<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
    (Mark One)
 
    [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                                      OR
 
    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
               For the transition period from to       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)
 
                               ----------------
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                     None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                                     None
 
  Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes  X  No
                                                   ---   ----- 
  The number of outstanding Common shares as of March 24, 1999, was 1,000
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
                                     PART I
 
<TABLE>
<CAPTION>
  Item
 Number                                                                    Page
 ------                                                                    ----
 <C>    <S>                                                                <C>
  1.    BUSINESS........................................................     1
  2.    PROPERTIES......................................................     5
  3.    LEGAL PROCEEDINGS...............................................     6
  4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.............     6

                                     PART II

  5.    MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.........     7
  6.    SELECTED FINANCIAL DATA.........................................     7
  7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS..........................................     8
  7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......    15
  8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................    16
  9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE...........................................    16

                                    PART III

 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............    17
 11.    EXECUTIVE COMPENSATION..........................................    18
 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..    19
 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................    20

                                     PART IV

 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
        8-K.............................................................    22
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS.
 
OVERVIEW
 
  Rose Hills Company (the "Company"), a Delaware corporation, is a wholly-
owned subsidiary of Rose Hills Holdings Corp. ("RH Holdings"). The Company was
formed in 1996 for purposes of acquiring Roses, Inc. (the "Mortuary") and
purchasing certain assets and assuming certain liabilities of Rose Hills
Memorial Park Association and Workman Mill Company (the "Association" and the
assets and liabilities purchased therefrom, the "Cemetery"). Also, in
connection with the acquisition, a subsidiary of The Loewen Group Inc. (The
Loewen Group Inc. collectively with its affiliates, "Loewen"), a shareholder
of RH Holdings, contributed 14 funeral homes and 2 funeral home cemetery
combination properties (the "Satellite Properties"). As a result of these
acquisitions (collectively "Acquisition Transaction"), the Company is the
successor to the operations of the predecessor Mortuary and Cemetery.
 
  The Cemetery and the Mortuary (collectively, "Rose Hills") are located on
the grounds of the Cemetery, Rose Hills Memorial Park. Rose Hills is the
largest single location cemetery funeral home combination in the United States
and the Cemetery is the largest single location cemetery in the United States.
Rose Hills is situated less than 14 miles from downtown Los Angeles on
approximately 1,418 acres of permitted cemetery land near Whittier,
California. The Cemetery and Mortuary have been continuously operating since
1914 and 1956, respectively. As a result of the Acquisition Transaction the
Company owns a strategic assembly of cemeteries and funeral homes in the
greater Los Angeles area.
 
  In 1997, the integration of the Satellite Properties with Rose Hills
effected through the Acquisition Transaction enabled the Company to begin to
take advantage of the benefits of "hub and spoke clustering,' including
opportunities to share personnel, vehicles and other key resources, and
implement revenue enhancing cross-marketing programs. In addition, the Company
intends to leverage Rose Hills' outstanding reputation in the region by using
the Rose Hills name at many of the Satellite Properties.
 
ACQUISITION TRANSACTION
 
  On September 19, 1996, the Company entered into an Agreement and Plan of
Merger with Roses, Inc. (the "Merger Agreement") providing for the acquisition
of the Mortuary through the merger of the Company with and into Roses, Inc.,
with Roses, Inc. (renamed RH Mortuary Corporation) being the surviving
corporation in the merger. On November 19, 1996 ("Acquisition Closing Date"),
the Company assigned all of its rights and obligations under the Merger
Agreement to a newly-created subsidiary of the Company, so that following the
merger, the Mortuary became a wholly-owned subsidiary of the Company.
 
  On September 19, 1996, the Company and the Association also entered into an
Asset Purchase Agreement (the "Asset Purchase Agreement") pursuant to which
the Company agreed to purchase from the Association the assets and assume the
liabilities constituting the Cemetery. At the Acquisition Closing Date, the
Company's rights under such Agreement were assigned to a newly created wholly-
owned subsidiary of the Company (RH Cemetery Corporation), and, accordingly,
on the Acquisition Closing Date, the Cemetery became a wholly-owned subsidiary
of the Company.
 
  In connection with the Acquisition, RH Holdings, Blackstone Capital Partners
II Merchant Banking Fund L.P and its affiliates (collectively, "Blackstone"),
a subsidiary of Loewen ("LN Sub"), Loewen Group International Inc. ("LGII")
and The Loewen Group Inc. ("LWN") entered into a subscription agreement (the
"Subscription Agreement") pursuant to which: (i) Blackstone subscribed for
common stock of RH Holdings in exchange for a cash contribution to RH
Holdings, (ii) LGII subscribed for common stock and preferred stock of RH
Holdings in exchange for a cash contribution to RH Holdings, and (iii) LN Sub
subscribed for shares of preferred stock of RH Holdings in exchange for the
contribution by LN Sub of the Satellite Properties.
 
  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 advanced by
 
                                       1
<PAGE>
 
the Company to RHI Management Direct L.P. ("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 borrowings under the Bank Credit Agreement was entered into;
and (vi) the sale of the Senior Subordinated Notes due 2004 was consummated.
(See Item 7, "Liquidity and Capital Resources.")
 
THE FUNERAL SERVICE AND CEMETERY INDUSTRY AND LOCAL CHARACTERISTICS
 
  The funeral service and cemetery industry historically has been
characterized by low business risk compared with most other businesses.
According to preliminary figures from The Dun & Bradstreet Corporation, the
average business failure rate in the United States is approximately 88 per
10,000. The failure rate of the funeral service and crematoria industry is
approximately 19 per 10,000, 78% lower than the average rate and among the
lowest of all industries. This low failure rate can be attributed to a number
of factors, including stable demand in the industry, positive demographic
trends and the low rate of new market entrants due to the length of time
required to establish community acceptance.
 
  In the last 15 years, demand has grown steadily at a 1% compound annual
growth rate while the aggregate number of funeral homes has remained
relatively constant. Future demographic trends are expected to contribute to
the continued stability of the funeral service industry. The Census Bureau
projects that the segment of the United States population over 65 years old,
which presently totals 34 million, will more than double in size to over 73
million by 2035. Over the next 15 years, the aging of this population is
expected to outweigh the effects of increased life expectancies. The Census
Bureau projects that the number of deaths in the United States will grow at
approximately 1% annually through 2010.
 
  The Company attracts customers from a geographic region encompassing
substantially all of Los Angeles County and the northern portion of Orange
County. According to statistics compiled by the State of California Department
of Health Services, the Census Bureau and Los Angeles County, the estimated
population of Los Angeles County was approximately 9.6 million people (over 3
million households) in 1997. Approximately 18% of this population was age 55
or older, 14% age 65 or older, and 5% age 75 or older. The death rate in
Los Angeles County has demonstrated stability over the last decade and the
number of deaths is expected to increase in step with the 1% annual projected
population growth in Los Angeles County over the next five years. However,
slight year to year variations can occur in the number of deaths. Early data
for 1998 indicate a 1% decline in deaths for Los Angeles County.
 
 Mortuary Operations
 
  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 has the current
capacity to provide over 30 funeral services per day. In 1998, the Mortuary
performed approximately 5,100 funeral calls.
 
  The Mortuary began operations in 1956, when the Association recognized that
additional revenue opportunities existed in funeral operations. As the
division's success continued, the Mortuary was spun off in 1976 as a taxable,
for profit, wholly-owned subsidiary of Rose Hills Memorial Park Association
("the Association"). In 1990, the Association sold the Mortuary business to
senior management in a leveraged buyout transaction. During the period from
October 1989 through November 19, 1996, pursuant to a Management Agreement,
the Mortuary also operated the Cemetery.
 
  The Mortuary provides funeral services on both an at-need and a pre-need
basis. Since 1987, substantially all pre-need funeral services have been
funded through the sale by the Mortuary to its customers of a life
 
                                       2
<PAGE>
 
insurance product. Under the insurance 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 and related expenses 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, two combination
properties and one cemetery 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 Satellite Properties permit the Company to access a base of mortuary
clients that it otherwise would be unable to develop solely from its location
near Whittier.
 
  The percentage of the Company's total revenues contributed by the Mortuary
operations during each of the last three fiscal years is set forth herein
under the caption "Item 7--Management's Discussion and Analysis".
 
 Cemetery Operations
 
  The Cemetery is the largest single location cemetery in the United States.
The Cemetery consists of approximately 1,418 acres, 408 of which have been
developed and sold, 295 of which are developed unsold cemetery property and
the remaining 715 of which have been permitted as cemetery property. Since its
founding in 1914, the Cemetery has performed over 300,000 interments, of which
approximately 8,700 occurred in 1998. 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 48% of the Cemetery's total revenues during 1998.
 
  Pre-need sales of cemetery interment rights and other related products and
services are recognized as revenue when the customer contracts are signed with
concurrent recognition of related costs.
 
  The Company voluntarily trusts 100% of pre-need cemetery service revenue
when the sales contracts are paid in full. Also, the Company has an agreement
with a vendor to purchase pre-need merchandise when pre-need contracts are
paid in full. Funds voluntarily trusted for pre-need cemetery services are
included in the consolidated financial statements.
 
  The Company funds its obligation to maintain cemetery grounds by placing a
portion, generally $60 per lot, of the proceeds from cemetery property sales
into perpetual care trust funds. Income from these funds is withdrawn and used
for maintenance of the cemeteries.
 
  Although the Cemetery is non-sectarian, in order to better serve an
increasingly diverse customer base, the Cemetery has developed and offers many
lawn areas for use by particular ethnic, religious and fraternal organizations
as well as its nine non-denominational chapels (including the newly
constructed SkyRose Chapel, a 350 seat chapel and mausoleum designed by
architect Fay Jones) eight additional mausoleums and a crematory. In addition
the Company has commenced construction pursuant to a development agreement
with the International Buddhist Progress Society ("IBPS") under which the
Company:
 
  .(i) granted IBPS the interment rights with respect to 4.5 acres of
       Cemetery property and agreed to contribute to IBPS's development of a
       16,000 square foot columbarium and surrounding stupa gardens; and
 
  .(ii) granted IBPS a seven-year option to build a second columbarium on an
        adjacent 2.7 acre site.
 
                                       3
<PAGE>
 
  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 has agreed to pay 10% of the gross revenues received by IBPS from the sale
of niches for seven years. Any remaining balance is required to be paid on
January 1, 2003. In addition, IBPS has agreed to pay the Company $75 per lot
on the first 5,000 cemetery lots sold and $50 per lot thereafter. The first
columbarium and stupa gardens is substantially complete and is scheduled to
open for interments in the Spring of 1999.
 
  The percentage of the Company's total revenue contributed by the Cemetery
operations during each of the last three fiscal years is set forth herein
under the caption "Item 7--Management's Discussion and Analysis".
 
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. The Company also faces
competition from large consolidators' in the industry which seek to reap
profits from an acquisition and consolidation strategy as well as retail
outlets such as casket stores. Such competitors include several large,
publicly-traded funeral services companies, including Service Corporation
International and Stewart Enterprises, Inc.
 
REGULATION
 
  The Company's funeral home operations are regulated by the Federal Trade
Commission (FTC) administers the Trade Regulation Rule on Funeral Industry
Practices (the "Funeral Rule"), which became effective on April 30, 1984, and
was revised as of July 19, 1994. The Funeral Rule defines certain acts and
practices in connection with the provision of funeral goods or services as
unfair or deceptive and sets forth various requirements intended to prevent
such unfair or deceptive acts and practices. The Company also must comply with
other federal legislation, including the Americans with Disabilities Act and
regulations administered by the Occupational Safety and Health Administration.
 
  The Company's operations are also regulated by the State of California,
which regulates the sale of pre-need cemetery and funeral services. California
state regulations require, among other things, that a portion of the funds
received by the Company in connection with all cemetery sales be deposited in
an endowment care fund. The principal of such endowment care fund must be
invested and the income from such investment may be used only for the
development, improvement, embellishment and maintenance of the cemetery.
California state regulations also require that money received from the sale of
pre-need funeral service contracts be held in trust until the services are
delivered, that such contracts may be cancelled by the customer at any time
prior to the delivery of such services and that upon any such cancellation the
principal and interest of such trust (less, in certain cases, a revocation
fee) be repaid to the customer.
 
  The Company believes that it is currently in substantial compliance with the
Funeral Rule and all other applicable federal, state and local laws and
regulations.
 
ENVIRONMENTAL MATTERS
 
  The Company's operations are subject to various federal, state and local
environmental laws and regulations, including those pertaining to remediation
of hazardous substances, the handling and disposal of biological materials,
and protection of endangered or threatened species. These laws and regulations
may require the Company to incur compliance, remediation and other costs from
time to time or restrict development in certain environmentally sensitive
areas.
 
                                       4
<PAGE>
 
  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 a solid waste
disposal area used to dump rubbish, green waste and used motor oil in the
1970's, that will require remediation. However, pursuant to an Environmental
Compliance Agreement entered into between the Association and the Company, the
Association has agreed to pay or indemnify the Company for certain costs
relating to such remediation. In connection with the Satellite Properties,
Management is also aware of certain areas which may have been contaminated
from former or adjacent underground storage tanks.
 
  In addition, two of the Company's properties are located in or near areas of
regional groundwater contamination. The Company submitted information in
connection with contamination at one of these areas and was informed by the
Environmental Protection Agency that the Company will not be included in the
Super Fund cleanup of the basin.
 
  Although there can be no assurance, Management does not believe that the
above or other environmental matters affecting the Company will have a
material adverse effect on the Company's financial condition or results of
operations.
 
EMPLOYEES
 
  As of March 24, 1999 the Company employed 840 people. Management believes
that the Company's relationship with employees is good.
 
  In December 1993 the National Labor Relations Board ("NLRB") certified the
Teamsters Union as the collective bargaining representative of 57 employees in
the Company's Park Department. In December 1994, certain of these employees
petitioned the NLRB to hold an election regarding decertifying the union.
During the same period the Teamsters filed numerous unfair labor practice
charges against the Company with the NLRB. On April 29, 1996, the NLRB General
Counsel issued a Consolidated Amended Complaint and Notice of Hearing on
certain of the union's charges. In April 1997, the Administrative Law Judge
issued an unfavorable decision regarding the unlawful termination of the two
employees and a favorable decision in the alleged failure to recognize and
bargain in good faith with the union.
 
  In reviewing the decision of the Administrative Law Judge, counsel advised
the Company that an error with respect to certain interpretations of law may
have been made. Based upon this advice, counsel in May 1997 filed on behalf of
the Company an exception brief to the NLRB seeking a complete reversal of the
former decision. In June 1997, the NLRB counsel submitted an answering brief
to the exceptions in the brief filed on behalf of the Company.
 
  In September 1997, the NLRB upheld the former decision. On October 3, 1997,
the Company filed an appeal with the United States 9th Circuit Court of
Appeals. To date, the 9th Circuit has not ruled on the appeal.
 
  On February 3, 1999, the NLRB dismissed the decertification petition on the
grounds that the petition had become moot as a result of the NLRB's previous
finding that the Company had lawfully withdrawn the recognition from the
Union.
 
  Although there can be no assurances, the Company does not believe that the
outcome of the proceeding with regard to these charges will have a material
adverse effect on the Company's financial condition.
 
ITEM 2. PROPERTIES.
 
  The property on which the Cemetery is located consists of approximately
1,418 acres, 408 of which have been developed and sold as cemetery property,
295 of which are developed unsold cemetery property and the remaining 715 of
which have been permitted as cemetery property. Also located on the grounds of
Rose Hills are seven chapels that seat over 800 people in the aggregate, six
mausoleums, 39 visitation rooms, a crematory and a 43,460 square foot
administrative building. In addition to the above facilities the Company
constructed SkyRose Chapel, a 26,490 square foot chapel and mausoleum
facility.
 
                                       5
<PAGE>
 
  In connection with the Acquisition Transaction, the Company was granted an
option, exercisable for a period of three years after the Acquisition Closing
Date, to purchase from the Association an additional 75 acres of permitted
cemetery property located in Los Angeles County, for an aggregate price of
$18.2 million.
 
  The Mortuary's facilities consist of 6.2 acres of land, a two-story, 74,000
(inclusive of relevant properties above) square foot mortuary and
administrative building, an adjacent flower shop and storage facilities.
 
  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, La
                                                    Puente (two locations)
White's Funeral Home.............................. Bellflower
Neels-Brea Funeral Home........................... Brea
Dimond & Sons-Mettler Chapel...................... Garden Grove
Shannon-Donegan Chapel............................ Orange
San Fernando Mortuary............................. San Fernando
R. L. Malinow-Glasband-Weinstein Mortuaries(1).... West Hollywood
Colton Funeral Chapel............................. Colton
Grove Colonial Mortuary........................... San Bernardino
Richardson-Peterson Mortuary...................... Ontario
Harbor Lawn(2).................................... Costa Mesa
Melrose Abbey (including Angels Lawn
 Cemetery)(3)..................................... Anaheim
</TABLE>
--------
(1) 95% owned by the Company.
(2) Combination property located on 28 acres; includes a funeral home and a
    cemetery (and crematory).
(3) Combination property located on 20 acres; includes a funeral home and a
    cemetery.
 
  The facilities of ten of the Satellite property locations are owned by the
Company and the facilities of the remaining six Satellite property locations
are leased by the Company.
 
  In December 1998, the Company acquired Home of Peace Memorial Park and
Mausoleum located in Los Angeles.
 
  The obligations of RH Holdings, the Company, and each of the Company's
existing and future domestic subsidiaries under the Bank Credit Facilities (as
defined below) are secured by a first priority security interest in all
existing and future assets (including the real property located at Rose Hills
but excluding other real property and vehicles covered by certificates of
title) of each such entity. See Item 6.
 
ITEM 3. LEGAL PROCEEDINGS.
 
  The Company is party to certain legal proceedings in the ordinary course of
its business. Management does not expect that the outcome of any such
proceedings will have a material adverse effect on the Company's financial
condition or results of operation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
 
  None.
 
                                       6
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
 
  In connection with the Acquisition Transaction, the Company issued 1,000
shares of Common Stock to RH Holdings. This represents all of the outstanding
Common Stock of the Company.
 
  There is no established public trading market for the Common Stock of the
Company.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
  The following table sets forth certain selected consolidated financial data
for the Company (and its predecessors, as the case may be) as of December 31,
1998 and for each of the five years in the five-year period ending December
31, 1998. The pro forma combined information as of and for the year ended
December 31, 1996 is a combination of the Company (for the period from
November 19, 1996 to December 31, 1996) and its predecessor companies the
Mortuary and Cemetery (for the period from January 1, 1996 to November 18,
1996). Comparative financial information as of and for the period ended
November 18, 1996 and the years ended December 31, 1994 and 1995 have been
included on a historical basis for the predecessor Mortuary and Cemetery and
are not comparable. Such combined financial data for the predecessor
operations has been included solely to facilitate a discussion of the
operations from period to period. Such presentation of the 1996, 1995 and 1994
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 have been omitted from
the presentation on the basis of immateriality.
 
  The selected financial data under the captions "Income Statement Data",
"Other Financial Data" and "Balance Sheet Data" for the year ended December
31, 1998 and 1997 and the period from November 19, 1996 through December 31,
1996 were derived from the Company's financial statements.
 
  The selected financial data under the captions "Income Statement Data",
"Other Financial Data" and "Balance Sheet Data" for the two years ended
December 31, 1995 and the period from January 1, 1996 through November 18,
1996 were derived from the financial statements of Roses, Inc., and of Rose
Hills Memorial Park Association and Workman Mill Investment Company.
 
                                       7
<PAGE>
 
  The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company's consolidated financial statements and notes thereto and other
financial information included elsewhere in this report.
 
<TABLE>
<CAPTION>
                                                                                  For the Years
                                                                                      Ended
                                                   Predecessor                    December 31,
                         For the Year For the Year   Company                       Predecessor
                            Ended        Ended      Proforma    Company            (Proforma)
                         December 31, December 31,   1/1/96-   11/19/96- Proforma --------------
                             1998         1997      11/18/96   12/31/96    1996    1995    1994
                         ------------ ------------ ----------- --------- -------- ------  ------
                                                     (in millions)
<S>                      <C>          <C>          <C>         <C>       <C>      <C>     <C>
INCOME STATEMENT DATA
Total Revenue...........    $ 83.6        70.7        42.9         7.1      50.0    47.4    45.1
Operating Income........    $ 19.5        14.7         5.1         1.3       6.4     7.2     3.1
Net Income (Loss).......    $  1.0        (1.8)        1.1        (0.5)      0.6     3.4     2.4
 
OTHER FINANCIAL DATA
EBITDA (1)..............    $ 28.9        23.4         6.2         2.4       8.6    11.0     9.1
Cash flows from:
 Operating Activities...    $  4.1         1.6         7.4         5.1      12.5     2.2     5.6
 Investing Activities...    $ (5.8)       (2.7)       (2.7)     (246.6)   (249.3)   (4.5)   (5.4)
 Financing Activities...    $ (0.1)       (3.4)       (3.7)      249.4     245.7    (2.2)    1.3
 
BALANCE SHEET DATA
Total Assets............    $321.9       312.6         N/A       317.8     317.8    77.1    72.9
Total Debt (2)..........    $ 74.5        74.0         N/A        75.0      75.0    19.5    22.0
</TABLE>
--------
(1) EBITDA is defined as income (loss) before income taxes plus interest
    expense, depreciation and amortization.
    EBITDA is presented because (i) Management believes that EBITDA provides
    relevant and useful information, (ii) it is a widely accepted financial
    indicator of a company's ability to incur and service debt and (iii) it is
    the basis on which compliance with the financial covenants under the
    Company's debt agreements is determined. However, EBITDA 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) Total Debt is defined as funded debt comprising bank borrowings.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.
 
THE COMPANY
 
  As a result of the Acquisition Transaction, the Company is the successor to
the operations of the predecessor Mortuary, Cemetery and the Satellite
Properties. As of November 19, 1996, the Company's assets and liabilities were
adjusted to their estimated fair values under purchase accounting. In
addition, the Company entered into new financing arrangements and changed its
capital structure. Accordingly, financial position and results of operations
subsequent to November 18, 1996 are not comparable to prior periods.
Operations of the Company since November 18, 1996 reflect increased
depreciation, amortization and interest expense. Accordingly, comparative
financial information for the period from January 1, 1996 to November 18, 1996
has been included on a historical basis for the predecessor Mortuary and
Cemetery and is not comparable. Such combined financial data for the
predecessor operations has been included solely to facilitate a discussion of
the operations from period to period. Such presentation of the 1996 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.
 
                                       8
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth certain income statement data as a percentage
of sales for the Company and its predecessor operations.
 
<TABLE>
<CAPTION>
                                                          Years ended December
                                                                  31,
                                                          ----------------------
                                                                        Proforma
                                                                        Combined
                                                          1998   1997     1996
                                                          -----  -----  --------
   <S>                                                    <C>    <C>    <C>
   Sales and services:
    Funeral sales and services...........................  35.9%  41.6%   41.7%
    Cemetery sales and services..........................  54.3%  47.2%   44.5%
    Insurance commissions and other......................   9.8%  11.2%   13.8%
     Total sales and services............................ 100.0% 100.0%  100.0%
   Gross profit:
    Funeral sales and services...........................  83.6%  80.3%   69.8%
    Cemetery sales and services..........................  80.5%  85.2%   78.7%
     Total gross profit..................................  83.5%  84.8%   77.9%
   Selling, general and administrative expenses..........  55.7%  58.6%   72.8%
   Amortization..........................................   4.5%   5.4%    0.9%
   Interest expense......................................  19.8%  23.2%    7.1%
</TABLE>
 
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
 
  Consolidated revenues increased 18.3% to $83.6 million for the year ended
December 31, 1998 compared to $70.7 million for the year ended December 31,
1997.
 
 Funeral Operations:
 
  Revenue from funeral operations decreased slightly to $31.9 million in 1998
compared to $32.4 million in 1997. At-need funeral revenue increased by $0.6
million or 2.0% from 1997. At-need funeral services average revenue per case
increased 2.0% from the prior year. Total case count declined slightly to
8,939 in 1998 compared to 9,033 in 1997. Pre-need funeral service revenue
decreased from $2.6 million in 1997 to $1.6 million in 1998 or 38.5%. The
unfavorable variance is due to the change in pre-need insurance products in
April 1998.
 
  Income from operations for the funeral segment decreased from 39.3% to 35.3%
as a percentage of sales due primarily to the decline in pre-need insurance
commission revenue and related additional administrative costs incurred as a
result of the change in insurance products. The Company's strategy is to
increase commission income levels to previous years results. Subsequent to
year end the Company negotiated a new general agent insurance agreement with
its previous vendor.
 
 Cemetery Operations:
 
  Revenue from cemetery operations increased $13.0 million or 35.0% over last
year. All most half of the increase was due to an increase in pre-need
property sales which was largely due to an increase in average lot price
attributed to the sale of upscale properties. The remaining variance is due
primarily to an increase in pre-need merchandise and services sales volume.
 
  Income from operations for the cemetery segment increased from 32.7% to
37.6% as a percentage of related sales. Compared to 1997, the cemetery
operations experienced unfavorable variances in direct cemetery sales
commissions from 17% to 23% and cemetery merchandise costs from 9.1% to 13.7%.
These unfavorable variances were offset by an increase in prices and an
increase in leverage of existing fixed and semi-variable overhead.
 
  Corporate selling, general and administrative expense increased from $6.7
million to $7.4 million. The increase was due primarily to non-recurring legal
and related settlement costs. As a percentage of total revenue,
 
                                       9
<PAGE>
 
corporate selling, general and administrative expenses has decreased from 9.5%
for the year ended December 31, 1997 to 8.9% for the year ended December 31,
1998.
 
  EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales),
increased to $28.9 million for 1998 from $23.4 million for 1997. The increase
in EBITDA of $5.5 million was primarily a result of (i) an increase in pre-
need contract sales and (ii) 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.
 
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
  Consolidated revenues increased 41.4% to $70.7 million for the year ended
December 31, 1997 compared to $50.0 million for the year ended December 31,
1996. Approximately 47.9% of the increase was attributed to the Satellite
Properties, whose consolidated revenue was $11.2 million in 1997. Funeral
service revenues increased 36.6% to $28.5 million, and cemetery revenues
increased 54.0% to $34.2 million. The increase in funeral service revenue was
largely due to the acquisition of the Satellite Properties. Revenue from total
calls for Rose Hills is down 4% from last year. Cemetery sales increased due
to an increase in pre-need property sales which benefited from the expansion
of products offered on pre-need contracts, and the addition of over 120 new
sales counselors and telemarketing support.
 
  Selling, general, and administrative expense increased $5.0 million to $41.4
million for 1997 from $36.4 million for 1996. The largest component of the
increase, $3.2 million, is associated with the acquisition of the Satellite
Properties. The remainder of the increase was driven by an increase in
variable commission expenses for pre-need cemetery sales. As a percentage of
consolidated revenue, selling, general and administrative expense decreased to
58.6% for the year ended December 31, 1997 compared to 72.8% for 1996. The
decline is attributed to the absorption of the Satellite Property operations
within the existing Company corporate infrastructure and additional leverage
realized from the increase in pre-need property sales.
 
  Other revenues, which include financing, commission, Endowment Care Fund
("ECF") and management fee income increased from $6.9 million in 1996 to $7.9
million in 1997. In August 1996 the Rose Hills ECF changed its investment
strategy by increasing the percentage of fund assets invested in fixed income
securities, increasing earnings available to the Cemetery. ECF earnings
increased by $1.4 million and commission and finance income increased $0.3
million.
 
  Amortization and interest expense increased $3.3 million and $12.8 million,
respectively, for 1997 compared to 1996. Amortization, which includes
amortization of goodwill and covenants not to compete, and interest expense
increased as a result of the Acquisition Transaction.
 
  Income from operations increased to $14.7 million for the year ended
December 31, 1997 from $6.4 million for the year ended December 31, 1996.
EBITDA, earnings before interest, taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales),
increased to $23.4 million for 1997 from $8.6 million for 1996. Both the
increase in income from operations of $8.3 million and EBITDA of $14.8 million
were primarily a result of (i) an increase in pre-need contract sales (ii) an
increase in leverage of existing corporate overhead and (iii) the addition of
the Satellite Properties. EBITDA should not be considered in isolation, as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
 
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, to satisfy its contingent obligations and
to service its indebtedness.
 
                                      10
<PAGE>
 
As of December 31, 1998, the Company had net working capital of $2.5 million
and a current ratio of 1.12 compared to net working capital of $5.2 million
and current ratio of 1.34 at December 31, 1997.
 
  Net cash provided by operating activities was $4.1 million for the year
ended December 31, 1998, compared to $1.6 million for the same period in 1997.
The increase over 1997 is due to an increase in earnings and an increase in
accounts payable and accrued liabilities offset by an increase in accounts
receivable and other working capital charges.
 
  The primary uses of cash were for principal payments on outstanding long-
term indebtedness and capital expenditures as permitted under the terms of
bank agreements. The Company's capital expenditures in 1998 of approximately
$5.0 million were used primarily to develop and improve the existing
infrastructure and cemetery grounds, as well as the addition of rolling stock.
In addition to principal payments on outstanding long-term debt and capital
expenditures, cash was used to finance installment contracts receivable during
the ramp up of pre-need sales.
 
  Concurrent with the Acquisition Transaction, the Company entered into senior
secured amortization extended term loan facilities (the "Bank Term Facility")
in an aggregate principal amount of $75 million, the proceeds of which were
used to finance the Acquisition Transaction and related transaction costs, to
pre-fund certain capital expenditures and to refinance existing indebtedness
of the Company, and a senior secured revolving credit facility (the "Bank
Revolving Facility" collectively with the Bank Term Facility, the "Bank Credit
Facilities") in an aggregate principal amount of up to $25 million, the
proceeds of which are available for general corporate purposes and a portion
of which may be extended (as agreed upon) in the form of swing line loans or
letters of credit for the account of the Company. In addition, the Company has
the right, subject to certain conditions to performance tests, to increase the
Bank Term Facility by up to $25 million. Each of the Bank Term Facility and
the Bank Revolving Facility will mature on November 1, 2003. The Bank Term
Facility is payable, subject to certain conditions, in semi-annual
installments in the amounts of $1 million in each of the first three years
after the anniversary of the closing date of the Bank Term Facility (the "Bank
Closing"); $3 million in the fourth year after the Bank Closing; $7 million in
the fifth year after the Bank Closing; $9 million in the ninth year after the
Bank Closing and $53 million upon maturity of the Bank Term Facility. The
Revolving Credit Facility is payable in full at maturity, with no prior
amortization.
 
  All obligations under the Bank Credit Facilities and any interest rate
hedging agreements entered into with the lenders or their affiliates in
connection therewith are unconditionally guaranteed (the "Bank Guarantees")
jointly and severally, by RH Holdings and each of the Company's existing and
future domestic subsidiaries (the "Bank Guarantors"). All obligations of the
Company and the Bank Guarantors are secured by first priority security
interests in all existing and future assets (including real property located
at Rose Hills but excluding other real property and vehicles covered by
certificates of title) of the Company and the Bank Guarantors. In addition,
the Bank Credit Facilities are secured by a first priority security interest
in 100% of the capital stock of the Company and each subsidiary thereof and
all intercompany receivables.
 
  In connection with the Acquisition Transaction, the Company also issued
$80.0 million of 9 1/2% Senior Subordinated Notes due 2004, which were
exchanged in September 1997 for $80.0 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
$154.5 million as of December 31, 1998. The Company also has $25.0 million of
borrowing capacity under the Bank Revolving Facility. As of December 31, 1998,
the Company had $23.0 million available under the Bank Revolving Facility.
Management believes that, based upon current
 
                                      11
<PAGE>
 
levels of operations and anticipated growth and the availability under the
Bank Revolving Facility, it can adequately service its indebtedness. If the
Company cannot generate sufficient cash flow from operations or borrow under
the Bank Revolving Facility to meet such obligations, the Company may be
required to take certain actions, including reducing capital expenditures,
restructuring its debt, selling assets or seeking additional equity in order
to avoid an event of default under the Bank Credit Facilities. There can be no
assurance that such actions could be effected or would be effective in
allowing the Company to meet such obligations.
 
  The Company and its Subsidiaries are subject to certain restrictive
covenants contained in the indenture to the Notes (the "Indenture"),
including, but not limited to, covenants imposing limitations on the
incurrence of additional indebtedness; certain payments, including dividends
and investments; the creation of liens; sales of assets and preferred stock;
transactions with interested persons; payment restrictions affecting
subsidiaries; sale-leaseback transactions; and mergers and consolidations. In
addition, the Bank Credit Facilities contain certain restrictive covenants
that, among other things, limit the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes), pay dividends or make certain restricted
payments, create liens on assets, engage in mergers or acquisitions or enter
into leases or transactions with affiliates. As of December 31, 1998, the
Company was in compliance with the terms of the Indenture and the Bank Credit
Facilities.
 
  In December 1998, the Company completed the acquisition of one cemetery for
$0.8 million. Although the Company has no material commitments for capital
expenditures, the Company anticipates capital expenditures and acquisitions of
approximately $4.0 million for 1999, exclusive of any decision the Company
makes regarding the exercise of a land purchase option in connection with the
Acquisition Transaction.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
  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 American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1 in March 1998. SOP 98-1 establishes accounting standards
for costs of internal use software and is effective for financial statements
for fiscal years beginning after December 15, 1998. Management does not
anticipate that the adoption of SOP 98-1 will have a material effect on the
company's results of operations.
 
  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.
 
YEAR 2000
 
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.
 
 
                                      12
<PAGE>
 
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.
 
  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 third quarter 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>
                                                                       Expected
                                                           Evaluation Completion
   Function                                                 Complete     Date
   --------                                                ---------- ----------
   <S>                                                     <C>        <C>
   Financial Accounting and Reporting.....................    Yes      3Q 1999
   Funeral Home Operations................................    Yes      3Q 1999
   Cemetery Operations....................................    Yes      3Q 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 second 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 $0.7 million. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to be approximately $1.0 million. The
Company has expensed all internal costs related to the remediation of Year
2000 Issues.
 
  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
 
                                      13
<PAGE>
 
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. 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.
 
FORWARD-LOOKING STATEMENTS
 
  Certain statements in this Form 10-K include "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical facts included herein, including, without
limitation, the statements under Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" regarding the Company's
financial position, its plans to increase revenues, reduce general and
administrative expense, take advantage of synergies, make capital
expenditures, address Y2K issues, and the Company's ability to service its
indebtedness, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed herein, including, without limitation, in conjunction with the
forward-looking statements included herein.
 
  All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
 
Cautionary Statements
 
  The Company cautions readers that the following important factors, among
other, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the
 
                                      14
<PAGE>
 
Company's actual consolidated results in the future to differ materially from
the goals and expectations expressed elsewhere herein.
 
    a) Maintaining current revenue levels and achieving future growth depends
  in part on sustaining the current level of pre-need cemetery sales and
  maintaining funeral market share. Several important factors, among others,
  affect the Company's ability to sustain and grow revenue:
 
    1. The volume and prices of properties, products and services sold.
 
      The inability of the Company to increase volume and prices could
    affect the Company's ability to increase revenue in the future. The
    ability to achieve volume and price increases at Rose Hills and other
    Company locations depends on several factors including local
    competition, death rates, changes in consumer buying patterns and
    economic conditions.
 
    2. Performances of endowment care and trust funds.
 
      The Company includes earnings from endowment care and trust funds in
    its results of operations. Although substantially all of these funds
    are invested in fixed income securities, the performance of these funds
    is subject to market conditions beyond the control of the Company.
 
    3. The level of prearranged funeral sales in prior periods.
 
      The level of prearranged funeral sales in prior periods may affect
    future revenues. The Company's inability to maintain and increase
    prearranged funeral sales could impact future revenues. The ability to
    maintain and increase the level of prearranged funeral sales may be
    adversely affected by such factors as competition and general economic
    conditions affecting individual discretionary income.
 
    b) In addition to the factors discussed above, earnings may be affected
    by other factors such as:
 
    1.  The ability of the Company to manage its growth in terms of
        implementing internal controls and information gathering systems,
        and retaining or attracting key personnel, among other things.
 
    2.  The amount and rate of growth in the Company's general and
        administrative expenses.
 
    3.  Changes in interest rates, which can increase or decrease the
        amount the Company pays on borrowings with variable rates of
        interest.
 
    4.  The impact on the Company's financial statements of nonrecurring
        accounting charges that may result from the Company's ongoing
        evaluation of its business strategies, asset valuations and
        organizational structures.
 
    5.  Changes in government regulation, including tax rates and their
        effects on corporate structure.
 
    6.  Changes in inflation and other general economic conditions,
        affecting financial markets (e.g. marketable security values as
        well).
 
    7.  Unanticipated legal proceedings and unanticipated outcomes of legal
        proceedings.
 
    8.  Changes in accounting policies and practices adopted voluntarily or
        required to be adopted by generally accepted accounting principles.
 
    9.  The ability of the Company and its significant vendors, financial
        institutions and insurers to achieve Year 2000 compliance on a
        timely basis.
 
  The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or
any other forward-looking statements made by or on behalf of the Company.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
  The Company's market risk is impacted by changes in interest rates. Pursuant
to the Company's policies, derivative financial instruments may be utilized to
reduce the impact of adverse changes in interest rates. The
 
                                      15
<PAGE>
 
Company does not use derivative instruments for speculation or trading
purposes, and has no material sensitivity to changes in market rates and
prices on its derivative financial instrument positions. The Company has
market risk in interest rate exposure, but manages the exposure through its
interest rate Collar Agreements which effectively set maximum and minimum
interest rates on the $75.0 million of senior debt.
 
  The Company has entered into interest rate collar agreements, which
effectively set maximum and minimum interest rates on the principal amount of
Senior Debt, ranging from a floor of 5.5% (the Company would pay 5.5% even if
rates fall below that level) to a maximum or cap of 6.5% for the period
commencing January 2, 1997 through December 1, 2000. The collar agreement is
based on three-month LIBOR. The fair value of the collar agreement at December
31, 1998 and 1997, as estimated by a dealer, was a favorable $808,000 and
$7,000, respectively.
 
  The counterparty to these contractual relationships is a major financial
institution with which the Company has other financial relationships. The
Company is exposed to credit losses in the event of nonperformance by the
other parties to the interest rate collar agreements. However, the Company
does not anticipate nonperformance by the other party, and no material loss
would be expected from nonperformance of such counterparty.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
  See Item 14(a).
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
  None.
 
                                      16
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
  The Company's current executive officers and directors, and their ages as of
March 24, 1999, are as follows:
 
<TABLE>
<CAPTION>
               Name                Age                           Position
               ----                ---                           --------
<S>                                <C> <C>
Gary P. Baker ...................   51 Senior Vice President, Operations
 
Chinh E. Chu ....................   32 Director
 
Kimberley K. Cleaver ............   34 Senior Vice President, Sales
 
David I. Foley ..................   31 Director
 
Howard A. Lipson.................   35 Director
 
Dennis C. Poulsen ...............   56 Chairman of the Board, Director
 
Paul Wagler .....................   52 Director
 
Dillis R. Ward ..................   62 President and Chief Executive Officer, Director
 
Michael G. Weedon................   46 Director
 
Kenton C. Woods .................   44 Senior Vice President of Finance and Chief Financial Officer,
                                        Secretary and Treasurer
</TABLE>
 
  The business experience of each of the executive officers and directors is
set forth below.
 
  Gary P. Baker is the Senior Vice President, Operations for Rose Hills
Company. Mr. Baker has over 30 years of service to Rose Hills in all aspects
of funeral service.
 
  Chinh E. Chu is a Managing Director of The Blackstone Group L.P., which he
joined in 1990. Prior to joining Blackstone, Mr. Chu was a member of the
Mergers and Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990. He
currently serves on the Board of Directors of Prime Succession Inc.
 
  Kimberley K. Cleaver joined the Company as Executive Vice President, Sales
in November of 1997. Prior to that, Ms. Cleaver served in senior management
positions with Stewart Enterprises, Inc. in Texas.
 
  David I. Foley is a Vice President at The Blackstone Group L.P., which he
joined in 1995. Prior to joining Blackstone, Mr. Foley was a member of AEA
Investors, Inc. and The Monitor Company.
 
  Howard A. Lipson is Senior Managing Director of The Blackstone Group L.P.,
which he joined in 1988. Prior to joining Blackstone, Mr. Lipson was a member
of the Mergers and Acquisitions Group of Salomon Brothers Inc. He currently
serves on the Board of Directors of UCAR International Inc., Volume Services,
Inc., AMF Group Inc., Ritvik Holdings, Inc., and Prime Succession Inc.
 
  Dennis C. Poulsen became the Chairman of the Company November 19, 1996. Mr.
Poulsen joined Rose Hills in 1981 and became President in 1984. Prior to
joining the Company, Mr. Poulsen was employed by INA Corporation and
Transamerica Corporation, and is a past director of the American Cemetery
Association. Mr. Poulsen is a member of the American, California and Los
Angeles Bar Associations. His community activities include serving as a
director and Chairman of the Los Angeles Chamber of Commerce in 1997.
 
  Paul Wagler is Executive Vice President Operations and Chief Operating
Officer of the Loewen Group, Inc. since November 1998. Prior to that time Mr.
Wagler was Senior Vice President, Finance and Chief Financial Officer of
Loewen.
 
  Dillis R. Ward became the President of the Company effective October 1,
1997. On August 11, 1998 he became Chief Executive Officer. Prior to this, Mr.
Ward was a Regional President, West Region of Loewen effective August 1, 1996.
 
                                      17
<PAGE>
 
  Michael Weedon is Executive Vice President and Chief Administrative Officer
of the Loewen Group, Inc. Mr. Weedon joined Loewen in November 1997. Prior to
joining Loewen Mr. Weedon served as Executive Vice President and Chief
Operating Officer of Viridian Inc. (formerly Sherritt Inc.) in Edmonton,
Alberta and Chief Executive Officer of Epton Industries Inc., in Kitchener,
Ontario.
 
  Kenton C. Woods became Senior Vice President and Chief Financial Officer in
May 1997. Prior to that, Mr. Woods served in senior financial positions at
Baskin-Robbins including Vice President-Finance and Chief Financial Officer.
Mr. Woods also spent 10 years with KPMG LLP.
 
  Under the Shareholders' Agreement described in Item #13 below, Blackstone
and Loewen have the right to designate five and three nominees, respectively,
to the Board of Directors of RH Holdings. Blackstone designated Messrs. Chu,
Foley, Lipson and Ward and Loewen designated Messrs. Wagler, Weedon and
Poulsen. Both Blackstone and Loewen have the right to designate one additional
director. Each of Blackstone's and Loewen's nominees to the RH Holdings Board
is also a member of the Company's Board of Directors.
 
  Directors of the Company will receive no compensation for their service as
Directors or for service on committees of the Board except for the
reimbursement of expenses.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
Summary Compensation Table
 
  The following table sets forth for the fiscal year ended December 31, 1998
the compensation paid by the Company to its Chief Executive Officer and each
of the other most highly compensated executive officers of the Company (c):
 
<TABLE>
<CAPTION>
                                                                       (a)
                                                                    All Other
          Name and Principal Position        Year  Salary   Bonus  Compensation
          ---------------------------        ---- -------- ------- ------------
   <S>                                       <C>  <C>      <C>     <C>

   Dillis E. R. Ward........................ 1998 $257,692 106,250    3,287
    President & Chief Executive Officer,     1997 $ 15,348     --       --
    Director                                 
 
   Kenton C. Woods.......................... 1998 $161,088  65,952    2,102
    Senior Vice President & Chief Financial  1997 $ 89,108  24,052       26
    Officer                                  
 
   Gary P. Baker ........................... 1998 $122,635  26,563    2,288
    Senior Vice President--Operations        1997 $100,000  15,000    2,288
 
   Kimberley K. Cleaver .................... 1998 $439,479     --     2,050
    Senior Vice President--Sales             1997 $ 60,390     --       --
</TABLE>
--------
(a) Consists of our contributions to the accounts of the named executive
    officers in our defined contribution plan, respectively: Mr. Ward, Mr.
    Woods, Mr. Baker and Ms. Cleaver each received $2,000 in 1998.
    Additionally, amounts shown include life insurance premiums. Mr. Baker is
    a participant in the defined benefit plan that has been frozen since
    December 31, 1996.
 
Employment Agreements
 
  The Company has entered into employment agreements with Mr. Ward and Mr.
Woods. Mr. Ward's agreement calls for an annual salary of $250,000, with
annual increases at the discretion of the Board, plus an annual cash bonus
based on Company performance. Mr. Woods' agreement provides for an annual
salary of $160,000 with annual increases at the discretion of the Board plus
an annual cash bonus based on Company performance. Both Mr. Ward and Mr. Woods
employment agreements also provide that if either is terminated without
"cause" (as defined in the agreement) the executive will receive a multiple of
his annual salary (Mr. Ward two years and Mr. Woods one year) plus a portion
of the annual bonus depending what time the termination became effective
during the year. Mr. Ward's agreement provides he will be entitled to a long-
term incentive bonus at any time that Loewen purchases all of the shares of
common stock of Rose Hills Holdings
 
                                      18
<PAGE>
 
Corp. owned by Blackstone, provided that certain EBITDA targets are achieved.
Such bonus will equal $500,000 if such purchase occurs prior to 2002 and will
be increased by $100,000 each year thereafter up to a maximum of $900,000.
 
  The Company has also entered into an employment agreement with Ms. Cleaver
which provides for an annual salary of $250,000, plus a monthly override based
on gross sales.
 
  Effective January 1, 1999 the Board extended Mr. Poulsen's term as Chairman
through December 31, 1999. Concurrent with his extension, the Company extended
his consulting agreement which calls for the payment of up to $100,000 during
1999, including certain expenses. In addition, Mr. Poulsen is a participant in
the Company's Supplemental Employee Retirement Plan.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
  The Company is a direct, wholly-owned subsidiary of RH Holdings. The
following table sets forth certain information as of March 24, 1999 regarding
the beneficial ownership of the common stock of RH Holdings:
 
<TABLE>
<CAPTION>
                                                          Number  Percentage of
                                                            of        Owner
   Name and Address of Beneficial Owner                   Shares  Common Stock
   ------------------------------------                   ------- -------------
   <S>                                                    <C>     <C>
   Blackstone entities(1)(6)............................. 795.455     79.55%
   Loewen Group International, Inc.(2)................... 204.545     20.45%
   Chinh E. Chu(3).......................................     --        --
   David I. Foley(3).....................................     --        --
   Howard A. Lipson(3)...................................     --        --
   Paul Wagler(4)........................................     --        --
   Michael Weedon(4).....................................     --        --
   Dennis C. Poulsen(5)..................................     --        --
   Dillis R. Ward(5).....................................     --        --
   All directors and executive officers as a group(6)....     --        --
</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 Item 10 above. Each such person's business
    address is c/o The Blackstone Group L.P., 345 Park Avenue, New York, N.Y.
    10154.
(4) Messrs. Wagler and Weedon are affiliated with Loewen in the capacity
    described under Item 10 above. Each such person's business address is c/o
    The Loewen Group Inc., 4126 Norland Avenue, Burnaby, B.C. V5G 3S8.
(5) Mr. Poulsen's and Mr. Ward's business address is c/o Rose Hills Company,
    3888 South Workman Mill Road, Whittier, CA 90601.
(6) Cetain officers of the Issuer hold a limited partnership interest in RHI
    Management Direct L.P. ("RHIMD"), which is the holder of 10.2273 shares
    (approximately 1.02%) of RH Holdings common stock; however, such officers
    do not have voting or dispositive power with respect to such shares. A
    Blackstone entity, PSI P&S Corp, is the general partner of RHIMD.
 
 
                                      19
<PAGE>
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  The summaries of the Shareholders' Agreement, the Put/Call Arrangement and
the Administrative Services Agreement set forth below do not purport to be
complete and are qualified in their entirety by reference to all the
provisions of the Stock Purchase Agreement, the Stockholders' Agreement, the
Put/Call Agreement and the Administrative Services Agreement, respectively.
Copies of the Stock Purchase Agreement, the Stockholders' Agreement, the
Put/Call Agreement and the Administrative Services Agreement are incorporated
as exhibits to this Annual Report on Form 10-K.
 
Shareholders' Agreement
 
  In connection with the Acquisition Transaction, Blackstone, LGII and LN Sub
entered into an agreement (the "Shareholders' Agreement") setting forth
certain of their rights and obligations as shareholders of RH Holdings.
 
  The Shareholders' Agreement provides that, subject to the Put/Call Agreement
referred to below, none of the shareholders is permitted to transfer any of
its respective shares of common or preferred stock of RH Holdings ("RH
Holdings Common Stock") without the others' prior written consent, subject to
certain exceptions.
 
  Under the terms of the Shareholders' Agreement, Blackstone and LGII have the
right to designate five and three nominees as directors, respectively, to the
Board of Directors of RH Holdings (the "Board'). Each of Blackstone and LGII
further agreed (i) to vote all of its shares of RH Holdings Common Stock to
ratify and adopt any and all actions adopted or approved by the Board and (ii)
subject to certain exceptions related to the election and removal of
directors, not to vote any of its shares of RH Holdings Common Stock in favor
of any resolution, give any consent with respect to any matter or take any
other action as a stockholder of RH Holdings unless such resolution, matter or
other action first shall have been adopted or approved by the Board and
recommended by it for adoption, approval or consent by the shareholders. In
addition, the By-Laws of RH Holdings provide that certain actions by or with
respect to RH Holdings will require the unanimous consent of the Board. See
"--Certain Matters Subject to Supermajority Vote.'
 
  In addition, in the event that Loewen owns, operates or controls any funeral
home or cemetery within 20 miles of any other funeral home or cemetery owned
by the Company, Loewen has an option, exercisable for the succeeding 12
months, to either sell such properties to a third party or transfer such
properties to the Company (free of indebtedness for borrowed money) in
exchange for additional equity in RH Holdings.
 
  The Shareholders' Agreement will terminate following the exercise by either
Blackstone or LGII of its option pursuant to the Put/Call Agreement or on such
other date as the parties may agree.
 
Put/Call Arrangement
 
  Pursuant to a separate agreement among Blackstone, LWN, LGII and LN Sub (the
"Put/Call Agreement"), (i) LGII has a call option, exercisable from and after
the fourth anniversary of the Acquisition Closing Date until but excluding the
sixth anniversary of the Acquisition Closing Date, to purchase all of
Blackstone's shares of RH Holdings Common Stock (the "Call Option") and (ii)
Blackstone has a put option, exercisable from and after the sixth anniversary
of the Acquisition Closing Date until but excluding the eighth anniversary of
the Acquisition Closing Date, to require LGII to purchase Blackstone's shares
of RH Holdings Common Stock (the "Put Option"). The option price in either
case is derived from a formula based on EBITDA. The performance by LGII of its
obligations under the Put/Call Agreement is guaranteed by LWN.
 
  By virtue of the Put/Call Agreement, the Company may eventually become a
wholly-owned subsidiary of Loewen. There can be no assurance, however, that
either the Call Option or the Put Option will be exercised.
 
  The exercise of either the Call Option or the Put Option will not give rise
to a Change of Control under the Indenture.
 
                                      20
<PAGE>
 
Certain Matters Subject to Supermajority Vote
 
  The By-Laws of RH Holdings provide that the following matters require the
unanimous approval of the Board of Directors: (1) amendments to the
Certificate of Incorporation or By-Laws of RH Holdings; (2) transactions
involving the merger, consolidation or sale of substantially all of the assets
of RH Holdings; (3) the declaration or payment of any cash dividend or other
distribution to the shareholders of RH Holdings (other than payments pursuant
to the Administrative Services Agreement or payment of the monitoring fee to
Blackstone described below under "--Payment of Certain Fees and Expenses;');
and (4) issuances of additional shares of capital stock, except for issuances
to third parties and issuances of additional shares of capital stock to the
extent they are required to be issued to cure or prevent an event of default
or failure of any financial covenants under the Bank Credit Agreement.
 
Administrative Services Agreement
 
  In connection with the Acquisition, the Company engaged Loewen to provide
certain administrative services and share certain resources (Loewen, in such
capacity, being the "Administrative Services Provider") pursuant to the
Administrative Services Agreement. Pursuant to the Administrative Services
Agreement, Loewen has undertaken some of the Company's administrative
functions, including: accounting services, computer, telecommunications,
general operations support, legal services, environmental compliance,
regulatory compliance, employee training and corporate development. In
addition, Loewen currently provides management expertise in planning MIS,
sales, tax, and fund management strategy. The Company also benefits under the
Administrative Services Agreement from access to some of Loewen's vendor
agreements.
 
  As compensation for services provided under the Administrative Services
Agreement, the Administrative Services Provider is entitled to receive from
the Company, a fee (the "Administrative Services Fee") payable monthly in
arrears and in an aggregate annual amount equal to $334,000 for the first year
following the Acquisition Closing Date and $250,000 for the second year
following the Acquisition Closing Date, to be increased by 2.5% for each year
thereafter until the termination of the Administration Services Agreement. The
Company is also generally required to reimburse the Administrative Services
Provider for all out-of-pocket costs and expenses incurred by it from third
parties in connection with performing the administrative services described in
the Administrative Services Agreement.
 
  The Administrative Services Agreement is subject to termination
automatically upon closing following the exercise of the Call Option or the
Put Option and at the option of the Company under certain other circumstances,
including the failure of Loewen to fully exercise the options set forth in the
fourth paragraph under "Shareholders' Agreement' above.
 
Payment of Certain Fees and Expenses
 
  From the Acquisition Closing Date until the date on which Loewen or
Blackstone exercises the Call Option or the Put Option, respectively, pursuant
to the Put/Call Agreement, an affiliate of Blackstone will receive a
monitoring fee equal to $250,000 per annum (as such fee may be increased to
account for inflation) from the Company.
 
Formation of RHIMD; Loans to Management
 
  In connection with the Acquisition, on the Acquisition Closing Date, RHIMD
purchased approximately 1.02% of the RH Holdings common stock (the "RHIMD-
Owned Stock"). Limited partnership interests in RHIMD has subsequently been
allocated to certain officers of the Company (and "RHIMD Limited Partners").
 
  In order to effect such purchase, on the Acquisition Closing Date, the
Company made a loan to RHIMD which is evidenced by a note bearing interest at
an annual rate of 9% and secured by the RHIMD-Owned Stock. RHIMD is deemed to
have made loans to each of the RHIMD Limited Partners in connection with their
subscription for limited partnership interests in RHIMD. The loan to certain
officers of the Company is evidenced by a note bearing interest at an annual
rate of 9% and secured by their limited partnership interest in RHIMD.
 
                                      21
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
(a) Documents filed as a part of this report:
 
1. Financial Statements
 Index to Financial Statements
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
ROSE HILLS COMPANY CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report..............................................   25
Consolidated Balance Sheets as of December 31, 1998 and 1997..............   26
Consolidated Statements of Operations for the Years ended December 31,
 1998 and 1997 and the Period from November 19, 1996 to December 31,
 1996.....................................................................   27
Consolidated Statements of Cash Flows for the Years ended December 31,
 1998 and 1997 and the Period from November 19, 1996 to December 31,
 1996.....................................................................   28
Consolidated Statements of Stockholder's Equity for the Years ended
 December 31, 1998 and 1997 and the Period from November 19, 1996 to
 December 31, 1996........................................................   29
Notes to Consolidated Financial Statements................................   30

ROSES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
 (PREDECESSOR MORTUARY)
Independent Auditors' Report..............................................   49
Consolidated Statement of Operations for the Period from January 1, 1996
 to November 18, 1996.....................................................   50
Consolidated Statement of Cash Flows for the Period from January 1, 1996
 to November 18, 1996.....................................................   51
Consolidated Statement of Shareholders' Equity (Deficit) for the Period
 from January 1, 1996 to November 18, 1996................................   52
Notes to Consolidated Financial Statements................................   53

ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 COMBINED FINANCIAL STATEMENTS (PREDECESSOR CEMETERY)
Independent Auditors' Report..............................................   59
Combined Statement of Activities for the Period from January 1, 1996 to
 November 18, 1996........................................................   60
Combined Statement of Changes in Net Assets for the Period from January 1,
 1996 to November 18, 1996................................................   61
Combined Statement of Cash Flows for the Period from January 1, 1996 to
 November 18, 1996........................................................   62
Notes to Combined Financial Statements....................................   63

2. Financial Statement Schedule
  Schedule II--Valuation and Qualifying Accounts..........................   71
</TABLE>
 
                                       22
<PAGE>
 
(b) Exhibits
 
<TABLE>
<CAPTION>
   Exhibit
   Number  Description
   ------- -----------
   <C>     <S>
    2.1*   --Asset Purchase Agreement, dated as of September 19, 1996, by and
             between and between Rose Hills Memorial Park Association and Tudor
             Acquisition Corp. (now known as the Rose Hills Company).
 
    2.2*   --Agreement and Plan of Merger, dated as of September 19, 1996, by
             and among the stockholders of Roses, Inc. And Tudor Acquisition
             Corp. (now known as the Rose Hills Company).
 
    2.3*   --Amendment to the Agreement and Plan of Merger dated as of November
             18, 1996 by and among Rose Hills Acquisition Corp. (now known as
             Rose Hills Company), Roses Inc., the Stockholders of Roses Inc.,
             and RH Mortuary Corporation.
 
    3.1*   --Restated Certificate of Incorporation of Tudor Acquisition Corp.
             changing its name to Rose Hills Acquisition Corp.
 
    3.2*   --Certificate of Amendment of Certificate of Incorporation of Rose
             Hills Acquisition Corp. changing its name to Rose Hills Company.
 
    3.3*   --Amended and Restated By-Laws of Rose Hills Company.
 
    4.1*   --Indenture dated as of November 15, 1996 between Rose Hills
             Acquisition Corp. and United States Trust Company of New York, as
             Trustee.
 
    4.2*   --Form of 9.5% Senior Subordinated Note due 2004 (included in
             Exhibit 4.1).
 
   10.1*   --Stockholders' Agreement dated as of November 19, 1996 among Rose
             Hills Holdings Corp., Blackstone Capital Partners II Merchant
             Banking Fund L.P., Blackstone Rose Hills Offshore Capital Partners
             L.P., Blackstone Family Investment Partnership II L.P., Roses
             Delaware, Inc., Loewen Group International, Inc., and RHI
             Management Direct L.P.
 
   10.2*   --Administrative Services Agreement dated as of November 19, 1996
             between Rose Hills Acquisition Corp. (now known as Rose Hills
             Company), The Loewen Group, Inc., and Loewen Group International
             Inc.
 
   10.3*   --Credit Agreement dated as of November 19, 1996 among Rose Hills
             Company, Rose Hills Holdings Corp., Goldman, Sachs & Co., as
             syndication agent and arranging agent, the financial institutions
             from time to time parties thereto as lenders and The Bank of Nova
             Scotia, as administrative agent for such lenders.
 
   10.4*   --Put/Call Agreement, dated as of November 19, 1996 among Blackstone
             Capital Partners II Merchant Banking Fund L.P., Blackstone Rose
             Hills Offshore Capital Partners L.P., Blackstone Family Investment
             Partnership II L.P., Roses Delaware, Inc., Loewen Group
             International, Inc., The Loewen Group Inc., and RHI Management
             Direct L.P.
 
   10.5*   --Buddhist Memorial Complex Development and Use Agreement dated as
             of March 1, 1994 between Rose Hills Memorial Park Association and
             International Buddhist Progress Society.
 
   10.6*   --First Amendment to Buddhist Memorial Complex Development and Use
             Agreement, dated as of September 1, 1994 between Rose Hills
             Memorial Park Association and International Buddhist Progress
             Society.
 
   10.7*   --Second Amendment to Buddhist Memorial Complex Development and Use
             Agreement, dated as of March 15, 1995 between Rose Hills Memorial
             Park Association and International Buddhist Progress Society.
</TABLE>
 
                                       23
<PAGE>
 
 
 
<TABLE>
<CAPTION>
   Exhibit
    Number  Description
   -------  -----------
   <C>      <S>
   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**  --Employment Agreement, dated July 10, 1998 by and between Rose
              Hills Company and Dillis R. Ward.
 
   10.12*** --Employment Agreement, dated December 1, 1998 by and between Rose
              Hills Company and Kenton C. Woods.
 
   10.13*** --Employment Agreement, dated December 1, 1998 by and between Rose
              Hills Company and Gary P. Baker.
 
   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***    --Statement re Computation of Earnings to Fixed Charges Ratio.
 
   21***    --Subsidiaries of Rose Hills Company (formerly known as Rose Hills
              Acquisition Corp.).
 
   27***    --Financial Data Schedule
</TABLE>
 
(c) Reports on Form 8K
 
  None
--------
  *Incorporated by reference to the Exhibits to the Company's Registration
   Statement on Form S-4 (Registration No. 333-21411).
 
 **Incorporated by reference from Rose Hills' Report on Form 10-Q for the
   quarter ended September 30, 1998, filed on November 5, 1998.
 
***Filed Herewith.
 
                                       24
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Rose Hills Company:
 
  We have audited the consolidated financial statements of Rose Hills Company
and subsidiaries (a wholly owned subsidiary of Rose Hills Holdings Corp.) as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Rose Hills Company and subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997 and period from November 19, 1996 to December 31,
1996 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
 
                                          KPMG LLP
 
Los Angeles, California
February 19, 1999
 
                                      25
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1998 and 1997
                      (In thousands, except share amounts)
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                             --------  -------
                           ASSETS
<S>                                                          <C>       <C>
Current assets:
 Cash and cash equivalents ................................. $  1,645    3,462
 Accounts receivable, net of allowances ....................   11,601    8,606
 Inventories ...............................................      979      875
 Prepaid expenses and other current assets .................    4,701    2,799
 Deferred tax asset ........................................    4,085    4,658
                                                             --------  -------
    Total current assets ...................................   23,011   20,400
Long-term receivables, net of allowances ...................   18,501    7,346
Cemetery property, at cost .................................   75,318   76,778
Property and equipment, net ................................   65,978   64,101
Goodwill ...................................................  124,877  128,200
Deferred finance charges ...................................    9,036   10,672
Other assets ...............................................    5,212    5,101
                                                             --------  -------
    Total assets ........................................... $321,933  312,598
                                                             ========  =======
            LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
 Accounts payable and accrued liabilities .................. $ 15,838   11,394
 Other current liabilities .................................    2,517    1,459
 Current portion of long-term debt .........................    2,133    2,368
                                                             --------  -------
    Total current liabilities ..............................   20,488   15,221
Retirement plan liabilities ................................    7,147    7,389
Deferred tax liability .....................................    6,455    5,122
Subordinated notes payable .................................   80,000   80,000
Bank senior-term loan ......................................   71,507   72,500
Other long-term debt .......................................    2,070    2,415
Other liabilities ..........................................    5,974    2,693
                                                             --------  -------
    Total liabilities ......................................  193,641  185,340
                                                             --------  -------
Commitments and contingencies
Stockholder's equity:
 Common stock, par value of $.01. Authorized and outstanding
  1,000 shares .............................................      --       --
 Additional paid-in capital ................................  129,554  129,554
 Accumulated deficit .......................................   (1,262)  (2,296)
                                                             --------  -------
    Total stockholder's equity .............................  128,292  127,258
                                                             --------  -------
    Total liabilities and stockholder's equity ............. $321,933  312,598
                                                             ========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       26
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
  Years ended December 31, 1998 and 1997 and for the period from November 19,
                           1996 to December 31, 1996
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                      1998     1997     1996
                                                    --------  -------  ------
<S>                                                 <C>       <C>      <C>
Sales and services:
 Funeral sales and services........................ $ 30,030   29,419   3,594
 Cemetery sales and services.......................   45,383   33,318   2,544
 Insurance commissions and other income............    8,164    7,908     942
                                                    --------  -------  ------
    Total sales and services.......................   83,577   70,645   7,080
                                                    --------  -------  ------
Cost of sales and services:
 Funeral sales and services........................    4,936    5,799     718
 Cemetery sales and services.......................    8,827    4,946     380
                                                    --------  -------  ------
    Total cost of sales and services...............   13,763   10,745   1,098
                                                    --------  -------  ------
    Gross profit...................................   69,814   59,900   5,982
Selling, general and administrative expenses.......   46,524   41,386   4,284
Amortization of purchase price in excess of net
 assets acquired and other intangibles.............    3,752    3,776     371
                                                    --------  -------  ------
    Income from operations.........................   19,538   14,738   1,327
Other expense--interest expense....................  (16,519) (16,411) (2,015)
                                                    --------  -------  ------
    Income (loss) before taxes.....................    3,019   (1,673)   (688)
Income tax expense (benefit).......................    1,985       95    (160)
                                                    --------  -------  ------
    Net income (loss).............................. $  1,034   (1,768)   (528)
                                                    ========  =======  ======
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       27
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
 
  Years ended December 31, 1998 and 1997 and for the period from November 19,
                           1996 to December 31, 1996
                    (In thousands except for share amounts)
 
 
<TABLE>
<CAPTION>
                                                                     Total
                           Shares      Additional    Accumulated Stockholder's
                         outstanding paid-in 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
Net loss................      --             --         (1,768)      (1,768)
                            -----       --------       -------     --------
Balance, December 31,
 1997...................    1,000        129,554        (2,296)     127,258
Net income..............      --             --          1,034        1,034
                            -----       --------       -------     --------
Balance, December 31,
 1998...................    1,000       $129,554       $(1,262)    $128,292
                            =====       ========       =======     ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       28
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  Years ended December 31, 1998 and 1997 and for the period from November 19,
                           1996 to December 31, 1996
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                      1998     1997     1996
                                                     -------  ------  ---------
<S>                                                  <C>      <C>     <C>
Cash flows from operating activities:
 Net income (loss).................................  $ 1,034  (1,768)      (528)
                                                     -------  ------  ---------
 Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
  Depreciation and amortization....................    8,603   7,712      1,013
  Amortization of cemetery property................    2,615   2,451        366
  Provision for bad debts and sales cancelation....    3,011   1,959         62
  Provision for deferred taxes.....................    1,906      81       (161)
  Loss on disposal of property, plant and
   equipment.......................................        9     --         --
  Changes in assets and liabilities, net of effects
   of Acquisition Transaction:
  Increase in accounts receivable..................  (17,046) (4,537)       (96)
  Increase in inventories..........................      (99)     (6)      (110)
  Increase in prepaid expenses and other current
   assets..........................................   (1,902)   (133)    (1,927)
  Increase (decrease) in accounts payable and
   accrued liabilities.............................    4,401  (3,676)     8,142
  Decrease in retirement plan liabilities..........     (242)   (227)      (992)
  Decrease (increase) in other assets and
   liabilities.....................................    1,780    (251)      (631)
                                                     -------  ------  ---------
    Total adjustments..............................    3,036   3,373      5,666
                                                     -------  ------  ---------
    Net cash provided by operating activities......    4,070   1,605      5,138
                                                     -------  ------  ---------
Cash flows from investing activities:
 Capital expenditures..............................   (5,080) (2,138)      (279)
 Cash paid for acquisitions, net of cash received..     (776)    --    (246,345)
 Proceeds from disposal of property................       39     --         --
 Additions to goodwill.............................      --     (522)       --
                                                     -------  ------  ---------
    Net cash used in investing activities..........   (5,817) (2,660)  (246,624)
                                                     -------  ------  ---------
Cash flows from financing activities:
 Proceeds from issuance of common stock to Parent..      --      --     106,554
 Proceeds from (repayments of) borrowings under
  Bank Credit Agreement............................      507  (1,500)    75,000
 Proceeds from subordinated notes payable..........      --      --      80,000
 Decrease in other long-term debt..................      (51)   (597)       --
 Addition to deferred finance charges..............      --     (934)   (12,074)
 Principal payments of capital lease obligations...     (526)   (352)       (94)
                                                     -------  ------  ---------
    Net cash (used in) provided by financing
     activities....................................      (70) (3,383)   249,386
                                                     -------  ------  ---------
    Net (decrease) increase in cash and cash
     equivalents...................................   (1,817) (4,438)     7,900
Cash and cash equivalents at beginning of period...    3,462   7,900        --
                                                     -------  ------  ---------
Cash and cash equivalents at end of period.........  $ 1,645   3,462      7,900
                                                     =======  ======  =========
Supplemental disclosures of cash flow information:
 Cash paid during the period for:
  Interest.........................................  $14,730  15,217         35
  Income taxes.....................................      859   1,219        --
                                                     =======  ======  =========
 Noncash financing activities:
  Acquisition of affiliate properties, contributed
   capital.........................................      --      --      23,000
                                                     =======  ======  =========
 Acquisition of businesses:
  Cash paid for acquisitions.......................      776     --     247,968
  Cash acquired from acquisitions..................      --      --      (1,623)
                                                     -------  ------  ---------
    Cash paid for acquisitions, net of cash
     received......................................  $   776     --     246,345
                                                     =======  ======  =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       29
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
           (A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) Description of Business and Basis of Presentation
 
  The December 31, 1998 consolidated financial statements of Rose Hills
Company and subsidiaries (collectively the Company) (a wholly owned subsidiary
of Rose Hills Holding Corp.) (RH Holdings) include the accounts of RH Mortuary
Corporation (the Mortuary), RH Satellite Properties Corporation (the Satellite
Properties) and RH Cemetery Corporation (the Cemetery). The Company is the
successor to the operations of Roses, the Association and the Satellite
Properties, as described below under Acquisition Transaction. The Company had
no prior operations. RH Holdings was formed by Blackstone Capital Partners II
Merchant Banking Fund L.P. and affiliates (Blackstone), RHI Management Direct
L.P. (RHIMD) and the Loewen Group Inc. and affiliates (Loewen) (collectively
the Buyers), in order to purchase certain mortuary and cemetery operations
(the Acquisition Transaction) as discussed below.
 
  The Company operates 14 funeral homes, 3 funeral home and cemetery
combination properties and 1 cemetery property in the Southern California
area. Services offered at the locations include cemetery interment and
professional mortuary services, both of which include pre-need and at-need
sales. In addition, the Company offers for sale caskets, memorials, vaults,
flowers and the sale of pre-need funeral insurance from which commissions are
earned.
 
  The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and the prevailing practices within the
cemetery and mortuary industry. All significant intercompany accounts and
transactions have been eliminated.
 
 Acquisition Transaction
 
  In connection with the Acquisition Transaction, Blackstone, RHIMD and Loewen
contributed to RH Holdings and RH Holdings contributed to the Company $106.6
million in cash ($107 million less $.4 million to be advanced by the Company
to RHIMD to finance its purchase of common stock of RH Holdings).
 
  Additionally, effective November 19, 1996, to finalize the capitalization
and structure of the Company, Loewen contributed to RH Holdings 14 funeral
homes and 2 combination funeral home and cemetery properties located in the
Southern California area (the Satellite Properties) which were valued at the
date of the Acquisition Transaction at $23 million. RH Holdings in turn
contributed these properties to the Company effective November 19, 1996.
Finally, the Company entered into the Bank Credit Agreement (see note 10) and
the sale of the senior subordinated notes was consummated (see note 10).
 
  Effective November 19, 1996, per terms of the merger agreement (the Merger
Agreement), the Company, through its subsidiary RH Mortuary Corporation,
acquired the common stock of Roses, Inc. (Roses), the predecessor mortuary, in
consideration of the payment of $59.9 million in cash (subject to downward
adjustment under certain circumstances) after giving effect to the repayment
of outstanding indebtedness of Roses, Inc. Upon consummation of the Merger
Agreement, RH Mortuary Corporation was merged with and into Roses.
 
  The Company also paid a cash purchase price for certain assets, net of
certain liabilities, (the Asset Purchase Agreement) of Rose Hills Memorial
Park Association, the predecessor cemetery (the Association), in the amount of
$166.3 million (subject to downward adjustment under certain circumstances).
 
  In connection with the Acquisition Transaction described above, Roses
entered into a "Settlement Agreement" dated November 19, 1996 with the
Association to resolve amounts due/owed between Roses and the Association as
of November 18, 1996. As of December 31, 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 December 31, 1998 are adequate to satisfy
amounts that may be due the Association.
 
                                      30
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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.
 
Reclassification
 
  Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation.
 
(2) Summary of Significant Accounting Policies
 
 (a) Use of Estimates
 
  The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and revenues and expenses and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 (b) Cash and Cash Equivalents
 
  Cash and cash equivalents are comprised of cash and short-term certificates
of deposit, with original maturities of three months or less.
 
 (c) Cemetery Operations
 
  Pre-need sales of cemetery interment rights and other related products and
services are recognized as revenue when the customer contracts are signed with
concurrent recognition of related costs. Allowances for anticipated customer
cancellations and refunds are provided at the date of sale based on
management's estimate of expected cancellations using historical trends.
Actual cancellation rates in the future may result in a change in estimate. A
portion of the proceeds from the sale of interment rights is required by state
law to be paid into the Endowment Care Fund to provide for the perpetual care
of the associated properties. Cemetery revenue is recorded net of these
amounts. Earnings of the Endowment Care Fund are used to defray the
maintenance costs of cemeteries. Additionally, pursuant to state law, the
proceeds from the sale of pre-need merchandise and services may also be
required to be paid into trust funds. It is the Company's policy to
voluntarily trust 100% of pre-need service revenue when contracts are paid in
full. Also, the Company has an agreement with a vendor to purchase pre-need
merchandise when pre-need contracts are paid in full. Funds voluntarily
trusted for pre-need cemetery services are included in the consolidated
financial statements.
 
 (d) Prearranged Funeral Services
 
  Prearranged funeral services provide for future funeral services and are
generally determined by prices prevailing at the time the contract is signed.
The payments made under the contract are either placed in trust or are used to
pay the premiums of life insurance policies under which the Company will be
designated as beneficiary. The pre-need funeral insurance policies sold by the
Company are whole-life policies sold on a pre-need basis to pay for the cost
of funeral services. Commissions earned are based on a combination of factors,
such as the amount of funeral cost coverage sold, the age of the insured and
the volume of monthly sales activity. Insurance commissions earned 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.
 
                                      31
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Trust fund principal amounts and insurance contract amounts, together with
trust fund investment earnings retained in trust and annual insurance
benefits, are deferred until the service is performed. The Company estimates
that trust fund investment earnings and annual insurance benefits exceed the
increase in cost over time of providing the related services. Upon performance
of the specific funeral service, the Company will recognize the trust fund
principal amount or insurance contract amounts together with the accumulated
trust earnings and annual insurance benefits as funeral revenues. Costs
relating to the sale of prearranged funeral services, including sales
commission expense, are expensed in the period incurred.
 
 (e) Receivables
 
  Receivables due from customers for merchandise and services sold at the time
of need are generally due at the time services are rendered. However,
financing arrangements are available over a period of one to three 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, merchandise and
services sold in advance of need are generally collected over one to seven
years and bear interest at the rate of 11.75% per annum. An allowance for
sales 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, 1998 and December 31,
1997, allowance for sales cancellations totaled $2,246,000 and $2,234,000,
respectively. A provision of $2,071,000, $1,747,000 and $52,000 was charged to
cemetery sales to provide for estimated future cancellations for the years
ended December 31, 1998, 1997 and period from November 19, 1996 to December
31, 1996, respectively.
 
  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 five years bearing interest at the
rate of 12% per annum. An allowance for doubtful accounts has been established
to recognize that a portion of these types of receivables may not ultimately
be collectible. As of December 31, 1998 and 1997, the allowance for doubtful
accounts totaled $314,000 and $613,000, respectively.
 
  Finance income earned on long term receivables is recognized on a current
basis. Total finance income earned was $2,300,000, $1,400,000 and $142,000 for
1998, 1997 and 1996.
 
 (f) Inventories
 
  Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
 
 (g) 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.
 
                                      32
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 (h) Property, Plant and Equipment
 
  Property, plant and equipment are valued at fair market value at the
acquisition date, with additions subsequent to the acquisition date recorded
at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets as follows:
 
<TABLE>
     <S>                               <C>
     Building and improvements........ 10 to 40 years
     Automobiles...................... 4 to 6 years
     Furniture, fixtures and
      equipment....................... 10 years
     Computer hardware and software... 3 to 6 years
     Leasehold improvements........... Life of the asset or term of the lease,
                                        whichever is shorter
</TABLE>
 
  Expenditures for maintenance and repairs are charged to operations as
incurred and expenditures for replacements and betterment are capitalized.
 
 (i) Goodwill
 
  The excess of purchase price over the fair value of identifiable net assets
acquired (goodwill) is being amortized by use of the straight-line method over
a 40-year period. As of December 31, 1998 and 1997, accumulated amortization
was $7,007,000 and $3,683,000, respectively. During 1997, certain amounts were
added to goodwill for preacquisition contingencies identified during the one-
year period following the acquisition date.
 
 (j) Covenants Not to Compete
 
  Covenants not to compete on the consolidated balance sheets represent
amounts prepaid or the present value of future payments under noncompetition
agreements with certain key management personnel of acquired operations.
 
  Amortization of such covenants not to compete is provided by use of the
straight-line method over the terms of the relevant agreements, typically ten
years. As of December 31, 1998 and 1997, accumulated amortization of covenants
not to compete was $892,000 and $464,000, respectively.
 
 (k) Deferred Financing Cost
 
  Deferred financing costs relating to the bank senior-term loan and the
senior subordinated notes are being amortized over the life of the loan and
the notes based on the effective interest method. As of December 31, 1998 and
1997, accumulated amortization of these costs was $3,462,000 and $1,826,000,
respectively.
 
 (l) Derivative Instruments
 
  The Company enters into derivative transactions with financial institutions
only as hedges of other financial transactions and not for speculative
purposes. The Company's policies do not allow leveraged transactions and are
designed to minimize credit and concentration risk with counterparties.
 
 (m) Income Taxes
 
  The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109 (SFAS
No. 109). Under the asset and liability method, deferred tax
 
                                      33
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
 
 (n) Fair Value of Financial Instruments
 
  The carrying value of the Company's debt instruments approximates fair value
which is based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities.
 
  The fair value of the Company's accounts and notes receivable in excess of
one year approximates carrying values and is determined as the present value
of expected future cash flows discounted at the interest rate 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.
 
 (o) Impairment of Long-Lived Assets
 
  The Company follows SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
which requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
operating cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount.
 
 (p) Earnings (Loss) per Share
 
  Earnings (loss) per share have not been included, as the Company is a wholly
owned subsidiary.
 
 (q) Pension and Other Postretirement Plans
 
  On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, Employers Disclosures about Pension and Other
Postretirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change
the method of accounting for such plans.
 
  The Company has a defined benefit plan, a defined contribution plan,
supplemental employee retirement plan (SERP) and a retirement plan for the
Board of Trustees. All plans except for the defined contribution plan are
frozen.
 
(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.
 
                                      34
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  At December 22, 1998, the Company acquired certain assets and liabilities of
the Home of Peace Memorial Park. Home of Peace is a Los Angeles, California
cemetery established in 1855 which consists of approximately 32 acres, some of
which is still available for future development. Cash paid for the transaction
amounted to approximately $776,000, which represents the difference between
$1,100,000 in assets and $324,000 in liabilities. As the amount paid was equal
to the estimated fair market asset value less liabilities, goodwill was not
recorded.
 
  The results of operations of Home of Peace for the period December 22, 1998
through December 31, 1998 were not material to the financial statements of
Rose Hills Company and therefore, were not included with the results of
operations for the Company for the year ended December 31, 1998.
 
(4) Prepaid Expenses and Other Current Assets
 
  Prepaid expenses and other current assets consist of the following at
December 31, 1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                     1998  1997
                                                                    ------ -----
   <S>                                                              <C>    <C>
   Due from insurance companies.................................... $1,351   632
   Due from Funeral Service Trust..................................    393   324
   Due from Endowment Care Fund....................................  1,050   246
   Taxes Receivable................................................  1,082   474
   Prepaid insurance...............................................    271   233
   Other...........................................................    554   890
                                                                    ------ -----
     Prepaid expenses and other current assets..................... $4,701 2,799
                                                                    ====== =====
</TABLE>
 
(5) Property, Plant and Equipment
 
  Property, plant and equipment consist of the following at December 31, 1998
and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1998    1997
                                                                  ------- ------
   <S>                                                            <C>     <C>
   Land.......................................................... $ 9,036  9,036
   Buildings and improvements....................................  41,064 40,012
   Furniture, fixtures and equipment.............................   6,540  5,533
   Vehicles......................................................   1,578    634
   Computers and computer software...............................   5,023  3,826
   Construction in progress......................................   8,224  7,617
                                                                  ------- ------
     Total property, plant and equipment.........................  71,465 66,658
   Less accumulated depreciation.................................   5,487  2,557
                                                                  ------- ------
     Property, plant and equipment, net.......................... $65,978 64,101
                                                                  ======= ======
</TABLE>
 
                                      35
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(6) Accounts Payable and Accrued Liabilities
 
  Accounts Payable and Accrued liabilities consist of the following at
December 31, 1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Trade payables............................................... $   819  1,096
   Interest.....................................................   1,371  1,291
   Property and other taxes.....................................   1,469    798
   Payroll and related costs....................................   1,442  2,145
   Other payables...............................................   7,578  5,357
   Other accrued expenses.......................................   3,159    713
                                                                 ------- ------
                                                                 $15,838 11,394
                                                                 ======= ======
</TABLE>
 
(7) Derivative Financial Instruments
 
  The Company's policy is not to use derivative instruments for speculation.
The Company does not trade in financial instruments and is not a party to
leveraged derivatives.
 
  The notational amounts of derivatives do not represent amounts exchanged by
the parties and, thus, are not a measure of the exposure of the Company
through the use of derivatives. The amounts exchanged during the term of the
derivatives are calculated on the basis of the notational amounts and the
other contractual conditions of the derivatives.
 
  The Company has entered into interest rate collar agreements, which
effectively set maximum and minimum interest rates on the principal amount of
Senior Debt (note 10), ranging from a floor of 5.5% (the Company would pay
5.5% even if rates fall below that level) to a maximum or cap of 6.5% for the
period commencing January 2, 1997 through December 1, 2000. The collar
agreement is based on three-month LIBOR. The fair value of the collar
agreement at December 31, 1998 and 1997 as estimated by a dealer, was a
favorable $808,000 and $7,000, respectively.
 
  The counterparty to these contractual relationships is a major financial
institution with which the Company has other financial relationships. The
Company is exposed to credit losses in the event of nonperformance by the
other parties to the interest rate collar agreements. However, the Company
does not anticipate nonperformance by the other party, and no material loss
would be expected from nonperformance of such counterparty.
 
(8) 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, 1998 and 1997, amounts owed to the Fund, but not yet
due or collected from customers, amounted to $1,089,000 and $1,761,000,
respectively. The Fund's assets are invested under the direction of the Board
of Trustees of the Fund. The principal of the fund generally cannot be
withdrawn by the Company and therefore is not included on the consolidated
balance sheet. The change in net assets of the Fund, net of amounts required
to be withheld under state law, is paid by the
 
                                      36
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Fund to the Company and is used for the care, maintenance and embellishment of
the cemetery. As allowable by state law, a portion of the undistributed
capital gains of the Fund has been reserved and is available to the Company at
the discretion of the Trustees for future maintenance, repair or restoration
of property or embellishment. The amounts earned by the Fund and transferred
to the Company are reported in the consolidated statements of operations and
amounted to $3,534,000 and $3,549,000 for the years then ended, respectively.
 
  Total assets of the Fund are $62,461,000 and $58,132,000 at December 31,
1998 and 1997, respectively, and consist primarily of cash and investments
carried at fair market value. Total liabilities of the Fund are $1,206,000 and
$703,000 at December 31, 1998 and 1997, respectively, and consist of amounts
payable to the Company. Total net assets of $61,255,000 and $57,429,000 at
December 31, 1998 and 1997, respectively, resulted primarily from Fund
deposits received or receivable from customers, capital gains (net of
transfers to reserves) and holding losses experienced by the Fund.
 
(9) 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, 1998 and 1997, 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, 1997 mature
as follows (in thousands):
 
<TABLE>
<CAPTION>
           Date                                                          Amount
           ----                                                          ------
     <S>                                                                 <C>
     Prior to February 1, 1998..........................................  $643
     February 1, 1999...................................................    71
     February 1, 2000...................................................    71
                                                                          ----
       Total............................................................  $785
                                                                          ====
</TABLE>
 
                                      37
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(10) Income Taxes
 
  The provision for income tax (benefit) is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              1998   1997  1996
                                                             ------  ----  ----
     <S>                                                     <C>     <C>   <C>
     Current:
      Federal............................................... $  --    --    --
      State.................................................     79    14    18
                                                             ------  ----  ----
       Total current........................................     79    14    18
                                                             ------  ----  ----
     Deferred:
      Federal...............................................  1,502   (10) (121)
      State.................................................    404    91   (57)
                                                             ------  ----  ----
       Total deferred.......................................  1,906    81  (178)
                                                             ------  ----  ----
       Total income tax (benefit)........................... $1,985    95  (160)
                                                             ======  ====  ====
</TABLE>
 
  Differences between the provision for income taxes (benefit) and income
taxes at the statutory Federal income tax rate are as follows (in thousands):
<TABLE> 
<CAPTION>
                                                              1998   1997  1996
                                                             ------  ----  ----
     <S>                                                     <C>     <C>   <C>
     Expected Federal tax (benefit)......................... $1,027  (569) (234)
     Net tax effects of:
      Goodwill amortization.................................    709   640   102
      State taxes, net of Federal benefit...................    319    87   (26)
      Nondeductible expenses................................    (10)   10    (2)
      Other.................................................    (60)  (73)  --
                                                             ------  ----  ----
       Actual income tax (benefit).......................... $1,985    95  (160)
                                                             ======  ====  ====
</TABLE>
 
  The components of the net deferred tax balances at December 31, 1998 and
1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                                -------  ------
   <S>                                                          <C>      <C>
   Deferred tax assets:
    Operating reserves......................................... $ 1,105   1,469
    Retirement benefits........................................   1,521   1,591
    Other reserves.............................................   2,921   2,101
    Net operating loss.........................................     332   1,032
    Other......................................................     130      75
                                                                -------  ------
     Total deferred tax assets.................................   6,009   6,268
                                                                -------  ------
   Deferred tax liabilities:
    Acquisition step ups.......................................  (2,977) (3,605)
    Goodwill amortization......................................  (2,121) (1,242)
    Depreciation...............................................  (2,418) (1,022)
    Land.......................................................    (863)   (863)
                                                                -------  ------
     Total deferred tax liability..............................  (8,379) (6,732)
                                                                -------  ------
     Net deferred tax liability................................ $(2,370)   (464)
                                                                =======  ======
</TABLE>
 
                                      38
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Based upon the level of historic taxable income and projections for future
taxable income over the periods, which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences at December 31, 1998.
 
  At December 31, 1998, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $1.0 million, which are available
to offset future federal income, if any, through 2012.
 
(11) Related Party Transactions
 
 (a) 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 $250,000 (subject to specified
annual increases). 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 years ended December 31, 1998, 1997 and the period from November 19, 1996
to December 31, 1996, the Company had recorded approximately $250,000,
$323,000 and $42,000 for Administrative Services Fee, respectively.
 
 (b) 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 expensed the Monitoring
Fee of $250,000 for December 31, 1998 and 1997 and $31,000 for the period from
November 19, 1996 to December 31, 1996.
 
 (c) Insurance Commissions
 
  In 1998, the Company earned insurance commissions totaling approximately
$1,000,000 from a subsidiary of Loewen. No amounts were earned in 1997 and
1996.
 
(12) Long-Term Debt
 
  Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                             --------  -------
   <S>                                                       <C>       <C>
   Borrowings outstanding under Bank Credit Agreement, due
    2003...................................................  $ 72,507   73,503
   Senior subordinated notes at 9.5%, due November 15,
    2004...................................................    80,000   80,000
   Notes payable and liabilities under noncompete
    agreements bearing interest at rates ranging from 7.46%
    to 9%. The notes and noncompete agreements have
    variable maturities ranging from 1999 through 2007.....     2,214    3,128
   Long term portion of capital lease obligations..........       989      652
                                                             --------  -------
                                                              155,710  157,283
   Less current portion....................................    (2,133)  (2,368)
                                                             --------  -------
     Long-term debt........................................  $153,577  154,915
                                                             ========  =======
</TABLE>
 
                                      39
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  At December 31, 1998, annual maturities of long-term debt consisted of the
following (in thousands):
 
<TABLE>
     <S>                                                                <C>
     Year ending December 31:
       1999............................................................ $  2,133
       2000............................................................    3,659
       2001............................................................    7,442
       2002............................................................    9,361
       2003............................................................   52,765
       Thereafter......................................................   80,350
                                                                        --------
                                                                        $155,710
                                                                        ========
</TABLE>
 
 Bank Credit Agreement
 
  Concurrent with the consummation of the Acquisition Transaction, the Company
entered into a credit agreement (the Bank Credit Agreement) with a group of
financial institutions in Canada and the United States, which provides for (1)
a senior secured amortization extended term loan facility (the Bank Term
Facility) in an aggregate principal amount of $75.0 million used to partially
finance the Acquisition Transaction, as described in note 1, to prefund
certain capital expenditures and to refinance existing indebtedness of the
Mortuary and (2) a senior secured revolving credit facility (the Revolving
Credit Facility) in an aggregate principal amount of $25.0 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 RH Holdings. All such guarantees are secured by
a first priority security interest of the capital stock of the Company and
each subsidiary and all inter-company receivables. The Company is required to
maintain certain defined financial ratios. The Company was in compliance with
all such requirements at December 31, 1998.
 
  Borrowings under the Bank Term Facility bear interest at the Company's
option, at the reference rate (the Base Rate) of the agent acting on behalf of
the financial institutions plus 2%, or under a Eurodollar option, at a
reserve-adjusted Eurodollar rate (the Adjusted Eurodollar Rate) plus 3%. The
Bank Term Facility will mature seven years after the Acquisition and requires
semiannual installments aggregating $1 million in each of the first three
years after the Acquisition, $3.0 million in the fourth year after the
Acquisition, $7.0 million in the fifth year after the Acquisition, $9.0
million in the sixth year after the Acquisition and $53 million in the seventh
year after the Acquisition.
 
  As of December 31, 1998, the Company was paying interest at the Adjusted
Eurodollar Rate (5.44%) plus 3% on its outstanding borrowings under the Bank
Term Facility. Additionally, the Company had entered into interest rate collar
agreements to limit its interest rate risk. Pursuant to the terms of the
interest rate collar agreements, the minimum and maximum Base Rate or Adjusted
Eurodollar interest rates range from 5.5% to 6.5%, respectively, for the
period from January 2, 1997 through December 1, 2000.
 
  Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at the Base Rate plus 1.75%, or the Adjusted Eurodollar Rate
plus 2.75%. The Company pays a commitment fee of .5% on the unused portion.
The Revolving Credit Facility is payable in full at maturity, with no prior
amortization. As of December 31, 1998, the Company had $2,000,000 of
borrowings under the Revolving Credit Facility, which is included in other
current liabilities and bears interest rates from 8.06% to 8.125%.
 
                                      40
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Concurrent with the consummation of the Acquisition Transaction, the Company
issued $80.0 million of 9.5% senior subordinated notes payable due November
15, 2004 (the Notes). There are no sinking fund requirements on the Notes and
they may not be redeemed until November 2000. At such date, they are
redeemable at 104.75% of principal amount, plus accrued and unpaid interest,
if any, to the redemption date, and thereafter, at an annually declining
premium over par until November 2003, when they are redeemable at par. The
indenture limits the payment of dividends and repurchase of capital stock, and
includes certain other restrictions on indebtedness and limitations customary
with subordinated indebtedness of this type.
 
  The Company assumed liabilities under notes payable and noncompete
agreements from the Satellite Properties. The notes payable are secured by
land and bear interest at rates ranging from 7.46% to 8.00%. The noncompete
agreements consist of the net present value of future payments discounted at
9.00%.
 
(13) Retirement Plans
 
 (a) Defined Benefit Plan
 
  As a result of the Acquisition Transaction, the Retirement Plan for
Employees of Rose Hills Mortuary, L.P. (the Plan) was frozen as of December
31, 1996. It is the intention to formally terminate the Plan at a later date.
Prior to the Acquisition Transaction, all employees of the Mortuary, which
employed all cemetery and mortuary employees, were participants in the Plan.
Participants became fully vested upon the freezing of the Plan. Employees may
elect to receive their pension benefits in the form of a single-life annuity
or a qualified joint and contingent annuity.
 
  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 change in benefit obligation included the following components (in
thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Benefit obligation at January 1..................... $10,701  10,917  11,321
   Service cost........................................     --      --       91
   Interest cost.......................................     731     712     109
   Actuarial (gain)/loss...............................     330    (445)   (533)
   Benefits paid.......................................    (512)   (483)    (71)
                                                        -------  ------  ------
     Benefit obligation at December 31................. $11,250  10,701  10,917
                                                        =======  ======  ======
</TABLE>
 
The change in plan assets included the following components (in thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Fair value of assets at January 1................... $11,249  10,887  10,918
   Actual return on plan assets........................     757     693     --
   Employer contribution...............................     --      152     --
   Benefits paid.......................................    (512)   (483)    (71)
                                                        -------  ------  ------
     Fair value of assets at December 31............... $11,494  11,249  10,887
                                                        =======  ======  ======
</TABLE>
 
                                      41
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The change in funded status included the following components (in
thousands):
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                     --------  -------  -------
   <S>                                               <C>       <C>      <C>
   Benefit obligation............................... $(11,250) (10,701) (10,917)
   Plan assets at fair value........................   11,494   11,249   10,887
   Unrecognized net actuarial (gain) loss...........      (82)    (376)     --
                                                     --------  -------  -------
     (Accrued) or prepaid pension cost.............. $    162      172      (30)
                                                     ========  =======  =======
</TABLE>
 
  The net pension cost included the following components (in thousands):
 
<TABLE>
<CAPTION>
                                                            1998   1997   1996
                                                            -----  -----  -----
   <S>                                                      <C>    <C>    <C>
   Service cost--benefits earned during the period......... $ --     --      91
   Interest cost on projected benefits obligations.........   731    712    109
   Expected earnings on Company plan assets................  (720)  (702)  (109)
                                                            -----  -----  -----
     Total net periodic pension cost....................... $  11     10     91
                                                            =====  =====  =====
</TABLE>
 
  The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.75%, 7% and 6.55% for 1998,
1997 and 1996, respectively. The expected long-term rate of return on assets
was 6.5% for 1998 and 1997 and 8.0% for 1996.
 
 (b) Defined Contribution Plan
 
  The Company also has a defined contribution plan, which has been qualified
under Section 401(k) of the Internal Revenue Service Code (the Savings Plan).
During 1995, the predecessor mortuary received a favorable letter of
determination from the Internal Revenue Service regarding the Savings Plan.
The Savings Plan permits participation by all employees of the Company who
have completed six months of continuous service, subject also to their entry
into the Savings Plan on enrollment dates of January 1 or July 1 of each year.
Participants may defer up to 15% of their compensation (subject to certain
limitations). In addition to the amount of compensation deferred by
participants, the Company matches up to 100% of the first $300 contributed and
50% of the next $3,400 contributed per year per participant. Additionally, the
Company may contribute to the trust for each Plan year, beginning with the
Plan year beginning January 1, 1997, such amounts as the Board of Directors
shall determine in its sole discretion. The Company's contribution to this
Savings Plan on behalf of the participants amounted to $391,000 and $388,000
for the year ended December 31, 1998 and 1997, respectively. For the period
from November 19, 1996 to December 31, 1996, the Company contribution to this
savings plan on behalf of the participants amounted to $48,000.
 
 (c) Supplemental Employee Retirement Plan
 
  Three senior officers of Roses, the predecessor mortuary, had employment
agreements, which obligated Roses to provide these three employees with a
supplemental employee retirement plan (SERP). This nonqualified supplemental
pension plan covering certain employees provides for incremental pension
payments from Roses' funds so that the total pension payments would more
realistically approximate amounts that would have been payable from the Roses'
principal pension plan if it were not for limitations imposed by income tax
regulations. In conjunction with the Acquisition Transaction, the SERP
liability was assumed by the Company. The annual lifetime benefit is based
upon a percentage of salary during the final five years of employment, offset
by several other sources of income, up to age 62, at which time the benefit
becomes payable to the participant.
 
                                      42
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The change in SERP benefit obligation included the following components (in
thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Benefit obligation at January 1..................... $ 4,656   4,244   4,775
   Interest cost.......................................     276     321      46
   Actuarial (gain)/loss...............................    (508)     91    (577)
   Benefits paid.......................................    (190)    --      --
                                                        -------  ------  ------
     Benefit obligation at December 31................. $ 4,234   4,656   4,244
                                                        =======  ======  ======
</TABLE> 
 
  The change in SERP plan assets included the following components (in
thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Fair value of assets at January 1................... $   --      --      --
   Participant contributions...........................     190     --      --
   Benefits paid.......................................    (190)    --      --
                                                        -------  ------  ------
     Fair value of assets at December 31............... $   --      --      --
                                                        -------  ------  ------
</TABLE> 
 
  The change in SERP funded status included the following components (in
thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Benefit obligation.................................. $(4,234) (4,656) (4,244)
   Unrecognized net actuarial (gain)/loss..............    (938)   (460)   (577)
                                                        -------  ------  ------
     Prepaid/(accrued) pension cost.................... $(5,172) (5,116) (4,821)
                                                        =======  ======  ======
</TABLE> 
 
  The net SERP pension cost included the following components (in thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Service cost at end of year......................... $   --              --
   Interest cost.......................................     275     321      46
   Settlement or curtailment cost......................     (30)    (26)    --
                                                        -------  ------  ------
     Total net pension cost............................ $   245     295      46
                                                        =======  ======  ======
</TABLE>
 
  The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.75%, 7.25% and 7.75% for 1998,
1997 and 1996, respectively. The expected long-term rate of return on assets
was 6.5% for 1998 and 8.0% for 1997 and 1996.
 
  To fund the SERP obligations, the Company has procured whole-life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7.0 million. The cash surrender value of the
Company's share of the policies is reflected in the consolidated balance
sheets under other assets and amounted to $1,319,000 and $940,000 as of
December 31, 1998 and 1997, respectively.
 
 (d) Board of Trustees' Plan
 
  The Association had a retirement plan (the Trustees' Plan) covering each
eligible member of the Association's Board of Trustees (Trustee). Per terms of
the Asset Purchase Agreement, the Company has assumed this liability. As a
result of the Acquisition Transaction, the Trustees' plan was frozen as of
December 31, 1996. Participants became fully vested upon the freezing of the
Plan.
 
                                      43
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Company has accrued the present value of these benefits. The Company
Plan is subject to and in compliance with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA).
 
  The change in benefit obligation included the following components (in
thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Benefit obligation at January 1..................... $ 2,434   2,362   2,440
   Service cost........................................     --      --       13
   Interest cost.......................................     140     179      20
   Actuarial (gain) loss...............................    (298)    153     (75)
   Benefits paid.......................................    (350)   (260)    (36)
                                                        -------  ------  ------
     Benefit obligation at December 31................. $ 1,926   2,434   2,362
                                                        =======  ======  ======
</TABLE> 
 
  The change in plan assets included the following components (in thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Fair value of assets at January 1................... $   --      --      --
   Employer contributions..............................     350     260      35
   Benefits paid.......................................    (350)   (260)    (35)
                                                        -------  ------  ------
     Fair value of assets at December 31............... $   --      --      --
                                                        -------  ------  ------
</TABLE> 
 
  The change in funded status included the following components (in
thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Benefit obligation.................................. $(1,926) (2,434) (2,362)
   Unrecognized net actuarial (gain)/loss..............     272     574     454
                                                        -------  ------  ------
     Prepaid/(accrued) pension cost.................... $(1,654) (1,860) (1,908)
                                                        =======  ======  ======
</TABLE> 
 
  The net pension cost included the following components (in thousands):
<TABLE> 
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Service cost at end of year......................... $   --      --       13
   Interest cost.......................................     140     179      20
   Gain................................................       3      33      18
   Prior service cost..................................     --      --        6
                                                        -------  ------  ------
     Total net pension cost............................ $   143     212      57
                                                        =======  ======  ======
</TABLE>
 
  The weighted average discount rate used in determining the actual present
value of the projected benefit obligation was 6.75% for 1998 and 7.25% for
1997 and 1996.
 
 (e) Deferred Compensation
 
  In addition, certain retired senior executives of the Association
participated in a nonqualified supplemental deferred compensation program. Per
terms of the Asset Purchase Agreement, the Company has assumed this liability.
At December 31, 1998 and 1997, the Company's liability for this program
totaled $49,000 and $143,000, respectively.
 
                                      44
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(14) Funeral Service Trust Agreements
 
  The Company sells, on a limited basis, Funeral Service Trust Agreements to
consumers (the "Trustor"). These trust agreements are sold generally on an
installment basis and funds derived therefrom earn income subject to certain
limitations. Trusts may be terminated at any time with all principal and
accumulated net income being distributed to the Trustor. The Trustor may at
any time apply the trust amount to the purchase price of funeral services and
arrangements furnished by the Company and/or to cemetery property, services
and commodities provided by the Association. The amounts relating to these
trusts are not included in the accompanying consolidated financial statements;
however, administration fees earned by the Company are reflected in the
consolidated statements of income.
 
(15) Commitments under Lease Agreements
 
  As of December 31, 1998, the future minimum lease obligation pursuant to
operating lease agreements is summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                       Operating
                                                                        leases
                                                                       ---------
     <S>                                                               <C>
     Year ending December 31:
       1999...........................................................  $  648
       2000...........................................................     514
       2001...........................................................     458
       2002...........................................................     372
       2003...........................................................     114
                                                                        ------
         Total minimum lease obligation...............................  $2,106
                                                                        ======
</TABLE>
 
  Rental expense under operating lease agreements for the years ended December
31, 1998 and 1997 was $778,000 and $719,000, respectively. For the period from
November 19, 1996 to December 31, 1996, rent expense was $25,000.
 
(16) Purchase Commitments
 
  In September 1992, the predecessor cemetery (the Association) and the local
County Sanitation District (the District) entered into an agreement (the
Agreement) whereby the Association agreed to construct a reclaimed water
storage reservoir (the Reservoir) with a capacity of 1.2 million gallons, one-
half of which would be made available to the District for its use at a site
located adjacent to the cemetery. The cost of the Reservoir, which was
completed during 1994, totaled $471,000. The Company is obligated, under this
Agreement, as successor to the Association.
 
  The District has agreed to pay its proportionate share of the capital costs
associated with the Company's construction of the Reservoir. The District's
share of such costs is based on the proportion of the Reservoir's designed
capacity required for the Company to provide reclaimed water storage for the
District. Annual payment of such amounts will be equal to 1/20th of the
District's share and will reduce the annual payment made by the Company to the
District for its share of the reclaimed water transmission system described
above.
 
  The District agreed to construct a reclaimed water transmission system to
transport reclaimed water from its existing water reclamation plant to the
Company's Reservoir. The reclaimed water transmission system was completed in
1997. The Company has agreed to pay its proportionate share of the capital
costs incurred by the District in constructing the reclaimed water
transmission system. Such proportionate share will be determined
 
                                      45
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
based on the percentage of peak flow design capacity required by the Company
to the total peak flow design capacity of the transmission facilities. The
Company's proportionate share is to be approximately $1,900,000. The Company's
annual payment of such costs is to be equal to 1/20th of its proportionate
share of the capital costs.
 
  The Company and the District have also agreed to reimburse the other for
operating and maintenance costs associated with the Reservoir and the
reclaimed water transmission system based on criteria outlined in the
Agreement.
 
(17) Commitments and Other Matters
 
 (a) Transaction with the International Buddhist Progress Society
 
  During 1994, the predecessor cemetery sold the exclusive interment rights on
an undeveloped parcel of land located on the property to the International
Buddhist Progress Society (IBPS), an unrelated organization. In exchange for
the interment rights, IBPS agreed to pay the predecessor cemetery $1,375,000,
of which $160,000 was received as a deposit during 1994. Sales commissions
totaled $206,000 in connection with this transaction. It was determined that
because, among other matters, an adequate down payment was not received and
the interment rights were sold on a parcel of land that was not ready for the
purpose for which it was sold, the earnings process was not complete and
revenue and expense recognition relating to the transaction should be deferred
until such time IBPS has completed a significant portion of the project.
 
  The remaining unpaid portion of the sales price is to be repaid after
construction of the columbarium is completed (estimated for Spring 1999),
based on a percentage of niches sales, but in no event later than January 1,
2003. The columbarium is substantially complete and IBPS will sell the niches
therein on an at-need and pre-need basis. Pursuant to the agreement with IBPS,
the Company will hold title to land improvements and the completed building.
 
 (b) General
 
  The Company has employment agreements with its executive officers, the terms
of which expire at various dates. Such agreements provide for minimum salary
levels, as well as incentive bonuses, which are, payable if specified
management goals are attained.
 
(18) 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.
 
  Management is aware that Rose Hills' cemetery may have been contaminated
when a portion of the cemetery was used to dispose of waste products prior to
1978. The cost to remediate the waste disposal area is not known; however,
under the terms of the asset purchase agreement, the Seller assumed all
liability to remediate the property.
 
(19) Segmented Information
 
  The Company has adopted FASB No. 131 Disclosure about Segments of an
Enterprise and Related Information which uses a "management approach" for
determining the way the Company reports information about its operating
segments.
 
                                      46
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Company's reportable segments are comprised of the two businesses it
operates, each of which offers different products and services: funeral homes
and cemeteries. The funeral home segment is an aggregation of funeral home and
funeral plan operations.
 
  The funeral homes offer a full range of funeral services, encompassing the
collection of remains, registration of death, professional embalming, use of
funeral home facilities, sale of caskets and other merchandise, and
transportation to the place of worship, funeral chapel, cemetery or
crematorium. In addition to providing at-need funeral services, the Company
sells insurance contracts for which it receives commission revenue.
 
  The cemeteries assist families in making burial arrangements and offer a
complete line of cemetery products (including a selection of burial spaces,
burial vaults, lawn crypts, caskets, memorials, niches and mausoleum crypts),
the opening and closing of graves and cremation services. The majority of
cemetery revenue is from pre-need sales.
 
  The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company sells entirely to
external customers. The Company evaluates performance based on earnings from
operations of the respective businesses. The Company does not allocate income
taxes or other corporate expenses to the operating segments.
 
<TABLE>
<CAPTION>
                                                       Funeral  Cemetery  Total
   (in thousands)                                      -------- -------- -------
   <S>                                                 <C>      <C>      <C>
   Revenues from external customers:
     1998............................................. $ 31,949  51,628   83,577
     1997............................................. $ 32,392  38,252   70,645
     1996............................................. $  4,002   3,078    7,080
   Income from operations:
     1998............................................. $ 11,288  19,422   30,710
     1997............................................. $ 12,734  12,509   25,240
     1996............................................. $  1,379   1,196    2,600
   Interest revenue (included in revenues):
     1998............................................. $    --    6,071    6,071
     1997............................................. $    --    4,934    4,934
     1996............................................. $    --      535      535
   Depreciation:
     1998............................................. $  1,660   1,299    2,959
     1997............................................. $  1,268   1,025    2,293
     1996............................................. $    193      83      276
   Total assets:
     1998............................................. $107,462 190,012  297,474
     1997............................................. $109,791 172,503  282,294
     1996............................................. $118,147 170,961  289,108
</TABLE>
 
                                      47
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
            (A Wholly Owned Subsidiary of Rose Hills Holding Corp.)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The following table reconciles income from operations of reportable segments
to income before income taxes:
 
<TABLE>
<CAPTION>
                                                    1998      1997     1996
                                                  --------  --------  -------
   <S>                                            <C>       <C>       <C>
   Income from operations of reportable
    segments..................................... $ 30,710    25,240    2,600
     Corporate general and administrative
      expenses...................................   (7,420)   (6,726)    (902)
     Amortization of intangible assets...........   (3,752)   (3,776)    (371)
                                                  --------  --------  -------
   Total income from operations..................   19,538    14,738    1,327
     Interest expense............................  (16,519)  (16,411)  (2,015)
                                                  --------  --------  -------
     Income (loss) before taxes.................. $  3,019    (1,673)    (688)
                                                  ========  ========  =======
 
  The following table reconciles total assets of reportable segments to
consolidated total assets:
 
<CAPTION>
                                                    1998      1997     1996
                                                  --------  --------  -------
   <S>                                            <C>       <C>       <C>
   Assets of reportable segments................. $297,474   282,294  289,108
   Cash in corporate bank accounts...............    1,645     3,462    7,174
   Deferred tax asset............................    4,085     4,658    1,176
   Corporate capital assets......................    7,933     7,892    7,570
   Deferred finance costs........................    9,036    10,672   11,382
   Other.........................................    1,760     3,620    1,424
                                                  --------  --------  -------
     Total consolidated assets................... $321,933   312,598  317,834
                                                  ========  ========  =======
</TABLE>
 
                                      48
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors
Roses, Inc.:
 
  We have audited the consolidated financial statements of Roses, Inc. and
subsidiaries (Predecessor Mortuary) as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of the operations and
the cash flows for the period from January 1, 1996 to November 18, 1996 of
Roses, Inc. and subsidiaries, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material aspects, the information
set forth therein.
 
                                          KPMG LLP
 
Orange County, California
June 12, 1997
 
                                      49
<PAGE>
 
                          ROSES, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
 
            For The Period from January 1, 1996 to November 18, 1996
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                         1996
                                                                        ------
<S>                                                                     <C>
Sales and services:
 Caskets .............................................................. $8,014
 Funeral services .....................................................  8,224
 Insurance commissions ................................................  2,337
 Flowers ..............................................................  1,502
 Management fee and other .............................................    345
                                                                        ------
  Total sales and services ............................................ 20,422
                                                                        ------
Cost of sales and services:
 Caskets ..............................................................  2,424
 Funeral services .....................................................  2,413
 Flowers ..............................................................    664
                                                                        ------
  Total cost of sales and services ....................................  5,501
                                                                        ------
  Gross profit ........................................................ 14,921
                                                                        ------
Selling, general and administrative expenses .......................... 12,331
Amortization of purchase related assets ...............................     87
Settlement of intercompany balances ...................................  1,853
                                                                        ------
  Income from operations ..............................................    650
                                                                        ------
Interest income (expense):
 Interest income ......................................................    378
 Interest expense ..................................................... (1,439)
                                                                        ------
  Total net interest expense .......................................... (1,061)
                                                                        ------
  Loss before tax provision ...........................................   (411)
Tax provision .........................................................    545
                                                                        ------
  Net loss ............................................................ $ (956)
                                                                        ======
</TABLE>
 
 
          See accompanying notes to consolidated financial statement.
 
                                       50
<PAGE>
 
                          ROSES, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
           For the Period from January 1, 1996 to November 18, 1996.
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                        1996
                                                                       -------
<S>                                                                    <C>
Cash flow from operating activities:
  Net loss ........................................................... $  (956)
 Adjustments to reconcile net loss to net cash provided by operating
  activities:
  Amortization of purchase related assets ............................      87
  Depreciation .......................................................   1,065
   Net loss on disposal of property, plant and equipment .............      (1)
  Provision for bad debts ............................................      53
  Provision for deferred income taxes ................................    (883)
Changes in assets and liabilities associated with operating
 activities:
  Decrease in customer accounts receivable ...........................      92
  Decrease in due from Rose Hills Memorial Park Association ..........   3,537
 Decrease in other receivables .......................................   1,213
 Decrease in other current assets ....................................     660
  Decrease in accounts payable and accrued expenses ..................  (2,042)
  Increase in other current liabilities ..............................     808
 Other, net ..........................................................      90
                                                                       -------
     Net cash provided by operating activities .......................   3,723
                                                                       -------
Cash flow from investing activities--capital expenditures ............     (71)
                                                                       -------
Cash flow from financing activities:
 Reduction of long-term debt .........................................  (4,776)
 Capital contribution ................................................   1,000
 Decrease in other long-term liabilities .............................    (253)
                                                                       -------
     Net cash used in financing activities ...........................  (4,029)
                                                                       -------
     Net decrease in cash and cash equivalents .......................    (377)
                                                                       -------
Cash and cash equivalents at beginning of period .....................   1,269
                                                                       -------
Cash and cash equivalents at end of period ........................... $   892
                                                                       =======
Supplemental cash flow information:
 Interest paid ....................................................... $ 2,544
                                                                       =======
 Taxes paid .......................................................... $   565
                                                                       =======
</TABLE>
 
          See accompanying notes to consolidated financial statement.
 
                                       51
<PAGE>
 
                          ROSES, INC. AND SUBSIDIARIES
 
             CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
 
            For the Period from January 1, 1996 to November 18, 1996
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                      Total
                                               Retained Earnings/ Shareholders'
                              Shares    Common    (Accumulated       Equity
                            Outstanding Stock       Deficit)        (Deficit)
                            ----------- ------ ------------------ -------------
<S>                         <C>         <C>    <C>                <C>
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 statement.
 
                                       52
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Basis of Presentation
 
  The November 18, 1996 consolidated financial statement 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").
 
  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.
 
                                      53
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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.
 
 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.
 
 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.
 
 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.
 
 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.
 
3. 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.
 
                                      54
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  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.
 
4. Income Taxes
 
  The provision for income taxes follows:
 
<TABLE>
<CAPTION>
                                                                    November 18,
                                                                        1996
                                                                    ------------
                                                                      (000's)
     <S>                                                            <C>
     Federal current...............................................    $1,085
     State current.................................................       343
                                                                       ------
       Total current...............................................     1,428
                                                                       ------
     Federal deferred..............................................      (665)
     State deferred................................................      (218)
                                                                       ------
       Total deferred..............................................      (883)
                                                                       ------
       Total income tax expense....................................    $  545
                                                                       ======
</TABLE>
 
  Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows:
 
<TABLE>
<CAPTION>
                                                                    November 18,
                                                                        1996
                                                                    ------------
     <S>                                                            <C>
     Federal tax at statutory rates................................    $(140)
     Net tax effects of:
       Goodwill amortization.......................................       28
       State taxes, net of federal benefit.........................       82
       Acquisition costs...........................................      601
       Other permanent differences.................................      (26)
                                                                       -----
     Actual tax expense............................................    $ 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.
 
5. 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
 
                                      55
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
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. General and administrative payroll and other employee benefit
expenses such as retirement plan costs 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.
 
6. 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 5, the expense of the Company Plan is shared between the Company and the
Association. The information presented below represents the net pension cost
for the Company Plan, however the accompanying Income Statement of the Company
reflects RHMLP's expenses only.
 
  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.
 
                                      56
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Roses has funded or accrued the present value of these benefits. The Company
Plan is subject to, and in compliance with, the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). During 1995, the Company
Plan received a favorable letter of determination from the IRS.
 
  The net pension cost included the following components:
 
<TABLE>
<CAPTION>
                                                                    December 31,
                                                                        1996
                                                                    ------------
                                                                      (000's)
     <S>                                                            <C>
     Service cost-benefits earned during the period................   $   623
                                                                      -------
     Interest cost on projected benefit obligation.................       710
                                                                      -------
     Actual (earnings) loss on company plan assets.................    (1,429)
     Net amortization and deferral.................................       701
                                                                      -------
       Total net periodic pension cost.............................   $   605
                                                                      =======
</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 5, 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 Statement of Income reflects only the net pension plan
expenses for Roses share of such expenses. The Company's share of the net
periodic pension cost was $346,000 for the period ended November 18, 1996.
 
 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, the
Company's contribution to this Savings Plan on behalf of the participants
amounted to $294,000. Of this amount $112,000 reflected the amount expensed by
the Company for its share of the total contributions in 1996, 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.
 
                                      57
<PAGE>
 
                         ROSES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The SERP net pension cost included the following components:
 
<TABLE>
<CAPTION>
                                                                     December 31,
                                                                         1996
                                                                     ------------
                                                                       (000's)
     <S>                                                             <C>
     Service cost-benefits earned during the period.................     $ --
     Interest cost on projected benefit obligation..................      312
     Net amortization and deferral..................................       70
                                                                         ----
     Total net periodic pension cost................................      382
     Less: Association's share of net periodic pension cost.........      141
                                                                         ----
       Roses share of net periodic pension cost.....................     $241
                                                                         ====
</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 7.75% and 4.0% at November 18, 1996
respectively. The expected long term rate of return on assets was 8.00%.
 
  To fund the SERP obligations the Company has procured whole life insurance
policies. The Company is the owner and beneficiary of these policies with an
aggregate face amount of $7 million. The insurance premiums, like other common
costs, are allocated between the Company and the Association and are charged
to expense, net of the annual increase in the cash surrender value of the
policies. The net premiums expensed by the Company for 1996, amounted to
$136,000.
 
7. 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.
 
8. 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.
 
                                      58
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Trustees
Rose Hills Memorial Park Association:
 
  We have audited the combined financial statements of Rose Hills Memorial
Park Association and Workman Mill Investment Company (Predecessor Cemetery) as
listed in the accompanying index. In connection with our audits of the
combined financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These combined financial
statements and financial statement schedule are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
combined financial statements and financial statement schedule based on our
audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
 
  The accompanying combined financial statements were prepared to present the
operations of Rose Hills Memorial Park Association and Workman Mill Investment
Company 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, Murrietta
Hills, Inc. and Workman Mill Investment Company.
 
  In our opinion, the combined financial statements referred to above present
fairly, in all material respects the changes in net assets and cash flows for
the period from January 1, 1996 to November 18, 1996 of Rose Hills Memorial
Park Association and Workman Mill Investment Company pursuant to the purchase
agreement described in note 1, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly, in all material aspects, the
information set forth therein.
 
                                          KPMG LLP
 
Los Angeles, California
May 9, 1997
 
                                      59
<PAGE>
 
                    ROSE HILLS MEMORIAL PARK ASSOCIATION AND
                        WORKMAN MILL INVESTMENT COMPANY
 
                        COMBINED STATEMENT OF ACTIVITIES
 
                Period from January 1, 1996 to November 18, 1996
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                       1996
                                                                      -------
<S>                                                                   <C>
Sales and services:
 Cemetery property, net of cancellations ............................ $10,929
 Other cemetery sales and services ..................................   8,299
                                                                      -------
  Total sales and services ..........................................  19,228
                                                                      -------
Cost of sales and services:
 Cemetery property ..................................................     658
 Other cemetery sales and services ..................................   3,257
                                                                      -------
  Total cost of sales and services ..................................   3,915
                                                                      -------
  Gross profit ......................................................  15,313
                                                                      -------
Other revenue:
 Endowment Care Fund income .........................................   1,833
 Finance income .....................................................     934
                                                                      -------
  Total other revenue ...............................................   2,767
                                                                       18,080
Selling, general and administrative expenses (including retirement
 plan curtailment loss of $421 in 1996) .............................  15,998
                                                                      -------
 Operating income (loss) ............................................   2,082
Other income (expense):
 Interest expense ...................................................     (93)
 Other income, net ..................................................      97
                                                                      -------
  Net income ........................................................ $ 2,086
                                                                      =======
</TABLE>
 
 
 
            See accompanying notes to combined financial statements.
 
                                       60
<PAGE>
 
                    ROSE HILLS MEMORIAL PARK ASSOCIATION AND
                        WORKMAN MILL INVESTMENT COMPANY
 
                  COMBINED STATEMENT OF CHANGES IN NET ASSETS
 
                Period from January 1, 1996 to November 18, 1996
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                       1996
                                                                      -------
<S>                                                                   <C>
Net assets at beginning of period.................................... $43,824
Net income...........................................................   2,086
Adjustments for exclusion of certain cash and cash equivalents
 pursuant to the Asset Purchase Agreement............................  (1,192)
Distributions received from Endowment Care Fund for capital
 expenditures........................................................   6,296
                                                                      -------
Net assets at end of period.......................................... $51,014
                                                                      =======
</TABLE>
 
 
 
 
 
            See accompanying notes to combined financial statements.
 
                                       61
<PAGE>
 
                    ROSE HILLS MEMORIAL PARK ASSOCIATION AND
                        WORKMAN MILL INVESTMENT COMPANY
 
                        COMBINED STATEMENT OF CASH FLOWS
 
                Period from January 1, 1996 to November 18, 1996
                             (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                                                        1996
                                                                       -------
<S>                                                                    <C>
Cash flows from operating activities:
 Net income........................................................... $ 2,086
 Adjustments to reconcile net income to net cash provided by (used in)
  operating activities:
  Depreciation and amortization.......................................   1,494
  Provision for sales cancellations...................................     852
  Provision for bad debts.............................................      53
  Changes in operating assets and liabilities:
   Customer accounts receivable.......................................  (1,306)
   Other receivables..................................................      84
   Due from Endowment Care Fund, net..................................    (291)
   Inventories........................................................     331
   Prepaid expenses and other assets..................................     460
   Accounts payable, accrued expenses and other liabilities...........       6
   Due from Rose Hills Company........................................    (179)
   Retirement plan liabilities........................................     145
                                                                       -------
     Net cash provided by operating activities........................   3,735
Cash flows from investing activities:
 Purchases of property, plant and equipment...........................  (8,872)
 Proceeds from dispositions of property, plant and equipment..........      18
 Distributions received from Endowment Care Fund for capital
  expenditures........................................................   6,296
                                                                       -------
     Net cash used in investing activities............................  (2,558)
                                                                       -------
Cash flows from financing activities:
 Payments received on notes receivable from Rose Hills Company........     284
 Decrease in obligations under capital leases, net....................     (26)
                                                                       -------
     Net cash provided by financing activities........................     258
                                                                       -------
     Increase in cash and cash equivalents............................   1,435
 Adjustments for exclusion of certain cash and cash equivalents
  pursuant to the Asset Purchase Agreement discussed in note 1........  (1,192)
Cash and cash equivalents at beginning of period......................     488
                                                                       -------
Cash and cash equivalents at end of period............................ $   731
                                                                       -------
     Cash paid during the period for interest......................... $    97
                                                                       -------
Non-cash investing activities:
 Purchases of software financed by capital leases..................... $   256
                                                                       =======
</TABLE>
 
            See accompanying notes to combined financial statements.
 
                                       62
<PAGE>
 
                     ROSE HILLS MEMORIAL PARK ASSOCIATION
                      AND WORKMAN MILL INVESTMENT COMPANY
 
                    NOTES TO COMBINED FINANCIAL STATEMENTS
 
               Period from January 1, 1996 to 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.
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 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. 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. The accounts of
the Endowment Care Fund are not included in the Company's combined financial
statements. All significant intercompany accounts and transactions among and
between the Association and Workman Mill have been eliminated.
 
                                      63
<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. A provision of $852,000 was charged to cemetery sales
to provide for estimated future cancellations for the period from January 1,
1996 to November 18, 1996.
 
 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.
 
 Use of Estimates
 
  Management of the Association has made certain estimates and assumptions
relating to the reporting of activities 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.
 
                                      64
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
  Adoption of this Statement did not have a material impact on the
Association's financial position, results of operations, or liquidity.
 
3. 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. 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 $1,833,000 for the period from January 1, 1996 through November 18, 1996.
 
  Total assets of the Fund are $58,239,000 at November 18, 1996, 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 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
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 changes in net assets of the Association as a not-for-
profit organization, and accordingly, management has not consolidated the
Endowment Care Fund.
 
4. 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.
 
                                      65
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
  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. 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 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. For the period
from January 1, 1996 through November 18, 1996, the Association incurred
management fees totaling $159,000.
 
  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.
 
5. 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. For the period from January 1, 1996 through November 18, 1996, the
Association recognized the allocated expense amounts totaling $259,000, in
connection with this plan.
 
                                      66
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
 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. For
the period from January 1, 1996 through November 18, 1996, the amounts
expensed by the Association for its share of contributions totaled $178,000.
 
 Board of Trustees' Retirement Plan
 
  The Association has a retirement plan (Trustees' Retirement Plan) covering
each eligible member of the Association's Board of Trustees (Trustee). A
Trustee is eligible to participate in this plan if such Trustee has completed
at least five years of service on the Board. Each eligible Trustee is entitled
to receive an annual retirement benefit equivalent to the annual Board meeting
fees. The benefit is paid for a period equal to the number of years that the
eligible Trustee served on the Board. Upon the death of an eligible Trustee,
the benefits, to which the eligible Trustee had been entitled, shall be
payable to such eligible Trustee's spouse, until receipt of the maximum
benefit to which the eligible Trustee would have been entitled, had he or she
survived, or until the death of the spouse, whichever first occurs, has been
paid.
 
  The Trustees' Retirement Plan is a noncontributory, nonqualified and
unfunded plan and represents only an unsecured general obligation of the
Association. The Board of Trustees has full and final authority to interpret
the plan and to make determinations which it believes advisable for the
administration of the plan, and all such determinations and decisions by the
Board are binding upon all parties. Net pension cost included the following
components for the period from January 1, 1996 through November 18, 1996
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                           1996
                                                                           ----
   <S>                                                                     <C>
   Service cost--benefits earned during the period ....................... $ 83
   Interest cost on projected benefit obligation .........................  141
   Net amortization and deferral .........................................  197
                                                                           ----
     Net periodic pension cost ........................................... $421
                                                                           ====
</TABLE>
 
  The present value of the projected benefit obligation and related pension
cost was determined using an assumed discount rate of 7.75% for the period
ended November 18, 1996, with no assumed pay increases due to certain Plan
provisions.
 
  Concurrent with the sale of the cemetery operations, the Trustees'
Retirement Plan ceased accrual of future benefits and vesting was accelerated
for all participants. The provisions of Statement of Financial Accounting No.
88 consider such an event a curtailment and require that any related gain or
loss is recognized in the current period. Accordingly, the Association has
recorded a curtailment loss of $421,000, which is included in selling, general
and administrative expenses in the accompanying combined statement of
activities for the period ended November 18, 1996.
 
 
                                      67
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
  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 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 $141,000 for the period from January 1,
1996 through November 18, 1996, 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.
 
  This SERP liability has been assumed by the buyer pursuant to the Asset
Purchase Agreement.
 
6. 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
 
                                      68
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
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.
 
7. 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. 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.
 
8. 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. Such provision was based on the existing facts
and circumstances and after consultation with engineers; however, given the
inherent uncertainties in evaluating
 
                                      69
<PAGE>
 
   ROSE HILLS MEMORIAL PARK ASSOCIATION AND WORKMAN MILL INVESTMENT COMPANY
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
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.
 
                                      70
<PAGE>
 
                      ROSE HILLS COMPANY AND SUBSIDIARIES
 
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                         Balance at Charged to  Charged to                 Balance at
                         beginning  costs and     other                      end of
      Description        of period   expenses  accounts (1) Deductions (2)   period
      -----------        ---------- ---------- ------------ -------------- ----------
                                                (in thousands)
<S>                      <C>        <C>        <C>          <C>            <C>
Allowance for contract
 cancellations and
 doubtful accounts:
 Current:
  Year ended December
   31, 1998 ............   $1,253     1,325        (77)         (1,374)      1,127
  Year ended December
   31, 1997.............   $1,082       862        147            (838)      1,253
  Period from November
   19, 1996 to December
   31, 1996 (the
   Company) ............   $  770        27        236              49       1,082
  Period from January 1,
   1996 to November 18,
   1996 (Proforma
   Predecessor)(3) .....   $  914       420        --             (564)        770
Long-Term:
  Year ended December
   31, 1998 ............   $1,594     1,686        (98)         (1,749)      1,433
  Year ended December
   31, 1997 ............   $1,377     1,097        187          (1,067)      1,594
  Period from November
   19, 1996 to December
   31, 1996 (the
   Company).............   $  980        35        301              61       1,377
  Period from January 1,
   1996 to November 18,
   1996 (Proforma
   Predecessor)(3) .....   $1,163       537        --             (720)        980
</TABLE>
--------
(1) Primarily consists of the opening balances for the Satellite Properties
    (1996) and reclassifications to other accounts (1997 and 1998).
(2) Uncollected receivables written off, net of recoveries.
(3) The financial data for the period January 1, 1996 to November 18, 1996
    represent the combined financial data for the predecessor Mortuary and
    Cemetery. Such presentation is pro forma in that generally accepted
    accounting principles would not allow such combination due to the lack of
    common ownership of the predecessor operations.
 
                                      71
<PAGE>
 
                                  Signatures
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          Rose Hills Company
 
                                                    /s/ Kenton C. Woods
                                          _____________________________________
                                                Kenton C. WoodsSenior Vice
                                                 President, Finance, Chief
                                             Financial Officer, Secretary and
                                                         Treasurer
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
              Signature                        Title                 Date
 
         /s/ Dillis R. Ward            President, Chief         March 24, 1999
-------------------------------------   Executive Officer
           Dillis R. Ward               and Director
 
         /s/ Kenton C. Woods           Senior Vice              March 24, 1999
-------------------------------------   President, Chief
           Kenton C. Woods              Financial Officer,
                                        Secretary and
                                        Treasurer
                                        (Principal
                                        Financial Officer)
 
         /s/ Mary C. Guzman            Vice President,          March 24, 1999
-------------------------------------   Controller
           Mary C. Guzman               (Principal
                                        Accounting Officer)
 
        /s/ Dennis C. Poulsen          Chairman and             March 24, 1999
-------------------------------------   Director
          Dennis C. Poulsen
 
        /s/ Howard A. Lipson           Director                 March 24, 1999
-------------------------------------
          Howard A. Lipson
 
          /s/ Chinh E. Chu             Director                 March 24, 1999
-------------------------------------
             Chinh E. Chu
 
         /s/ David I. Foley            Director                 March 24, 1999
-------------------------------------
           David I. Foley
 
           /s/ Paul Wagler             Director                 March 24, 1999
-------------------------------------
             Paul Wagler
 
        /s/ Michael G. Weedon          Director                 March 24, 1999
-------------------------------------
          Michael G. Weedon
 
                                      72