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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(Mark One)



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | ----------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2002



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934



Commission file number 333-21411



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ROSE HILLS COMPANY

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 13-3915765                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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



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Securities registered pursuant to Section 12(g) of the Act:

None



Indicate by check mark 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 ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x



Indicate by check
mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.  Yes ̈No  x



The number of shares outstanding of the Registrants common stock as of March 27, 2003, was 1,000.



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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 owner and operator of the Rose Hills
Mortuary, and purchasing certain assets and assuming certain liabilities of Rose Hills Memorial Park Association (the Association) and Workman Mill Company, the owners of the real property and other cemetery assets of the Rose Hills
Memorial Park (Rose Hills Cemetery).



In April
2001, the shareholders of RH Holdings reached an agreement (the Loewen Blackstone Settlement Agreement) pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. and its affiliates (collectively Blackstone),
then the beneficial owner of 79.55% of the outstanding common stock of RH Holdings, would exercise its put right and the minority shareholder, a reorganized Loewen Group International, Inc. (Loewen), would acquire all of the stock of RH
Holdings owned by Blackstone upon Loewens emergence from bankruptcy. The U.S. Bankruptcy Court confirmed Loewens reorganization plan, including the proposed acquisition of shares of RH Holdings from Blackstone on December 5, 2001, and
the plan became effective on January 2, 2002. Effective with its emergence from bankruptcy, Loewen has since been renamed the Alderwoods Group, Inc. (Alderwoods). Since the U.S. Bankruptcy Court approved the reorganization plan on
December 5, 2001, such approval effectively obligated Blackstone and Alderwoods to consummate the put agreement. Accordingly, the Company has recorded this transaction effective on December 31, 2001.



On January 3, 2002, in full satisfaction of its obligations
under the put arrangement, Alderwoods delivered to Blackstone unsecured, subordinated notes in the aggregate principal amount of $24,678,571 and Alderwoods common stock with an aggregate value of $6,515,143. As a result of the delivery of the
consideration, Alderwoods completed its purchase of all of the stock of RH Holdings beneficially owned by Blackstone. Upon closing of the transaction (Alderwoods Purchase Transaction), Alderwoods increased its ownership from 20.45% to
100% of the outstanding common stock of RH Holdings, thereby causing the Company to become a wholly owned subsidiary of Alderwoods. All shareholders and other agreements between Alderwoods and Blackstone with respect to the Company terminated as of
the closing of the transaction, and Alderwoods became entitled to elect all of the directors of the Company as of such date.



Since the Company has pushed-down the fresh-start reporting that occurred as a result of Alderwoods purchase of Blackstones
interest in the Company, the Companys successor statement of operations and statement of cash flows for the year ended December 31, 2002 are presented on a different cost basis than the predecessor statement of operations and statement of cash
flows for the years ended December 31, 2001 and 2000. Therefore, such statements are not comparable.



Rose Hills Mortuary and Memorial Park is the largest, single-location cemetery and funeral home combination in the United States, and the
Cemetery is the largest, single-location cemetery in the United States. Rose Hills Memorial Park and the Rose Hills Mortuary have been continuously operating since 1914 and 1956, respectively. Rose Hills is situated less than 14 miles from downtown
Los Angeles on approximately 1,400 acres of land near Whittier, California. In addition to Rose Hills, the Company operated 9 funeral homes, 2 funeral home cemetery combination properties and 1 cemetery property (Affiliates) as of
December 31, 2002. Management believes that Rose Hills, together with the Affiliates, constitute a strategic assembly of cemeteries and funeral homes in the greater Los Angeles area.



THE DEATH CARE INDUSTRY AND LOCAL CHARACTERISTICS



Since 1986, demand for funeral services and related commodities has grown steadily at a 1% compound annual
growth rate while the aggregate number of funeral homes has remained relatively constant. Management



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believes these demographic trends will help contribute to the stability of the funeral service industry. The Census Bureau projects that the
segment of the United States population over 65 years old, which presently totals approximately 34 million, will more than double in size to over 73 million by 2035. The Census Bureau projects that the number of deaths in the United States will grow
at approximately 1% annually through 2010.



Historically, the death care industry has been made up of relatively small, family owned and operated businesses. In the last several decades, several large consolidators have sought to take advantage of economies of
scale by acquiring a large number of smaller funeral homes and cemeteries. Management believes large consolidators serve approximately 20% of the overall market in the United States. In 1999, the trend toward consolidation changed significantly. Two
of the larger consolidators, Service Corporation, International and Stewart Enterprises, Inc, both of which compete directly in the Companys market, announced plans to significantly curtail their acquisition activity and to offer properties
for sale. In June 1999, the second largest consolidator, Loewen, now a reorganized Alderwoods and beneficial owner of 100% of the Company, entered into bankruptcy proceedings, abandoned its acquisition strategy and began to offer properties for
sale. These trends of curtailed acquisition activity continued through 2002. Although acquisitions have been curtailed, one of the major consolidators has made significant investments in new funeral homes through its relationship with the
Archdiocese of Los Angeles which compete directly with the Companys funeral homes.



The Company attracts customers from a geographic region encompassing substantially all of Los Angeles County and the northern portion of Orange County. According to statistics compiled by the State of
California Department of Health Services, the Census Bureau and Los Angeles County, the estimated population of Los Angeles County was approximately 9.9 million people (over 3 million households) in 2000. Approximately 17% of this population was age
55 or older, 10% age 65 or older, and 4% age 75 or older. The death rate in Los Angeles County has demonstrated stability over the last decade and the number of deaths is expected to increase in step with the 1% annual projected population growth in
Los Angeles County over the next five years. However, slight year-to-year variations can occur in the number of deaths. In 2001, deaths for Los Angeles County increased by approximately 1%. Current years data through October 2002 indicates
deaths have decreased 0.8% from the same 10 month period in 2001.



The Company believes that significant barriers exist for new competitors to enter the funeral and cemetery business within the Los Angeles market. Development of new cemetery property requires significant capital investment
over several years. New cemeteries must also meet the demands of a rigorous local entitlement process. Management believes that Rose Hills strategic location and large amount of undeveloped and unsold cemetery property provide it with a
significant long-term competitive advantage.



OPERATIONS



Funeral Operations



The Rose Hills Mortuary, which first began operations in
1956, provides a complete range of funeral services, including collection of remains, certification of death, embalming, sale of caskets and related merchandise, sale of flowers, visitation facilities and transportation to place of services and to
burial sites. An experienced counselor coordinates all funeral arrangements provided to each mortuary customer with the assistance of a centralized computer system. Management believes its centralized computer and operating systems combine to reduce
fixed costs per funeral call, giving the Rose Hills Mortuary a competitive advantage over smaller, independently operated funeral homes. The Mortuary has the current capacity to provide over 30 funeral services per day. In 2002, the Rose Hills
Mortuary performed approximately 4,900 funeral calls.



In addition to the Rose Hills Mortuary, the Company also operates 9 funeral homes and 2 funeral home cemetery combination properties located in Los Angeles and Northern Orange County. These affiliate funeral homes provide a wide
variety of funeral services to various communities in such counties. While the demographics of the population served by these funeral homes, taken as a whole, are generally similar to that of



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Rose Hills clients, the smaller size and unique location of each funeral home has led each to develop a demographically unique client
base within its particular community. Therefore, as a result of this extended cluster of funeral service providers, Management believes that the strategically located affiliate locations permit the Company to access a base of mortuary clients that
it otherwise would be unable to develop solely from its location near Whittier. In 2002, the affiliate funeral homes performed approximately 2,100 calls.



The Rose Hills Mortuary and its affiliate funeral homes sell funeral services on both an at-need and a pre-need basis. Substantially all
pre-need funeral services offered by the Company have been funded through the sale of a life insurance product. Under the insurance plan, the Company is named the beneficiary of the insurance policy. Revenue related to the contracted services is
recognized when such services are provided, although the Companys general agent commission income and related selling expenses are recognized upon the sale of such policies. On the date of performance of the prearranged funeral service, the
Company recognizes funeral service income and the proceeds received under the policy are applied against the contract. Currently, the Company has an arrangement with its third party insurance carrier which locks in the price of caskets at the time
an insurance policy is sold, protecting future casket margins. Prior to 1987, the Rose Hills Mortuary offered trust-backed and debenture-backed pre-need products.



Substantially all revenues from funeral operations are derived from at-need services (including services
funded through insurance policies). In 2002, total revenues from at-need services accounted for 88% (35% from pre-need conversions) of funeral operation revenue and 35% of total Company revenue. The remaining 12% of funeral operation revenue for the
period was derived from insurance commission income and trust administration fees. The amount and percentage of the Companys total revenues contributed by the funeral operations during each of the last three fiscal years is set forth herein
under the caption Item 7Managements Discussion and Analysis. For additional information about the revenues, income and assets attributable to the Companys mortuary operations, see note 22 to the Companys
consolidated financial statements which are included as part of this Annual Report on Form 10-K.



Cemetery Operations



The Rose Hills Cemetery is the largest single location cemetery in the United States and consists of approximately 1,457 total acres. As of December 31, 2002, the cemetery property is described as
approximately 740 acres of developed and sold, 33 acres of developed and unsold and 632 acres of undeveloped permitted cemetery property. The Company estimates that approximately 326 acres of the undeveloped property is rugged terrain (including a
utility company easement) and cannot be easily developed for cemetery property for economic and environmental reasons. Since its founding in 1914, the Rose Hills Cemetery has performed over 350,000 interments, of which 9,046 occurred in 2002. The
Rose Hills Cemetery provides a complete line of cemetery products (including a selection of burial spaces, private estates, vaults, crypts, memorials and niches) and burial and cremation services on both an at-need and pre-need basis.



In addition to the Rose Hills Cemetery, the Company also
operates one small cemetery located in Los Angeles and two funeral home cemetery combinations located in Northern Orange County. In 2002, the Company performed 661 interments at these locations.



Pre-need sales of cemetery interment rights are generally
recognized as revenue when the customer contracts are signed with concurrent recognition of related costs. In cases where inadequate initial down payments are made (less than 10%) pre-need cemetery interment rights are deferred until the minimum
percentage of the sales has been collected. When cemetery property is not fully developed and significant development costs remain, cemetery interment rights revenue is deferred and recognized on a percentage of completion basis.



Prior to 2000, the Company recognized the sale of cemetery
merchandise and services at the time a customer contract was signed. Effective July 1, 2000, the Company stopped selling cemetery merchandise and services on cemetery contracts in advance of need. For sales made prior to July 1, 2000, the Company
voluntarily



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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 shown as trust receivables in the consolidated financial statements.



The Company funds its obligation to maintain cemetery grounds
by placing a portion, generally ranging from $100 per standard lot to $38,000 for certain private estates, of the proceeds from cemetery property sales into perpetual care trust funds. Income from these funds is withdrawn and used for maintenance of
the cemetery.



Although the Cemetery is
non-sectarian, in order to better serve an increasingly diverse customer base, the Cemetery has developed and offers many lawn areas for use by particular ethnic, religious and fraternal organizations as well as its eight non-denominational chapels
(including the Sky Rose Chapel, a 350 seat chapel and mausoleum designed by architect Fay Jones that was completed in 1997), seven additional mausoleums and a crematory.



In 2002, approximately 56% of cemetery revenue and 33% of total Company revenue was derived from pre-need
sales of cemetery interment rights. The amount and percentage of the Companys total revenue contributed by the cemetery operations during each of the last three fiscal years is set forth herein under the caption Item
7Managements Discussion and Analysis. For additional information concerning the revenues, income and assets attributable to the Companys cemetery operations, see Note 22 to the Companys consolidated financial statements
which are included as part of this Annual Report on Form 10-K.



COMPETITION



The Company
competes with a number of sectarian and nonsectarian mortuaries and cemeteries in the greater Los Angeles area. Mortuary competition is primarily from small, local mortuaries that attract customers through the personal reputation of the funeral
director and their ability to tailor their services to their local ethnic, religious or fraternal communities. Cemetery competition comes primarily from Forest Lawn, Inglewood, Oakdale, Live Oak and Memory Gardens cemeteries, as well as a number of
cemeteries owned by the Catholic Church. The Companys primary methods of competition in both its mortuary and cemetery operations consist of building goodwill in the community by continually strengthening and leveraging its heritage and name
recognition and developing its infrastructure to further improve its ability to serve the diverse population of the greater Los Angeles area.



The Company also faces competition from large consolidators in the industry as well as casket retailers (including internet
casket stores) and low-cost funeral providers. Such competitors include several large, publicly traded multinational funeral services companies, including Service Corporation International and Stewart Enterprises, Inc. Management believes that, in
the Los Angeles area, large consolidators control over 20% of the funeral market, and together with large independents, control over 40% of the Los Angeles funeral market. Alderwoods, the parent of the Company, does not own or operate funeral homes
and cemeteries that directly compete with the Company in its markets.



In 2002, cremations represented 22% of Rose Hills funeral business and 33% of its Affiliates funeral business. In 2001, cremations in the Los Angeles market area were approximately 35% of total death cases. The
Companys traditional funeral and cemetery operations face increasing competition from non-traditional cremation and alternative service firms. The Company believes that it can capitalize on its reputation and name to compete with lesser-known
companies through its own alternative service strategy, which include products and services tailored to the cremation market.



REGULATION



The Companys operations are regulated by the State of California, which regulates the sale of cemetery property and funeral services
and commodities, and licenses sales persons, funeral directors and others engaged



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in the provision of these services. California state regulations require, among other things, that a portion of the funds received by the
Company in connection with all cemetery sales be deposited in an endowment care fund. The principal of such endowment care fund must be invested and the income from such investment may be used only for the development, improvement, embellishment and
maintenance of the cemetery. Capital gains from investments in the fund can be set-aside in a special reserve fund for major maintenance and repair projects. California state regulations also require that money received from the sale of pre-need
funeral service contracts be held in trust until the services are delivered, that such contracts may be cancelled by the customer at any time prior to the delivery of such services and that upon any such cancellation the principal and interest of
such trust (less, in certain cases, a revocation fee) be repaid to the customer.



The Companys operations must also comply with federal legislation, including the laws administered by the Occupational Safety and Health Administration, the Americans with Disabilities Act and
the Federal Trade Commission (FTC). The FTC administers the Trade Regulation Rule on Funeral Industry Practices (the Funeral Rule). The Funeral Rule defines certain acts and practices in connection with the provision of
funeral goods and services as unfair or deceptive and sets forth various requirements intended to prevent such unfair or deceptive acts and practices.



The Company currently markets its pre-need sales programs through various communication channels, including outbound telemarketing. The
Company believes that it is in compliance with the regulations of the Federal Telemarketing Consumer Fraud and Abuse Act that restrict the methods and timing of telemarketing sales calls. Recently, the FTC has passed legislation requiring
telemarketing firms to maintain separate do-not-call lists.



The Company believes that it is currently in substantial compliance with all other applicable federal, state and local laws and regulations specifically applicable to the cemetery and mortuary businesses as presently
conducted. The Company cannot predict the outcome of any proposed legislation or regulation, or the effect that any such legislation or regulation might have on the Company, its business or results of operations.



ENVIRONMENTAL MATTERS



The Companys operations are subject to various federal,
state and local environmental laws and regulations, including those pertaining to remediation of hazardous substances, the handling and disposal of biological materials and protection of endangered or threatened species. These laws and regulations
may require the Company to incur compliance, remediation and other costs from time to time or restrict development in certain environmentally sensitive areas.



Environmental audits of the Companys various properties were conducted in connection with the 1996 acquisition. Management is aware
of certain areas within the Cemetery that have required and may in the future require remediation, including a solid waste disposal area that previously was used to dump rubbish, green waste and used motor oil in the 1970s. The Company
believes that Rose Hills Foundation (the Foundation), an unaffiliated company that is the successor to the Association, is obligated to pay for or otherwise indemnify the Company for the remediation costs associated with this area
pursuant to the terms of an Environmental Compliance Agreement entered into at the time of the 1996 acquisition. To date, the Foundation has taken charge of the investigation and remediation of the areas, including installing a cap on the area. In
the past, the Company and the Foundation have disagreed about the amount of work required to remedy the situation. As a result, the Company retained its own outside technical consultant to further investigate the solid waste disposal area to
determine what risks, if any, the solid waste disposal area poses for the Company, and to quantify such risks. The Foundation has submitted a report, which incorporated the findings of the Companys consultant, to the local regional water
quality control board (Water Board), concluding that the capping has been successful and requesting that the Water Board issue a closure letter for the disposal area. The Water Board is the agency overseeing the remediation. In August 2002, the
Company received a closure letter from the Water Board indicating no further action is required and monitoring devices can be removed.



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In addition,
two of the Companys cemetery properties are located in or near areas of regional groundwater contamination. The Company submitted information in connection with contamination at one of these areas and was informed by the Environmental
Protection Agency that the Company will not be included in the Super Fund cleanup of the basin.



During August and September 2000, the Company discovered that there had been some land movement in a portion of the Rose Hills Cemetery. The affected area represents approximately 13 acres of the
Cemeterys approximately 1,400 total acres, and consists of approximately 12,000 interment sites. The Company hired outside geo-technical and engineering consultants to study the affected area to identify the underlying cause and the extent of
the land movement, and to make recommendations with regard to both short-term and long-term remediation and stabilization measures. The Companys consultants advised that the affected area could continue to move, particularly in the event of
heavy rainfall during the winter months. Accordingly, during October 2000, the Company began to take some intermediate remediation measures, including the installation of additional dewatering wells in the affected area and the relocation to other
areas of the Cemetery (at the Companys expense) of approximately 140 interred remains that were in the most severely impacted portion of the affected area. Through December 31, 2002, the Company has accommodated over 1,100 additional families
that have requested relocation of interred remains from the affected area.



Based on preliminary reports in July 2001 and additional testing through October 2001, the engineering firm concluded that the land movement most likely had been caused by a combination of geologic,
topographic, water and soil conditions within the affected area. The reports also identified a variety of measures that the Company could take to remediate and improve the stability of the area, including the construction and installation of
engineered reinforcement fill berms at the base of the slide, the installation of de-watering wells throughout the affected area, and the implementation of other erosion control measures. Based on these test results and recommendations provided by
the engineering firm, the Company decided to undertake complete restoration and stabilization of the affected area. In the first quarter of 2002, the Company began its remediation of the affected area by installing additional de-watering wells. In
June 2002, the engineering firm finalized their earthwork construction design plans, including the exact area that would require disinterments and relocation of interred remains in preparation for the construction project. The construction and
installation of the reinforcement berms will begin after the necessary disinterments and relocations are completed. The Company expects to begin construction during the first quarter 2004 and to complete construction by the end of the third quarter
2004.



In 2001, the Company reserved $3.0 million
for the estimated remediation project costs in excess of the availability of remaining Endowment Care Fund (ECF) improvement reserve funds. The Company spent approximately $1.0 million in each of the years ended December 31, 2001 and 2002 on
remediation and related costs. The remaining remediation costs will be spent in 2003 through the third quarter of 2004. As of December 31, 2002, the Companys remaining accrued liability and the ECF improvement reserve fund balance available
for future remediation costs totaled approximately $1.0 million and $1.8 million, respectively. Management believes, based in part on the advice of its geo-technical consultants and the availability of ECF improvement reserves, the Companys
reserve as of December 31, 2002 is adequate to fulfill future remediation cost obligations.



EMPLOYEES



As of December 31, 2002, the Company had 678 employees. In general, Management believes that the Companys relationship with its employees is good.



In January 2003, the Company was notified by the National Labor Relations Board (NLRB) that the
Teamsters Union petitioned to be the collective bargaining agent for approximately 60 employees of the Company. On February 28, 2003, a majority of the 60 employees voted to have the Teamsters Union represent them as a collective bargaining agent.
Negotiations on the collective bargaining agreement have not commenced.



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ITEM
2.    
PROPERTIES.



The
property on which the Rose Hills Cemetery is located consists of approximately 1,457 total acres. As of December 31, 2002, the cemetery property is described as approximately 740 acres of developed and sold, 33 acres of developed and unsold and
632 acres of undeveloped permitted cemetery property. The Company estimates that approximately 326 acres of the undeveloped property is rugged terrain (including a utility company easement) and cannot be easily developed for cemetery property for
economic and environmental reasons. Also located on the grounds of Rose Hills are eight chapels that seat over 800 people in the aggregate, seven mausoleums, 39 visitation rooms, a crematory and a 43,460 square foot administrative building. In
addition to the above facilities, Sky Rose Chapel, a 26,490 square foot chapel and mausoleum facility, is also located on the Cemetery grounds.



The Mortuarys facilities consist of 13.3 acres of land, a two-story, 74,000 square foot mortuary and administrative building
(inclusive of relevant properties above), an adjacent flower shop and storage facilities.



The Affiliates locations consist of the funeral homes and combination properties located in the cities listed below:



|Name                                                    |  | Location                                                                                              
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------
|Rose Hills Affiliates (nine funeral homes)              |  | West Covina, Covina, Glendora, La Puente (two locations) Bellflower, Brea, Garden Grove West
Hollywood
|Harbor Lawn Mount Olive Memorial Park (1)               |  | Costa Mesa                                                                                            
|Melrose Abbey (including Angels Lawn Memorial Park) (2) |  | Anaheim                                                                                               
|Home of Peace Memorial Park (3)                         |  | Los Angeles                                                                                           

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|(1) |  | Combination property located on 28 acres; includes a funeral home and a cemetery (with crematory).
|--- |  | --------------------------------------------------------------------------------------------------

|(2) |  | Combination property located on 20 acres; includes a funeral home and a cemetery.
|--- |  | ---------------------------------------------------------------------------------

|(3) |  | Cemetery property located on 35 acres; includes a funeral home that, while not currently in use, can be made fully operational.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------



The Company owns ten of the Affiliate locations, while the
remaining two are leased.



The obligations of RH
Holdings, the Company and each of the Companys existing and future domestic subsidiaries under the Bank Credit Facilities (as defined below) are secured by a first priority security interest in all existing and future assets (including the
real property located at Rose Hills, but excluding other real property and vehicles covered by certificates of title) of each such entity. See item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.



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.



In connection
with the 1996 acquisition, the Rose Hills Memorial Park cemetery land was subject to a significant step-up in assessed value by the County of Los Angeles. In July 2000, the County of Los Angeles completed its property tax reassessment reflecting its
opinion of the fair value of Rose Hills cemetery property at the 1996 acquisition date. The County placed a fair value on the cemetery property that is approximately 60% higher than the independent appraisal prepared by a property tax
consultant and approximately 50% higher than the fair market value computed by an independent appraiser at the time of the 1996 acquisition. The Company



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filed an assessment appeal with the Los Angeles County Assessor. In December 2002, the Company received written notification from the Los
Angeles County Assessors Office that the 1996 property base taxable value was reduced to an amount consistent with the property tax expense accrued by the Company.



ITEM 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.



None.



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PART II



ITEM 5.    
MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.



In connection with the acquisition of Rose Hills in 1996, 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 as of and for the fiscal year ended December 31, 2002, and as of and for each of the preceding four fiscal years. The selected financial data
under the captions Income Statement Data, Other Financial Data and Balance Sheet Data for the years ended December 31, 1998 through 2002 were derived from the Companys financial statements.



Effective January 1, 2000, the Company changed its method of
accounting for revenue recognized on sales of pre-need interment rights, cemetery services and merchandise, and for earnings realized through the cemetery service and merchandise trust funds. For further details, see note 5 to the Companys
consolidated financial statements included in Item 15. Data for fiscal years 1998 through 1999 are presented as originally reported.



The following information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations, the Companys consolidated financial statements and notes thereto and other financial information included elsewhere in this report. As a result of the changes in control discussed in Item 1, certain financial
statements are referred to as Predecessor and others as Successor. The Income Statement Data and Other Financial Data for the years ended December 31, 2002 is presented as Successor. The December 31, 2001, 2000,
1999 and 1998 are presented as Predecessor. The Balance Sheet Data for the period ended December 31, 2002 and 2001 are presented as Successor and all remaining years are presented as Predecessor. As a result, the
Balance Sheet Data as of December 31, 2002 and 2001 are on a different cost basis and will not be comparable.



|                                                                 |  | Selected Consolidated Financial Data (Dollars in millions) For the Year Ended December 31, |      
|---------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | -----
|                                                                 |  | Successor 2002                                                                             |      
|INCOME STATEMENT DATA                                            |  |                                                                                            |      
|Total revenue                                                    |  | $                                                                                          | 78.3 
|Asset write-down                                                 |  |                                                                                            |     
|Operating income (loss)                                          |  |                                                                                            | 16.7 
|Net income (loss) before cumulative effect of accounting change. |  |                                                                                            | 4.8  
|Cumulative effect of accounting change, net of tax               |  |                                                                                            |     
|Net income (loss)                                                |  |                                                                                            | 4.8  
|OTHER FINANCIAL DATA                                             |  |                                                                                            |      
|EBITDA                                                           |  |                                                                                            | 26.0 
|Cash flows from:                                                 |  |                                                                                            |      
|Operating activities                                             |  |                                                                                            | 13.5 
|Investing activities                                             |  |                                                                                            | (3.6 
|Financing activities                                             |  |                                                                                            | (9.5 
|                                                                
|                                                                 |  | Successor 2002                                                                             |      
|BALANCE SHEET DATA                                               |  |                                                                                            |      
|Total assets                                                     |  | $                                                                                          | 405.9
|Long-term obligations (1)                                        |  |                                                                                            | 131.7

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|(1) |  | Long-term obligations include long-term debt (including bank borrowings and subordinated notes) and capital leases.
|--- |  | -------------------------------------------------------------------------------------------------------------------



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EBITDA



The Companys earnings before interest expense, taxes,
depreciation, amortization (including cemetery property amortization included in cost of sales) and special charges (EBITDA) for the years ended December 31, 2002 through 1998 are presented in the table below and reconciled to the
accompanying financial statements (in thousands):



|                                    |  | For the years ended December 31,
|----------------------------------- |  | --------------------------------
|                                    |  | Successor 2002                  
|Net income (loss)                   |  | $                               
|Interest                            |  |                                 
|Taxes                               |  |                                 
|Deprecation and amortization        |  |                                 
|Amortization of cemetery property   |  |                                 
|Asset write-downs and other charges |  |                                 
|Cumulative effect of SAB 101        |  |                                 
|                                    |  |                                 
|EBITDA                              |  | $                               

---

|(1) |  | 1999 includes a non-recurring gain on a Settlement Agreement.
|--- |  | -------------------------------------------------------------



EBITDA is presented because it is a widely accepted financial indicator of a companys ability to incur and service debt and it is
the basis on which compliance with the financial covenants under the Companys debt agreements is determined. EBITDA should not be considered in isolation, as a substitute for net income or cash flow data prepared in accordance with accounting
principles generally accepted in the United States of America, or as a measure of a companys profitability or liquidity. Also, this measure of EBITDA may not be comparable to similar measures reported by other companies.



ITEM 7.    
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



INTRODUCTORY NOTES



CHANGE IN CONTROL OF REGISTRANT



As discussed in Item 1Business, effective December 31, 2001, Alderwoods, the minority shareholder, acquired 100% of the outstanding
common stock of RH Holdings. Accordingly, the December 31, 2001 consolidated balance sheet reflects the fresh-start accounting that has been pushed-down as a result of this transaction. As a result, the consolidated balance sheets prior
to December 31, 2001 are on a different cost basis, and therefore are not comparable. The consolidated balance sheets dated December 31, 2002 and 2001 are referred to as successor. See further discussion below of methods and assumptions
in Critical Accounting Policies and Estimates and in note 1 to the consolidated financial statements for an itemized accounting of the push-down adjustments.



CHANGE IN ACCOUNTING PRINCIPLE



SAB 101. In December 1999, the United States Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (the Bulletin). The Bulletin provides the SEC Staffs views on the application of existing accounting principles generally accepted in the United
States of America to revenue recognition in financial statements. The Bulletin, which applies to all companies and was not directed at the death care industry, states that industry practice would not override these views. The Bulletin among other
matters emphasizes the importance of physical delivery of a product or service to justify the recognition of revenue. The Company had heretofore followed industry practice in recognizing



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revenues, including recognizing revenue upon the sale of cemetery merchandise and services before delivery of such product and performance of
services.



In response to the issuance of the
Bulletin and consultation with the SEC Staff, the Company changed the following accounting principles effective January 1, 2000:



| | · |  | Revenue recognition of pre-need interment rights are now accounted for in accordance with Financial Accounting Standards (SFAS) No. 66, Accounting for the Sales of
Real Estate. The cost of goods sold for the deferred sales are now deferred and recognized concurrent with the recognition of the deferred sales. Prior to January 1, 2000, the Company recognized the sale of pre-need interment rights, and their
related costs, at the time of sale;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Revenue recognition of pre-need cemetery services and merchandise, and their direct costs, are now deferred until time of delivery or performance of service. Prior
to January 1, 2000, the Company recognized the sale of pre-need service and merchandise, and their related costs, at the time of sale; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Earnings realized by the cemetery service and merchandise trust funds are now deferred until the underlying service is performed or merchandise is delivered. Prior
to January 1, 2000, the Company recognized the earnings as they accrued.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The cumulative effect of these changes in accounting principles on prior years resulted in a $12.3 million decrease in net earnings before taxes and a $7.5 million decrease in net earnings after taxes
for the year ended December 31, 2000.



CRITICAL ACCOUNTING
POLICIES AND ESTIMATES



The Companys
critical accounting policies are as follows:



Cemetery Revenue Recognition



Pre-need sales of cemetery interment rights are recognized in accordance with the guidance of SFAS No. 66, Accounting for the Sales of Real Estate. Accordingly, sales of interment rights are recognized under the full accrual
method, the percentage of completion method, or the deposit method depending on the level of the buyers down payment and any continuing involvement the Company has in developing sold property. Direct cost of goods sold are deferred and
recognized concurrent with the recognition of deferred sales. Costs relating to the sale of cemetery interment rights, including sales commissions, are expensed in the period incurred.



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 over the past 6 years. In 2002 and 2001, a 4% and 5% effective cancellation rate was used to provide for anticipated cancellations and refunds, respectively. Actual
cancellation rates in the future may result in a change in estimate. Significant variances in expected cancellations could impact future gross margins.



Pre-need merchandise and service sales, and their direct cost of goods sold, are recognized at the time of delivery of merchandise or
performance of service. Costs relating to the sale of merchandise and services, including sales commissions, are expensed in the period incurred.



At-need sales of cemetery interment rights, merchandise and services are recognized when the merchandise is delivered or the service is
rendered.



A portion of the proceeds from the
sale of interment rights is required by state law to be paid into an Endowment Care Fund to provide for the perpetual care of the associated properties. Cemetery revenue is recorded net of these amounts. Interest and dividend earnings of the
Endowment Care Funds are used to defray



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the maintenance costs of the cemeteries which are expensed as incurred. Additionally, pursuant to state law, the proceeds from the sale of
pre-need merchandise and services may also be required to be paid into trust funds. A significant increase in cost of services or loss of principal in the trust could negatively impact future gross margins.



It is the Companys policy to voluntarily trust 100% of
pre-need service revenue when contracts are paid in full. Also, the Company has an agreement with a vendor to purchase pre-need merchandise when the sales contracts are paid in full. Funds voluntarily trusted for pre-need cemetery services are
included in the consolidated financial statements.



Effective January 1, 2000, the Company changed its method of accounting for pre-need sales of cemetery products and services. See Introductory NotesChange in Accounting Principles.



Funeral Revenue Recognition



Pre-arranged funeral services provide for future funeral
services and are generally determined by prices prevailing at the time the contract is signed. The payments made under the contract are either placed in trust or are used to pay the premiums of third-party life insurance policies under which the
Company will be designated as beneficiary. The pre-need funeral insurance policies sold by the Company are whole-life policies sold on a pre-need basis to pay for the cost of funeral services. Commissions earned are based on a combination of
factors, such as the amount of funeral cost coverage sold, the age of the insured and the volume of monthly sales activity. Insurance commissions earned and related selling expenses are recognized when the insurance company accepts the policies.
Except for insurance commissions, no income is recognized until the performance of a specific funeral.



Income from trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust
and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon
performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amounts together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Costs relating to
the sale of pre-arranged funeral services, including sales commission expense, are expensed in the period incurred.



At-need funeral services revenues are recognized when the service is performed.



Valuation of Long-Lived Assets



Through December 31, 2001, the Company accounted for
long-lived assets under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized was measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets. Assets
to be disposed of were reported at the lower of the carrying amount or fair value, less cost to sell. In 2001, the long-lived assets of two operating locations were reduced $1,032,000 and charged to Asset Write-Down and Other Charges.



Effective January 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds



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the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to
sell.



Valuation of Goodwill



Through December 31, 2001, the excess of purchase price over
the fair value of identifiable net assets acquired (goodwill) was being amortized by use of the straight-line method over a 40-year period.



As a result of Alderwoods purchase of Blackstones interest in the Company, the Company recorded the push-down of
Alderwoods fresh-start reporting in its successor consolidated balance sheet as of December 31, 2001. As of December 31, 2001, the Company estimated the excess of the purchase price over the fair values of identifiable net assets based upon a
third party appraisal of the Companys enterprise value. Based upon the third party appraisal, the Company recorded goodwill of $67,385,000, a $46,065,000 reduction to the predecessor Companys goodwill at December 31, 2001.



Effective January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment for each of the Companys reporting segments. The
Companys reporting segments are cemetery operations and funeral operations. The annual review entails determining an estimated fair value of goodwill for comparison to the carrying amount of goodwill, to assess whether or not impairment has
occurred. In determination of the estimated fair value of goodwill, the Company compared the net carrying value of assets (including goodwill) less liabilities to the discounted cash flows of each segment. The Company performed its annual goodwill
impairment review on October 31, 2002. No impairment to goodwill was identified during the review. Such determination involves complex assumptions; accordingly, if any estimates or related underlying assumptions change in the future, the Company may
be required to record goodwill impairment charges that result.



As a result of the adoption of SFAS No. 142, the Company did not record any amortization expense of goodwill for the twelve months ended December 31, 2002. The following table shows the impact of the adoption of SFAS No. 142 (in
thousands):



|                                |  | Twelve Months ended December 31, |      
|------------------------------- |  | -------------------------------- | -----
|                                |  | Successor 2002                   |      
|Reported net income (loss)      |  | $                                | 4,766
|Add back: goodwill amortization |  |                                  |     
|                                |  |                                  |      
|Adjusted net income (loss)      |  | $                                | 4,766
|                                |  |                                  |      



In 2002,
the Company utilized a $444,000 benefit from the December 31, 2001 net operating loss carry forward valuation allowance. The guidance provided by SFAS No. 109 and Statement of Position No. 90-7, state that the benefit of a valuation allowance for a
deferred tax asset is to be recorded to goodwill. Accordingly, goodwill was reduced $444,000 in 2002.



Critical Accounting Policies related to Push-down Accounting



Valuation of the CompanyIn April 2001, Loewen and Blackstone negotiated a settlement pursuant to
which Blackstone would exercise its Put Option (see Item 13Certain Relationships and Related Transactions) and Loewen would acquire all of RH Holdings common shares owned by Blackstone. The Loewen Blackstone Settlement Agreement,
which was contingent on Loewens emergence from bankruptcy,



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indicated Blackstone would receive a promissory note for approximately $24.7 million and newly reorganized Loewen (Alderwoods) common stock
valued at approximately $6.6 million, in full satisfaction of all of Blackstones claims in the Loewen bankruptcy. Management did not use the consideration received by Blackstone as the purchase price to value the Companys assets, since
the amount of consideration was an amount negotiated to settle Blackstones claims under the Put/Call Agreement and other claims with Loewen and not based on the fair value of RH Holdings common stock. Instead, management based the purchase
price paid by Blackstone to Alderwoods upon a third party appraisal of the Companys enterprise value of $64.5 million which was recorded by the Company in the push-down of the fresh start accounting. Management also used third party appraisals
to estimate the fair value of the Companys long-lived assets and cemetery inventory and in the push-down accounting. The Company increased the value in the push-down accounting of its long-lived assets to $33.3 million and adjusted the value
of its cemetery property inventory and goodwill by $41.4 million and $46.1 million, respectively, based upon the third party appraisals.



Market Value of DebtThe estimated market value at the consummation of the change in ownership of the Companys senior
subordinated notes was 96% of their maturity value. Accordingly, a $3.2 million adjustment was recorded to reduce the subordinated notes to their fair value, resulting in a new effective rate of 11.34%. In addition, the remaining $4.1 million
deferred financing costs related to the 1996 acquisition debt was eliminated.



Adjustment of Deferred Pre-need Cemetery Contract Revenue in conjunction with Push-down AccountingManagement has estimated the value of deferred pre-need cemetery contract revenue by 1)
performing an analysis to determine the current cost of the services to be rendered by the Company, 2) utilizing mortality rates to anticipate the date of service fulfillment, and 3) using inflationary rates and discount rates to project the present
value of the cost to perform the obligated services. As a result, the deferred pre-need cemetery contract revenue was reduced $7.7 million in the push-down accounting. Significant changes in mortality, costs of services and merchandise, inflation,
and interest rates could negatively impact future gross margins.



RESULTS OF OPERATIONS



The following table sets forth certain income statement data as a percentage of total sales as reported for the years ended December 31, 2002, 2001 and 2000.



|                                    |  | Years ended December 31, |  
|----------------------------------- |  | ------------------------ | -
|                                    |  | Successor 2002           |  
|Sales and Services                  |  |                          |  
|Funeral sales and services          |  | 40.6                     | %
|Cemetery sales and services         |  | 59.4                     | %
|Total sales and services            |  | 100.0                    | %
|Gross Profit:                       |  |                          |  
|Funeral sales and services          |  | 30.1                     | %
|Cemetery sales and services         |  | 29.2                     | %
|Total gross profit                  |  | 29.6                     | %
|General and Administrative Expenses |  | 8.2                      | %
|Interest Expense                    |  | 15.1                     | %



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YEAR ENDED DECEMBER 31,
2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001



The following table presents the results as reported for the years ended December 31, 2002 and 2001 (in thousands):



|                                                                      |  | Years ended December 31, |       
|--------------------------------------------------------------------- |  | ------------------------ | ------
|                                                                      |  | Successor 2002           |       
|Sales and services                                                    |  |                          |       
|Funeral:                                                              |  |                          |       
|Services and merchandise                                              |  | $                        | 27,596
|Insurance commissions                                                 |  |                          | 3,635 
|Disposed locations                                                    |  |                          | 433   
|Other                                                                 |  |                          | 141   
|                                                                      |  |                          |       
|Funeral sales and services                                            |  | $                        | 31,805
|Cemetery:                                                             |  |                          |       
|Pre-need                                                              |  | $                        | 25,920
|At-need                                                               |  |                          | 17,367
|Endowment care                                                        |  |                          | 3,185 
|                                                                      |  |                          |       
|Cemetery sales and services                                           |  | $                        | 46,472
|                                                                      |  |                          |       
|Total sales and services                                              |  | $                        | 78,277
|Gross profit:                                                         |  |                          |       
|Funeral sales and services                                            |  | $                        | 9,562 
|Disposed locations                                                    |  |                          | (4    
|Cemetery sales and services                                           |  |                          | 13,584
|                                                                      |  |                          |       
|Total gross profit                                                    |  | $                        | 23,142
|General and administrative expenses                                   |  |                          | 6,395 
|Amortization expense                                                  |  |                          | 24    
|Asset write-down and other charges                                    |  |                          | 18    
|Interest expense                                                      |  |                          | 11,819
|Finance and interest income                                           |  |                          | (2,913
|Income (loss) before taxes and cumulative effect of accounting change |  |                          | 7,799 
|EBITDA (2)                                                            |  |                          | 26,037

---

|(1) |  | 2001 includes special charges related to the disposal of certain funeral locations and environmental issues. Excluding these charges, the loss before taxes and
cumulative effect of accounting change would have been $4.1 million (see note 4 in the consolidated financial statements).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | See Item 6Selected Financial Data, for explanation of EBITDA and reconciliation to net income (loss).
|--- |  | ------------------------------------------------------------------------------------------------------



Consolidated revenues for the year ended December 31, 2002
totaled $78.3 million compared to $77.2 million for the year ended December 31, 2001. Consolidated gross profit totaled $23.1 million in 2002 compared to $18.5 million in 2001. As a percentage of revenue, consolidated gross profit percentage
increased to 30% in 2002 from 24% in 2001.



Funeral Operations:



Revenues from funeral operations decreased 2.7% to $31.8 million in 2002 compared to $32.7 million in 2001. At-need funeral revenue same store sales totaled $27.6 million in 2002, which is compared to $27.7 million in the
prior year. On a same store sales basis, the Company performed 6,996 funeral service calls in 2002 compared to 7,289 in 2001, a 4.0% decline. The decline in funeral calls from the prior year was largely due to competition at the affiliate funeral
home locations. The average revenue per funeral call increased from $3,798 in 2001 to $3,944 in 2002. The increase in call revenue average was due to changes in service and casket product



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mix at the Rose Hills funeral home and a price increase implemented in January 2002. The increase in average revenue per call partially
offset the decline in calls. Pre-need funeral service revenue totaled $3.6 million compared to $3.2 million in the prior year, an increase of 13.4%. The gross profit margin for the funeral segment increased to 30.1% from 27.3% in the prior year. The
improvement in margin is due to improvements in operational labor efficiencies, price increases at Rose Hills funeral home in early 2002 and a favorable change in the sales mix of products and services. In 2002, the Companys funeral and
cemetery insurance and trust backlog increased over 4% from $172.1 million to $179.3 million.



Cemetery Operations:



Revenues from cemetery operations increased 4.4% compared to last year to $46.5 million. Pre-need cemetery revenue increased 7.3% from $24.2 million in 2001 to $25.9 million in 2002. Pre-need cemetery
revenues in 2001 include a bulk sale to the International Buddhist Progress Society (IBPS) for $1.8 million. No comparable sale was made in the current year. In 2002, the pre-need cemetery lot averages and number of units sold increased 10% over the
prior years production. In the fourth quarter of 2002, a significant number of specialty properties were sold while under construction. As a result, approximately $1.0 million of pre-need cemetery revenue was deferred under the percentage of
completion accounting method. At-need cemetery revenue in 2002 was $17.4 million compared to $16.7 million in the prior year. The favorable variance in at-need cemetery business is primarily due to the 4% price increase in cemetery services in
January 2002. Total interments were comparable to prior year at 9,683 in 2002.



Gross profit, as a percentage of sales, increased from 21.6% in 2001 to 29.2% in 2002. The primary reasons for the improved margin was the lower margin associated with the IBPS bulk sale in 2001, price
increases at Rose Hills Memorial Park, reduced advertising spending and reduced amortization of cemetery property due to the re-valuation of cemetery inventory from the Alderwoods Purchase Transaction.



Other:



Corporate general and administrative expenses decreased from
$7.5 million in 2001 to $6.4 million in 2002. The decrease of $1.1 million compared to last year was due to a special $0.6 million charge for a settlement of lawsuit involving the maintenance of drainage easements for Rose Hills Memorial Park and a
$0.6 million phantom equity plan charge, both of which were incurred in 2001. As a percentage of total sales, general and administrative expenses were 8.2% in 2002 compared to 8.1% for the prior year, excluding the special charges.



EBITDA, earnings before taxes, depreciation and amortization
(including cemetery property amortization included in cost of sales) and excluding special charges, increased to $26.0 million for 2002 from $22.8 million for 2001. The primary reasons for the $3.2 million increase in EBITDA over the prior year was
the $1.2 million of special charges in 2001, increased cemetery sales volume and increased emphasis in funeral operational labor efficiencies. EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in
accordance with accounting principles generally accepted in the United States of America or as a measure of the Companys profitability or liquidity. See Item 6Selected Financial Data, for a reconciliation of EBITDA to net income (loss).



16



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YEAR ENDED DECEMBER 31,
2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:



The following table represents the results as reported for the year ended December 31, 2001 and for the year ended December 31, 2000 (in thousands):



|                                                             |  | Years ended December 31, |        
|------------------------------------------------------------ |  | ------------------------ | -------
|                                                             |  | Predecessor 2001         |        
|Sales and services                                           |  |                          |        
|Funeral:                                                     |  |                          |        
|Services and merchandise                                     |  | $                        | 28,405 
|Insurance commissions                                        |  |                          | 3,238  
|Disposed locations                                           |  |                          | 829    
|Other                                                        |  |                          | 215    
|                                                             |  |                          |        
|Funeral sales and services                                   |  | $                        | 32,687 
|Cemetery:                                                    |  |                          |        
|Pre-need                                                     |  | $                        | 24,153 
|At-need                                                      |  |                          | 16,770 
|Endowment care                                               |  |                          | 3,610  
|                                                             |  |                          |        
|Cemetery sales and services                                  |  | $                        | 44,533 
|                                                             |  |                          |        
|Total sales and services                                     |  | $                        | 77,220 
|Gross profit:                                                |  |                          |        
|Funeral sales and services                                   |  | $                        | 8,965  
|Disposed locations                                           |  |                          | (48    
|Cemetery sales and services                                  |  |                          | 9,616  
|                                                             |  |                          |        
|Total gross profit                                           |  | $                        | 18,533 
|General and administrative expenses                          |  |                          | 7,462  
|Amortization expense                                         |  |                          | 3,662  
|Asset write-down and other charges                           |  |                          | 8,160  
|Interest expense                                             |  |                          | 14,725 
|Finance and interest income                                  |  |                          | (3,185 
|Loss before taxes and cumulative effect of accounting change |  |                          | (12,291
|EBITDA (2)                                                   |  |                          | 22,809 

---

|(1) |  | 2001 includes special charges related to the disposal of certain funeral locations and environmental issues. Excluding these charges, the loss before taxes and
cumulative effect of accounting change would have been $4.1 million (see note 4 in the consolidated financial statements).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | See Item 6Selected Financial Data, for explanation of EBITDA and reconciliation to net income (loss).
|--- |  | ------------------------------------------------------------------------------------------------------



Consolidated revenues for the year ended December 31, 2001
totaled $77.2 million compared to $76.6 million for the year ended December 31, 2000. Consolidated gross profit totaled $18.5 million in 2001 compared to $21.0 million in 2000. As a percentage of revenue, consolidated gross profit percentage
decreased to 24.0% in 2001 from 27.4% in 2000.



Funeral Operations:



Revenues from funeral operations increased 1.2% to $32.7 million in 2001 compared to $32.3 million in 2000. At-need funeral revenue same store sales totaled $28.4 million, representing a 2.5% increase from the prior year.
On a same store basis, the Company performed 7,628 funeral calls in 2001 compared to 7,512 in 2000. The Rose Hills funeral home experienced a 3.5% call increase, which was partially offset by a 2.5% decrease at the affiliate funeral locations. Based
upon available market data from Vital Statistics (an independent firm that compiles and issues funeral home statistics for the greater Los Angeles area), the Company believes that



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the increase in funeral calls at Rose Hills was due to an overall increase in deaths in the geographic region and an increase in market
share. Pre-need funeral service revenue totaled $3.2 million compared to $2.9 million in prior year, an increase of 10.3%. The significant increase over the prior year was due to a greater emphasis on increasing prearranged funeral services and
beginning in July 2000, offering cemetery merchandise and services as part of the pre-arranged funeral insurance contracts. As of December 31, 2001, the Company had a pre-arranged funeral and cemetery backlog of $172.1 million



As a percentage of sales, gross profit for the funeral segment
increased from 26.6% in 2000 to 27.3% in 2001. The increase in gross profit percentage was primarily attributable to the divestiture in June 2001 of four under performing affiliate funeral home locations that were operating near breakeven.



Cemetery Operations:



Cemetery revenue in 2001 was comparable to 2000 at $44.5
million. Pre-need cemetery revenue increased 2.1% from $23.7 million in 2000 to $24.2 million in 2001. Pre-need cemetery revenues in 2001 include a bulk sale to the IBPS for $1.8 million. No comparable sale was made in 2000. The total property units
sold in 2001 were 8,392 compared to 9,256 in 2000. In 2001, over 30% of pre-need property revenue was in semi-private and private estate products, compared to 17% in 2000. The shift in property product revenue mix to higher priced custom estates
resulted in property unit revenue averages increasing over 3.5%. However, custom estate properties generally have lower margins due to added development costs. In the fourth quarter of 2001, the Company offered several lower interest rate-financing
programs to customers that resulted in increased volume. The lower interest rate programs also resulted in $0.7 million of imputed sales discounts, negatively affecting gross profit margins. At-need cemetery revenue in 2001 was $16.8 million
compared to $16.7 million in the prior year. Total interments increased 2.7% from 9,446 in 2000 to 9,705 in 2001.



Gross profit, as a percentage of sales, decreased from 28.0% in 2000 to 21.6% in 2001. The $2.8 million margin decline over the prior year
is due to a change in sales mix to lower margin private and semi-private estate sales, the IBPS $1.8 million bulk land sale in 2001 and lower interest rate financing programs. In addition, pre-need commission expense has increased as a percentage of
sales from 28% to 29% along with approximately $1.0 million in increased spending on a major media campaign in early 2001.



Other:



Corporate general and administrative expenses of $7.5 million for 2001, approximates 9.7% of sales. Included in 2001 was a $0.6 million
legal settlement. Excluding this special charge in 2001, corporate general and administrative expenses decreased 8.7% over the prior year.



EBITDA, earnings before taxes, depreciation and amortization (including cemetery property amortization included in cost of sales and
excluding special charges of $8.2 million), decreased to $22.8 million for 2001 from $23.8 million for 2000. EBITDA decreased $1.0 million as a result of decreased cemetery profit margins and a $0.6 million legal settlement. EBITDA should not be
considered in isolation as a substitute for net income or cash flow data prepared in accordance with accounting principles generally accepted in the United States of America or as a measure of the Companys profitability or liquidity. See Item
6Selected Financial Data, for a reconciliation of EBITDA to net income (loss).



LIQUIDITY AND CAPITAL RESOURCES



Cash Flow/Working Capital



Net cash provided by operating activities was $13.5 million for the year ended December 31, 2002, compared to $11.4 million for the same period in 2001. An increase in pre-need cemetery sales and reduction of interest payments was
primarily responsible for the increase in cash from operating activities which was partially



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offset by a one-time $2.5 million change in control payment to management in January 2002. As of December 31, 2002, the Company had a
current ratio of 0.32 compared to a current ratio of 0.97 as of December 31, 2001.



The primary use of cash has been for working capital, principal payments on outstanding long-term indebtedness and capital expenditures as permitted under the terms of bank agreements. Although the
Company has no material commitments for capital expenditures in 2003, the Company anticipates spending approximately $2.0 million in 2004 to reclaim approximately 13 acres of cemetery property at the Rose Hills Memorial Park negatively impacted by
land movement. The Companys capital expenditures in 2002 of $3.6 million were used primarily to develop and improve the existing infrastructure and cemetery grounds.



On February 14, 2003, the terms of Alderwoods $75.0 million Credit Facility Agreement was amended to
allow Alderwoods, upon the satisfaction of specified conditions precedent, to draw up to $30.0 million from its credit facility for the purposes of assisting in the repayment of the principal amount of $52.6 million outstanding under the
Companys Bank Term Facility. Under the terms of the amended Alderwoods Credit Facility Agreement, Alderwoods obligations thereunder will be guaranteed by RH Holdings, the Company and the Companys subsidiaries, and the lenders
thereunder will receive a first priority security interest in and lien on all personal property of RH Holdings, the Company and the Companys subsidiaries and the real property of eight affiliate funeral homes and cemeteries. Real property at
Rose Hills Memorial Park and Mortuary is not included in the Alderwoods Credit Facility Agreement. Alderwoods has committed, upon the satisfaction of specified conditions precedent, at a minimum, to contribute $42.0 million in equity cash to the
Company prior to May 1, 2003. Upon receipt, the Company intends to retire in full the $52.6 million outstanding under its Bank Term Facility using the equity cash contribution from Alderwoods and up to $10.6 million of its own funds.



The Company believes that the equity cash contributions from
Alderwoods, together with its existing and projected cash flows, will be sufficient to maintain its current level of operating activities through November 2004 when the Senior Subordinated Notes mature.



Long-Term Indebtedness



The Companys total indebtedness as of December 31, 2002
was $131.7 million. After retirement of the Bank Term Facility (as discussed below) the Companys remaining indebtedness will consist of the $80.0 million in outstanding Senior Subordinated Notes. The Company will have to obtain new or
additional financing to pay some or all the principal amount outstanding on the Senior Subordinated Notes (due on November 15, 2004). No assurance can be given that such financing will be available to the Company or, if available that it may be
obtained on terms and conditions that are satisfactory to the Company.



Bank Term Facility



In connection with the 1996 acquisition, the Company entered into senior secured amortization extended term loan facilities (the Bank Term Facility) in an aggregate principal amount of $75.0 million, the proceeds of which
were used to finance the 1996 acquisition and related transaction costs, to pre-fund certain capital expenditures and to refinance existing indebtedness of the Company, and a senior secured revolving credit facility (the Bank Revolving
Facility) in an aggregate principal amount of up to $25.0 million, the proceeds of which are available for general corporate purposes and a portion of which could be extended (as agreed upon) in the form of swing line loans or letters of
credit for the account of the Company. Effective May 2, 2001 the Company amended the Bank Revolving Facility reducing the aggregate principal amount available to $10.0 million and extending its maturity date to April 1, 2003. Borrowings under the
Revolving Credit Facility must be fully paid for a minimum period of 30 days for each 12-month period ending December 1. As of March 24, 2003, the Company had no borrowings under the Revolving Credit Facility and does not anticipate and borrowings
prior to its expiration on April 1, 2003.



All
obligations under the Bank Credit Facilities entered into with the lenders or their affiliates in connection therewith are unconditionally guaranteed (the Bank Guarantees), jointly and severally, by Rose Hills Holdings Corp. and each of
the Companys existing and future domestic subsidiaries (the Bank Guarantors). All



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obligations of the Company and the Bank Guarantees are secured by first priority security interests in all existing and future assets
(including real property located at Rose Hills but excluding other real property and vehicles covered by certificates of title) of the Company and the Bank Guarantors. In addition, the Bank Credit Facilities are secured by a first priority security
interest in 100% of the capital stock of the Company and each subsidiary thereof and all intercompany receivables.



As discussed above, the Company intends to retire the Bank Term Facility on or before May 1, 2003 using existing cash on hand and the cash
equity contribution from Alderwoods. Accordingly, the restrictions under the Bank Term Facility discussed above will cease.



Senior Subordinated Notes



In connection with the 1996 acquisition, the Company also issued $80 million of 91/2% Senior Subordinated Notes due 2004, which were exchanged in September 1997 for $80 million of 91/2% 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 91/2%. 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 1996 acquisition.



The Company and its Subsidiaries are subject to certain restrictive covenants contained in the indenture to the Notes, including, but not
limited to, covenants imposing limitations on: the incurrence of additional indebtedness; certain payments, including dividends and investments; the creation of liens; sales of assets and preferred stock; transactions with interested persons;
payment restrictions affecting subsidiaries; sale-leaseback transactions; and mergers and consolidations. The indenture does allow for dividend payments out of cash capital contributions. Accordingly, dividends are permitted to the extent of
Alderwoods equity contributions as discussed above. In addition, the Bank Credit Facilities contain certain restrictive covenants that, among other things, limit the ability of the Company and its Subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness (including the Exchange Notes), pay dividends or make certain restricted payments, create liens on assets, engage in mergers or acquisitions or enter into leases or transactions with affiliates. At
December 31, 2002 the Company was in compliance with the terms of the indenture and the Bank Credit Facilities.



Contractual Obligations and Commercial Commitments



The following table details the future principal payments of certain contractual obligations as of December 31, 2002 (in
thousands):



|                              |  |       |       | Payments due by December 31,
|----------------------------- |  | ----- | ----- | ----------------------------
|Contractual Obligations       |  | Total |       | 2003                        
|Bank term facility            |  | $     | 52.6  |                             
|Senior subordinated notes (1) |  |       | 80.0  |                             
|Capital lease obligations     |  |       | 0.7   |                             
|Operating lease agreements    |  |       | 0.7   |                             
|Non-compete agreements        |  |       | 0.5   |                             
|                              |  |       |       |                             
|                              |  | $     | 134.5 |                             
|                              |  |       |       |                             

---

|(1) |  | Amount includes unamortized discount of $ 2.2 million as of December 31, 2002.
|--- |  | ------------------------------------------------------------------------------



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for
Asset Retirement Obligations. The Statement requires entities to record the fair value of a liability for legal



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obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. When the
liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company has adopted the provisions of SFAS No. 143; there was no material impact of the adoption.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections which requires that the extinguishment of debt not be considered an extraordinary item under APB Opinion No. 30 (APB 30) Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions unless the debt extinguishment meets the unusual in nature and infrequency of occurrence criteria in APB 30. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002 and upon adoption, companies must reclassify prior period items that do not meet the extraordinary item classification criteria in APB 30. The adoption of SFAS No. 145 is not expected to have a material
impact on the Companys financial position and results of operations.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it
meets the definition of a liability in the FASBs conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on its financial position or results from operations.



In November 2002, the FASB issued Interpretation
(FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34. FIN No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The
recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company did not have any guarantees at December 31, 2002 and will apply the provisions of FIN No. 45 prospectively to guarantees made after December
31, 2002.



In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based compensation. In addition, amendments are made to the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting
for stock-based compensation and the effect of the method used on reported results. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. The Company has not participated in a stock-based compensation
plan. Accordingly, there is no impact to the Company upon implementation of SFAS No. 148.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors lack certain characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of



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the entity. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company did not have any investments in any variable interest entities at December 31, 2002 and will apply the provisions of FIN No. 46 prospectively to investments in variable interest entities made after January 31, 2003.



FORWARD-LOOKING STATEMENTS



Certain statements in this Form 10-K include
forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included herein, including, without limitation, the statements under Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, regarding the Companys financial position, results of operations, its objective to increase revenues and cash flows, reduce general and
administrative expense, take advantage of synergies, and make capital expenditures, and the Companys ability to service its indebtedness, are forward-looking statements. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Companys expectations (Cautionary
Statements) are disclosed herein, including, without limitation, in conjunction with the forward-looking statements included herein.



All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.



CAUTIONARY STATEMENTS



The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Companys actual consolidated results and could cause the Companys actual
consolidated results in the future to differ materially from the goals and expectations expressed elsewhere herein:



The Company may not be able to achieve growth in its revenues and cash flows. Maintaining current revenue and cash flow levels and
achieving future growth depends in part on sustaining the current level of pre-need cemetery sales and maintaining and increasing funeral market share. Several important factors, among others, affect the Companys ability to sustain and grow
revenue:



| | · |  | The volume and prices of properties, products and services sold.
| | - |  | ----------------------------------------------------------------



The inability of the Company to increase volume and prices could affect the Companys ability to
increase revenue in the future. The ability to achieve volume and price increases at Rose Hills and other Company locations depends on several factors including local competition, death rates, changes in consumer buying patterns, economic conditions
and the availability of qualified sales personnel. Furthermore, the Company may experience pricing pressures from low-cost funeral service and merchandise providers and from large consolidators with greater market power than the Company, which could
result in reduced volume or having to reduce prices in order to recapture market share.



| | · |  | Performances of endowment care and trust funds.
| | - |  | -----------------------------------------------



The Company includes earnings from endowment care and trust funds in its results of operations. Although substantially all of these funds
are invested in fixed income securities, the performance of these funds is subject to market conditions beyond the control of the Company.



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| | · |  | The level of pre-arranged funeral sales in prior periods.
| | - |  | ---------------------------------------------------------



The level of pre-arranged funeral sales in prior periods may affect future revenues. The Companys inability to maintain and increase
pre-arranged funeral sales could impact future revenues. The ability to maintain and increase the level of pre-arranged funeral sales may be adversely affected by such factors as competition and general economic conditions which may reduce
individual discretionary income.



| | · |  | Changes in the sales organization, or in its size, compensation or morale.
| | - |  | --------------------------------------------------------------------------



Pre-need cemetery sales are a significant component of the Companys cemetery revenue, and are usually
associated with new customers of the Company. Changes in the Companys sales organization, or in the size, compensation, or morale thereof, may affect the Companys ability to increase pre-need sales.



Our earnings may be adversely affected by a number of
factors. Such factors include:



| | · |  | Declines in the number of deaths in our market can cause a decrease in cash flows and revenues.
| | - |  | -----------------------------------------------------------------------------------------------



| | · |  | The growing trend in the number of cremations could result in lower revenue and gross profit. The alternative to traditional funeral service dispositions usually
result in lower revenues and gross profits.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The ability of the Company to manage its growth in terms of implementing internal controls and information gathering systems, and retaining, attracting, and
motivating key personnel, among other things.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The amount and rate of growth in the Companys general and administrative expenses.
| | - |  | -----------------------------------------------------------------------------------



| | · |  | Changes in interest rates, which can increase or decrease the amount the Company pays on borrowings with variable rates of interest.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The impact on the Companys financial statements of accounting charges that may result from the Companys ongoing evaluation of its business strategies,
asset valuations and organizational structures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Changes in government regulations, including tax rates and their effects on corporate structure.
| | - |  | ------------------------------------------------------------------------------------------------



| | · |  | Changes in inflation and other general economic conditions, both domestically and internationally, affecting financial markets (e.g. marketable security values).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Unanticipated legal proceedings and unanticipated outcomes of legal proceedings.
| | - |  | --------------------------------------------------------------------------------



| | · |  | Changes in accounting policies and practices adopted voluntarily or required to be adopted by accounting principles generally accepted in the United States of
America.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The Companys ability to, as necessary, access debt markets on satisfactory terms and conditions, including without limitation its ability to obtain such new or
additional financing as may become necessary to avoid defaults under any of its existing debt agreements. See Liquidity and Capital Resources above.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Any amendments, renegotiations, or extensions of existing debt agreements.
| | - |  | --------------------------------------------------------------------------



| | · |  | Environmental liabilities that are unanticipated or unanticipated in their extent, including without limitation costs and expenses associated with past or future
land movement within Rose Hills and costs and expenses associated with remediation of existing contamination of Company properties. See Environmental Matters above and note 20 to the Companys consolidated financial statements,
which are included as part of this Annual Report on Form 10-K.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · |  | The impact of actions, including reducing capital expenditures, selling assets, or seeking additional equity, the Company may become required to take to avoid
defaults under any of its debt agreements. See Liquidity and Capital Resources above.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The impact of any defaults that may occur under any of the Companys debt agreements.
| | - |  | -------------------------------------------------------------------------------------



| | · |  | The Companys ability to remain in compliance with the restrictions of its debt agreements is affected by several factors, including the Companys earnings
and fixed charges. The Companys ability to achieve projected earnings and fixed charges depends upon many uncertainties, including each of the factors discussed herein.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company also cautions readers that it assumes no obligation to update or publicly release any revisions
to forward-looking statements made herein or any other forward-looking statements made by or on behalf of the Company.



ITEM 7(a).    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



The Companys market risk is impacted by changes in interest rates. Pursuant to the Companys policies, derivative financial instruments may be utilized to reduce the impact of adverse
changes in interest rates. The Company does not use derivative instruments for speculation or trading purposes, and has no material sensitivity to changes in market rates and prices on its derivative financial instrument positions.



The Companys floating rate exposure of $52.6 million,
represents 39% of the Companys total debt, and has a weighted average of approximately 4.9%. A one percent change in the applicable floating rate indices would cause an approximate $0.5 million change in the Companys annual interest
expense.



ITEM 8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



See Item 15(a).



ITEM
9.    
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                    FINANCIAL DISCLOSURE.



None.



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PART III



ITEM 10.    
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



The following table sets forth certain information regarding the directors and executive officers of the Company as of March 27, 2003:



|Name                |  | Age |  | Position                                                                            
|------------------- |  | --- |  | ------------------------------------------------------------------------------------
|Dennis C. Poulsen   |  | 60  |  | Chairman of the Board and Chief Executive Officer                                   
|Kenton C. Woods     |  | 48  |  | Executive Vice President, Chief Financial Officer, Secretary and Treasurer, Director
|Gregg M. Williamson |  | 56  |  | Executive Vice President, Sales & Marketing                                         
|Patrick L. Monroe   |  | 40  |  | Vice President, Chief of Operations                                                 
|John S. Lacey       |  | 59  |  | Director                                                                            
|Paul A. Houston     |  | 54  |  | Director                                                                            
|Kenneth A. Sloan    |  | 53  |  | Director                                                                            
|Shawn R. Phillips   |  | 39  |  | Director                                                                            



Dennis C. Poulsen. Mr. Poulsen was named Chief Executive Officer on February 1, 2002. He has served as Chairman of the Board of the Company since November 1996 and has served as a director of the Company since its formation in
1996. Mr. Poulsen joined Rose Hills in 1981 and became President in 1984. Mr. Poulsen currently serves on the Board of Directors of Ameron International Corporation and Orthopaedic Hospital and is a Trustee of Payden & Rygel Mutual Funds. Mr.
Poulsen is a member of the American, California and Los Angeles Bar Associations. He served as a director and Chairman of the Los Angeles Chamber of Commerce in 1997 and is past director of the American Cemetery Association.



Kenton C. Woods. Mr. Woods was named director of the
Company effective January 3, 2002. Mr. Woods joined the Company as Senior Vice President and Chief Financial Officer in May 1997. From 1990 to 1997, Mr. Woods served in senior financial positions at Baskin-Robbins, including Vice President-Finance
and Chief Financial Officer. Mr. Woods previously spent 10 years with KPMG LLP.



Gregg M. Williamson.Mr. Williamson was named Executive Vice President, Sales and Marketing of the Company on June 11, 2001. From 1990 to 2001, Mr. Williamson served as Executive Vice President,
Marketing and Sales Officer for Palm Mortuary, Inc. in Las Vegas, Nevada.



Patrick L. Monroe. Mr. Monroe was named Vice President, Chief of Operations of the Company in July 2002. Mr. Monroe joined Rose Hills in 1991. Prior to July 2002, Mr. Monroe served in senior operational positions
including Vice President, Cemetery Operations.



John S. Lacey. Mr. Lacey was named director of the Company effective March 10, 2000. Mr. Lacey became the Chairman of the Board of Directors of Alderwoods, the corporate parent of the Company, on January 2, 2002. From January
1999 to January 2002, Mr. Lacey was the Chairman of the Board of Directors of Loewen. In December 1998, Mr. Lacey became a director of Loewen. From July 1998 to November 1998, Mr. Lacey was President and Chief Executive Officer of the Oshawa Group
Ltd., a marketer of food and pharmaceutical products, in Toronto, Ontario. From November 1996 to July 1998, Mr. Lacey was President and Chief Executive Officer of WIC Western International Communications Inc., a private broadcaster, in Vancouver,
British Columbia.



Paul A. Houston. Mr.
Houston was named a director of the Company effective May 22, 2001. Mr. Houston became a director, President and Chief Executive Officer of Alderwoods, the corporate parent of the Company, on January 2, 2002. From December 1999 to January 2002, Mr.
Houston was President and Chief Executive Officer of Loewen. Additionally, Mr. Houston served as a director of Loewen from June 1999 to January 2002. From August 1996 to October 1999, Mr. Houston was President and Chief Executive Officer of
Scotts Restaurants Inc., a quick service food company.



Kenneth A. Sloan. Mr. Sloan was named a director of the Company effective May 22, 2001. Mr. Sloan became the Executive Vice President, Chief Financial Officer of Alderwoods, the corporate parent of the Company, on January 22,
2003. From January 2, 2002 to January 21, 2003, Mr. Sloan was Senior Vice President,



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Chief Financial Officer of Alderwoods. From November 2000 to January 2002, Mr. Sloan was Senior Vice President, Chief Financial Officer of
Loewen. From September 1987 to September 2000, Mr. Sloan served as Senior Executive Vice President, Finance and Planning and Chief Financial Officer of Shoppers Drug Mart Ltd., an operator of drug stores.



Shawn R. Phillips. Mr. Phillips was named a director of
the Company effective January 3, 2002. Mr. Phillips is currently the Vice President, Operations, Western U.S.A. of Alderwoods, the corporate parent of the Company. Mr. Phillips has served in various management positions since joining Loewen in 1993.



Concurrent with the change in control of the
Company on January 3, 2002, the directors appointed by Blackstone resigned as directors of RH Holdings and the bylaws of RH Holdings were amended to reduce the number of required directors of RH Holdings from eight to six. Each of the directors of
RH Holdings is also a member of the Companys Board of Directors.



Each of the Companys directors is elected to serve until their respective successor is elected and qualified (unless the director earlier resigns or is removed from office). Alderwoods, as the sole shareholder of the
Company, has the power to elect all of the Companys directors. Each of the Companys officers serves at the pleasure of the Board of Directors, subject to the rights under their employment agreements.



Directors of the Company receive no compensation for their
service as directors or for service on committees of the Board. All directors are reimbursed for all reasonable expenses of attendance at each meeting.



Mr. Lacey, Mr. Houston, Mr. Sloan and Mr. Phillips were directors and/or officers of the Loewen Group, Inc., which filed for bankruptcy in
June 1999 and emerged from bankruptcy as a reorganized Alderwoods Group, Inc. in January 2002.



ITEM 11.    
EXECUTIVE COMPENSATION.



The following table sets forth for the periods indicated the compensation paid to or accrued for the benefit of persons who served as the Chief Executive Officer of the Company during 2002 and certain other executive officers of the
Company. The position identified in the table for each person is their current position unless otherwise indicated:



SUMMARY COMPENSATION TABLE



|Name and Principal Position                                                       |  | Year           |  | Salary                  |  | Bonus           |  | All Other Compensation  |    
|--------------------------------------------------------------------------------- |  | -------------- |  | ----------------------- |  | --------------- |  | ----------------------- | ---
|Dennis C. Poulsen Chief Executive Officer (1)                                     |  | 2002 2001 2000 |  | 120,000 120,000 100,000 |  |                 |  | 178,157 513,157 178,157 | (2)
|                                                                                 
|Dillis E.R. Ward Former President & Chief Executive Officer (1)                   |  | 2002 2001 2000 |  | 50,480 250,000 250,000  |  | 38,000          |  | 502,254 713,792 2,792   | (3)
|                                                                                 
|Kenton C. Woods Executive Vice President & Chief Financial Officer                |  | 2002 2001 2000 |  | 169,000 169,000 160,431 |  | 109,850 25,000  |  | 2,180 587,180 2,180     | (4)
|                                                                                 
|Virginia C. Phillips Former Executive Vice PresidentChief Operations Officer (5) |  | 2002 2001 2000 |  | 98,862 135,000 92,000   |  | 8,000           |  | 2,180 174,180 25,644    | (6)
|                                                                                 
|Gregg M. Williamson Executive Vice PresidentSales & Marketing                    |  | 2002 2001      |  | 200,000 120,136         |  | 180,000 181,667 |  | 2,516 2,645             | (7)
|                                                                                 
|Patrick L. Monroe. Vice PresidentChief of Operations (8)                         |  | 2002 2001 2000 |  | 120,084 110,000 104,000 |  | 40,267 10,500   |  | 2,108 107,054 2,054     | (9)



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---

|(1) |  | Mr. Ward resigned from the Company effective February 1, 2002, on which date Mr. Poulsen assumed the position of CEO.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(2) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan, a payment of $792 for life insurance premiums and a payment of
$175,365 for the supplemental employee retirement plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan, a payment of $254 for life insurance premiums, and a severance
equal to $250,000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan and a payment of $180 for life insurance premiums.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Ms. Phillips resigned from the Company on July 26, 2002.
|--- |  | --------------------------------------------------------

|(6) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan and a payment of $180 for life insurance premiums.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan and a payment of $516 for life insurance premiums.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Mr. Monroe was named Vice President, Chief of Operations effective July 26, 2002.
|--- |  | ---------------------------------------------------------------------------------

|(9) |  | Amount includes $2,000 in matching contributions by the Company under its 401(k) profit-sharing plan and a payment of $108 for life insurance premiums.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



Change-in-Control Arrangements



On March 20, 2001, a committee of
the Companys Board of Directors authorized the grant of bonus awards to certain of the Companys executive officers pursuant to the Companys Phantom Equity Appreciation Plan (the Plan). Each of the bonus awards
represented the right to receive a fixed sum in cash conditioned upon and payable only in the event the Alderwoods Purchase Transaction occurred on or before December 31, 2001. The bonus amounts paid upon the closing of the Alderwoods Purchase
Transaction to each of the named executive officers were as follows: Dennis C. Poulsen, $335,000; Dillis R. Ward, $711,000; Kenton C. Woods, $585,000; Virginia C. Phillips, $172,000; Patrick L. Monroe, $105,000. The Alderwoods Acquisition closed on
December 31, 2001, thus the Company expensed these amounts in its December 31, 2001 statement of operations. These amounts were subsequently paid to the officers in January 2002.



Pursuant to the Loewen Blackstone Settlement Agreement, Blackstone granted certain of the Companys
executive officers who were entitled to awards under the Phantom Equity Appreciation Plan a share of a note issued by the reorganized Loewen (Alderwoods Note). The Alderwoods Note is partial consideration received by Blackstone under the terms of
the Settlement Agreement. The Alderwoods Note is in the amount of $24,678,571, bears interest at an annual rate of 12.25%, and matures in 2012. The aggregate amount of the share in the Alderwoods Note received by certain Company directors and
officers was $500,000. Each Director and Executive Officer was allocated a proportionate share of the $500,000, based upon their proportionate allocation under the Phantom Equity Appreciation Plan.



The U.S. Bankruptcy Court confirmed Loewens
reorganization plan, including the proposed acquisition of shares of RH Holdings Corp. from Blackstone on December 5, 2001, and the reorganization plan became effective on January 2, 2002. Effective with its emergence from bankruptcy, Loewen was
renamed as Alderwoods. On January 3, 2002, in full satisfaction of Loewens obligations under the put, Alderwoods delivered to Blackstone unsecured, subordinated notes and Alderwoods common stock. As a result of the delivery of the
consideration, Alderwoods completed its purchase of all of the stock of RH Holdings Corp. beneficially owned by Blackstone. Upon closing of the transaction, Alderwoods increased its ownership from 20.45% to 100% of the outstanding common stock of RH
Holdings Corp., thereby causing the Company to become a wholly owned subsidiary of Alderwoods. Effective upon completion of the transaction, the Company paid approximately $2.4 million in January 2002 in aggregate compensation under the
Companys Phantom Equity Appreciation Plan that was recorded as an expense as of December 31, 2001. Additionally, Blackstone transferred an aggregate $500,000 in Alderwoods notes to certain Company directors and executive officers.



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Employment Agreements and
Termination of Employment Arrangements



Dennis C. Poulsen. Mr. Poulsen has an employment agreement with the Company effective as of March 1, 2000. Under the terms of his employment agreement, Mr. Poulsens annual salary is $120,000. Mr. Poulsen may be
terminated without cause (as defined in the employment agreement) at any time, but if so terminated, Mr. Poulsen will continue to receive his salary for twenty-four (24) months after the date on which the Company notifies him of the
termination. The employment agreement provides that a resignation by Mr. Poulsen within three months following a change in control of the Company is deemed a termination by the Company without cause. The Alderwoods Purchase Transaction constituted a
change of control for purposes of the employment agreement. On December 23, 2002, Alderwoods, as sole shareholder of the Company, approved an amendment extending the period that Mr. Poulsens resignation will be deemed a termination by the
Company without cause to a date that will be mutually agreed upon. In accordance with the provision of the agreement, Mr. Poulsens resignation will be deemed a termination by the Company without cause following the change in control. Mr.
Poulsen has the right to terminate the employment agreement at any time with 60 days notice to the Company. Further, in accordance with the Companys Supplemental Employee Retirement Plan, Mr. Poulsen receives an annual benefit of $175,365 for
the duration of his life.



Dillis R. Ward.
The Company entered into a Resignation and General Release Agreement with Mr. Ward dated as of January 31, 2002. Pursuant to the agreement, Mr. Ward resigned as the Companys President and Chief Executive Officer effective February 1, 2002. Mr.
Ward is to receive severance equal to two years base pay for an aggregate of $500,000 to be paid in bi-weekly installments for a period of twenty-four months beginning February 2, 2002. The Company agreed to reimburse Mr. Ward for the cost of
moving, up to $10,000, and COBRA coverage during the eligible period.



Kenton C. Woods. The Company has an employment agreement with Mr. Woods dated as of December 1, 1998, pursuant to which Mr. Woods currently serves as the Companys Executive Vice President
and Chief Financial Officer. Mr. Woods base salary is $169,050, which is subject to annual review and may be increased (but not reduced) at the sole discretion of the Board. Mr. Woods cash bonus may range from 0%-100% of his base salary
and is based on the Companys performance as measured against EBITDA targets established annually by the Board. Mr. Woods may be terminated without cause (as defined in the employment agreement) at any time with 12 months notice to
Mr. Woods, but if so terminated, Mr. Woods will receive (i) his then base salary and benefits through the effective date of the termination; (ii) his annual bonus for all years completed prior to the effective date of the termination; and (iii) a
prorated portion of the annual bonus for the year in which the termination becomes effective. Mr. Woods has the right to terminate the employment agreement at any time with 90 days notice to the Company.



Gregg M. Williamson. The Company has an employment
agreement with Mr. Williamson dated as of June 11, 2001, pursuant to which Mr. Williamson currently serves as the Companys Executive Vice President, Sales and Marketing. The Company has extended this agreement through December 31, 2003. Mr.
Williamsons base salary is $200,000. Mr. Williamson is eligible for an EBITDA cash bonus, ranging from 0%-20% of his base salary, based on the Companys performance as measured against EBITDA targets determined annually by the
Board. Also, Mr. Williamson is eligible for a sales cash bonus, ranging from 0%-80% of his base salary, based upon the Companys pre-need cemetery and funeral insurance sales. Mr. Williamson may be terminated without
cause (as defined in the employment agreement) at any time but if so terminated prior to December 31, 2003, will receive one years base salary. Mr. Williamson has the right to terminate the employment agreement at any time with 90
days notice to the Company.



Compensation Committee Interlocks
and Insider Participation



The Company does
not have a compensation committee. Compensation policies applicable to executive officers are determined by the Board of Directors. As directors of the Company, Mr. Ward and Mr. Poulsen participated in the deliberations of the Board concerning
executive compensation in 2001. Currently, Messrs. Poulsen and Woods are the only directors who are also Executive Officers of the Company.



28



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During fiscal
2000, Mr. Poulsen provided consulting services to the Company for which he was paid $16,046. As discussed in Item 10, Directors and Executive Officers of the Registrant: (i) on March 20, 2001, the consulting agreement was terminated and
replaced by an employment agreement providing for an annual salary of $120,000; (ii) on March 20, 2001, Mr. Poulsen was awarded a bonus amount of $335,000, conditioned upon and payable only in the event that the closing of the Alderwoods
Acquisition; and (iii) on April 12, 2001, Blackstone granted Mr. Poulsen a share in the Alderwoods Note, conditioned upon and granted only in the event of the closing of the Alderwoods Acquisition. Due to the approval of Loewens reorganization
plan by the U.S. Bankruptcy court on December 5, 2001, the Company recorded an accrued expense for the $350,000 bonus that was paid in January 2002.



ITEM 12.    
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 27, 2003 regarding the beneficial ownership of the common stock of RH
Holdings:



|Name of Beneficial Owner                        |  | Number of Shares |  | Percentage of Common Stock |  
|----------------------------------------------- |  | ---------------- |  | -------------------------- | -
|Alderwoods Group, Inc. (1)                      |  | 1,000            |  | 100                        | %
|John S. Lacey (2)                               |  |                 |  |                           |  
|Paul A. Houston (2)                             |  |                 |  |                           |  
|Kenneth A. Sloan (2)                            |  |                 |  |                           |  
|Shawn R. Phillips (2)                           |  |                 |  |                           |  
|Dennis C. Poulsen                               |  |                 |  |                           |  
|Kenton C. Woods                                 |  |                 |  |                           |  
|Virginia C. Phillips                            |  |                 |  |                           |  
|Gregg Williamson                                |  |                 |  |                           |  
|All directors and executive officers as a group |  |                 |  |                           |  

---

|(1) |  | The address for Alderwoods Group, Inc. is 2225 Sheppard Ave, 11th Floor, Atria III, Toronto, Ontario, Canada M2J 5C2.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(2) |  | Messrs. Lacey, Houston, Sloan and Phillips are affiliated with Alderwoods in the capacities described under Item 10, Directors and Executive Officers of the
Registrant, above. Each of Messrs. Lacey, Houston, Sloan and Phillips disclaim beneficial ownership of the shares owned or controlled by Alderwoods and its affiliates.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 13.    
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



The summary of the Put/Call Arrangement set forth below does not purport to be complete and is qualified in its entirety by reference to all the provisions of the Put/Call Agreement. A copy of the
Put/Call Agreement is incorporated by reference as an exhibit to this Annual Report on Form 10-K. One or more of our directors during 2002 were affiliated with Alderwoods which is involved in this agreement.



Put/Call Arrangement



Pursuant to a separate agreement among Blackstone, LWN, LGII
and LN Sub (the Put/Call Agreement), (i) LGII had a call option, exercisable from and after November 19, 2000 (the fourth anniversary of the 1996 acquisition closing date), until but excluding November 19, 2002 (the sixth anniversary of
the 1996 acquisition closing date) to purchase all of Blackstones shares of RH Holdings Common Stock (the Call Option) and (ii) Blackstone had a put option, exercisable from and after November 19, 2002 (the sixth anniversary of the
1996 acquisition closing date) until but excluding November 19, 2004 (the eighth anniversary of the 1996 acquisition



29



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##### Table of Contents

closing date) to require LGII to purchase Blackstones shares of RH Holdings Common Stock (the Put Option). The option price
in either case was to be derived from a formula based on EBITDA. The performance by LGII of its obligations under the Put/Call Agreement was guaranteed by LWN.



On June 1, 1999, LWN, LGI and LN Sub filed for protection from their creditors under Chapter 11 of the U.S. Bankruptcy Code. On November
15, 2000, LWN submitted a plan of reorganization to the U.S. Bankruptcy Court. The Plan was amended on February 15, 2001. In April 2001, LWN reached an agreement with Blackstone and RHMID, pursuant to which Blackstone would exercise its put and a
reorganized Alderwoods would acquire 100% of the outstanding common stock of RH Holdings. The acquisition was approved by U.S. Bankruptcy Court and upon Alderwoods emergence from bankruptcy, Blackstones put was exercised. Upon exercise of the
Put option, RH Holdings became a wholly owned subsidiary of a reorganized Alderwoods, and the Put/Call Agreement was terminated.



The exercise of the Put Option on January 3, 2002 did not give rise to a Change of Control under the Indenture.



Mayflower Insurance



In the course of ordinary business, the Company receives
proceeds from insurance companies as payment for at-need services rendered. In 2002, the Company received approximately $0.2 million of insurance proceeds from Mayflower Insurance, a subsidiary of Alderwoods. As of December 31, 2002 and 2001, the
Company was the stated beneficiary of insurance policies totaling a face amount of $8,046,000 and $8,262,000, respectively, with Mayflower Insurance. The Company did not sell any Mayflower Insurance policies in 2002.



ITEM 14.    
CONTROLS AND PROCEDURES.



Within the 90 days preceding the date of this report, Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this
annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.



30



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##### Table of Contents

PART IV



ITEM 15.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.



(a) Documents filed as a part of this report:



1. Financial Statements

Index to Financial Statements



|                                                                                                                                             |  | Page
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|ROSE HILLS COMPANY CONSOLIDATED FINANCIAL STATEMENTS                                                                                         |  |     
|Independent Auditors Report                                                                                                                 |  | 34  
|Consolidated Balance Sheets as of December 31, 2002 (Successor) and 2001
(Successor)                                                         |  | 35  
|Consolidated Statements of Operations for the Years ended December 31, 2002 (Successor),
2000 (Predecessor) and 1999 (Predecessor)           |  | 36  
|Consolidated Statements of Cash Flows for the Years ended December 31, 2002 (Successor),
2000 (Predecessor) and 1999 (Predecessor)           |  | 37  
|Consolidated Statements of Stockholders Equity for the Years ended December 31,
2002 (Successor), 2000 (Predecessor) and 1999 (Predecessor) |  | 38  
|Notes to Consolidated Financial Statements                                                                                                   |  | 39  
|                                                                                                                                            
|2. Financial Statement Schedule                                                                                                              |  |     
|Schedule IIValuation and Qualifying Accounts                                                                                                |  | 66  



31



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##### Table of Contents

(b) Exhibits



|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|2.1            |  | Asset Purchase Agreement, dated as of September 19, 1996, by and between Rose
Hills Memorial Park Association and Tudor Acquisition Corp. (now known as the Rose Hills Company). (1)                                                                                                                                  
|              
|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). (1)                                                                                                                                    
|              
|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. (1)                                                                                 
|              
|3.1            |  | Restated Certificate of Incorporation of Tudor Acquisition Corp. changing its
name to Rose Hills Acquisition Corp. (1)                                                                                                                                                                                                
|              
|3.2            |  | Certificate of Amendment of Certificate of Incorporation of Rose Hills
Acquisition Corp. changing its name to Rose Hills Company. (1)                                                                                                                                                                                 
|              
|3.3            |  | Amended and Restated By-Laws of Rose Hills Company. (1)                                                                                                                                                                                                                                                               
|              
|4.1            |  | Indenture dated as of November 15, 1996 between Rose Hills Acquisition Corp.
and United States Trust Company of New York, as Trustee. (1)                                                                                                                                                                             
|              
|4.2            |  | Form of 9.5% Senior Subordinated Note due 2004 (included in Exhibit 4.1).
(1)                                                                                                                                                                                                                                         
|              
|10.1           |  | 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.
(1)
|              
|10.2           |  | Buddhist Memorial Complex Development and Use Agreement dated as of March 1,
1994 between Rose Hills Memorial Park Association and International Buddhist Progress Society. (1)                                                                                                                                       
|              
|10.3           |  | 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. (1)                                                                                                               
|              
|10.4           |  | 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. (1)                                                                                                                 
|              
|10.5           |  | 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. (1)                                                                                                                    
|              
|10.6           |  | 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. (1)                                                                                                               
|              
|10.7           |  | Memorandum of Understanding, dated as of March 22, 1996 between Rose Hills
Memorial Park Association and International Buddhist Progress Society. (1)                                                                                                                                                                 
|              
|10.8           |  | Employment Agreement, dated December 1, 1998 by and between Rose Hills Company
and Kenton C. Woods. (3)                                                                                                                                                                                                               
|              
|10.9           |  | Non-Competition Agreement dated as of November 19, 1996 between RH Mortuary
Corporation and Dennis C. Poulsen. (1)                                                                                                                                                                                                    
|              
|10.10          |  | Profit Sharing/401K Plan (3)                                                                                                                                                                                                                                                                                          
|              
|10.11          |  | Employment Agreement, effective March 1, 2000 by and between Rose Hills Company
and Dennis C. Poulsen. (4)                                                                                                                                                                                                            



32



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##### Table of Contents

|Exhibit Number |  | Description                                                                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|              
|10.12          |  | First Amendment to Credit Agreement (6)                                                                                                           
|              
|10.13          |  | Second Amendment to Credit Agreement (6)                                                                                                          
|              
|10.14          |  | Fifth Amendment to Buddhist Memorial Complex, Development and Use Agreement,
dated April 27, 2001. (6)                                            
|              
|10.15          |  | Employment Agreement, dated May 9, 2001 by and between Rose Hills Company and
Gregg M. Williamson (7)                                             
|              
|10.16          |  | Resignation and General Release Agreement, dated January 31, 2002 by and
between Rose Hills Company and Dillis R. Ward. (8)                       
|              
|10.17          |  | Rose Hills Mortuary, L.P. Amended and Restated Supplemental Employee Retirement
Plan, dated May 28, 1996. (10)                                    
|              
|12             |  | Statement Re-Computation of Earnings to Fixed Charges Ratio.
(10)                                                                                 
|              
|21             |  | Subsidiaries of Rose Hills Company (formerly known as Rose Hills Acquisition
Corp.) (9)                                                           
|              
|99.1           |  | Certifications pursunt to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated March 27, 2003. (10)



(c)Reports on Form 8-K



None

---

|(1) |  | Incorporated by reference to the Exhibits to the Companys Registration Statement on Form S-4 (Registration No. 33-321411).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference from Rose Hills Report on Form 10-Q for the quarter ended September 30, 1998, filed on November 5, 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from Rose Hills Report on Form 10-K for the year ended December 31, 1999, filed on March 24, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference from Rose Hills Report on Form 10-Q for the quarter ended June 30, 2000, filed on August 10, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference from Rose Hills Report on Form 10-K for the year ended December 31, 2000, filed on March 28, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference from Rose Hills Report on Form 10-Q for the quarter ended March 31, 2001, filed on May 15, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference from Rose Hills Report on Form 10-Q for the quarter ended June 30, 2001, filed on August 14, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference from Rose Hills Report on Form 10-K for the year ended December 31, 2001, filed on March 28, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(9) |  | See Item 2Properties.
|--- |  | ----------------------

|(10) |  | Filed herewith.
|---- |  | ---------------





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##### Table of Contents

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
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Rose Hills Company and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.



As discussed in note 1 to the consolidated financial statements, effective December 31, 2001, the minority shareholder of Rose Hills Holdings Corp. emerged from bankruptcy and acquired 100% of the outstanding common stock of Rose
Hills Holdings Corp. Accordingly, the 2002 consolidated statement of operations and cash flows reflect the parent Companys fresh-start accounting basis that has been pushed-down as a result of this transaction.



As discussed in note 2 to the consolidated financial
statements, the Company implemented Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. As discussed in note 5 to the consolidated financial statements, the Company changed its method of recognizing
revenue in 2000.



KPMG LLP

|
|



Los Angeles,
California

February 14, 2003



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##### Table of Contents



ROSE HILLS
COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



CONSOLIDATED BALANCE SHEETS



December 31, 2002 and 2001

(In thousands)



|                                                                         |  | Successor 2002 |         | Successor 2001
|------------------------------------------------------------------------ |  | -------------- | ------- | --------------
|ASSETS                                                                   |  |                |         |               
|Current assets:                                                          |  |                |         |               
|Cash and cash equivalents                                                |  | $              | 8,093   |               
|Accounts receivable, net of allowances                                   |  |                | 10,064  |               
|Inventories                                                              |  |                | 753     |               
|Prepaid expenses and other current assets                                |  |                | 859     |               
|                                                                         |  |                |         |               
|Total current assets                                                     |  |                | 19,769  |               
|Long-term receivables, net of allowances                                 |  |                | 188,997 |               
|Cemetery property, at cost                                               |  |                | 35,845  |               
|Property and equipment, net                                              |  |                | 81,878  |               
|Deferred tax asset                                                       |  |                | 1,486   |               
|Goodwill                                                                 |  |                | 66,941  |               
|Receivables from service trusts                                          |  |                | 8,098   |               
|Other assets                                                             |  |                | 2,919   |               
|                                                                         |  |                |         |               
|Total assets                                                             |  | $              | 405,933 |               
|                                                                         |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                     |  |                |         |               
|Current liabilities:                                                     |  |                |         |               
|Accounts payable and accrued liabilities                                 |  | $              | 8,974   |               
|Current portion of long-term debt                                        |  |                | 53,306  |               
|                                                                         |  |                |         |               
|Total current liabilities                                                |  |                | 62,280  |               
|Retirement plan liabilities                                              |  |                | 6,629   |               
|Subordinated notes payable                                               |  |                | 77,800  |               
|Bank senior-term loan                                                    |  |                |        |               
|Other long-term debt                                                     |  |                | 546     |               
|Other liabilities                                                        |  |                | 78      |               
|Deferred pre-need funeral contract revenue                               |  |                | 179,323 |               
|Deferred pre-need cemetery contract revenue                              |  |                | 9,630   |               
|                                                                         |  |                |         |               
|Total liabilities                                                        |  |                | 336,286 |               
|Commitments and contingencies                                            |  |                |         |               
|Stockholders equity:                                                    |  |                |         |               
|Common stock, par value of $.01. Authorized and outstanding 1,000 shares |  |                |        |               
|Additional paid-in capital                                               |  |                | 64,881  |               
|Retained earnings                                                        |  |                | 4,766   |               
|                                                                         |  |                |         |               
|Total stockholders equity                                               |  |                | 69,647  |               
|                                                                         |  |                |         |               
|Total liabilities and stockholders equity                               |  | $              | 405,933 |               
|                                                                         |  |                |         |               



See
accompanying notes to consolidated financial statements.



35



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##### Table of Contents



ROSE HILLS
COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



CONSOLIDATED STATEMENTS OF OPERATIONS



Years ended December 31, 2002, 2001 and 2000

(In thousands)



|                                                                                      |  | Successor 2002 |         |   | Predecessor 2001 |   |         | Predecessor 2000 | 
|------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | ---------------- | 
|Sales and services:                                                                   |  |                |         |   |                  |   |         |                  | 
|Funeral sales and services                                                            |  | $              | 31,805  |   |                  | $ | 32,687  |                  | 
|Cemetery sales and services                                                           |  |                | 46,472  |   |                  |   | 44,533  |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Total sales and services                                                              |  |                | 78,277  |   |                  |   | 77,220  |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Cost of sales and services:                                                           |  |                |         |   |                  |   |         |                  | 
|Funeral sales and services                                                            |  |                | 22,217  |   |                  |   | 23,770  |                  | 
|Cemetery sales and services                                                           |  |                | 32,918  |   |                  |   | 34,917  |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Total cost of sales and services                                                      |  |                | 55,135  |   |                  |   | 58,687  |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Gross profit                                                                          |  |                | 23,142  |   |                  |   | 18,533  |                  | 
|General and administrative expenses                                                   |  |                | 6,395   |   |                  |   | 7,462   |                  | 
|Amortization of purchase price in excess of net assets acquired and other
intangibles |  |                | 24      |   |                  |   | 3,662   |                  | 
|Asset write-down and other charges                                                    |  |                | 18      |   |                  |   | 8,160   |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Income (loss) from operations                                                         |  |                | 16,705  |   |                  |   | (751    | )                | 
|Interest expense                                                                      |  |                | (11,819 | ) |                  |   | (14,725 | )                | 
|Finance and interest income                                                           |  |                | 2,913   |   |                  |   | 3,185   |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Income (loss) before income taxes and cumulative effect of accounting
change          |  |                | 7,799   |   |                  |   | (12,291 | )                | 
|Income tax expense (benefit)                                                          |  |                | 3,033   |   |                  |   | 2,074   |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Net income (loss) before cumulative effect of accounting change                       |  |                | 4,766   |   |                  |   | (14,365 | )                | 
|Cumulative effect of accounting change (net of income tax benefit of
$4,862)          |  |                |        |   |                  |   |        |                  | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 
|Net income (loss)                                                                     |  | $              | 4,766   |   |                  | $ | (14,365 | )                | 
|                                                                                      |  |                |         |   |                  |   |         |                  | 





See accompanying notes to consolidated financial statements.



36



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



CONSOLIDATED STATEMENTS OF CASH FLOWS



Years ended December 31, 2002, 2001 and 2000

(In thousands)



|                                                                                         |  | Successor 2002 |        |   | Predecessor 2001 |   |         | Predecessor 2000 | 
|---------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------- | ---------------- | 
|Cash flows from operating activities:                                                    |  |                |        |   |                  |   |         |                  | 
|Net income (loss)                                                                        |  | $              | 4,766  |   |                  | $ | (14,365 | )                | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |  |                |        |   |                  |   |         |                  | 
|Depreciation and amortization                                                            |  |                | 3,626  |   |                  |   | 7,613   |                  | 
|Amortization of deferred finance cost                                                    |  |                |       |   |                  |   | 1,629   |                  | 
|Amortization of bond discount                                                            |  |                | 1,000  |   |                  |   |        |                  | 
|Amortization of cemetery property                                                        |  |                | 2,750  |   |                  |   | 4,626   |                  | 
|Provision for bad debts and sales cancellations                                          |  |                | 1,356  |   |                  |   | 1,345   |                  | 
|Cumulative effect of change in accounting principle                                      |  |                |       |   |                  |   |        |                  | 
|Provision for deferred taxes                                                             |  |                | 2,019  |   |                  |   | 2,522   |                  | 
|Loss (gain) on disposal of property and equipment                                        |  |                | 43     |   |                  |   | (35     | )                | 
|Asset impairments                                                                        |  |                |       |   |                  |   | 3,804   |                  | 
|Changes in operating assets and liabilities, net of effects of acquisition
transaction:  |  |                |        |   |                  |   |         |                  | 
|Accounts receivable                                                                      |  |                | 1,456  |   |                  |   | 2,952   |                  | 
|Insurance contract accounts receivable                                                   |  |                | (7,268 | ) |                  |   |        |                  | 
|Inventories                                                                              |  |                | 185    |   |                  |   | 103     |                  | 
|Prepaid expenses and other current assets                                                |  |                | (121   | ) |                  |   | (8      | )                | 
|Goodwill                                                                                 |  |                | 444    |   |                  |   |        |                  | 
|Accounts payable and accrued liabilities                                                 |  |                | (4,152 | ) |                  |   | 2,160   |                  | 
|Retirement plan liabilities                                                              |  |                | (91    | ) |                  |   | (60     | )                | 
|Net deferred revenue                                                                     |  |                | 8,033  |   |                  |   | (1,435  | )                | 
|Other assets and liabilities                                                             |  |                | (538   | ) |                  |   | 554     |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Total adjustments                                                                        |  |                | 8,742  |   |                  |   | 25,770  |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Net cash provided by operating activities                                                |  |                | 13,508 |   |                  |   | 11,405  |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Cash flows from investing activities:                                                    |  |                |        |   |                  |   |         |                  | 
|Capital expenditures                                                                     |  |                | (3,592 | ) |                  |   | (4,273  | )                | 
|Proceeds from disposal of property and equipment                                         |  |                | 4      |   |                  |   | 98      |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Net cash used in investing activities                                                    |  |                | (3,588 | ) |                  |   | (4,175  | )                | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Cash flows from financing activities:                                                    |  |                |        |   |                  |   |         |                  | 
|Repayments of borrowings under Bank Credit Agreement                                     |  |                | (9,172 | ) |                  |   | (6,953  | )                | 
|Borrowings (repayments) on other long-term debt                                          |  |                | 274    |   |                  |   | (147    | )                | 
|Principal payments of capital lease obligations                                          |  |                | (568   | ) |                  |   | (662    | )                | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Net cash used in financing activities                                                    |  |                | (9,466 | ) |                  |   | (7,762  | )                | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Net increase (decrease) in cash and cash equivalents                                     |  |                | 454    |   |                  |   | (532    | )                | 
|Cash and cash equivalents at beginning of period                                         |  |                | 7,639  |   |                  |   | 8,171   |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Cash and cash equivalents at end of period                                               |  | $              | 8,093  |   |                  | $ | 7,639   |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 
|Supplemental disclosures of cash flow information:                                       |  |                |        |   |                  |   |         |                  | 
|Cash paid during the period for:                                                         |  |                |        |   |                  |   |         |                  | 
|Interest                                                                                 |  | $              | 10,795 |   |                  | $ | 13,065  |                  | 
|Income taxes                                                                             |  |                | 30     |   |                  |   |        |                  | 
|                                                                                         |  |                |        |   |                  |   |         |                  | 



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



Years ended December 31, 2002, 2001 and 2000

(In thousands except for share amounts)



|                                                                                                         |  | Shares Outstanding |  | Additional paid-in capital |         |   | Retained Earnings (Deficit) |   |         | Total Stockholders Equity | 
|-------------------------------------------------------------------------------------------------------- |  | ------------------ |  | -------------------------- | ------- | - | --------------------------- | - | ------- | -------------------------- | 
|Balance, December 31, 1999 (Predecessor)                                                                 |  | 1,000              |  | $                          | 129,554 |   |                             | $ | 2,435   |                            | 
|Net loss                                                                                                 |  |                   |  |                            |        |   |                             |   | (10,354 | )                          | 
|                                                                                                         |  |                    |  |                            |         |   |                             |   |         |                            | 
|Balance, December 31, 2000 (Predecessor)                                                                 |  | 1,000              |  | $                          | 129,554 |   |                             | $ | (7,919  | )                          | 
|Net loss                                                                                                 |  |                   |  |                            |        |   |                             |   | (14,365 | )                          | 
|                                                                                                         |  |                    |  |                            |         |   |                             |   |         |                            | 
|Balance, December 31, 2001 (Predecessor)                                                                 |  | 1,000              |  | $                          | 129,554 |   |                             | $ | (22,284 | )                          | 
|Effect of the push-down accounting of Alderwoods fresh-start accounting for the
purchase of RH Holdings |  |                   |  |                            | (64,673 | ) |                             |   | 22,284  |                            | 
|                                                                                                         |  |                    |  |                            |         |   |                             |   |         |                            | 
|Balance, December 31, 2001 (Successor)                                                                   |  | 1,000              |  | $                          | 64,881  |   |                             | $ |        |                            | 
|Net income                                                                                               |  |                   |  |                            |        |   |                             |   | 4,766   |                            | 
|                                                                                                         |  |                    |  |                            |         |   |                             |   |         |                            | 
|Balance, December 31, 2002 (Successor)                                                                   |  | 1,000              |  | $                          | 64,881  |   |                             | $ | 4,766   |                            | 
|                                                                                                         |  |                    |  |                            |         |   |                             |   |         |                            | 



See
accompanying notes to consolidated financial statements.



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##### Table of Contents



ROSE HILLS
COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)    Description of Business and Basis of
Presentation



Rose Hills Company (the
Company), a Delaware corporation, is a wholly owned subsidiary of Rose Hills Holdings Corp. (RH Holdings). The Company was formed in 1996 for purposes of acquiring Roses, Inc., the owner and operator of the Rose Hills
Mortuary and purchasing certain assets and assuming certain liabilities of Rose Hills Memorial Park Association (the Association) and Workman Mill Company, the owners of the real property and other cemetery assets of the Rose Hills
Memorial Park (Rose Hills Cemetery). In connection with the acquisition, The Loewen Group Inc., a shareholder of RH Holdings, also caused one of its subsidiaries to contribute to the Company 14 funeral homes and 2 funeral home cemetery combination
properties (the Contributed Properties). As a result of these acquisitions (collectively the 1996 Acquisition), the Company is the successor to the operations, assets and liabilities of the Rose Hills Mortuary and Cemetery
(collectively, Rose Hills) and the Contributed Properties.



Rose Hills is the largest, single-location cemetery and funeral home combination in the United States, and the Cemetery is the largest, single-location cemetery in the United States. The Rose Hills Cemetery and the Rose
Hills Mortuary have been continuously operating since 1914 and 1956, respectively. Rose Hills is situated less than 14 miles from downtown Los Angeles on approximately 1,400 acres of land near Whittier, California. In addition to Rose Hills, the
Company operated 9 funeral homes, 2 funeral home cemetery combination properties and one cemetery (Affiliates) as of December 31, 2002. Together with Rose Hills, the Affiliates constitute a strategic assembly of cemeteries and funeral
homes in the greater Los Angeles area.



The
accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and the prevailing practices within the cemetery and mortuary industry. All significant intercompany accounts
and transactions have been eliminated.



Changes in Control of
Registrant



In April 2001, the shareholders
of RH Holdings reached an agreement (Loewen Blackstone Settlement Agreement) pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. (Blackstone), the beneficial owner of 79.55% of the outstanding common
stock of the Company, would exercise its put right and the minority shareholder, a reorganized Loewen Group International, Inc. (Loewen), would acquire all of the stock of RH Holdings owned by Blackstone upon Loewens emergence from
bankruptcy. The U.S. Bankruptcy Court confirmed Loewens reorganization plan, including the proposed acquisition of the shares of RH Holdings from Blackstone on December 5, 2001, and the plan became effective on January 2, 2002. Effective with
its emergence from bankruptcy, Loewen has since been renamed the Alderwoods Group, Inc. (Alderwoods).



On January 3, 2002, in full satisfaction of Loewens obligations under the put, Alderwoods delivered to Blackstone unsecured,
subordinated notes in the aggregate principal amount of $24,678,571 and Alderwoods common stock with an aggregate value of $6,515,143. As a result of the delivery of the consideration, Alderwoods completed its purchase of all of the stock of RH
Holdings beneficially owned by Blackstone. Upon closing of the transaction (Alderwoods purchase transaction), Alderwoods increased its ownership from 20.45% to 100% of the outstanding common stock of RH Holdings, thereby causing the
Company to become a wholly owned subsidiary of Alderwoods. The shareholders agreement, and all other agreements,between Alderwoods and Blackstone with respect to the Company terminated as of the closing of the transaction, and Alderwoods
became entitled to elect all of the directors of the Company as of such date.



For accounting purposes, the effective date of the change in control has been determined by the Company to be December 31, 2001. This is based on the fact that the U.S. Bankruptcy Court
confirmed Loewens reorganization plan, including the proposed acquisition of the shares of RH Holdings from Blackstone on



39



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 5, 2001. Thus, Blackstone and Loewen were obligated under the put. Accordingly, the Company has recorded the push-down of
Loewens fresh-start reporting in its successor consolidated balance sheet as of December 31, 2001.



Push-down Accounting Adjustments



Since the Company has pushed-down the fresh start reporting that occurred as a result of Loewens purchase of Blackstones interest in the Company, the Companys successor consolidated
balance sheets as of December 31, 2001 and 2002, is presented on a different cost basis than the predecessor consolidated balance sheet as of December 31, 2000. Therefore, such statements are not comparable. The following provides a balance sheet
continuity from the Companys predecessor balance sheet prior to push-down of the fresh-start reporting to the Companys successor balance sheet.



|                                          |  | Predecessor Balance Sheet December 31, 2001 |  | Push-down Accounting Adjustments |      |  | Successor Balance Sheet December 31, 2001
|----------------------------------------- |  | ------------------------------------------- |  | -------------------------------- | ---- |  | -----------------------------------------
|ASSETS                                    |  |                                             |  |                                  |      |  |                                          
|Current assets:                           |  |                                             |  |                                  |      |  |                                          
|Cash and cash equivalents                 |  | 7,639                                       |  |                                 |      |  | 7,639                                    
|Accounts receivable, net of allowances    |  | 12,810                                      |  |                                 |      |  | 12,810                                   
|Inventories                               |  | 939                                         |  |                                 |      |  | 939                                      
|Prepaid expenses and other current assets |  | 738                                         |  |                                 |      |  | 738                                      
|                                          |  |                                             |  |                                  |      |  |                                          
|Total current assets                      |  | 22,126                                      |  |                                 |      |  | 22,126                                   
|Long term receivables, net of allowances  |  | 10,417                                      |  | 172,055                          | (1)  |  | 182,472                                  
|Cemetery property, at cost (net)          |  | 77,436                                      |  | (41,358                          | )(2) |  | 36,078                                   
|Property and equipment, net               |  | 50,522                                      |  | 33,252                           | (2)  |  | 83,774                                   
|Deferred tax asset                        |  | 8,132                                       |  | (4,627                           | )(6) |  | 3,505                                    
|Goodwill                                  |  | 113,450                                     |  | (46,065                          | )(3) |  | 67,385                                   
|Deferred finance charges                  |  | 4,148                                       |  | (4,148                           | )(4) |  |                                         
|Receivables from service trusts           |  | 7,942                                       |  |                                 |      |  | 7,942                                    
|Other assets                              |  | 2,535                                       |  |                                 |      |  | 2,535                                    
|                                          |  |                                             |  |                                  |      |  |                                          
|Total assets                              |  | 296,708                                     |  | 109,109                          |      |  | 405,817                                  
|                                          |  |                                             |  |                                  |      |  |                                          



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                           |  | Predecessor Balance Sheet December 31, 2001 |   |  | Push-down Accounting Adjustments |      |  | Successor Balance Sheet December 31, 2001
|------------------------------------------ |  | ------------------------------------------- | - |  | -------------------------------- | ---- |  | -----------------------------------------
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                                             |   |  |                                  |      |  |                                          
|Current liabilities:                       |  |                                             |   |  |                                  |      |  |                                          
|Accounts payable and accrued liabilities   |  | 12,620                                      |   |  | 506                              | (5)  |  | 13,126                                   
|Current portion of long-term debt          |  | 9,698                                       |   |  |                                 |      |  | 9,698                                    
|                                           |  |                                             |   |  |                                  |      |  |                                          
|Total current liabilities                  |  | 22,318                                      |   |  | 506                              |      |  | 22,824                                   
|Retirement plan liabilities                |  | 6,720                                       |   |  |                                 |      |  | 6,720                                    
|Deferred tax liability                     |  | 10,169                                      |   |  | (10,169                          | )(6) |  |                                         
|Subordinated notes payable                 |  | 80,000                                      |   |  | (3,200                           | )(4) |  | 76,800                                   
|Bank senior-term loan                      |  | 52,642                                      |   |  |                                 |      |  | 52,642                                   
|Other long-term debt                       |  | 979                                         |   |  |                                 |      |  | 979                                      
|Other liabilities                          |  | 50                                          |   |  |                                 |      |  | 50                                       
|Deferred pre-need funeral contract revenue |  |                                            |   |  | 172,055                          | (1)  |  | 172,055                                  
|Deferred pre-need cemetery revenue         |  | 16,560                                      |   |  | (7,694                           | )(7) |  | 8,866                                    
|Stockholders equity:                      |  |                                             |   |  |                                  |      |  |                                          
|Common stock                               |  |                                            |   |  |                                 |      |  |                                         
|Additional paid-in capital                 |  | 129,554                                     |   |  | (64,673                          | )(8) |  | 64,881                                   
|Accumulated deficit                        |  | (22,284                                     | ) |  | 22,284                           | (8)  |  |                                         
|                                           |  |                                             |   |  |                                  |      |  |                                          
|Total stockholders equity                 |  | 107,270                                     |   |  | (42,389                          | )    |  | 64,881                                   
|                                           |  |                                             |   |  |                                  |      |  |                                          
|Total liabilities and stockholders equity |  | 296,708                                     |   |  | 109,109                          |      |  | 405,817                                  
|                                           |  |                                             |   |  |                                  |      |  |                                          

---

|(1) |  | Amounts due from trust funds and third-party insurance companies, net of an allowance for non-deliverance by Company owned funeral homes have been included in the
successor balance sheet, as further discussed in note 8.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Independent appraisals were utilized to revalue unsold cemetery property, land and buildings to their fair value at the date of change in ownership. Cemetery
property was reduced $41,358,000 and land and buildings and improvements were increased $25,329,000 and $7,923,000, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The Company has estimated the excess of the purchase price over the fair values of identifiable net assets (goodwill) based upon a third party appraisal of the
Companys enterprise value. Management also used third party appraisals to estimate the fair value of the Companys long-lived assets and cemetery inventory in the allocation of the purchase price. Based upon the third party appraisals,
the Company recorded goodwill of $67,385,000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | At the consummation of the change in ownership, the estimated market value of the Companys senior subordinated notes was 96% of their maturity value.
Accordingly, $80,000,000 of its 91⁄2% senior subordinated notes have been recorded at $76,800,000 and $4,148,000 of deferred finance charges was eliminated.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The amount represents severance due to the resignation of the Companys President and Chief Executive Officer concurrent with the change of control.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The net effect of the push-down accounting transactions decreased the net deferred tax liability by $5,542,000.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(7) |  | Pre-need cemetery contracts carried on the Companys predecessor balance sheet include the sales price of unserviced and undelivered cemetery services and
merchandise, net of their direct and acquisition costs. In accordance with fresh-start accounting pushed-down by Alderwoods, the successor Company balance sheet carries obligations to perform pre-arranged cemetery services and provide cemetery
merchandise at their
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | fair value, net of their direct fulfillment costs. Deferred commission costs have been eliminated. The fair value of future cemetery services
was estimated by management to be 70% of the current sales price of those services adjusted for an inflation factor and reduced by a discount rate dependent on the expected fulfillment date. The cost to deliver cemetery merchandise was obtained from
independent vendors adjusted for an inflation factor and reduced by a discount rate dependant on the expected fulfillment date. Accordingly, the Company has recorded deferred pre-need cemetery revenue of $8,866,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | In April 2001, Loewen and Blackstone negotiated a settlement pursuant to which Blackstone would exercise its Put Option and Loewen would acquire all of RH Holdings
common shares owed by Blackstone. The settlement agreement, which was contingent on Loewens emergence from bankruptcy, indicated Blackstone would receive a note for approximately $24.7 million and newly reorganized Loewen (Alderwoods) common
stock valued at approximately $6.6 million in full satisfaction for all Blackstones claims in the Loewen bankruptcy. Management did not use the consideration received by Blackstone since it was an amount negotiated to settle Blackstones
claims under the Put/Call Agreement and was not based on the fair value of RH Holdings common stock. Accordingly, the Company has recorded in the push-down of the fresh-start reporting, an additional paid-in capital balance of $64,881,000 that
represents the Companys enterprise value in its December 31, 2001, successor consolidated balance sheet. This enterprise value is based on an independent appraisal of the Company as of December 31, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(2)    Summary of Critical and Significant Accounting
Policies and Estimates



Critical Accounting Policies and
Estimates



(a)    Cemetery Revenue Recognition



Pre-need sales of cemetery interment rights are recognized in accordance with the guidance of Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for the Sales of Real Estate.
Accordingly, sales of interment rights are recognized under the full accrual method, the percentage of completion method, or the deposit method depending on the level of the buyers down payment and any continuing involvement the Company has in
developing sold property. Direct cost of goods sold are deferred and recognized concurrent with the recognition of deferred sales. Costs relating to the sale of cemetery interment rights, including sales commissions, are expensed in the period
incurred.



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 over the past 6 years. In 2002 and 2001, a 4% and 5% effective cancellation rate was used to provide for
anticipated cancellations and refunds, respectively. Actual cancellation rates in the future may result in a change in estimate. Significant variances in expected cancellations could impact future gross margins.



Pre-need merchandise and service sales, and their direct cost
of goods sold, are recognized at the time of delivery of merchandise or performance of service. Costs relating to the sale of merchandise and services, including sales commissions, are expensed in the period incurred.



At-need sales of cemetery interment rights, merchandise and
services are recognized when the merchandise is delivered or the service is rendered.



A portion of the proceeds from the sale of interment rights is required by state law to be paid into an Endowment Care Fund to provide for the perpetual care of the associated properties. Cemetery
revenue is recorded net of these amounts. Interest and dividend earnings of the Endowment Care Funds are used to defray the maintenance costs of the cemeteries which are expensed as incurred. Additionally, pursuant to state law, the proceeds from
the sale of pre-need merchandise and services may also be required to be paid into trust funds. A significant increase in cost of services or loss of principal in the trust could negatively impact future gross margins.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





It is the
Companys policy to voluntarily trust 100% of pre-need service revenue when contracts are paid in full. Also, the Company has an agreement with a vendor to purchase pre-need merchandise when the sales contracts are paid in full. Funds
voluntarily trusted for pre-need cemetery services are included in the consolidated financial statements.



Effective January 1, 2000, the Company changed its method of accounting for pre-need sales of cemetery products and services. See note 5.



(b)    Funeral Revenue
Recognition



Pre-arranged funeral services
provide for future funeral services and are generally determined by prices prevailing at the time the contract is signed. The payments made under the contract are either placed in trust or are used to pay the premiums of third-party life insurance
policies under which the Company will be designated as beneficiary. The pre-need funeral insurance policies sold by the Company are whole-life policies sold on a pre-need basis to pay for the cost of funeral services. Commissions earned are based on
a combination of factors, such as the amount of funeral cost coverage sold, the age of the insured and the volume of monthly sales activity. Insurance commissions earned and related selling expenses are recognized when the insurance company accepts
the policies. Except for insurance commissions, no income is recognized until the performance of a specific funeral.



Income from trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust
and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon
performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amounts together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Costs relating to
the sale of pre-arranged funeral services, including sales commission expense, are expensed in the period incurred.



At-need funeral services revenues are recognized when the service is performed.



(c)    Valuation of Long-Lived Assets



Through December 31, 2001, the Company
accounted for long-lived assets under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized was measured by the amount by which the carrying amount of the assets exceeded the fair value of the
assets. Assets to be disposed of were reported at the lower of the carrying amount or fair value, less cost to sell. In 2001, the long-lived assets of two operating locations were reduced $1,032,000 and charged to Asset Write-Down and Other Charges.



Effective January 1, 2002, the Company adopted
SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the
future net



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.



(d)    Valuation of Goodwill



Through December 31, 2001, the excess of
purchase price over the fair value of identifiable net assets acquired (goodwill) was being amortized by use of the straight-line method over a 40-year period.



As a result of Alderwoods purchase of Blackstones interest in the Company, the Company recorded the push-down of Loewens
fresh start reporting in its successor consolidated balance sheet as of December 31, 2001. As of December 31, 2001, the Company estimated the excess of the purchase price over the fair values of identifiable net assets based upon a third party
appraisal of the Companys enterprise value. Based upon the third party appraisal, the Company recorded goodwill of $67,385,000, a $46,065,000 reduction to the predecessor Companys goodwill at December 31, 2001.



Effective January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment for each of the Companys reporting segments. The
Companys reporting segments are cemetery operations and funeral operations. The annual review entails determining an estimated fair value of goodwill for comparison to the carrying amount of goodwill, to assess whether or not impairment has
occurred. In determination of the estimated fair value of goodwill, the Company compared the net carrying value of assets (including goodwill) less liabilities to the discounted cash flows of each segment. The Company performed its annual goodwill
impairment review on October 31, 2002. No impairment to goodwill was identified during the review. Such determination involves complex assumptions; accordingly, if any estimates or related underlying assumptions change in the future, the Company may
be required to record goodwill impairment charges that result.



As a result of the adoption of SFAS No. 142, the Company did not record any amortization expense of goodwill for the twelve months ended December 31, 2002. The following table shows the impact of the adoption of SFAS No. 142 (in
thousands):



|                                |  | Twelve Months ended December 31, |      
|------------------------------- |  | -------------------------------- | -----
|                                |  | Successor 2002                   |      
|Reported net income (loss)      |  | $                                | 4,766
|Add back: goodwill amortization |  |                                  |     
|                                |  |                                  |      
|Adjusted net income (loss)      |  | $                                | 4,766
|                                |  |                                  |      



In 2002,
the Company utilized a $444,000 benefit from the December 31, 2001 net operating loss carry forward valuation allowance. The guidance provided by SFAS No. 109 and Statement of Position No. 90-7, state that the benefit of a valuation allowance for a
deferred tax asset is to be recorded to goodwill. Accordingly, goodwill was reduced $444,000 in 2002.



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 expenses and disclosure of contingent assets and liabilities at the



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates include those required in the valuation of intangible assets, evaluating the impairment for long lived assets, the recording of allowance for sales cancellations and doubtful accounts and various elements of the push-down transactions
related to the change in control of the Company (including the valuation of purchased assets and liabilities, as well as the determination of deferred revenues). Actual results could differ from those estimates.



(b)    Cash and Cash Equivalents



Cash and cash equivalents are comprised of
cash and short-term certificates of deposit, with original maturities of three months or less.



(c)    Receivables



Receivables due from customers for cemetery property, merchandise and services sold in advance of need are generally collected over one to seven years and bear interest at the average rate of 9.9% per
annum. An allowance for sales cancellations has been established to recognize that cemetery property sold in advance of need, for which a minimum down payment is received, may be subsequently cancelled. Accordingly, as of December 31, 2002 and
December 31, 2001, allowance for sales cancellations totaled $2,067,000 and $2,021,000, respectively. A provision of $1,080,000, $1,027,000, and $1,717,000 was charged to cemetery sales to provide for estimated future cancellations for the years
ended December 31, 2002, 2001 and 2000, respectively.



In addition, receivables due from customers for cemetery and mortuary goods and services provided at the time of need are generally collected over a period of one to five years bearing interest at the average rate of 9.9% 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, 2002 and 2001, the allowance for doubtful accounts totaled $235,000 and $273,000,
respectively.



Finance income earned on
long-term receivables is recognized on a current basis.



(d)    Inventories



Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value.



(e)    Cemetery Property



Cemetery property consists of developed and undeveloped cemetery property and is valued at average cost,
which is not in excess of market value. Amounts are expensed (cemetery amortization) to cost of sales and services as sales of cemetery plots occur.



(f)    Property and Equipment



Property and equipment are valued at cost and depreciated on a straight-line basis over the estimated useful
lives of the assets as follows:



|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



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Expenditures for
maintenance and repairs are charged to operations as incurred and expenditures for replacements and betterment are capitalized.



(g)    Covenants Not to Compete



Covenants not to compete included in Other Assets on the consolidated balance sheets represent
amounts prepaid or the present value of future payments under noncompetition agreements with certain key management personnel of acquired operations.



Amortization of such covenants not to compete is provided by use of the straight-line method over the terms of the relevant agreements,
typically ten years. The carrying amount of the covenants not to compete was $41,000 and $65,000 as of December 31, 2002 and 2001, respectively. Certain covenants were fully amortized at December 31, 2002; however the amortization expense related to
open covenants for December 31, 2002, 2001 and 2000 was $24,000, $356,000 and $406,000, respectively.



(h)    Deferred Financing Cost



Pursuant to the original debt acquisition in 1996, deferred financing costs relating to the bank senior-term
loan and the senior subordinated notes were being amortized over the life of the loan and the notes based on the effective interest method. As of December 31, 2000, accumulated amortization of these costs was $6,721,000. Commensurate with the change
in control, the Companys debt was revalued based on market conditions and the unamortized deferred financing costs were eliminated.



(i)    Income Taxes



The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that included the
enactment date.



In connection with the
Alderwoods purchase transaction, effective January 2, 2002, the Company will be included in the consolidated income tax return of the Alderwoods Group, Inc. Net operating loss carryover benefits are not available to offset income in 2002. The
current period tax liability is due to the Alderwoods Group, Inc. and is included in the accounts payable and accrued liabilities in the consolidated balance sheet. Prior to 2002, the Company filed separate income tax returns.



(j)    Fair Value of Financial
Instruments



The carrying value of the
Companys debt instruments approximates fair value that is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.



The fair value of the Companys accounts and notes
receivable in excess of one year approximates carrying values and is determined as the present value of expected future cash flows discounted at the interest rate currently offered by the Company, which approximates rates currently offered for loans
with similar terms and collateral to borrowers with comparable credit risk.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
carrying amounts of the remaining current assets and liabilities approximate fair value because of the short-term nature of those accounts.



(k)    Earnings (Loss) per Share



Earnings (loss) per share have not been included, as the Company is a wholly owned subsidiary.



(l)    Reclassifications



Certain reclassifications have been made to
the 2001 consolidated financial statements to conform to the 2002 presentation.



(3)    Liquidity



On February 14, 2003, the terms of Alderwoods $75.0 million Credit Facility Agreement was amended to allow Alderwoods, upon the satisfaction of specified conditions precedent, to draw up to $30.0 million from its credit
facility for the purposes of assisting in the repayment of the principal amount of $52.6 million outstanding under the Companys Bank Term Facility. Under the terms of the amended Alderwoods Credit Facility Agreement, Alderwoods
obligations thereunder will be guaranteed by RH Holdings, the Company and the Companys subsidiaries, and the lenders thereunder will receive a first priority security interest in and lien on all personal property of RH Holdings, the Company
and the Companys subsidiaries and the real property of eight affiliate funeral homes and cemeteries. Real property at Rose Hills Memorial Park and Mortuary is not included in the Alderwoods Credit Facility Agreement. Alderwoods has committed,
upon the satisfaction of specified conditions precedent, at a minimum, to contribute $42.0 million in equity cash to the Company prior to May 1, 2003. Upon receipt, the Company intends to retire in full the $52.6 million outstanding under its Bank
Term Facility using the equity cash contribution from Alderwoods and up to $10.6 million of its own funds.



(4)    Asset Write-Downs and Other Charges:



Disposition of Funeral Homes



In 2001, the Company began assessing the long-term term prospects of certain Contributed Properties including their fit with the Rose
Hills Cemetery and Mortuary and the effectiveness of clustering synergies. Based on this assessment, the Company determined that four of the Contributed Properties did not fit the Companys long-term market strategy. In June 2001, the Company
completed disposition of these four locations, which included sub-leasing three locations, and leasing one owned location to independent funeral operators. In connection with the disposition of these four locations, the Company restructured its
Affiliate operations and terminated approximately 40 employees. The Company recorded a charge of $1.7 million ($1.1 million non cash charges relating to the write-off of goodwill and other assets and $0.6 million in severance pay and lease
termination costs) in 2001. As of December 31, 2002, $94,000 remains in the lease termination provision.



Asset Impairment of Long-lived Assets



In the fourth quarter of 2001, the Company determined that Affiliate locations had suffered asset impairments due to market conditions. The Company recorded a $2.1 million non-cash charge for the
write-off of goodwill and other assets.



Change in Control
Compensation Agreements



Pursuant to the
phantom equity plan, the consummation of the change in control discussed in note 1 triggered an additional $1,354,000 bonus award commitment by the Company to certain members of the



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Companys management. The incremental amount was recorded in the 2001 consolidated statement of operations and paid on January 3, 2002.



Land Movement



As more fully discussed in note 21, during 2001 the Company
recorded $3.0 million for remediation and related costs to be incurred in connection with the land movement in a portion of the Rose Hills Memorial Park.



The following table below sets forth the impact to the December 31, 2001 consolidated statement of operations for those amounts indicated
in the notes above:



|                                                           |  | Asset write- down and other charges
|---------------------------------------------------------- |  | -----------------------------------
|Disposal of affiliatesgoodwill and other assets write-off |  | $                                  
|Disposal of affiliatesseverance and other cash payments   |  |                                    
|Provision for loss on lease arrangements                   |  |                                    
|Asset impairments                                          |  |                                    
|Phantom equity planchange in control provision            |  |                                    
|Land movement.                                             |  |                                    
|                                                           |  |                                    
|                                                           |  | $                                  
|                                                           |  |                                    



(5)    Change in Accounting Principles



In response to the issuance of Staff Accounting Bulletin No.101 (SAB 101) and consultation with the U.S. Securities Exchange Commission, the Company changed the following accounting principles
effective January 1, 2000:



Revenue recognition
of pre-need interment rights are now accounted for in accordance with SFAS No. 66. The direct costs for the deferred sales are now deferred and recognized concurrent with the recognition of the deferred sales. Previously, the Company recognized the
sale of pre-need interment rights, and their related costs, at the time of sale.



Revenue recognition of pre-need cemetery services and merchandise, and their direct costs, are now deferred until time of delivery or performance of service. Previously, the Company recognized the sale
of pre-need service and merchandise, and their related costs, at the time of sale.



Revenue realized by the cemetery service and merchandise trust funds are now deferred until the underlying service and merchandise is delivered. Previously, the Company recognized the earnings as they
accrued.



The cumulative effect of these changes
in accounting principles on prior years resulted in $12,329,000 decrease in net earnings before taxes and $7,467,000 decrease in net earnings after taxes for the year ended December 31, 2000. The effect of the change in accounting principles for the
year ended December 31, 2001 was an increase in net earnings of $1,238,000. On December 31, 2001, the Company eliminated $5,880,000 of profit that was previously included in the cumulative effect of accounting change as a result of the push-down of
fresh-start accounting. For the year ended December 31, 2002, the effect of the change in accounting principles was an increase in net earnings of $779,000.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(6)    Prepaid Expenses and Other Current Assets



Prepaid expenses and other current assets consist of the following at December 31, 2002 and 2001 (in thousands):



|                                          |  | Successor 2002 |     | Successor 2001
|----------------------------------------- |  | -------------- | --- | --------------
|Deposits                                  |  | $              | 261 |               
|Prepaid expenses                          |  |                | 174 |               
|Prepaid insurance                         |  |                | 424 |               
|                                          |  |                |     |               
|Prepaid expenses and other current assets |  | $              | 859 |               
|                                          |  |                |     |               



(7)    Property and Equipment



Property and equipment consist of the following at December 31, 2002 and 2001 (in thousands):



|                                  |  | Successor 2002 |        | Successor 2001
|--------------------------------- |  | -------------- | ------ | --------------
|Land                              |  | $              | 33,590 |               
|Buildings and improvements        |  |                | 43,555 |               
|Furniture, fixtures and equipment |  |                | 4,937  |               
|Vehicles                          |  |                | 1,188  |               
|Computers and computer software   |  |                | 1,170  |               
|Construction in progress          |  |                | 940    |               
|                                  |  |                |        |               
|Total property and equipment      |  |                | 85,380 |               
|Less accumulated depreciation     |  |                | 3,502  |               
|                                  |  |                |        |               
|Property and equipment, net       |  | $              | 81,878 |               
|                                  |  |                |        |               



(8)    Long-term Receivables



The balance in long-term receivables represents amounts due from customer receivables beyond one year and related allowance for doubtful accounts, funeral trust funds less an allowance for cancellations and non-fulfillment,
insurance companies for unperformed, price guaranteed, pre-need funeral contracts and allowance for cancellations and non-fulfillment, and unearned finance income. The components of long-term accounts receivable in the consolidated balance sheets
are as follows:



|                                                                                       |  | Successor 2002 |         |   | Successor 2001 |  
|-------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | -
|Funeral installment contracts                                                          |  | $              | 1,282   |   |                | $
|Allowance for doubtful accounts                                                        |  |                | (131    | ) |                |  
|Pre-need cemetery installment contracts                                                |  |                | 10,427  |   |                |  
|Allowance for cancellations and refunds                                                |  |                | (1,214  | ) |                |  
|Amounts receivable from funeral trusts                                                 |  |                | 4,286   |   |                |  
|Amounts receivable from third-party insurance companies                                |  |                | 178,356 |   |                |  
|Allowance for cancellations and non-fulfillmentfuneral trusts and insurance
companies |  |                | (3,319  | ) |                |  
|Unearned finance income                                                                |  |                | (690    | ) |                |  
|                                                                                       |  |                |         |   |                |  
|                                                                                       |  | $              | 188,997 |   |                | $
|                                                                                       |  |                |         |   |                |  



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For funeral and cemetery installment contracts, an allowance for cancellations and
refunds is provided at the date of sale based on managements estimates.



Amounts receivable from funeral trusts represent the proceeds deposited in the funeral trust funds. Amounts receivable from third party insurance companies represent the value of the unserviced
policies. An allowance for cancellations and non fulfillment by company-owned funeral homes is provided at the date of sale based upon managements estimates. The company will receive these amounts when the contracted services are performed.



(9)    Accounts Payable and Accrued
Liabilities



Accounts payable and accrued
liabilities consist of the following at December 31, 2002 and 2001 (in thousands):



|                       |  | Successor 2002 |       | Successor 2001
|---------------------- |  | -------------- | ----- | --------------
|Trade payables         |  | $              | 820   |               
|Taxes payable          |  |                | 2,172 |               
|Accrued payroll costs  |  |                | 2,110 |               
|Accrued interest       |  |                | 1,167 |               
|Phantom equity         |  |                |      |               
|Land movement          |  |                | 950   |               
|Other accrued expenses |  |                | 1,755 |               
|                       |  |                |       |               
|                       |  | $              | 8,974 |               
|                       |  |                |       |               



(10)    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.



(11)    Cemetery Funds



(a)    Endowment Care Fund



The Company, pursuant to state law, has
placed the cemeteries under endowment care. Therefore, when cemetery property is sold, an endowment care charge is made for which a minimum amount is statutory. Charges are payable to the Endowment Care Funds (the Funds), separate 501(c)(13)
organizations, 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, 2002 and 2001, amounts owed to the Funds, but not yet due or collected in full from customers, amounted to $2,431,000 and $1,946,000, respectively.
The Funds assets are invested under the direction of the Trustees of the Funds. The principal of the Funds generally cannot be withdrawn by the Company and therefore is not included on the Companys consolidated balance sheet. The change
in net assets of the Funds, net of amounts required to be withheld under state law, is paid by the Funds to the Company and is used for the care, maintenance and embellishment of the cemeteries. As allowable by state law, a portion of the
undistributed capital gains of the Funds has been reserved and is available



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to the Company at the discretion of the Trustees for future maintenance, repair or restoration of property or embellishment. The amounts
earned by the Funds and transferred to the Company are reported as cemetery revenues in the consolidated statements of operations and amounted to $3,185,000, $3,616,000 and $3,814,000 for the years ended December 31, 2002, 2001 and 2000
respectively.



Total assets of the Funds are
$68,275,000 and $64,586,000 at December 31, 2002 and 2001, respectively, and consist primarily of cash and investments carried at market value. Total liabilities of the Funds are $641,000 and $293,000 at December 31, 2002 and 2001, respectively, and
consist primarily of amounts payable to the Company. Total net assets of $67,634,000 and $64,292,000 at December 31, 2002 and 2001, respectively, resulted primarily from Funds deposits received or receivable from customers, capital gains (net
of transfers to reserves) and holding gains and losses experienced by the Funds.



(b)    Special Care Funds



In 1998, the Company established Cemetery Special Care Funds (SCF) pursuant to state law for the investment of proceeds from the sale of
pre-need cemetery services and merchandise. The Companys policy is to voluntarily set aside in trust, 100% of the pre-need cemetery service revenue when the contracts are paid in full. The funds deposited are carried on the Companys
consolidated balance sheet in receivables from service trusts. American Funeral and Cemetery Trust Services is the Trustee of the Special Care Funds.



Total assets of the SCF are $10,420,000 and $10,779,000 at December 31, 2002 and 2001, respectively, and consist primarily of cash and
investments carried at market value. Total liabilities of the SCF are $588,000 and $786,000 at December 31, 2002 and 2001, respectively, and consist of amounts payable to the Company. Total net assets of $9,832,000 and $9,993,000 at December 31,
2002 and 2001 respectively, resulted primarily from SCF deposits received or receivable from customers, capital gains (net of transfers to reserves) and holding gains and losses experienced by the SCF.



(12)    Pre-need Funeral Service Debentures



From 1960 to 1975, the Association (the
predecessor cemetery) sold pre-need funeral service debentures at face amounts under subscription agreements, which provided for the collection of the amount on an installment basis. Debentures were issued in denominations of $125 each when
installments of the amount were collected. The Company may redeem the debentures at any time prior to maturity at the face amount or the holders thereof may at any time apply the debentures to the purchase price of funeral services and arrangements
furnished by the Company.



Additionally, the
subscription agreements may be canceled at any time by either the Company or the subscriber. Interest on the debentures is calculated at the rate of 3% per annum, is payable semiannually and continues to accrue on debentures not presented for
payment on their maturity date.



Under the
indenture and supplemental indentures, as amended, the Company is required to make payments to a trustee of the fund to be used for the retirement of the debentures at maturity or upon their application to the purchase price of funeral services.
Initial funding payments in amounts equal to 25% of the face amount of debentures being issued were required at the time of issuance. The issued and outstanding debentures at December 31, 2002, equaling $401,000, have matured.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(13)    Income Taxes



The provision for income tax expense (benefit) is as follows (in thousands):



|                                    |  | Successor 2002 |       | Predecessor 2001 |   |       | Predecessor 2000 | 
|----------------------------------- |  | -------------- | ----- | ---------------- | - | ----- | ---------------- | 
|Current:                            |  |                |       |                  |   |       |                  | 
|Federal                             |  | $              | 926   |                  | $ | (474  | )                | 
|State                               |  |                | 88    |                  |   | 26    |                  | 
|                                    |  |                |       |                  |   |       |                  | 
|Total current                       |  |                | 1,014 |                  |   | (448  | )                | 
|                                    |  |                |       |                  |   |       |                  | 
|Deferred:                           |  |                |       |                  |   |       |                  | 
|Federal                             |  |                | 1,718 |                  |   | 2,375 |                  | 
|State                               |  |                | 301   |                  |   | 147   |                  | 
|                                    |  |                |       |                  |   |       |                  | 
|Total deferred                      |  |                | 2,019 |                  |   | 2,522 |                  | 
|                                    |  |                |       |                  |   |       |                  | 
|Total income tax expense (benefit). |  | $              | 3,033 |                  | $ | 2,074 |                  | 
|                                    |  |                |       |                  |   |       |                  | 



Differences between the provision for income tax expense (benefit) (exclusive of the tax benefit related to the cumulative effect of the accounting change) and income tax expense (benefit) at the statutory federal income tax rate are
as follows (in thousands):



|                                       |  | Successor 2002 |       |   | Predecessor 2001 |   |        | Predecessor 2000 | 
|-------------------------------------- |  | -------------- | ----- | - | ---------------- | - | ------ | ---------------- | 
|Expected federal tax (benefit) expense |  | $              | 2,652 |   |                  | $ | (4,179 | )                | 
|Net tax effects of:                    |  |                |       |   |                  |   |        |                  | 
|Goodwill amortization                  |  |                |      |   |                  |   | 703    |                  | 
|State taxes, net of federal benefit    |  |                | 455   |   |                  |   | (717   | )                | 
|Change in valuation allowance          |  |                |      |   |                  |   | 6,190  |                  | 
|Other                                  |  |                | (74   | ) |                  |   | 77     |                  | 
|                                       |  |                |       |   |                  |   |        |                  | 
|Actual income tax expense (benefit)    |  | $              | 3,033 |   |                  | $ | 2,074  |                  | 
|                                       |  |                |       |   |                  |   |        |                  | 



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
components of the net deferred tax balances at December 31, 2002 and 2001 are as follows (in thousands):



|                                                                             |  | Successor 2002 |         |   | Successor 2001 |  
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | -
|Deferred tax assets:                                                         |  |                |         |   |                |  
|Operating reserves                                                           |  | $              | 781     |   |                | $
|Retirement benefits                                                          |  |                | 1,255   |   |                |  
|Land movement reserve                                                        |  |                | 394     |   |                |  
|Tax basis over book value resulting from push-down of fresh-start
accounting |  |                | 17,689  |   |                |  
|Asset write-downs                                                            |  |                |        |   |                |  
|Net operating loss                                                           |  |                | 5,748   |   |                |  
|Deferred revenue and other                                                   |  |                | 539     |   |                |  
|                                                                             |  |                |         |   |                |  
|Total deferred tax assets before valuation allowance                         |  | $              | 26,406  |   |                | $
|                                                                             |  |                |         |   |                |  
|Valuation allowance                                                          |  |                | (5,748  | ) |                |  
|                                                                             |  |                |         |   |                |  
|Total deferred tax assets after valuation allowance                          |  |                | 20,658  |   |                |  
|Deferred tax liabilities:                                                    |  |                |         |   |                |  
|Tax basis over book value resulting from push-down of fresh-start
accounting |  |                | (13,771 | ) |                |  
|Debt discount                                                                |  |                |        |   |                |  
|Goodwill amortization                                                        |  |                | (657    | ) |                |  
|Depreciation                                                                 |  |                | (3,941  | ) |                |  
|Land                                                                         |  |                | (803    | ) |                |  
|                                                                             |  |                |         |   |                |  
|Total deferred tax liability                                                 |  |                | (19,172 | ) |                |  
|                                                                             |  |                |         |   |                |  
|Net deferred tax asset                                                       |  | $              | 1,486   |   |                | $
|                                                                             |  |                |         |   |                |  



The
Company had a $5.7 million and $6.2 million valuation allowance related to the entire net operating loss carry forward (NOL) available to the Company as of December 31, 2002 and 2001, respectively. In 2002, a $442,000 reduction in the estimated
valuation allowance was recorded as a push-down fresh-start accounting adjustment. In assessing the realizability of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets
would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, or the NOLs can be used. Management
considered scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the
periods which the deferred tax assets are deductible and the NOLs can be used, and the change of ownership occurring in early 2002, and the potential limitation imposed on the utilization of the Companys NOLs resulting from that change,
management believes it is more likely than not that the benefits of these NOLs will not be utilized by the Company.



(14)    Related Party Transactions



In the course of ordinary business, the Company receives proceeds from insurance companies as payment for at-need services rendered. In
2002, the Company received approximately $0.2 million of insurance proceeds from Mayflower Insurance, a subsidiary of Alderwoods. As of December 31, 2002 and 2001, the Company is the stated beneficiary of insurance policies totaling a face amount of
$8,046,000 and $8,262,000 with Mayflower Insurance, respectively.



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##### Table of Contents

ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(15)    Long-term Debt



Long-term debt consists of the following at December 31, 2002 and 2001 (in
thousands):



|                                                                                                                                                                                                          |  | Successor 2002 |         |   | Successor 2001 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | -
|Borrowings outstanding under Bank Credit Agreement, due November 2003                                                                                                                                     |  | $              | 52,642  |   |                | $
|9.5% Senior subordinated notes due November 15, 2004, with an effective interest rate of
11.13% net of unamortized discount of $2.2 million                                                               |  |                | 77,800  |   |                |  
|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 2003 through 2007 |  |                | 551     |   |                |  
|Capital lease obligations                                                                                                                                                                                 |  |                | 659     |   |                |  
|                                                                                                                                                                                                          |  |                |         |   |                |  
|                                                                                                                                                                                                          |  |                | 131,652 |   |                |  
|Less current portion                                                                                                                                                                                      |  |                | (53,306 | ) |                |  
|                                                                                                                                                                                                          |  |                |         |   |                |  
|Long-term debt                                                                                                                                                                                            |  | $              | 78,346  |   |                | $
|                                                                                                                                                                                                          |  |                |         |   |                |  



At December 31, 2002, annual maturities of long-term debt consisted of the following (in thousands):



|Year ending December 31: |  |   |        
|------------------------ |  | - | -------
|2003                     |  | $ | 53,306 
|2004                     |  |   | 78,181 
|2005                     |  |   | 72     
|2006                     |  |   | 26     
|2007                     |  |   | 14     
|Thereafter               |  |   | 53     
|                         |  |   |        
|                         |  | $ | 131,652
|                         |  |   |        



The
Company has a credit agreement (the Bank Credit Agreement) with a group of financial institutions in Canada and the United States, which provides for (1) a senior secured amortization extended term loan facility (the Bank Term Facility) in an
aggregate principal amount of $75.0 million and (2) a senior secured revolving credit facility (the Revolving Credit Facility) in an aggregate principal amount of $25.0 million, a portion of which may be extended (as agreed upon) in the form of
swing line loans or letters of credit for the account of the Company. Effective May 2, 2001, the Company amended the Revolving Credit Facility reducing the aggregate principal amount available to $10.0 million and extending its maturity date to
April 1, 2003. Borrowings under the Revolving Credit Facility must be fully paid for a minimum period of 30 days for each 12-month period ending December 1.



The Bank Credit Agreement contains certain affirmative and negative covenants customary for this type of agreement and is guaranteed by
the Company, its subsidiaries and RH Holdings. All such guarantees are secured by a first priority security interest of the capital stock of the Company and each subsidiary and all inter-company receivables.



The Company is required to maintain certain defined financial
ratios. The Company was in compliance with all such requirements at December 31, 2002.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 1996 acquisition and requires semiannual installments aggregating $1.0 million in each of the first three years after the acquisition, $3.0 million in
the fourth year after the acquisition, $7.0 million in the fifth year after the acquisition, $9.0 million in the sixth year after the acquisition and $53 million in the seventh year after the acquisition.



As of December 31, 2002, the Company was paying interest at
the Adjusted Eurodollar Rate (1.42%) plus 3.0% on its outstanding borrowings under the Bank Term Facility. Additionally, the Company had entered into interest rate Collar Agreements to limit its interest rate risk that expired 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 0.5% on the unused portion. The Revolving Credit Facility is payable in full at maturity, with
no prior amortization. As of December 31, 2002, the Company had no borrowings under the Revolving Credit Facility.



The Company has face value $80.0 million of 9.5% senior subordinated notes payable due November 15, 2004 (the Notes). There are no sinking
fund requirements on the Notes and they may not be redeemed until November 2000. At such date, they are redeemable at 104.75% of principal amount, plus accrued and unpaid interest, if any, to the redemption date, and thereafter, at an annually
declining premium over par until November 2003, when they are redeemable at par. The indenture limits the payment of dividends and repurchase of capital stock, and includes certain other restrictions on indebtedness and limitations customary with
subordinated indebtedness of this type. The Company is in compliance with all such requirements as of December 31, 2002.



The Company assumed liabilities under notes payable and non-compete agreements from the Contributed Properties in the 1996 acquisition.
The notes payable are secured by land and bear interest at rates ranging from 7.46% to 8.00%. The non-compete agreements are recorded at the net present value of future payments discounted at 9.00%.



(16)    Retirement Plans



The Company has a defined benefit plan, a defined
contribution plan, supplemental employee retirement plan (SERP) and a retirement plan for the Board of Trustees. All plans except for the defined contribution plan are frozen. As a result of the change in control, the Company eliminated any
unrealized gain or loss in the change in funded status footnotes on December 31, 2001.



(a)    Defined Benefit Plan



The Retirement Plan for Employees of Rose Hills Mortuary, L.P. (the Plan) is frozen. It is the intention to formally terminate the Plan at
a later date. Prior to the 1996 acquisition, all employees of the Mortuary, which employed all cemetery and mortuary employees, were participants in the Plan. Participants became fully vested upon the freezing of the Plan. Employees may elect to
receive their pension benefits in the form of a single-life annuity or a qualified joint and contingent annuity.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has funded or accrued the present value of these benefits. The Plan is
subject to and in compliance with the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). During 1995, the Plan received a favorable letter of determination from the IRS.



The change in benefit obligation included the following
components (in thousands):



|                                  |  | Successor 2002 |        |   | Predecessor 2001 |  
|--------------------------------- |  | -------------- | ------ | - | ---------------- | -
|Benefit obligation at January 1   |  | $              | 12,557 |   |                  | $
|Interest cost                     |  |                | 764    |   |                  |  
|Actuarial (gain) loss             |  |                | (343   | ) |                  |  
|Benefits paid                     |  |                | (666   | ) |                  |  
|                                  |  |                |        |   |                  |  
|Benefit obligation at December 31 |  | $              | 12,312 |   |                  | $
|                                  |  |                |        |   |                  |  



The
change in plan assets included the following components (in thousands):



|                                    |  | Successor 2002 |        |   | Predecessor 2001 |  
|----------------------------------- |  | -------------- | ------ | - | ---------------- | -
|Fair value of assets at January 1   |  | $              | 11,978 |   |                  | $
|Actual return on plan assets        |  |                | 892    |   |                  |  
|Benefits paid                       |  |                | (666   | ) |                  |  
|                                    |  |                |        |   |                  |  
|Fair value of assets at December 31 |  | $              | 12,204 |   |                  | $
|                                    |  |                |        |   |                  |  



The
change in funded status included the following components (in thousands):



|                                |  | Successor 2002 |         |   | Successor 2001 |  
|------------------------------- |  | -------------- | ------- | - | -------------- | -
|Benefit obligation              |  | $              | (12,312 | ) |                | $
|Plan assets at fair value       |  |                | 12,204  |   |                |  
|Unrecognized net actuarial gain |  |                | (478    | ) |                |  
|                                |  |                |         |   |                |  
|Accrued pension cost            |  | $              | (586    | ) |                | $
|                                |  |                |         |   |                |  



The net
pension cost included the following components (in thousands):



|                                                |  | Successor 2002 |      |   | Predecessor 2001 |   |      | Predecessor 2000 | 
|----------------------------------------------- |  | -------------- | ---- | - | ---------------- | - | ---- | ---------------- | 
|Interest cost on projected benefits obligations |  | $              | 764  |   |                  | $ | 763  |                  | 
|Expected earnings on plan assets                |  |                | (757 | ) |                  |   | (746 | )                | 
|Gain                                            |  |                |     |   |                  |   | (3   | )                | 
|                                                |  |                |      |   |                  |   |      |                  | 
|Total net periodic pension cost                 |  | $              | 7    |   |                  | $ | 14   |                  | 
|                                                |  |                |      |   |                  |   |      |                  | 



The
weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.25% for 2002 and 2001. The expected long-term rate of return on assets was 6.50% for 2002 and 2001.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(b)    Defined Contribution Plan



The Company also has a defined contribution plan, which has been qualified under Section 401(k) of the Internal Revenue Service Code (the Savings Plan). During 1995, the predecessor mortuary received a
favorable letter of determination from the Internal Revenue Service regarding the Savings Plan. The Savings Plan permits participation by all employees of the Company who have completed six months of continuous service, subject also to their entry
into the Savings Plan on enrollment dates of January 1 or July 1 of each year. Participants may defer up to 15% of their compensation (subject to certain limitations). In addition to the amount of compensation deferred by participants, the Company
matches 50% of up to $4,000 contributed per year per participant. Additionally, the Company may contribute to the Savings Plan for each Plan year, beginning with the Plan year beginning January 1, 1997, such amounts as the Board of Directors shall
determine in its sole discretion. The Companys contribution to this Savings Plan on behalf of the participants amounted to $427,000, $446,000 and $486,000, for the years ended December 31, 2002, 2001 and 2000 respectively.



(c)    Supplemental Employee Retirement
Plan



Three senior officers of Roses, the
predecessor mortuary, had employment agreements, which obligated Roses to provide these three employees with a supplemental employee retirement plan (SERP). This non-qualified supplemental pension plan covering certain employees provides for
incremental pension payments from Roses funds so that the total pension payments would more realistically approximate amounts that would have been payable from the Roses principal pension plan if it were not for limitations imposed by
income tax regulations. In conjunction with the 1996 acquisition, the Company assumed the SERP liability. The annual lifetime benefit is based upon a percentage of salary during the final five years of employment, offset by several other sources of
income, up to age 62, at which time the benefit becomes payable to the participant.



The change in SERP benefit obligation included the following components (in thousands):



|                                  |  | Successor 2002 |       |   | Predecessor 2001 |  
|--------------------------------- |  | -------------- | ----- | - | ---------------- | -
|Benefit obligation at January 1   |  | $              | 4,755 |   |                  | $
|Interest cost                     |  |                | 303   |   |                  |  
|Actuarial loss                    |  |                | 1     |   |                  |  
|Benefits paid                     |  |                | (175  | ) |                  |  
|                                  |  |                |       |   |                  |  
|Benefit obligation at December 31 |  | $              | 4,884 |   |                  | $
|                                  |  |                |       |   |                  |  



The
change in SERP plan assets included the following components (in thousands):



|                                    |  | Successor 2002 |      |   | Predecessor 2001 |  
|----------------------------------- |  | -------------- | ---- | - | ---------------- | -
|Fair value of assets at January 1   |  | $              |     |   |                  | $
|Employer contributions              |  |                | 175  |   |                  |  
|Benefits paid                       |  |                | (175 | ) |                  |  
|                                    |  |                |      |   |                  |  
|Fair value of assets at December 31 |  | $              |     |   |                  | $
|                                    |  |                |      |   |                  |  



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The change
in SERP funded status included the following components (in thousands):



|                                |  | Successor2002 |        |   | Successor2001 |  
|------------------------------- |  | ------------- | ------ | - | ------------- | -
|Benefit obligation              |  | $             | (4,884 | ) |               | $
|Unrecognized net actuarial loss |  |               | 1      |   |               |  
|                                |  |               |        |   |               |  
|Accrued pension cost            |  | $             | (4,883 | ) |               | $
|                                |  |               |        |   |               |  



The net
SERP pension cost included the following components (in thousands):



|                       |  | Successor2002 |     | Predecessor2001 |   |     | Predecessor2000 | 
|---------------------- |  | ------------- | --- | --------------- | - | --- | --------------- | 
|Interest cost          |  | $             | 303 |                 | $ | 300 |                 | 
|Gain                   |  |               |    |                 |   | (34 | )               | 
|                       |  |               |     |                 |   |     |                 | 
|Total net pension cost |  | $             | 303 |                 | $ | 266 |                 | 
|                       |  |               |     |                 |   |     |                 | 



The
weighted average discount rate used in determining the actuarial present value of the projected benefit obligation and the expected long-term rate of return on assets was 6.50% for 2002 and 2001.



To fund the SERP obligations, the Company has procured
whole-life insurance policies. The Company is the owner and beneficiary of these policies with an aggregate face amount of $7.0 million. The cash surrender value of the Companys share of the policies is reflected in the consolidated balance
sheets under other assets and amounted to $2,819,000 and $2,403,000 as of December 31, 2002 and 2001, 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 1996 acquisition, the Trustees plan was frozen as of December 31, 1996. Participants became
fully vested upon the freezing of the Plan.



The
Company has accrued the present value of these benefits. The Trustees Plan is subject to and in compliance with the provisions of the ERISA.



The change in benefit obligation included the following components (in thousands):



|                                  |  | Successor 2002 |       |   | Trustees Predecessor 2001 |  
|--------------------------------- |  | -------------- | ----- | - | -------------------------- | -
|Benefit obligation at January 1   |  | $              | 1,386 |   |                            | $
|Service cost                      |  |                |      |   |                            |  
|Interest cost                     |  |                | 80    |   |                            |  
|Actuarial loss                    |  |                | 51    |   |                            |  
|Benefits paid                     |  |                | (306  | ) |                            |  
|                                  |  |                |       |   |                            |  
|Benefit obligation at December 31 |  | $              | 1,211 |   |                            | $
|                                  |  |                |       |   |                            |  



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The change
in plan assets included the following components (in thousands):



|                                    |  | Successor2002 |      |   | Predecessor2001 |  
|----------------------------------- |  | ------------- | ---- | - | --------------- | -
|Fair value of assets at January 1   |  | $             |     |   |                 | $
|Employer contributions              |  |               | 306  |   |                 |  
|Benefits paid                       |  |               | (306 | ) |                 |  
|                                    |  |               |      |   |                 |  
|Fair value of assets at December 31 |  | $             |     |   |                 | $
|                                    |  |               |      |   |                 |  



The
change in funded status included the following components (in thousands):



|                                |  | Successor2002 |        |   | Successor2001 |  
|------------------------------- |  | ------------- | ------ | - | ------------- | -
|Benefit obligation              |  | $             | (1,211 | ) |               | $
|Unrecognized net actuarial loss |  |               | 51     |   |               |  
|                                |  |               |        |   |               |  
|Accrued pension cost            |  | $             | (1,160 | ) |               | $
|                                |  |               |        |   |               |  



The net
pension cost included the following components (in thousands):



|                       |  | Successor 2002 |    | Predecessor 2001 |   | Predecessor 2000
|---------------------- |  | -------------- | -- | ---------------- | - | ----------------
|Interest cost          |  | $              | 80 |                  | $ | 104             
|Gain                   |  |                |   |                  |   |                
|                       |  |                |    |                  |   |                 
|Total net pension cost |  | $              | 80 |                  | $ | 104             
|                       |  |                |    |                  |   |                 



The
weighted average discount rate used in determining the actual present value of the projected benefit obligation was 6.50% for 2002 and 2001.



(e)    Deferred Compensation



Certain retired senior executives of the Association participated in a nonqualified supplemental deferred
compensation program. Per terms of the Asset Purchase Agreement, the Company has assumed this liability. Annual payments are immaterial and are expensed as paid.



(17)    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 cemetery and/or funeral products and services furnished by the Company. The amounts relating to these trusts are
included in the accompanying consolidated financial statements as long-term receivables; administration fees earned by the Company are reflected in the consolidated statements of income.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(18)    Commitments under Lease Agreements



As of December 31, 2002, the future minimum lease obligation pursuant to operating lease agreements is summarized as follows (in thousands):



|                               |  | Operating leases
|------------------------------ |  | ----------------
|Year ending December 31:       |  |                 
|2003                           |  | $               
|2004 2005 2006 2007            |  |                 
|                               |  |                 
|Total minimum lease obligation |  | $               
|                               |  |                 



Rental
expense under operating lease agreements for the years ended December 31, 2002, 2001 and 2000 was $735,000, $827,000 and $877,000, respectively.



(19)    Purchase Commitments



In September 1992, the cemetery that existed prior to the Company (the Association) and the local County Sanitation District (the
District) entered into an agreement (the Agreement) whereby the Association agreed to construct a reclaimed water storage reservoir (the Reservoir) with a capacity of 1.2 million gallons, one-half of which would be made available to the District for
its use at a site located adjacent to the cemetery. The cost of the Reservoir, which was completed during 1994, totaled $471,000. The Company is obligated, under this Agreement, as successor to the Association.



The District has agreed to pay its proportionate share of the
capital costs associated with the Companys construction of the Reservoir. The Districts share of such costs is based on the proportion of the Reservoirs designed capacity required for the Company to provide reclaimed water storage
for the District. Annual payment of such amounts will be equal to 1/20th of the Districts share and will reduce the annual payment made by the Company to the District for its share of the reclaimed water transmission system described below.



The District agreed to construct a reclaimed
water transmission system to transport reclaimed water from its existing water reclamation plant to the Companys Reservoir. The reclaimed water transmission system was completed in 1997. The Company has agreed to pay its proportionate share of
the capital costs incurred by the District in constructing the reclaimed water transmission system. Such proportionate share will be determined based on the percentage of peak flow design capacity required by the Company to the total peak flow
design capacity of the transmission facilities. The Companys proportionate share is $2,000,000, which is being paid in $34,500 ($138,000 annualized) quarterly installments over a 20 year period that began in July 1998.



The Company and the District have also agreed to reimburse the
other for operating and maintenance costs associated with the Reservoir and the reclaimed water transmission system based on criteria outlined in the Agreement.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(20)    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 $1,405,000, of which $160,000 was received as a deposit during 1994. It was determined that
because, among other matters, the interment rights were sold on a parcel of land that was not ready for the purpose for which it was sold, the earnings process was not complete and revenue and expense recognition relating to the transaction should
be deferred until such time IBPS has completed a significant portion of the project. In 1999, the construction of the columbarium was completed and ready for inurnments. Accordingly, the Company recorded the sale in the fourth quarter of 1999. The
$1,245,000 unpaid portion of the sales price is to be paid in quarterly installments beginning April 2000 with the final payment due January 2003. At December 31, 2002, IBPS had paid the obligation in full.



In April 2001, IBPS exercised its option and purchased the 2.7
acre site for $2.0 million in cash at the time of the transaction.



(b)    General



The Company has employment agreements with its executive officers, the terms of which expire at various dates. Such agreements provide for minimum salary levels, as well as incentive bonuses, which are payable if specified
management goals are attained.



(c)    Phantom Equity Appreciation Plan



In June 2000, the Board of Directors of the Rose Hills Company met in a special session and approved the Rose Hills Phantom Equity Appreciation Plan (Plan). The purpose of the Plan was to promote the
interests of the Company and its stockholders by attracting and retaining officers and other key employees and motivate such individuals to maximize stockholder value by awarding opportunities based upon future appreciation in the value of the
Company.



The Plan established a bonus pool, the
aggregate amount of which shall be equal to ten (10) percent of the excess of (i) the product of six times EBITDA for the exit year of the Plan (2003) over the product of six times EBITDA for the base year of the Plan (1997), and (ii) all debt for
the exit year of the Plan over the base year. Under the terms of the Plan a Committee was formed consisting of three Board Members to administer, interpret, and make individual awards under the Plan. The Plan contained annual vesting
provisions based on time and performance measures. Vesting accelerated upon a change in control where any party acquired over 50% of the outstanding stock of Rose Hills Holdings, Corp. The bonus pool was fixed at $2.5 million in the event of a
change in control. The U.S. Bankruptcy Court confirmed Loewens reorganization plan, including the proposed acquisition of shares of Holdings from Blackstone on December 5, 2001, and the reorganization plan became effective on January 2, 2002.
As of December 31, 2001, the Company accrued the $2.5 million bonus pool in the statement of operations. Effective upon completion of the transaction, the Company paid $2.4 million in aggregate compensation to certain members of the Companys
management under the Companys phantom equity appreciation plan.



(21)    Contingencies



The Company is involved in certain matters of threatened and filed litigation, none of which, in the judgment of management, will have a material impact on its consolidated financial position or results of operations.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Environmental Issues



Environmental audits of the Companys
various properties were conducted in connection with the acquisition in 1996. Management is aware of certain areas within the Cemetery that have required and may in the future require remediation, including a solid waste disposal area that
previously was used to dump rubbish, green waste and used motor oil in the 1970s. The Company believes that Rose Hills Foundation (Foundation), an unaffiliated company that is the successor to the Association, is obligated to pay for or
otherwise indemnify the Company for the remediation costs associated with this area pursuant to the terms of an Environmental Compliance Agreement entered into at the time of the 1996 acquisition. To date, the Rose Hills Foundation has taken charge
of the investigation and remediation of the areas, including installing a cap on the area. In the past the Company and the Foundation have disagreed about the amount of work required to remedy the situation. As a result, the Company retained its own
outside technical consultant to further investigate the solid waste disposal area to determine what risks, if any, the solid waste disposal area poses for the Company, and to quantify such risks. The Foundation has recently submitted a report, which
incorporated the findings of the Companys consultant findings, to the local regional water quality control board (Water Board), concluding that the capping has been successful and requesting that the water board issue a closure letter for the
disposal area. The Water board is the agency overseeing the remediation. In August 2002, the Company received a closure letter from the Water Board indicating no further action is required and monitoring devices can be removed.



In addition, two of the Companys cemetery properties are
located in or near areas of regional groundwater contamination. The Company submitted information in connection with contamination at one of these areas and was informed by the Environmental Protection Agency that the Company will not be included in
the Super Fund cleanup of the basin.



Although
there can be no assurance, Management does not believe that the above or other environmental matters affecting the Company will have a material adverse effect on the Companys financial condition or results of operations.



Land Movement



During August and September 2000, the Company discovered that
there had been some land movement in a portion of Rose Hills Cemetery. The affected area represents approximately 13 acres of the Cemeterys approximately 1,400 total acres, and consists of approximately 12,000 interment sites. The Company
hired an outside geo-technical and engineering consultant to study the affected area, to identify the underlying cause and the extent of the land movement, and to make recommendations with regard to both short-term and long-term remediation and
stabilization measures. The Companys consultants advised that the affected area could continue to move, particularly in the event of heavy rainfall during the winter months. Accordingly, during October 2000, the Company began to take some
intermediate remediation measures, including the installation of additional de-watering wells in the affected area and the relocation to other areas of the Cemetery (at the Companys expense) of approximately 140 interred remains that were in
the most severely impacted portion of the affected area. Through December 31, 2002, the Company has accommodated over 1,100 additional families that have requested relocation of interred remains from the affected area.



Based upon preliminary reports in July 2001 and additional
testing through October 2001, the engineering firm concluded that the land movement most likely had been caused by a combination of geologic, topographic, water and soil conditions within the affected area. The reports also identified a variety of
measures that the



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Company could take to remediate and improve the stability of the area, including the construction and installation of engineered
reinforcement fill berms at the base of the slide, the installation of de-watering wells throughout the affected area, and the implementation of other erosion control measures. Based upon these test results and recommendations provided by the
engineering firm, the Company decided to undertake complete restoration and stabilization of the affected area. In the first quarter of 2002, the Company began its remediation of the affected area by installing additional de-watering wells. In June
2002, the engineering firm finalized their earthwork construction design plans, including the exact area that would require disinterments and relocation of interred remains in preparation for the construction project. The construction and
installation of the reinforcement berms will begin after the necessary disinterments and relocations are completed. The Company expects to begin construction during the first quarter 2004 and to complete construction by the end of the third quarter
2004.



In 2001, the Company reserved $3.0 million
for the estimated remediation project costs in excess of the availability of remaining Endowment Care Fund (ECF) improvement reserve funds. The Company spent approximately $1.0 million in each of the years ended December 31, 2001 and 2002 on
remediation and related costs. The remaining remediation costs will be spent in 2003 through the third quarter of 2004. As of December 31, 2002, the Companys remaining accrued liability and the ECF improvement reserve fund balance available
for future remediation costs totaled approximately $1.0 million and $1.8 million, respectively. Management believes, based in part on the advice of its geo-technical consultants and the availability of ECF improvement reserves, the Companys
reserve as of December 31, 2002 is adequate to fulfill future remediation cost obligations.



Property Taxes



In connection with the 1996 acquisition, the Rose Hills Memorial Park cemetery land was subject to a significant step-up in assessed value by the County of Los Angeles. In July 2000, the County of Los Angeles completed its
property tax reassessment reflecting its opinion of the fair value of Rose Hills cemetery property at the 1996 acquisition date. The County placed a fair value on the cemetery property that is approximately 60% higher than the independent
appraisal prepared by a property tax consultant and approximately 50% higher than the fair market value computed by an independent appraiser at the time of the 1996 acquisition. The Company filed an assessment appeal with the Los Angeles County
Assessor. In December 2002, the Company received written notification from the Los Angeles County Assessors Office that the 1996 property base taxable value was reduced to an amount consistent with the property tax expense accrued by the
Company.



(22)    Segment Information



The Companys reportable segments are
comprised of the two businesses it operates, each of which offers different products and services: funeral homes and cemeteries. The funeral home segment is an aggregation of funeral home and funeral plan operations.



The funeral homes offer a full range of funeral services,
encompassing the collection of remains, registration of death, professional embalming, use of funeral home facilities, sale of caskets and other merchandise, and transportation to the place of worship, funeral chapel, cemetery or crematorium. In
addition to providing at-need funeral services, the Company sells insurance contracts for which it receives commission revenue.



The cemeteries assist families in making burial arrangements and offer a complete line of cemetery products (including a selection of
burial spaces, burial vaults, lawn crypts, caskets, memorials, niches and mausoleum crypts), the opening and closing of graves and cremation services. The majority of cemetery revenue is derived from pre-need sales.



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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.



|                                  |  | Funeral        |  | Cemetery |  | Total  
|--------------------------------- |  | -------------- |  | -------- |  | -------
|                                  |  | (In thousands)
|Revenues from external customers: |  |                |  |          |  |        
|2002(Successor)                   |  | 31,805         |  | 46,472   |  | 78,277 
|2001(Predecessor)                 |  | 32,687         |  | 44,533   |  | 77,220 
|2000(Predecessor)                 |  | 32,299         |  | 44,284   |  | 76,583 
|Gross profit:                     |  |                |  |          |  |        
|2002(Successor)                   |  | 9,588          |  | 13,554   |  | 23,142 
|2001(Predecessor)                 |  | 8,917          |  | 9,616    |  | 18,533 
|2000(Predecessor)                 |  | 8,587          |  | 12,401   |  | 20,988 
|Depreciation:                     |  |                |  |          |  |        
|2002(Successor)                   |  | 2,125          |  | 1,241    |  | 3,366  
|2001(Predecessor)                 |  | 2,366          |  | 1,553    |  | 3,919  
|2000(Predecessor)                 |  | 2,697          |  | 1,576    |  | 4,273  
|Total assets:                     |  |                |  |          |  |        
|2002(Successor)                   |  | 256,535        |  | 135,171  |  | 391,706
|2001(Successor)                   |  | 252,927        |  | 138,342  |  | 391,269
|Capital expenditures:             |  |                |  |          |  |        
|2002(Successor)                   |  | 865            |  | 2,296    |  | 3,161  
|2001(Predecessor)                 |  | 1,614          |  | 2,545    |  | 4,159  
|2000(Predecessor)                 |  | 1,694          |  | 2,775    |  | 4,469  



The
following table reconciles gross profit of reportable segments to income (loss) before income taxes:



|                                                                                   |  | Successor 2002 |         |   | Predecessor 2001 |   |         | Predecessor 2000 | 
|---------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | ---------------- | 
|Gross profit of reportable segments                                                |  | $              | 23,142  |   |                  | $ | 18,533  |                  | 
|Corporate general and administrative expenses                                      |  |                | (6,395  | ) |                  |   | (7,462  | )                | 
|Amortization of intangible assets                                                  |  |                | (24     | ) |                  |   | (3,662  | )                | 
|Loss from disposal of assets and other charges                                     |  |                | (18     | ) |                  |   | (8,160  | )                | 
|                                                                                   |  |                |         |   |                  |   |         |                  | 
|Total income (loss) from operations                                                |  |                | 16,705  |   |                  |   | (751    | )                | 
|Interest expense                                                                   |  |                | (11,819 | ) |                  |   | (14,725 | )                | 
|Finance income                                                                     |  |                | 2,913   |   |                  |   | 3,185   |                  | 
|                                                                                   |  |                |         |   |                  |   |         |                  | 
|Income (loss) before taxes and cumulative effect of change in accounting
principle |  | $              | 7,799   |   |                  | $ | (12,291 | )                | 
|                                                                                   |  |                |         |   |                  |   |         |                  | 



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table reconciles total assets of reportable segments to consolidated total assets:



|                                      |  | Successor 2002 |         | Successor 2001
|------------------------------------- |  | -------------- | ------- | --------------
|Assets of reportable segments         |  | $              | 391,706 |               
|Cash in corporate bank accounts       |  |                | 8,093   |               
|Deferred tax asset                    |  |                | 1,486   |               
|Cash value of SERP insurance policies |  |                | 2,819   |               
|Other                                 |  |                | 1,829   |               
|                                      |  |                |         |               
|Total consolidated assets             |  | $              | 405,933 |               
|                                      |  |                |         |               



(23)    Quarterly Financial Data (unaudited)



|Year Ended December 31, 2002 |  | Successor First |        | Successor Second |   | Successor Third |  | Successor Fourth
|---------------------------- |  | --------------- | ------ | ---------------- | - | --------------- |  | ----------------
|Sales and Services:          |  |                 |        |                  |   |                 |  |                 
|Funeral                      |  | $               | 8,491  |                  | $ | 8,336           |  | $               
|Cemetery                     |  |                 | 9,553  |                  |   | 11,145          |  |                 
|                             |  |                 |        |                  |   |                 |  |                 
|Total                        |  |                 | 18,044 |                  |   | 19,481          |  |                 
|Gross Profit:                |  |                 |        |                  |   |                 |  |                 
|Funeral                      |  |                 | 2,769  |                  |   | 3,021           |  |                 
|Cemetery                     |  |                 | 2,203  |                  |   | 2,902           |  |                 
|                             |  |                 |        |                  |   |                 |  |                 
|Total                        |  |                 | 4,972  |                  |   | 5,923           |  |                 
|Net Income                   |  | $               | 670    |                  | $ | 1,191           |  | $               



|Year Ended December 31, 2001 |  | Predecessor First |        |   | Predecessor Second |   |        | Predecessor Third |  |   | Predecessor Fourth |  
|---------------------------- |  | ----------------- | ------ | - | ------------------ | - | ------ | ----------------- |  | - | ------------------ | -
|Sales and Services:          |  |                   |        |   |                    |   |        |                   |  |   |                    |  
|Funeral                      |  | $                 | 9,165  |   |                    | $ | 8,118  |                   |  | $ | 7,111              |  
|Cemetery                     |  |                   | 9,050  |   |                    |   | 12,306 |                   |  |   | 9,460              |  
|                             |  |                   |        |   |                    |   |        |                   |  |   |                    |  
|Total                        |  |                   | 18,215 |   |                    |   | 20,424 |                   |  |   | 16,571             |  
|Gross Profit:                |  |                   |        |   |                    |   |        |                   |  |   |                    |  
|Funeral                      |  |                   | 2,737  |   |                    |   | 2,220  |                   |  |   | 1,359              |  
|Cemetery                     |  |                   | 1,423  |   |                    |   | 2,983  |                   |  |   | 1,652              |  
|                             |  |                   |        |   |                    |   |        |                   |  |   |                    |  
|Total                        |  |                   | 4,160  |   |                    |   | 5,203  |                   |  |   | 3,011              |  
|Net Loss                     |  | $                 | (1,573 | ) |                    | $ | (1,765 | )                 |  | $ | (2,162             | )



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ROSE HILLS COMPANY AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Rose Hills Holdings Corp.)



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



|Description                                                 |  | Balance at beginning of period |  | Charged to costs and expenses |  | Charged to other accounts (1) |   |  | Deductions (2) |   |  | Balance at end of period
|----------------------------------------------------------- |  | ------------------------------ |  | ----------------------------- |  | ----------------------------- | - |  | -------------- | - |  | ------------------------
|                                                            |  | (in thousands of dollars)     
|Allowance for contract cancellations and doubtful accounts: |  |                                |  |                               |  |                               |   |  |                |   |  |                         
|Current:                                                    |  |                                |  |                               |  |                               |   |  |                |   |  |                         
|Year ended December 31, 2002                                |  | 1,072                          |  | 637                           |  |                              |   |  | (753           | ) |  | 956                     
|Year ended December 31, 2001                                |  | 807                            |  | 605                           |  | (8                            | ) |  | (332           | ) |  | 1,072                   
|Year ended December 31, 2000                                |  | 1,338                          |  | 629                           |  | (238                          | ) |  | (922           | ) |  | 807                     
|Long-term:                                                  |  |                                |  |                               |  |                               |   |  |                |   |  |                         
|Year ended December 31, 2002                                |  | 1,222                          |  | 719                           |  |                              |   |  | (596           | ) |  | 1,345                   
|Year ended December 31, 2001                                |  | 1,749                          |  | 740                           |  | (7                            | ) |  | (1,260         | ) |  | 1,222                   
|Year ended December 31, 2000                                |  | 2,041                          |  | 1,369                         |  | (516                          | ) |  | (1,145         | ) |  | 1,749                   

---

|(1) |  | Primarily consists of reclassifications to other accounts.
|--- |  | ----------------------------------------------------------

|(2) |  | Uncollected receivables written off, net of recoveries.
|--- |  | -------------------------------------------------------



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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.
WOODSKenton C. Woods Executive Vice President, Finance, Chief Financial Officer, Secretary and Treasurer




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|Signature                                 |  | Title                                                                                                    |  | Date          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------------
|                                         
|/s/    DENNIS C.
POULSENDennis C. Poulsen |  | Chairman and Chief Executive Officer                                                                     |  | March 27, 2003
|                                         
|/s/    KENTON C.
WOODSKenton C. Woods     |  | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal
Financial Officer) |  | March 27, 2003
|                                         
|/s/    MARY C.
GUZMANMary C. Guzman       |  | Vice President, Controller(Principal Accounting Officer)                                                 |  | March 27, 2003
|                                         
|/s/    JOHN S.
LACEYJohn S. Lacey         |  | Director                                                                                                 |  | March 27, 2003
|                                         
|/s/    PAUL A.
HOUSTONPaul A. Houston     |  | Director                                                                                                 |  | March 27, 2003
|                                         
|/s/    KENNETH A.
SLOANKenneth A. Sloan   |  | Director                                                                                                 |  | March 27, 2003
|                                         
|/s/    SHAWN R.
PHILLIPSShawn R. Phillips |  | Director                                                                                                 |  | March 27, 2002



67



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CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002



CERTIFICATION



I, Dennis C. Poulsen, Chief Executive Officer of Rose Hills Company, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Rose Hills Company;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the
registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



/s/    DENNIS C. POULSENDennis C. Poulsen Chief Executive Officer


March 27, 2003



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##### Table of Contents



CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002



CERTIFICATION



I, Kenton C. Woods, Chief Financial Officer of Rose Hills Company, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Rose Hills Company;
|-- |  | ----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the
registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



/s/    KENTON C.
WOODSKenton C. Woods Chief Financial Officer


March 27, 2003



69