or offer employment to
any person who has been employed by the Company, Loewen, Blackstone or
any of their parent, subsidiary or affiliated companies at any time
during the 12 months immediately preceding such solicitation.
5.3 For the purposes of paragraph 5.2, a business shall be deemed to be in
competition with the Company or Loewen if it owns, operates or manages
a funeral home or cemetery property that is located within 25 miles of
any funeral home or cemetery property owned, operated or managed by
the Company or Loewen within Los Angeles or Orange counties, or if it
is engaged as the material part of its business in the consolidation
of funeral home or cemetery properties as a national or North America
wide basis. Nothing in this Agreement shall be construed to bar Woods
from accepting employment with a funeral home or cemetery property or
in any other geographic region.
5.4 Woods and the Company agree that the covenant of paragraphs 5.2 and
5.3 are reasonable under the circumstances, and farther agree that if
in the opinion of any court of competent jurisdiction such restraint
is not reasonable in any respect, that, without further action by the
parties, said covenant shall be deemed modified so as to have the
broadest possible scope, consistent with the opinion of said court,
and shall be enforceable as so modified.
-4-
<PAGE>
5.5 Woods agrees that any breach of the covenants of this section 5 would
cause irreparable injury to the Company, Loewen and Blackstone for
which monetary damages would not be an adequate remedy. Accordingly,
Woods agrees that, in the event of such breach, the Company, Loewen or
Blackstone, in addition to pursuing any other remedies that they may
have in law or in equity, (i) may cease making any payments otherwise
required by this Agreement, and (ii) shall be entitled to a temporary
injunction and permanent injunction restraining any further violation
of this Agreement by Woods.
6. ARBITRATION
-----------
6.1 Any and all disputes and claims arising from or in relation to this
Agreement, with the exception of (i) an action by the Company, Loewen
or Blackstone for injunctive relief under section 5 of this Agreement,
or (ii) an action by Woods under federal or state laws against
discrimination in employment, shall be resolved through arbitration in
Los Angeles, California under the auspices and rules of the American
Arbitration Association Any action for injunctive relief under section
5 hereof or under federal or state anti-discrimination laws may be
brought in any court of competent jurisdiction.
6.2 In the event that either party to this Agreement, or Loewen or
Blackstone brings a claim or action for enforcement of this Agreement,
or otherwise relating to or arising from this Agreement, the
prevailing party shall be entitled to recover his or its costs of suit
including a reasonable attorney's fee.
7. SUCCESSORS AND ASSIGNS
----------------------
7.1 This Agreement shall inure to the benefit of and be binding upon the
undersigned parties hereto and their respective successors and
assigns.
7.2 Woods may not assign his performance of this Agreement without the
prior, expressed written, consent of the Company,
8. SURVIVAL OF COVENANTS
---------------------
8.1 The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to
the intended preservation of such rights and obligations. Without
limiting the generality of the foregoing, the provisions of section 5
hereof shall remain in effect as long as necessary to give effect
thereto, notwithstanding the termination of this Agreement.
9. GOVERNING LAW
-------------
9.1 This Agreement shall be construed, interpreted and governed in
accordance with the laws of the State of California without reference
to rules relating to conflicts of laws.
-5-
<PAGE>
10. EFFECT ON PRIOR AGREEMENTS
--------------------------
10.1 This Agreement contains the entire understanding between the parties
relating to the subject matter hereof and supersedes in all respects
any prior or other agreement or understanding between the Company,
Blackstone, Loewen or any of their affiliates and Woods relating to
the subject matter.
11. COUNTERPARTS
------------
11.1 This Agreement may be executed in two or more counterparts, each of
which will be deemed an original.
ROSE HILLS COMPANY
By /s/ DILLIS R. WARD Signed:
------------------
Dillis R. Ward
President and CEO
/s/ KENTON C. WOODS
-------------------
Kenton C. Woods
-6-
<PAGE>
SCHEDULE A
----------
ANNUAL INCENTIVE BONUS
- ----------------------
For the fiscal year ended December 31, 1998, and, for each succeeding year
during the term of the Employment Agreement, a bonus payment will be made based
on the relationship between the audited EBITDA (as defined in title Put/Call
Agreement) for the, year in question and the Projected EBITDA (as described
below) for that year. For the purposes of this comparison, the audited EBITDA
will be adjusted to take into account an accrual for these bonus payments.
Projected EBITDA for the year ended December 31, 1998 (before adjustments for
acquisitions) shall be $32.7 million. EBITDA targets for 1999 and later years,
will be set by the Board of Directors, on or before February 1 of the bonus
year. For the purposes of determining the amount of any annual bonus, the
Projected EBITDA for the year will be adjusted by adding, to the Projected
EBITDA initially established by the Board of Directors, the budgeted EBITDA for
any acquisition during the year.
The realization matrix for the annual bonus will be:
Percent Projected Percent Salary
EBITDA Attained Paid as Bonus
--------------- -------------
Less than 90% .00%
90% 12.50%
91% 13.75%
92% 15.00%
93% 16.25%
94% 17.50%
95% 18.75%
96% 20.00%
97% 21.25%
98% 22.50%
99% 23.75%
100% 25.00%
101% 27.50%
102% 30.00%
103% 32.50%
104% 35.00%
105% 47.50%
106% 40.00%
107% 42.50%
108% 45.00%
109% 47.50%
110% or greater 50.00%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited interim consolidated financial statements of Rose Hills Company and
subsidiaries, for the nine months ended September 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,882
<SECURITIES> 0
<RECEIVABLES> 7,995
<ALLOWANCES> 0
<INVENTORY> 979
<CURRENT-ASSETS> 20,123
<PP&E> 66,066
<DEPRECIATION> 0
<TOTAL-ASSETS> 319,279
<CURRENT-LIABILITIES> 19,308
<BONDS> 80,000
0
0
<COMMON> 0
<OTHER-SE> 129,554
<TOTAL-LIABILITY-AND-EQUITY> 319,279
<SALES> 61,453
<TOTAL-REVENUES> 61,453
<CGS> 9,803
<TOTAL-COSTS> 9,803
<OTHER-EXPENSES> 36,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,359
<INCOME-PRETAX> 3,089
<INCOME-TAX> 1,487
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,602
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
