-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVkMQJWaKJMSvrvdE5K1zd2n8TxJ1QrbUgGSJEXxPVkdUbyAFqnDarQweUFU0hPl C7h6ZvV4uxQShf4lWq9Jhw== 0001047469-99-014883.txt : 19990415 0001047469-99-014883.hdr.sgml : 19990415 ACCESSION NUMBER: 0001047469-99-014883 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOEWEN GROUP INC CENTRAL INDEX KEY: 0000845577 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 980121376 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12163 FILM NUMBER: 99593939 BUSINESS ADDRESS: STREET 1: 4126 NORLAND AVE CITY: BURNABY BC CANADA V5 STATE: A1 ZIP: V5G 3S8 BUSINESS PHONE: 6042999321 MAIL ADDRESS: STREET 1: 4126 NORLAND AVE STREET 2: BRITISH COLUMIA CITY: BURNABY V5G 3S8 STATE: A1 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE One) SECURITIES EXCHANGE ACT OF 1934 /X/ For the fiscal year ended December 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
COMMISSION FILE NUMBER 1-12163 ------------------------ THE LOEWEN GROUP INC. (Exact name of registrant as specified in its charter) ------------------------------ BRITISH COLUMBIA 98-0121376 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 4126 NORLAND AVENUE, BURNABY, V5G 3S8 BRITISH COLUMBIA, CANADA (Postal Code) (Address of principal executive offices)
Registrant's telephone number, including area code: 604-299-9321 Securities registered pursuant to Section 12(b) of the Act: (Title of class) (Name of each exchange on which COMMON SHARES WITHOUT PAR VALUE registered) NEW YORK STOCK EXCHANGE THE TORONTO STOCK EXCHANGE THE MONTREAL EXCHANGE LOEWEN GROUP CAPITAL, L.P. NEW YORK STOCK EXCHANGE 9.45% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A, GUARANTEED BY THE LOEWEN GROUP INC.
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) 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. / / The aggregate market value of Common shares held by non-affiliates of the registrant was approximately U.S.$134 million as of March 31, 1999. The number of outstanding Common shares as of March 31, 1999, was 74,061,600. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Specified sections of the registrant's definitive Proxy Statement and Information Circular for the 1999 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, are incorporated by reference in Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE --------- GENERAL INFORMATION........................................................................................ 1 PART I
ITEM NUMBER - ----------- 1. BUSINESS......................................................................................... 2 2. PROPERTIES....................................................................................... 5 3. LEGAL PROCEEDINGS................................................................................ 6 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.............................................. 10 EXECUTIVE OFFICERS OF LOEWEN..................................................................... 11 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 14 FORWARD-LOOKING AND CAUTIONARY STATEMENTS........................................................ 15 6. SELECTED FINANCIAL DATA.......................................................................... 16 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 18 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 32 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 35 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 157 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 157 11. EXECUTIVE COMPENSATION........................................................................... 157 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 157 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 157 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................. 158
i GENERAL INFORMATION Unless the context otherwise requires (i) "Loewen" refers to The Loewen Group Inc., a corporation organized under the laws of British Columbia, Canada, (ii) "LGII" refers to Loewen Group International, Inc., a Delaware corporation and a wholly-owned subsidiary of Loewen, and (iii) the "Company" refers to Loewen together with its subsidiaries and associated companies. All dollar amounts are in United States dollars ("U.S.$" or "$") unless otherwise indicated. References to "Cdn.$" are to Canadian dollars. Except as specifically noted, financial information is presented in accordance with Canadian GAAP. Material differences between Canadian GAAP and accounting principles generally accepted in the United States ("U.S. GAAP"), as applicable to the Company, are explained in Note 25 to the Company's consolidated financial statements for the year ended December 31, 1998 (the "Consolidated Financial Statements"), included in Item 8 of this Form 10-K. 1 PART I ITEM 1. BUSINESS. OVERVIEW The Company operates the second-largest number of funeral homes and cemeteries in North America. In addition to providing services at the time of need, the Company also makes funeral, cemetery and cremation arrangements on a pre-need basis. As at March 31, 1999, the Company operated 1,115 funeral homes and 427 cemeteries throughout North America. During 1997, the Company expanded into the United Kingdom and now operates 32 funeral homes there. As at March 31, 1999, the Company also operated three insurance subsidiaries that principally sell a variety of life insurance products to fund funeral services purchased through a pre-need arrangement. Historically, the Company pursued an aggressive growth strategy based primarily upon acquisitions. In the past three years the Company's growth strategy emphasized cemetery acquisitions, as compared to the historical emphasis on funeral home acquisitions. Since 1995, the Company has grown by 651 locations to 1,701 at December 31, 1998, including 348 additional cemeteries. The Company's recent financial results have been disappointing. Beginning in the second half of 1998, as part of its strategy to improve its results, liquidity and financial condition the Company virtually eliminated its acquisition program in order to concentrate on improving existing operations. This strategy focuses upon emphasizing cash flow from operations and, in particular, cash flow from cemetery operations. Also, efforts to reduce costs have been made, including the closure of the Company's Cincinnati and Trevose offices and consolidation of substantially all management functions in Burnaby. In July 1998, the Company secured the services of the investment banking firm Salomon Smith Barney to identify and evaluate opportunities to maximize shareholder value that could include strategic partnerships, combinations, dispositions and capital investments in the Company. Significant management changes occurred beginning in the fourth quarter of 1998. On October 8, 1998, Robert L. Lundgren was appointed President and Chief Executive Officer replacing Raymond L. Loewen who resigned on the same date. On December 17, 1998, the Company named three new outside directors, Thomas M. Taylor, John S. Lacey and William R. Riedl, to the Company's Board of Directors, replacing three inside directors who simultaneously retired from the Board. On January 22, 1999, the Company's Board of Directors appointed John S. Lacey as Chairman, replacing Co-Chairmen Robert L. Lundgren and Raymond L. Loewen. Through actions taken on March 30, 1999 and April 12, 1999, the Board of Directors was reduced from 14 to seven members. On March 31, 1999, the Company entered into revised lending agreements with the lenders under its bank credit agreement, MEIP bank term credit agreement, Series D and E senior amortizing notes and one privately held note agreements (collectively, the "Credit Agreements"). The revised lending agreements change and add certain financial covenants, waive defaults that would have occurred with respect to the Company's financial results as of December 31, 1998, suspend all Common share, Preferred share and MIPS dividends, provide no further borrowings under the bank credit agreement except for letters of credit, and require refinancing of $300 million of pass-through asset trust senior guaranteed notes due 2009 (the "PATS Senior Notes") on terms satisfactory to the lenders by September 15, 1999. On the same day, the Company completed the sale of 124 cemeteries and three funeral homes for gross proceeds of $193 million, of which $126.5 million was required to be paid to certain lenders, to an investor group led by McCown De Leeuw & Co., a private investment firm. The Company has two smaller groups of properties which are considered probable for sale. The Company has recorded a pre-tax impairment loss of $333.9 million in 1998 on individual properties contained in the above groups. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. Should 2 additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, and prevailing market conditions. The Company's Consolidated Financial Statements have been prepared on a going concern basis in accordance with Canadian GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. If the going concern basis was not appropriate, then significant adjustments in the Consolidated Financial Statements would be necessary in the carrying value of assets and liabilities, the reported revenue and expenses, and the balance sheet classifications used. There is substantial doubt about the appropriateness of the going concern assumption because in 1998 the Company experienced both a significant net loss and negative cash flow. The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of actions that the Company has taken or plans to take which management believes will mitigate the adverse conditions and events that raise doubts about the validity of the "going concern" assumption. However, there is no certainty that these actions or other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS Senior Notes on terms satisfactory to the lenders under the Credit Agreements by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding the Credit Agreements, asset sales, and the going concern assumption. Loewen serves as the holding company for all operations of the Company, which are contained in subsidiary and associated companies. Loewen was incorporated under the Company Act of British Columbia on October 30, 1985. The principal executive offices of the Company are located at 4126 Norland Avenue, Burnaby, British Columbia V5G 3S8, telephone number (604) 299-9321. BUSINESS OPERATIONS The Company's operations are comprised of three businesses: funeral homes, cemeteries and insurance. The Company maintains a regional management structure for both funeral home and cemetery businesses that is organized in several geographic regions in the United States, Canada and Europe. Management believes that this recently implemented organizational structure will enable the Company to better manage local profit centers. FUNERAL HOMES The Company's funeral homes offer a full range of funeral services, including the collection of remains, registration of death, professional embalming, use of funeral home facilities, sale of caskets and other merchandise, and transportation to a place of worship, funeral chapel, cemetery or crematorium. To provide the public with the opportunity to choose the service that is most appropriate from both a personal and financial perspective, the Company offers complete funeral services (including caskets and related merchandise) at prices averaging approximately $3,400. Substantially all of the Company's funeral homes provide basic cremation services, and the Company has proprietary programs designed to provide a full range of merchandise and services to families choosing cremation. In 1998, cremations accounted for approximately 26% (27% in 1997) of all funeral services performed by the Company. As a percentage of all funeral services in the United States, cremations have been increasing by approximately 1.0% annually over the past five years and, in 1997, accounted for approximately 24% of all funeral services performed in the United States. Funeral operations accounted for approximately 56% of the Company's consolidated revenue for 1998. Amounts paid for funeral services are recorded as revenue at the time the service is performed. 3 Payments made for pre-need funeral contracts are either placed in trust by the Company or are used on behalf of the purchaser of the pre-need contract to pay premiums on life insurance polices under which the Company is designated as the beneficiary. At the date of performing a pre-arranged funeral service, the Company records as funeral revenue the amount originally trusted or the insurance contract amount, together with related accrued earnings retained in trust and increased insurance benefits. The Company's gross pre-arranged funeral sales in 1998 were approximately $258 million (1997 -- $267 million). CEMETERIES The Company's cemetery operations 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 Company's cemetery operations comprised approximately 36% of the Company's consolidated revenue for 1998, the majority of which was derived from pre-need sales of cemetery products and services. The pre-need sale of interment rights and related products and services is recorded as revenue when customer contracts are signed. At that time, costs related to the sale are also recorded and an allowance is established for future cancellations and refunds, based on management's estimates in light of actual historical experience and trends. A portion of the proceeds received by the Company from pre-need merchandise and service sales is generally set aside in trust funds to provide for the future delivery of the cemetery products and services. In addition, the Company provides for the long-term maintenance of its cemetery properties by placing a portion, typically 10%, of the proceeds from the sale of interment rights into a perpetual care trust fund. The income from these funds is used to offset the maintenance costs of operating the cemeteries. At December 31, 1998, the Company's cemeteries had approximately $270 million in perpetual care trust funds, which are not reflected on the Company's balance sheet because the principal is required to stay in trust in perpetuity. INSURANCE The Company operates three insurance subsidiaries licensed in 29 jurisdictions to principally sell a variety of life insurance products to fund funerals. Revenue from the Company's insurance operations totaled approximately $97 million in 1998, or 8% of the Company's consolidated revenue. COMPETITION Competition generally arises from two sources in the funeral service industry. The first form is competition among local funeral homes and cemeteries for at-need and pre-need business. The market share of a single funeral home or cemetery in any community is often a function of the name, reputation and location of that funeral home or cemetery. Gains in market share within a community are usually achieved over a period of time. While executing its acquisition growth strategy, the Company faced competition from other large consolidators in the industry. In the North American funeral service industry, the Company's competition includes Service Corporation International ("SCI"), Stewart Enterprises, Inc., and Carriage Services, Inc., all of which are publicly-traded funeral service and cemetery companies with significant United States operations, as well as other non-public regional consolidators. The Company also experienced competition on a local level from consolidators who own funeral home and cemetery properties in a concentrated geographic area. REGULATION The funeral service industry is regulated primarily on a state and provincial basis with a vast majority of jurisdictions requiring licensing and supervision of individuals who provide funeral-related services. A 4 number of jurisdictions also regulate the sale of pre-need services and the administration of any resulting trust funds or insurance contracts. The laws and regulations are complex, subject to the interpretation by regulators and vary from jurisdiction to jurisdiction. Non-compliance with these regulations can result in fines or suspension of licenses required to sell pre-need services and merchandise. In addition, concerns regarding lack of competition have led a few jurisdictions to enact legislation restricting the common ownership of funeral homes, cemeteries and related operations within a specific geographic region. The Company's United States 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") regulations. The FTC administers the Trade Regulation Rule on Funeral Industry Practices, the purpose of which is to prevent unfair or deceptive acts or practices in connection with the provision of funeral goods or services. Certain regulatory requirements also exist in Canada and the United Kingdom. The Company's insurance company subsidiaries are subject to regulation by the states in which they are domiciled and the states in which their products are sold. ENVIRONMENTAL RISK The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company's policies are designed to control environmental risk upon acquisition through extensive due diligence and corrective measures taken prior to and after acquisition. Management endeavors to ensure that environmental issues are identified and addressed in advance of acquisition or are covered by an indemnity by the seller or an offset to the purchase price. On a continuing basis, management assesses and evaluates environmental risk and, when necessary, conducts appropriate corrective measures. The Company provides for environmental liabilities using its best estimates. Actual environmental liabilities could differ significantly from these estimates. EMPLOYEES At December 31, 1998, the Company employed approximately 16,700 people with approximately 575 people employed at the Company's corporate offices. Management believes that its relationship with employees is good, but recognizes employees have concerns over the challenges facing the Company. Approximately 100 of the Company's employees are members of collective bargaining units. ITEM 2. PROPERTIES. The Company's properties consist primarily of funeral homes and cemeteries. Of the Company's 1,151 funeral homes at December 31, 1998 (including 51 funeral homes located on or adjacent to a cemetery property), 172 were leased facilities and the balance were owned by the Company. In addition, 50 of the funeral homes owned by the Company were mortgaged as security for loans from the seller of the property or from a commercial lender. Generally, the Company has a right of first refusal and an option to purchase its leased premises. The Company operated or provided management or sales services to 550 cemeteries at December 31, 1998, of which eight were mortgaged as security for loans from the seller of the property. For certain cemeteries, the Company provides management and sales services pursuant to certain management and sales agreements. The cemeteries operated by the Company contained an aggregate of approximately 24,000 acres of which approximately 58% were developed. In December 1998, the Company sold its Trevose, Pennsylvania office building in connection with its plans to transfer most functions to Burnaby, British Columbia. The Company's corporate offices in 5 Burnaby occupy 35,000 square feet in a building owned by the Company and 54,000 and 3,900 square feet of office space under separate lease agreements expiring in 2000 and 1999, respectively. In 1999, in connection with the Company's closure of the Trevose office and transitioning of its administrative functions to Burnaby, the Company entered into two additional leases that each expire in 2002 for an aggregate 25,000 square feet of corporate office space in Burnaby. ITEM 3. LEGAL PROCEEDINGS. FELDHEIM ET AL. v. SI-SIFH CORP. ET AL. AND DUFFY ET AL. v. SI-SIFH CORP. ET AL. Two complaints were filed in 1997 on behalf of individuals who claim damages in connection with funeral insurance policies allegedly issued to them by insurance companies owned, directly or indirectly, by S.I. Acquisition Associates, L.P. ("S.I."). The Company acquired the assets but not the stock of S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. are affiliates of S.I. In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Orleans, State of Louisiana. Plaintiffs seek a class action. The DUFFY complaint was filed by the same lawyers who filed the complaint in the FELDHEIM case, and is a virtually identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial court and, as of the date hereof, no discovery has taken place. The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also alleged unfair trade practices in violation of Louisiana's trade practices laws. Plaintiffs' petitions seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies. On June 13, 1997, the district court in Jefferson Parish dismissed the FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing of the appeal was completed in December 1997, and oral argument was held on January 15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal affirmed the dismissal of the FELDHEIM plaintiffs' class-action claims except as to a claim by "Sub Class B" plaintiffs (the proposed class of current policyholders who are seeking a declaratory judgment). The appellate court found that the trial court's opinion did not consider the validity of class treatment for the "Sub Class B" plaintiffs' claim for a declaratory judgment when it dismissed plaintiffs' class-action claims, and it remanded the case to the trial court for a hearing on that issue. On September 22, 1998, the trial court ruled that the claim could not go forward as a class action, and granted the exception of no cause of action as to Count IV, sub-class B. On October 20, 1998, plaintiffs noticed a suspensive appeal to the Louisiana Fifth Circuit Court of Appeal from this ruling. No order granting the suspensive appeal has been signed by the trial court and the matter has not been filed with the Court of Appeal. To date, plaintiffs have taken no further action in connection with this filing. On August 26, 1998, defendants sought dismissal of all of plaintiffs' remaining individual claims in FELDHEIM. The trial court has not yet ruled on that request. 6 On September 21, 1998, plaintiffs in FELDHEIM filed an "Amended Petition for Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an unspecified sum of attorneys' fees. Defendants will respond shortly to that amended petition. As of the date hereof, no discovery has taken place. On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the defendants' exception seeking to dismiss the plaintiffs' class action allegations on the face of the pleadings. Instead, the court deferred ruling on those issues until the hearing on the class action issues, and the court indicated it would permit some discovery. On April 23, 1998 the defendants filed a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the trial court's April 17, 1998 judgment, and the trial court granted the defendants' motion for a stay of all proceedings pending a ruling by the Court of Appeal on the supervisory writ application. The defendants filed their Application for Supervisory Writs with the Louisiana Fourth Circuit Court of Appeal on June 5, 1998. On July 16, 1998, the trial court lifted its previously entered stay of all proceedings in this case; defendants have filed a motion requesting that the trial court reinstitute its stay. On January 6, 1999, the Fourth Circuit Court of Appeal granted supervisory writs, reversed the trial court judgment overruling the exception of RES JUDICATA, maintained the exception of RES JUDICATA and dismissed the action. On February 5, 1999 the DUFFY plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court. The Company has filed an opposition to the application. The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. LUENING, ET AL. v. SI-SIFH CORP., ET AL. In June 1998, Warren S. Luening and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp, SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of St. Bernard, State of Louisiana. Plaintiffs seek a class action. Defendants in this case are the same entities against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the addition of local counsel in St. Bernard Parish, the same lawyers who filed the FELDHEIM and DUFFY complaints filed the LUENING complaint. Plaintiffs allegedly hold and held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that the defendants failed to provide the funeral services purchased with policies by, among other things, (i) charging them for certain funeral services, including the services of a funeral director and staff, a funeral ceremony, care of the deceased, automotive services and a casket, even though these services were allegedly covered by their policies, and (ii) unjustly enriching themselves through the payment of services allegedly covered under the plaintiffs' policies, and the plaintiffs are therefore entitled to restitution of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages in their complaint. On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition for Damages." In response to the First Amended Petition, on October 19, 1998 defendants removed the LUENING case to federal court on diversity-of-citizenship grounds. The federal court subsequently remanded the case to state court. As of the date hereof, no discovery has taken place. On January 29, 1999, the state court heard argument on the plaintiffs' motion to compel discovery and the Company's exceptions of venue and RES JUDICATA. On February 3, 1999, the court denied both exceptions 7 and granted the motion to compel discovery, ruling that the dismissal of the class action claims in the FELDHEIM and DUFFY cases did not operate to bar this particular sub-class of potential plaintiffs. On February 26, 1999, the Company filed supervisory writs on these rulings, and requested a stay of the discovery ruling pending a decision on the writ application. On March 1, 1999, the Fourth Circuit Court of Appeals stayed all further legal proceedings and discovery in the trial court and ordered the plaintiffs to respond to the Company's writ application on an expedited basis. The Fourth Circuit granted the Company's writ application on March 25, 1999, finding that under the RES JUDICATA doctrine as stated in the Fourth Circuit's DUFFY decision, relitigation of the plaintiffs' class action claims was forever barred in Louisiana courts by denial of the class certification in the FELDHEIM case. Accordingly, the Fourth Circuit reversed the trial court's denial of the Company's RES JUDICATA exception, while recognizing that individual plaintiffs' claims could proceed in St. Bernard Parish. It also remanded the case to the trial court for a hearing on the plaintiffs' motion to compel discloverey, but it instructed that any discovery requests that are not related to the individual plaintiffs' claims should be denied. On March 29, 1999, the LUENING plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court, and asked that the writ application be consolidated with the application for writ of certiorari filed by the DUFFY plaintiffs. The Company intends to file an opposition to the application. The Company has determined that it is not possible to predict the final outcome of this legal proceeding, including whether a class will be certified, and it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. THE LOEWEN GROUP INC. ET AL. v. THE UNITED STATES OF AMERICA On October 30, 1998, Loewen and an affiliate filed a claim against the United States government for damages under the arbitration provisions of the North American Free Trade Agreement ("NAFTA"). The plaintiffs contend that they were damaged as a result of breaches by the United States of its obligations under NAFTA in connection with certain litigation in the State of Mississippi entitled O'KEEFE v. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege that they were subjected to discrimination, denial of the minimum standard of treatment guaranteed by NAFTA and uncompensated expropriation, all in violation of NAFTA. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of the damages that may be awarded to the Company. SECURITIES CLASS ACTIONS Since December 1998 Loewen has been served with various related lawsuits filed in the United States District Courts for the Eastern District of Pennsylvania and for the Eastern District of New York. Raymond L. Loewen, the former Chairman and Chief Executive Officer, and certain officers and directors have been named as defendants in some of the suits. All but one of these lawsuits were filed as purported class actions on behalf of persons or entities that purchased Loewen common shares during five different time periods ranging from November 3, 1996 through January 14, 1999. LGII and Loewen Group Capital, L.P. are named as defendants in two suits (with Loewen, the "Loewen Defendants"). The plaintiffs in the two lawsuits purport to sue on behalf of a class of purchasers of MIPS from March 5, 1997 through January 14, 1999. The MIPS were issued by Loewen Group Capital, L.P. The complaints generally make allegations concerning, among other things, Loewen's internal controls, accounting practices, financial disclosures and acquisition practices. The Loewen Defendants have filed a motion with the Judicial Panel on Multidistrict Litigation (the "MDL Panel") to consolidation all of the actions for pretrial coordination in the United States District Court for the Eastern District of Pennsylvania. Counsel for the plaintiffs in the actions currently pending in the Eastern District of New 8 York have filed a written stipulation with the MDL Panel agreeing to the transfer of their cases to the Eastern District of Pennsylvania. The MDL Panel has not ruled. By agreement, the Loewen Defendants' responses to all complaints currently are due by April 26, 1999. The complaints filed in the United States District Court for the Eastern District of Pennsylvania are: BERG v. THE LOEWEN GROUP INC., ET AL., 99-CV-321; BRODY v. RAYMOND L. LOEWEN, ET AL., 99-CV-19; CAMUTO ET AL. v. RAYMOND L. LOEWEN, ET AL., 99-CV-640; GILMORE v. RAYMOND L. LOEWEN, ET AL., 99-CV-232; CITY OF PHILADELPHIA v. LOEWEN GROUP, INC. ET AL., 99-CV-1007; HILL v. THE LOEWEN GROUP INC. ET AL., 99-CV-560; JAMISON v. RAYMOND L. LOEWEN, ET AL., 99-CV-98; MCGLATHERY ET AL. v. RAYMOND L. LOEWEN ET AL. 99-CV-665 (the MCGLATHERY suit was filed on behalf of purchasers of MIPS); PASKOWITZ v. RAYMOND L. LOEWEN ET AL., 99-CV-91; SIROTA & SIROTA EMPLOYEES PROFIT SHARING PLAN v. THE LOEWEN GROUP INC. ET AL., 99-CV-585; STEINER v. RAYMOND L. LOEWEN, ET AL., 98-CV-6740; TEKIRAN v. RAYMOND L. LOEWEN ET AL., 99-CV-589; and TRAVIS v. RAYMOND L. LOEWEN, ET AL., No. 99-11340. The complaints filed in the United States District Court for the Eastern District of New York are: COHEN v. THE LOEWEN GROUP INC., ET AL. (the COHEN suit was filed on behalf of purchasers of MIPS); CV 99 553; COLLINS v. THE LOEWEN GROUP INC., ET AL., CV 99 261; CORRADINI, ET AL. v. THE LOEWEN GROUP INC. ET AL., CV 99 443; GERSH v. THE LOEWEN GROUP INC., CV 98 7983; GREAT NECK CAPITAL APPRECIATION PARTNERS v. RAYMOND L. LOEWEN, ET AL., CV 99 164; HARRIS v. THE LOEWEN GROUP INC., ET AL., CV 99 153; and SALEM v. THE LOEWEN GROUP INC., ET AL., CV 99 351. The Pennsylvania cases have all been assigned to Judge Thomas O'Neill. Plaintiffs have filed a stipulated motion seeking the appointment of the City of Philadelphia Board of Pensions as lead plaintiff. The Company anticipates that all of the Pennsylvania cases will be consolidated and that, when and if transferred, the New York cases will also be consolidated. It is expected that the lead plaintiff will, when appointed, file a Consolidated and Amended Complaint, to which the defendants will be required to respond. Additional class action complaints containing similar allegations may be filed in the future. The Company has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in the Company's consolidated financial statements. F. LEO GROFF, INC. ET AL. v. RESTLAWN MEMORIAL GARDENS, INC. ET AL. This action (No. 96-CV-397, Court of Common Pleas, Erie County, Ohio) was served on the Company and other defendants on September 19, 1996. Plaintiffs allegedly compete with defendants Restlawn Memorial Park Association, Restlawn Memorial Gardens, Inc., and Sinfran, Inc., which were acquired by the Company. Plaintiffs allege thirteen counts, including counts alleging that defendant Restlawn engaged in false and deceptive advertising, misused confidential information, defamed plaintiffs, breached contractual obligations, misappropriated trade secrets, and tortiously interfered with plaintiffs' contractual relationships. Plaintiffs further allege that the Company knew or should have known of Restlawn's conduct and adopted and continued Restlawn's alleged unfair, false, and deceptive practices. Plaintiffs also allege that the defendants conspired to destroy plaintiffs' business and created a "trust in order to prevent competition" in violation of Ohio's antitrust laws. Plaintiffs seek compensatory damages, which are unspecified but alleged to exceed $350,000; punitive damages, which are unspecified but alleged to exceed $300,000; and injunctive relief. Defendants' summary judgment motion was denied as to all but one of plaintiffs' counts. A trial date has been set for July 12, 1999. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the 9 range of possible damages that may be awarded to the plaintiff. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. FLANAGAN On December 7, 1998, Honorine T. Flanagan filed a complaint in the Superior Court of the State of California in the County of Los Angeles against Loewen and LGII. To date, only LGII has been served with the complaint. The matter was subsequently removed to federal court based on diversity jurisdiction, and it is now pending in the United States District Court in the Central District of California. The complaint alleges that the defendants breached an express warranty contained in the Share Purchase Agreement dated July 17, 1995, between LGII and Ms. Flanagan, her husband John Flanagan (now deceased) and the Flanagan Family Trust. The Share Purchase Agreement was made in connection with LGII's purchase of the Flanagans' mausoleum and mortuary business in exchange for approximately $2,000,000 in cash and $7,800,000 of Loewen stock. The Loewen stock was valued at $36.00 per share at the time of the transaction. Ms. Flanagan alleges that LGII knew of claims, suits or other actions which would materially and adversely affect the financial condition of the Company, yet made false statements to the contrary in the Share Purchase Agreement. Ms. Flanagan alleges that two lawsuits pending at the time of the Share Purchase Agreement did eventually have a material adverse impact on the financial condition of the Company and the value of the stock received by Ms. Flanagan in connection with the Share Purchase Agreement. Ms. Flanagan's complaint also contains causes of action for breach of contract in connection with the Share Purchase Agreement and in connection with employment and consulting agreements entered into at the time of the Share Purchase Agreement. Additionally, Ms. Flanagan alleges causes of action for intentional and negligent misrepresentation and declaratory relief. Ms. Flanagan estimates that her damages as a result of the alleged breaches and misrepresentations are not less than $5,000,000. This amount is based on her claim that the shares she received were represented to have a value of $7,800,000 at the time of the agreement, and at the time the complaint was filed those shares had a value that was approximately one third of the original represented value. Her claimed damages may change as the price of Loewen's common shares fluctuates. Further, Ms. Flanagan seeks punitive damages in an unspecified sum. On the declaratory relief cause of action, Ms. Flanagan seeks a declaration that she is to be reimbursed for her losses pursuant to the indemnity provision contained in the Share Purchase Agreement. She also seeks a declaration that until she is indemnified for her losses she is not obligated to transfer property that pursuant to the Agreement LGII has the option to purchase for a specified price pursuant to the Share Purchase Agreement. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiff. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. OTHER The Company is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operation or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None. 10 EXECUTIVE OFFICERS OF LOEWEN The following table sets forth certain information with respect to the current executive officers of Loewen. The ages of the executive officers are shown as of March 31, 1999.
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- John S. Lacey(1)*.................................... 55 Chairman of the Board Robert B. Lundgren(2)................................ 55 President and Chief Executive Officer Michael G. Weedon(3)................................. 45 Executive Vice-President, Administration, Accounting and Control and Chief Administrative Officer Timothy R. Hogenkamp(4).............................. 53 Executive Vice-President, Corporate Affairs and Chairman of the Board, LGII Paul Wagler(5)....................................... 52 Executive Vice-President, Chief Operating Officer and Acting Chief Financial Officer Bradley D. Stam(6)................................... 51 Senior Vice-President, Law Dwight K. Hawes(7)................................... 39 Senior Vice-President, Corporate Controller Jeffrey L. Cashner(8)................................ 44 Senior Vice-President, Funeral Home & Cemetery Operations Peter S. Hyndman(9).................................. 57 Corporate Secretary Thomas C. Hardy(10).................................. 57 President, Loewen Life Insurance Group Inc. Guy Heywood(11)...................................... 40 Vice-President, Treasurer Roger Ryan(12)....................................... 49 Vice-President, Taxation William Stewart(13).................................. 39 Vice-President, Corporate Development & International
- ------------------------ * Mr. Lacey is not an employee of The Loewen Group Inc. or any affiliated company, and serves as a non-executive Chairman. FOOTNOTES APPEAR ON THE FOLLOWING PAGE. 11 (1) Mr. Lacey became the Chairman of the Board of Directors of Loewen on January 22, 1999. From July 1998 to November 1998, Mr. Lacey was President and Chief Executive Officer of The Oshawa Group Ltd. in Toronto, Ontario. From November 1996 to July 1998, Mr. Lacey was President and Chief Executive Officer of WIC Western International Communications Inc. in Vancouver, British Columbia. From March 1990 to November 1996, Mr. Lacey was President and Chief Executive Officer of Scott's Hospitality Inc. in Toronto, Ontario. (2) Mr. Lundgren, who has served as a Director of Loewen since June 1986, returned from retirement to become President and Chief Executive Officer of Loewen in October 1998. Mr. Lundgren also served as Co-Chairman of the Board of Directors from October 1998 to January 1999. (3) Mr. Weedon became Chief Administrative Officer of Loewen in November 1997 and Executive Vice-President, Administration, Accounting and Control of Loewen in November 1998. From July 1998 to November 1998, Mr. Weedon served as Executive Vice-President, Operations and Administration of Loewen. From November 1997 to July 1998, Mr. Weedon served as Executive Vice-President of Administration of Loewen. From December 1996 to November 1997, Mr. Weedon was a private business consultant and investor. From April 1993 to December 1996, Mr. Weedon served as Executive Vice-President and Chief Operating Officer of Viridian Inc. (formerly Sherritt Inc.) in Fort Saskatchewan, Alberta. (4) Mr. Hogenkamp became Executive Vice-President, Corporate Affairs of Loewen in November 1998 and Chairman of the Board of LGII in November 1997. From September 1993 to November 1997, Mr. Hogenkamp served as President and Chief Operating Officer of Loewen. (5) Mr. Wagler became Executive Vice-President, Operations and Chief Operating Officer of Loewen in November 1998 and Acting Chief Financial Officer in December 1998. From July 1998 to November 1998, Mr. Wagler served as Executive Vice-President, Finance of Loewen. From March 1995 until July 1998, Mr. Wagler served as Senior Vice-President, Finance. Mr. Wagler served as Chief Financial Officer from March 1995 until December 1998. Prior to that time, Mr. Wagler was a Senior Vice-President of ABN AMRO Bank, in Vancouver, British Columbia. (6) Mr. Stam became Senior Vice-President, Law of Loewen in March 1998. From January 1996 until September 1997 Mr. Stam was President, General Counsel and a director of Western Star Trucks Holdings Ltd. From June 1995 to January 1996, Mr. Stam was Vice-President, General Counsel and Corporate Secretary of Western Star Trucks Holdings Ltd. Prior to that time, Mr. Stam was a partner with the Seattle-based law firm of Culp, Dwyer, Guterson & Grader. (7) Mr. Hawes became Senior Vice-President, Corporate Controller of Loewen in August 1998. From October 1994 to August 1998, Mr. Hawes served as Vice-President, Finance of Loewen. From January 1993 to October 1994, Mr. Hawes served as Director of Treasury Operations of Loewen. (8) Mr. Cashner became Senior Vice-President, Funeral Home & Cemetery Operations of Loewen in January 1999. From August 1996 to January 1999, Mr. Cashner served as Regional President, Operations, South East Region of Loewen. From February 1994 until August 1996, Mr. Cashner served as Vice-President, Cemetery and Combination Division, South and Western Region of Loewen. (9) In addition to serving as Corporate Secretary of Loewen, Mr. Hyndman served as Vice-President, Law of Loewen from March 1995 to November 1997. (10) Mr. Hardy became President of Loewen Life Insurance Group Inc. in September 1997. From March 1997 to September 1997, Mr. Hardy served as President, Chief Executive Officer, Life Insurance Group. Prior to that time, Mr. Hardy was self-employed. Prior to June 1994, Mr. Hardy served as Executive Vice-President and Chief Operating Officer of Provident Life & Accident Insurance Company in Chattanooga, Tennessee. 12 (11) Mr. Heywood became Vice-President, Treasurer of Loewen in November 1998. From June 1996 to November 1998, Mr. Heywood served as Director, Treasury Operations of Loewen. Prior to that time, Mr. Heywood was Assistant Vice-President of ABN AMRO Bank, in Vancouver, British Columbia. (12) Mr. Ryan became Vice-President, Taxation of Loewen in March 1998. From October 1996 to March 1998, Mr. Ryan served as Vice-President, Taxation of LGII. From March 1994 to October 1996, Mr. Ryan was Director of Taxation, LGII. Prior to that time, Mr. Ryan was a partner with KPMG in Vancouver, B.C. and a Senior Tax Manager with KPMG in Seattle, Washington. (13) Mr. Stewart became Vice-President, Corporate Development & International of Loewen in September 1998. From July 1997 to September 1998, Mr. Stewart served as Director, International of Loewen. From March 1995 to July 1997, Mr. Stewart served as Manager, Finance and Investment Management of Loewen. Prior to that time, Mr. Stewart was a private finance consultant. No executive officer of Loewen is related by blood, marriage or adoption to any director or other executive officer of Loewen. There are no arrangements or understandings between any executive officer of Loewen and any other person pursuant to which the executive officer was selected to serve as an executive officer of Loewen. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Common shares of Loewen have been listed on The New York Stock Exchange ("NYSE") since October 1996 under the symbol "LWN." Prior to such listing, the Common shares were quoted on The Nasdaq National Market under the symbol "LWNG." The Common shares have been trading on The Toronto Stock Exchange since May 1987 under the symbol "LWN" and commenced trading on The Montreal Exchange in April 1993, also under the symbol "LWN." The following table sets forth, for the periods indicated, the range of high and low sales prices, as reported by the NYSE and The Toronto Stock Exchange.
NEW YORK STOCK TORONTO STOCK EXCHANGE EXCHANGE -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- (U.S.$) (CDN.$) 1997 First quarter......................................................... 41.375 31.000 56.750 47.350 Second quarter......................................................... 34.875 27.500 45.000 30.900 Third quarter.......................................................... 35.750 24.750 49.500 34.250 Fourth quarter......................................................... 28.375 23.000 39.000 32.000 1998 First quarter......................................................... 27.500 20.875 38.750 30.150 Second quarter......................................................... 28.813 24.625 41.450 35.000 Third quarter.......................................................... 26.875 11.063 39.800 17.000 Fourth quarter......................................................... 14.500 7.000 21.950 10.750 1999 First quarter......................................................... 8.438 0.938 12.500 1.350
As at March 31, 1999, there were 2,552 record holders of Loewen's Common shares. Each of the Exchanges has rules setting forth quantitative and qualitative criteria it considers in determining whether a company's securities should continue to be listed with that Exchange. Based on the Company's recent financial results, it may not meet all of the criteria for continued listing with the Exchanges and accordingly, it is possible that those Exchanges may take action to delist the Company's securities. In the event of any such delisting, the Company would pursue alternative listing arrangements. The NYSE, in April 1999, indicated to the Company that it is reviewing the Company's status. DIVIDENDS The Company declared dividends of $0.10 per Common share in June and December 1997 and June 1998. In December 1998, the Company did not declare a dividend for Common shareholders as a result of the ongoing process to consider all strategic alternatives to maximize shareholder value and operating cash needs. In March 1999, the Company suspended future dividends on its Common shares, Preferred shares and MIPS (as defined below) and pursuant to the Credit Agreements is prohibited from declaring such dividends in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 8 to the Company's Consolidated Financial Statements for additional information regarding the Credit Agreements and restrictions on the payment of dividends. In addition, until the Company pays all deferred dividends on the Series C Preferred shares and the MIPS, the Company is prohibited from paying dividends on its Common shares. Aggregate dividends declared per Common share over the last five years were as follows:
1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Dividends per Common share............................................. $ 0.10 $ 0.20 $ 0.20 $ 0.05 $ 0.07
14 The payment of cash, stock and deemed dividends on the Common shares is generally subject to Canadian withholding tax. The rate of withholding tax is 25% or such lesser amount as may be provided by treaty between Canada and the country of residence of the recipient. Under the current income tax treaty between the United States and Canada, such withholding tax rate is reduced to 15%. FORWARD-LOOKING AND CAUTIONARY STATEMENTS FORWARD-LOOKING STATEMENTS In 1999, funeral gross margin is expected to be approximately 35% to 40% and cemetery gross margin is expected to be approximately 25% to 30%. Management believes that the aggregate purchase price for acquisitions in 1999 will be minimal. The foregoing statements and certain other statements made in this Form 10-K, including certain statements made in the section entitled "Quantitative and Qualitative Disclosures about Market Risk," in other filings made with the Securities and Exchange Commission, and elsewhere (including oral statements made on behalf of the Company) are forward-looking statements within the meaning of Section 27A(i) of the Securities Act of 1933 and Section 21E(i) of the Securities Exchange Act of 1934. Shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected or predicted. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. CAUTIONARY STATEMENTS In addition to other information in this Form 10-K, including the information that appears in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risks and Uncertainties", the following important factors, among others, could cause future results to differ materially from estimates, predictions or projections. 1. ABILITY TO CONTINUE AS A GOING CONCERN. The Company's Consolidated Financial Statements have been prepared on a going concern basis in accordance with Canadian GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. If the going concern basis was not appropriate, then significant adjustments in the Consolidated Financial Statements would be necessary in the carrying value of assets and liabilities, the reported revenue and expenses, and the balance sheet classifications used. There is substantial doubt about the appropriateness of the going concern assumption because in 1998 the Company experienced both a significant net loss and negative cash flow. The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of actions that the Company has taken or plans to take which management believes will mitigate the adverse conditions and events that raise doubts about the validity of the "going concern" assumption. However, there is no certainty that these actions or other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS Senior Notes on terms satisfactory to the lenders under the Credit Agreements by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. 2. REVENUE AND MARGINS. Revenue is affected by the volume of services rendered and the mix and pricing of services and products sold and actual pre-need contract cancellation experience. Margins are affected by the volume of services rendered, the mix and pricing of services and products sold and related costs. Further, revenue and margins may be affected by fluctuations in the number of deaths (which may be significant from period to period), competitive pricing strategies, pre-need sales and other sales programs 15 implemented by the Company and the ability to hire and retain the necessary level of sales staff. Revenue is also affected by the level of acquisitions, which has been substantially reduced, as described below. 3. ACQUISITION LEVELS. In light of the Company's 1998 operating results and its announced initiative to evaluate opportunities to maximize shareholder value and improve liquidity, the Company expects its level of acquisitions in 1999 to be minimal. There can be no assurance that funds will be available to complete any future acquisitions, and there can be no assurance that the Company will complete any specific number or dollar amount of acquisitions in a particular year. 4. DISPOSITIONS. On March 31, 1999 one group of properties consisting of 124 cemeteries and three funeral homes was sold for gross proceeds of $193 million. Two smaller groups of properties are considered as probable for sale. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. 5. TAX RATE. Historically, the Company's financing structures have allowed it to achieve an effective tax rate well below the Canadian statutory rate of 45%. These structures are not expected to produce similar benefits in the future due to uncertainty as to when, if ever, the tax benefit of deducting the Company's future interest expense will be realized. As a result, the Company expects that its income taxes for 1999 and beyond will likely exceed the Canadian statutory rate. In addition, the tax rate for 1999 and beyond may be affected disproportionately by asset dispositions. In addition to generating a gain or loss for tax purposes, the disposition of certain locations may require the Company to take a valuation allowance against certain tax assets that were taken into account in determining the net amount of the Company's liability for future income taxes recorded on its balance sheet at December 31, 1998. If this occurs, the resulting change in the valuation allowance would be treated as an additional income tax expense in the year such dispositions become probable. 6. OTHER. Consolidated financial results also may be affected by (i) the ability of the Company to implement various aspects of its strategic initiative to maximize shareholder value, (ii) the cost and availability of the Company's financing arrangements (including interest rates on short- and long-term debt and the availability of equity capital which may be affected by whether the Company's securities continue to be listed on the Exchanges), (iii) the number of Common shares outstanding, (iv) competition, (v) the accounting treatment of acquisitions, dispositions and the valuation of assets, (vi) the level of the Company's general and administrative costs, (vii) changes in or application of applicable accounting principles and governmental regulations, (viii) the outcome of legal proceedings, (ix) the ability of the Company and third parties to achieve Year 2000 Issue compliance on a timely basis, (x) the ability of the Company to retain and motivate its employees, including senior management and critical staff. ITEM 6. SELECTED FINANCIAL DATA. Set forth below is certain selected consolidated financial and operating information of the Company for each year in the five-year period ended December 31, 1998. The selected consolidated financial information is derived from the Company's audited consolidated financial statements for such periods. The Company's consolidated financial statements are prepared in accordance with Canadian GAAP. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto. The financial results for the year ended December 31, 1998 include approximately $649 million of pre-tax charges representing impairment of capital assets and investments and accrual of contingent losses 16 on investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding these charges. The financial results for the year ended December 31, 1997 include $89.2 million of pre-tax charges ($58.0 million after tax), representing certain restructuring, strategic initiative and other charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding these charges. The financial results for the year ended December 31, 1996 include $18.7 million (pre-tax) of finance and other costs related to SCI's October 1996 hostile takeover proposal for the Company, which proposal was withdrawn in January 1997. The financial results for the year ended December 31, 1995 include an aggregate of $195.7 million (pre-tax) for legal settlements and litigation related finance costs and certain general and administrative costs related to the legal settlements.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997(1) 1996(1) 1995(1) 1994(1) ---------- ---------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, RATIOS AND OPERATING INFORMATION) INCOME STATEMENT INFORMATION: Revenue............................................ $1,136,234 1,114,099 $ 908,385 $ 598,493 $417,328 Gross margin....................................... 291,736 363,639 329,008 224,476 158,854 Earnings (loss) from operations.................... (263,966) 152,131 204,670 117,765 95,660 Net earnings (loss)................................ (598,969) 41,810 65,999 (75,604) 39,872 Basic earnings (loss) per share.................... (8.22) 0.48 1.01 (1.67) 1.00 Fully diluted earnings (loss) per share(2)......... (8.22) 0.48 1.00 (1.67) 1.00 Ratio of earnings to fixed charges(3).............. n/a 1.3x 1.9x n/a 2.4x Aggregate dividends declared per share............. 0.10 0.20 0.20 0.05 0.07
AS AT DECEMBER 31, ----------------------------------------------------------- 1998 1997(1) 1996(1) 1995(1) 1994(1) ---------- ---------- ---------- ---------- ----------- BALANCE SHEET INFORMATION: Total assets....................................... $4,673,908 $4,790,687 $3,718,734 $2,380,011 $ 1,361,096 Total long-term debt(4)............................ 2,268,014 1,793,934 1,495,925 932,296 515,703 Preferred securities of subsidiary................. 75,000 75,000 75,000 75,000 75,000 Shareholders' equity............................... 905,441 1,517,771 1,026,617 591,006 386,467 OPERATING INFORMATION:............................. Number of funeral homes(5)......................... 1,151 1,070 956 815 641 Number of funeral services......................... 163,000 153,000 142,000 114,000 94,000 Number of cemeteries(5)............................ 550 483 313 179 116
- -------------------------- (1) Certain of the comparative figures have been restated to conform to the change in accounting for income taxes adopted in 1998 (see Note 3 to the Consolidated Financial Statements). (2) Fully diluted earnings (loss) per share figures are calculated in accordance with Canadian GAAP and assume, if dilutive (a) exercise of employee and other stock options effective on their dates of issue and that the funds derived therefrom were invested at annual after-tax rates of return ranging from 6.2% to 7.1%, (b) conversion of the Series C Preferred Shares effective on the date of the issue of the Series C Receipts and the add-back of the preferred dividends during the period and (c) exercise of options and purchase rights under the 1994 Management Equity Investment Plan ("MEIP") effective on their dates of issue and the add-back of the interest under the related MEIP loan. See Note 11 to the Consolidated Financial Statements. (3) The 1998 and 1995 losses are not sufficient to cover fixed charges by a total of approximately $765.9 million and $127.9 million, respectively, and as such the ratio of earnings to fixed charges has not been computed. Reference is made to the Statement re: Computation of Earnings to Fixed Charges Ratio (Canadian GAAP), which is Exhibit 12.1 to this Form 10-K. (4) Total long-term debt comprises long-term debt, including current portion. (5) The numbers of locations for 1994 includes adjustments and consolidations related to prior periods. 17 Had the Company's Consolidated Financial Statements been prepared in accordance with U.S. GAAP (see Note 25 to the Consolidated Financial Statements), selected consolidated financial information would have been as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997(1) 1996(1) 1995(1) 1994(1) ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) INCOME STATEMENT INFORMATION: Revenue............................................ $ 1,123,460 $ 1,115,400 $ 909,137 $ 598,493 $ 417,479 Earnings (loss) from operations.................... (260,127) 153,038 203,040 117,442 95,897 Earnings (loss) before cumulative effect of change in accounting principles......................... (594,257) 42,231 64,559 (75,800) 39,652 Diluted earnings (loss) per share before cumulative effect of change in accounting principles(2)..... (8.15) 0.48 0.97 (1.67) 0.97 Ratio of earnings to fixed charges(3).............. n/a 1.3x 1.8x n/a 2.4x Aggregate dividends declared per share............. 0.10 0.20 0.20 0.05 0.07
AS AT DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET INFORMATION: Total assets....................................... $ 4,709,654 $ 4,776,535 $ 3,699,950 $ 2,345,874 $ 1,329,928 Total long-term debt(4)............................ 2,268,014 1,793,934 1,495,925 892,296 515,703 Preferred securities of subsidiary................. 75,000 75,000 75,000 75,000 75,000 Shareholders' equity............................... 913,365 1,524,195 1,026,110 519,006 385,950
- -------------------------- (1) Certain of the comparative figures have been reclassified to conform to the presentation adopted in 1998. (2) Effective December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," for United States GAAP purposes, on a retroactive basis. (3) The 1998 and 1995 losses are not sufficient to cover fixed charges by a total of approximately $767.1 million and $128.3 million, respectively, and as such the ratio of earnings to fixed charges has not been computed. Reference is made to the Statement re: Computation of Earnings to Fixed Charges Ratio (U.S. GAAP), which is Exhibit 12.2 to this Form 10-K. (4) Total long-term debt comprises long-term debt, including current portion. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RISKS AND UNCERTAINTIES BASIS OF PRESENTATION The Consolidated Financial Statements have been prepared on a going concern basis in accordance with Canadian GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is substantial doubt about the appropriateness of the use of the going concern assumption because in 1998 the Company has experienced both a significant net loss and negative cash flow. As a result, the Company obtained waivers and amendments to certain of its debt agreements. There is also uncertainty as to the Company's ability to refinance the PATS Senior Notes which may be redeemed on October 1, 1999 and which require refinancing by September 15, 1999 under the terms of amended credit agreements. These uncertainties and the strategies necessary to mitigate the doubt about the validity of the going concern assumption are discussed below. There is no certainty that these and other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS Senior Notes on terms satisfactory to the lenders under the Credit Agreements by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. 18 The Consolidated Financial Statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate because management expects that the actions already taken or planned, some of which are described below, will mitigate the adverse conditions and events that raise doubts about the validity of the "going concern" assumption used in preparing these financial statements. If the "going concern" basis was not appropriate for the Consolidated Financial Statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. OPERATIONS The Company reported a loss from operations in 1998 of $264.0 million after recording a charge for asset impairment of $333.9 million. Over the past three years, the Company's strategic growth plan had emphasized cemetery acquisitions, as compared to the historical emphasis on funeral home acquisitions. Acquisitions and the integration of cemeteries has required significant cash due to the pre-need sales of cemetery interment rights, products and services and related interest costs on debt incurred. The rapid growth in cemetery pre-need sales and the related long-term receivables have contributed to the negative cash flow from operations. Cemetery pre-need sales are typically structured with low initial cash payments by the customers that do not offset the cash costs of establishing and supporting a growing pre-need sales program, including the payment of certain sales commissions. The Company expects to continue to incur negative cash flow from cemetery operations until it is able to satisfactorily implement various strategies to generate positive cash flow. During the second half of 1998 the Company curtailed its acquisition program and undertook a number of steps to improve profitability and cash flow from operations: - In June 1998, the Company began the consolidation of many operational and administrative functions in the Trevose office to the Burnaby head office. In January 1999, the Company announced the further consolidation of most of the remaining functions, cemetery accounting, trust administration and information systems, leaving only the receivable collections function remaining in Trevose. This consolidation is expected to reduce costs and improve information and control to support decision making; - In July 1998, the Board of Directors engaged the services of financial advisors and investment bankers and announced its intention to consider all available options to maximize shareholder value, including opportunities such as strategic partnerships, combinations, dispositions and capital investments in the Company; - In September 1998, the Board of Directors created a Special Committee of independent directors to oversee and supervise the Company's efforts to maximize shareholder value. In October 1998, the Board of Directors appointed a new President and Chief Executive Officer. In December 1998, three new directors recommended by significant shareholders were appointed to the Board of Directors. In January 1999, the Board of Directors elected a newly appointed director as Chairman. Through actions taken on March 30, 1999 and April 12, 1999, the Board of Directors was reduced from 14 to seven members; - The Company has reorganized its operational management to enhance funeral and cemetery operations, reduce regional management overhead and achieve greater accountability for cemetery profitability and cash flow; - Management reviewed its cemetery pre-need sales strategy and, to improve cash flow, began implementing changes to the terms and conditions of cemetery pre-need sales. These changes include: setting minimum contract terms; adjusting sales force compensation for sales with certain terms; and eliminating certain types of contracts in jurisdictions with poor cash flow characteristics after trusting obligations are considered; and 19 - The Company is implementing several new information systems, principally in cemeteries, to ensure better information is available to monitor and evaluate key variables. FINANCING As a result of expected negative cash flow from operations during 1999, scheduled debt maturities in 1999 and its current financial position, on March 31, 1999 the Company: - Sold 124 cemeteries and three funeral homes for gross proceeds of $193 million of which $126.5 million was used to reduce indebtedness; and - Completed negotiations with the lenders under the Credit Agreements resulting in revised lending agreements effective March 31, 1999, including waivers of certain financial covenants as of December 31, 1998. As a result, the Company has not had an event of default of the covenants under the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the bank credit agreement, including letters of credit, from $600 million to $294 million after application of a portion of the net proceeds from the Company's first major asset sale; - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing the PATS Senior Notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development of cemetery land to $60 million for 1999; and - Permit additional asset sales subject to certain terms and conditions. The Company's indebtedness includes the PATS Senior Notes which are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. Notwithstanding the obligation to refinance the PATS Senior Notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999, the trust has a put option that entitles the trust to redeem the PATS Senior Notes on October 1, 1999 to fund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. The Company does not expect to have sufficient funds to redeem these notes without further asset sales or proceeds from debt or equity issues. The Company is of the opinion that this facility has a prospect of being refinanced; however, there is no certainty of such financing as it will depend primarily on financial market conditions and the Company's credit rating at that time. The debt relating to the Credit Agreements and the PATS Senior Notes has been classified as current liabilities. The Series 1 to 7 Senior Notes have been classified as non-current liabilities but have cross-default clauses that could accelerate payment if covenants in the Credit Agreements and the PATS Senior Notes are not met and the lenders thereunder accelerate payment under those agreements. The Company is continuing to review its operations in order to identify additional strategies to those identified above, including further asset sales, that are designed to generate cash flow, improve the Company's financial position, and enable the discharge of the Company's obligations. 20 RESULTS OF OPERATION Detailed below are the Company's operating results for the years ended December 31, 1998, 1997 and 1996, expressed in dollar amounts as well as relevant percentages. The operating results are presented as a percentage of revenue except income taxes, which are presented as a percentage of earnings (loss) before income taxes and equity and other earnings of associated companies. The Company's operations are comprised of three businesses: funeral homes, cemeteries and insurance. See Note 22 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- (IN MILLIONS) (PERCENTAGES) Revenue Funeral........................................ $ 631.2 $ 602.1 $ 549.8 55.6 54.0 60.5 Cemetery....................................... 408.5 422.0 286.7 36.0 37.9 31.6 Insurance...................................... 96.5 90.0 71.9 8.4 8.1 7.9 --------- --------- --------- --------- --------- --------- Total........................................ $ 1,136.2 $ 1,114.1 $ 908.4 100.0 100.0 100.0 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Gross margin Funeral........................................ $ 223.9 $ 227.9 $ 222.9 35.5 37.9 40.5 Cemetery....................................... 51.3 119.0 88.9 12.6 28.2 31.0 Insurance...................................... 16.5 16.7 17.2 17.1 18.5 23.9 --------- --------- --------- Total........................................ 291.7 363.6 329.0 25.7 32.6 36.2 Expenses General and administrative..................... 133.3 112.7 71.2 11.7 10.1 7.8 Depreciation and amortization.................. 88.5 65.4 53.1 7.8 5.9 5.9 Asset impairment............................... 333.9 -- -- 29.4 -- -- Restructuring costs............................ -- 33.4 -- -- 3.0 -- --------- --------- --------- Earnings (loss) from operations.................. (264.0) 152.1 204.7 (23.2) 13.6 22.5 Interest on long-term debt....................... 182.3 132.2 93.0 16.0 11.9 10.2 Investment impairment and contingent loss........ 315.2 -- -- 27.7 -- -- Loss on early extinguishment of debt............. -- 7.7 -- -- 0.7 -- Gain on sale of investment....................... -- (24.1) -- -- (2.2) -- Finance and other costs related to hostile takeover proposal.............................. -- -- 18.7 -- -- 2.1 Dividends on preferred securities of subsidiary..................................... 7.1 7.1 7.1 0.6 0.6 0.8 Income taxes..................................... (164.5) 0.8 23.5 n/a 1.8 26.2 --------- --------- --------- (604.1) 28.4 62.4 (53.2) 2.6 6.9 Equity and other earnings of associated companies...................................... 5.1 13.4 3.6 0.5 1.2 0.4 --------- --------- --------- Net earnings (loss).............................. $ (599.0) $ 41.8 $ 66.0 (52.7) 3.8 7.3 --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Consolidated revenue increased 2.0% to $1.136 billion in the year ended December 31, 1998 from $1.114 billion in 1997, due to acquisitions. Consolidated gross margin decreased 19.8% to $291.7 million in 1998 from $363.6 million in 1997, primarily due to volume declines in funeral and cemetery businesses and increases in the allowance for funeral accounts receivable and pre-need cemetery accounts receivable as a result of worsening trends in collections experience. As a percentage of revenue, consolidated gross margin 21 decreased to 25.7% in 1998 from 32.6% in 1997, principally due to the declines in funeral, cemetery and insurance gross margins, as discussed below. Funeral revenue increased 4.8% to $631.2 million in 1998 compared to $602.1 million in 1997, due to revenue from acquisitions. The number of funeral services performed at locations in operation for all of 1997 and 1998 ("Established Locations") declined by 5.2% from 1997 to 1998. This decline, combined with slightly lower average revenue per funeral service, had an unfavorable impact on revenue. Funeral gross margin as a percentage of funeral revenue for Established Locations decreased to 37.2% in 1998 from 38.0% in 1997, as the decrease in revenue was partially offset by a 5.2% decrease in costs, resulting from the decline in the number of funeral services performed and the fixed nature of operating costs. As a result of the gross margin decrease for Established Locations, together with the lower margins of recently acquired funeral locations, overall funeral gross margin as a percentage of funeral revenue decreased to 35.5% in 1998 from 37.9% in 1997. Management expects funeral gross margin to be approximately 35% to 40% in 1999. Cemetery revenue decreased 3.2% to $408.5 million in 1998 compared to $422.0 million in 1997, and cemetery gross margin decreased to 12.6% in 1998 from 28.2% in 1997, both primarily due to a decline in pre-need sales and an increase in the estimate of the allowance for pre-need accounts receivable to reflect worsening trends in collections experience. Similarly, for Established Locations, cemetery gross margin decreased to 7.1% in 1998 from 27.5% in 1997. Management expects cemetery gross margin to be approximately 25% to 30% in 1999. Insurance revenue increased to $96.5 million for 1998 from $90.0 million in 1997. The increase in revenues was primarily due to the continuing effort to expand the sale of pre-need funeral insurance through Company-owned funeral homes, partially offset by reduced revenues as a result of the sale of First Capital Life Insurance Company of Louisiana ("First Capital"). On July 27, 1998, the Company entered into an agreement to sell First Capital for cash proceeds of approximately $24 million and a pre-tax gain of approximately $6.8 million included in general and administrative expenses (see below). The sale was consummated on December 22, 1998. First Capital specialized in the sale of pre-need funeral insurance sold through non-Company funeral homes. First Capital had tangible assets of approximately $90 million and annual revenues of approximately $24 million. Insurance gross margin decreased to 17.1% for 1998 from 18.5% in 1997, primarily due to the loss of First Capital business and the implementation of the Company's insurance products in and expansion into several states. The Company's gross pre-arranged funeral sales decreased to approximately $258 million in 1998 from approximately $267 million in 1997. Pre-arranged funeral services comprised approximately 23% of the funeral services performed by the Company in 1998 and approximately 21% of the funeral services performed by the Company in 1997. The Company estimates that it had a backlog of approximately $1.1 billion in pre-need funeral sales as of December 31, 1998. Approximately 75% of the Company's cemetery revenue in 1998 was generated from pre-need sales compared with 77% in 1997. Note 2 to the 1998 Consolidated Financial Statements provides information regarding the accounting treatment of pre-arranged funeral services and pre-need cemetery sales. General and administrative expenses, as a percentage of revenue, increased to 11.7% in 1998 from 10.1% in 1997. For the year ended December 31, 1998, general and administrative expenses increased $20.6 million to $133.3 million from $112.7 million in 1997. The increase in general and administrative expenses in 1998 is a result of the write off of approximately $14.9 million of previously capitalized costs, primarily for acquisitions and planned construction projects that are no longer being pursued and approximately $2.0 million of costs associated with the Company's initiative to evaluate strategic alternatives to maximize shareholder value, including the transition of the Trevose office, partially offset by the pre-tax gain of approximately $6.8 million from the sale of First Capital (see above). Without reflecting the impact of these items, general and administrative expenses for 1998 as a percentage of revenue, was 10.8% as compared to 7.9% in 1997, after the exclusion of approximately $24.8 million of charges for litigation and various asset write downs in 1997. 22 Depreciation and amortization expenses, as a percentage of revenue, increased to 7.8%, compared to 5.9% in 1997, primarily due to the fixed cost component effect of lower than expected revenues, accelerated depreciaton and amortization of assets based on a reassessment of useful lives and the write off of certain assets. Interest expense on long-term debt increased by $50.1 million in 1998, primarily as a result of additional borrowings by the Company to finance its previous acquisition programs and working capital needs. In 1998, the Company wrote off as interest expense approximately $15.0 million of deferred debt issue costs related to its bank credit agreements. Due to severe liquidity constraints and the need to generate cash in late 1998, the Company identified certain properties which it would consider selling at their fair value. On March 31, 1999 one group of properties consisting of 124 cemeteries and three funeral homes was sold for gross proceeds of $193 million (see Notes 1 and 24). Two smaller groups of properties are considered as probable for sale. The Company has recorded a pre-tax impairment loss of $333.9 million in 1998 on individual properties contained in the above groups. In calculating the impairment loss, the Company has used estimated cash flow from operations and estimated cash proceeds on the sale of these properties. The impairment loss has reduced cemetery property by $319.3 million, property and equipment by $4.0 million and names and reputations by $10.6 million. The impairment loss is based on management estimates and as a result, actual results could differ significantly from these estimates. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no additional impairment losses have been recognized since future sales of other properties are not determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. The Company has recorded in 1998 an investment impairment and contingent loss of $315.2 million relating to its investments in Rose Hills Holding Corp. ("Rose Hills") and Prime Succession Holdings, Inc. ("Prime"). Prior to the fourth quarter of 1998, the Company had evaluated the exercise of its call options related to the majority owner's investment in Rose Hills and Prime as likely, and the exercise of the majority owner's put options as unlikely. Due to liquidity concerns of the Company, the performance of Rose Hills and Prime, and the reduced market values for the Company's and other industry participants' stock, the Company determined the exercise of the calls to be unlikely and the exercise of the puts to be likely. Accordingly, the Company determined that its investments suffered a decline in value that is other than temporary and has written down its investment in Rose Hills and Prime based on an assumed distribution of Rose Hill and Prime's shareholders' equity at December 31, 1998, taking into account the majority owner's return under the put. In addition, the Company has estimated the expected put option price on the sixth anniversary, the first date the put options become exercisable by the majority owner, based on the Company's best estimate of earnings before interest, taxes, depreciation and amortization at that time and the relevant formula in the put/call agreements. The Company has accrued contingent losses based upon the difference between the estimated option prices and the Company's estimates of the fair value of the majority owner's interest which is based in part on current market conditions. Such amount could change based on changes in the estimated future value of the businesses. A net liability (see Notes 5 and 21) has been recorded reflecting an accrual of the expected losses on the options reduced by the remaining carrying value of the investments. In 1998, the Company adopted the Canadian Institute of Chartered Accountants Handbook Section 3465, "Income Taxes." The provisions of this standard were applied retroactively to January 1, 1993 which conforms to the effective date that the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," for its financial statement amounts presented under 23 United States GAAP. Implementation of the standard resulted in a $23.9 million cumulative effect decrease of retained earnings as of January 1, 1996. The income tax benefit of $164.5 million and an effective tax rate of (21.5%) compares to an income tax expense of $0.8 million and an effective tax rate of 1.8% for 1997. In 1998 the Company established valuation allowances against future potential tax deductions associated with the following items in the amounts indicated: 1) provision for losses on the Company's existing investment in Rose Hills and Prime and the establishment of a liability regarding the Company's put obligation in the amount of $120.0 million; 2) certain state, provincial, and federal net operating loss carryovers in the amount of $50.1 million; and 3) certain other tax benefits in the amount of $7.5 million. Additional information regarding the change in effective tax rate in 1998 compared to 1997 is provided in Note 19 to the Company's Consolidated Financial Statements. Historically, the Company's financing structures have allowed it to achieve an effective tax rate well below the Canadian statutory rate of 45%. These structures are not expected to produce similar benefits in the future due to uncertainty as to when, if ever, the tax benefit of deducting the Company's future interest expense will be realized. As a result, the Company expects that its income taxes for 1999 and beyond will likely exceed the Canadian statutory rate. In addition, the tax rate for 1999 and beyond may be affected disproportionately by asset dispositions. In addition to generating a gain or loss for tax purposes, the disposition of certain locations may require the Company to take a valuation allowance against certain tax assets that were taken into account in determining the net amount of the Company's liability for future income taxes recorded on its balance sheet at December 31, 1998. If this occurs, the resulting change in the valuation allowance would be treated as an additional income tax expense in the year such dispositions become probable. Equity and other earnings of associated companies were $5.1 million during 1998, down from $13.4 million in 1997, primarily due to the performance of the Prime and Rose Hills investments as further described in Note 5 to the Company's Consolidated Financial Statements. The Company had a net loss of $599.0 million in 1998 compared to net income of $41.8 million in 1997. Fully diluted loss per share was $8.22 per share compared to earnings of $0.48 per share in 1997. The net loss and loss per share for 1998 were primarily due to the decrease in operating earnings and the charges taken for asset impairment primarily related to cemetery disposals and the impairment of the Company's equity investments and accrual for contingent loss in Rose Hills and Prime. The Company has and plans to further implement strategies to improve profitability in its businesses and to reduce corporate costs. Management believes that costs in 1998 included many items that will not occur in 1999. The Company's statement of cash flows for the year ended December 31, 1998 reflects cash applied to operations of $124.5 million, primarily as a result of pre-need cemetery programs. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Consolidated revenue increased 22.6% to $1.1 billion in the year ended December 31, 1997 from $908.4 million in 1996. Consolidated gross margin increased 10.5% to $363.6 million in 1997 from $329.0 million in 1996. As a percentage of revenue, consolidated gross margin percentage decreased to 32.6% in 1997 from 36.2% in 1996, due to the increased proportion of cemetery revenue with associated lower margins, and declines in the gross margin percentages of the Company's funeral home, cemetery and insurance businesses. Charges relating to the implementation of certain strategic initiatives and other charges contributed to reduced margins in 1997 compared to 1996. Funeral revenue increased 9.5% to $602.1 million in 1997 compared to $549.8 million in 1996, due to acquisitions. Funeral revenue for 1996 includes $4.4 million of commission income received by the Company due to certain non-recurring conversions of trust investments to insurance investments. Excluding the factors described below, 1997 funeral gross margin at locations in operation for all of 1996 24 and 1997 ("Established Locations") was comparable with the prior year. The number of funeral services performed at Established Locations declined by 3.2% from 1996 to 1997, substantially consistent with other consolidators in the industry; however, the effect on revenue was partially offset by a slightly higher average revenue per funeral service of approximately 2.5%. As a result, casket and funeral service revenue for Established Locations declined by only 0.7% versus the prior year. Funeral gross margin as a percentage of funeral revenue for Established Locations decreased to 38.7% in 1997 from 40.8% in 1996, due to decreased revenue of $6.0 million from a lower number of services that was partially offset by higher average revenue per service, coupled with increased operating costs of $6.5 million. The increase in 1997 operating costs was primarily due to an addition to the reserve for doubtful accounts of approximately $5.0 million, and certain other charges aggregating approximately $0.6 million. Overall funeral gross margin as a percentage of funeral revenue decreased to 37.9% in 1997 from 40.5% in 1996, primarily as a result of the decrease in funeral gross margin at Established Locations, together with lower margins on acquired funeral locations. Cemetery revenue increased 47.2% to $422.0 million in 1997 compared to $286.7 million in 1996, due to acquisitions. Cemetery revenues in 1997 included a higher proportion of pre-need sales of openings and closings, as well as caskets, which have a higher gross margin than other components of cemetery revenues. Excluding the factors described below, cemetery gross margin for Established Locations was 31.7%, slightly below 1996, as increased revenues were offset by higher selling costs, primarily commissions associated with pre-need sales, and other operating costs, such as maintenance. Overall cemetery gross margin percentage decreased to 28.2% in 1997 from 31.0% in 1996. The decrease in overall cemetery gross margin percentage was principally a result of (i) lower cemetery revenue of $10.4 million attributable to imputed interest on non-interest bearing installment contract sales in 1997, (ii) $2.0 million in cemetery cost of sales representing the write off of certain costs related to the National Baptist Convention program initiated during 1995 and terminated in the third quarter of 1997, (iii) reversal in 1997 of $3.7 million of sales and $1.2 million of related cost of sales recorded in 1996 for transactions not consummated, and (iv) $2.1 million in cemetery cost of sales related to a write down of cemetery accounts receivable. Insurance revenue increased to $90.0 million for 1997 from $71.9 million in 1996. Insurance gross margin in 1997 was 18.5% compared to 17.5% in 1996, after adjusting 1996 to exclude $4.6 million for a revision to actuarial assumptions. The Company's gross pre-arranged funeral sales increased to approximately $267 million in 1997 from approximately $190 million in 1996. Pre-arranged funeral services comprised approximately 21% of the funeral services performed by the Company in 1997 and approximately 19% of the funeral services performed by the Company in 1996. The Company estimates that it had a backlog of approximately $967 million in pre-need funeral sales as of December 31, 1997. Approximately 77% of the Company's cemetery revenue in 1997 was generated from pre-need sales compared with 66% in 1996. Note 2 to the 1998 Consolidated Financial Statements provides information regarding the accounting treatment of pre-arranged funeral services and pre-need cemetery sales. General and administrative expenses for 1997 increased to $112.7 million from $71.2 million in 1996. Included in general and administrative expenses for 1997 are charges of (i) $9.4 million attributable to management's decision to negotiate the termination of covenant not to compete agreements with certain former owners in locales where the marketplace has changed and the restrictive covenants no longer have value to the Company, (ii) $6.0 million for litigation, (iii) $5.6 million for the write off of acquisition costs associated with acquisitions that management determined during the year to no longer pursue, (iv) $2.2 million of fixed asset write downs as a result of streamlining general and administrative functions, and (v) $1.6 million of software and other costs associated with a change in the Company's operating strategy. Also included in 1997 general and administrative expenses is the gain before taxes of $3.0 million on the sale of certain funeral home properties. The Company recognized a restructuring charge of $33.4 million for the third quarter of 1997. The charge was principally composed of (i) $19.4 million related to the severance of 545 employees in operating 25 locations where the Company was not achieving the full benefits of local staffing synergy, (ii) $6.0 million in fixed asset write downs as a result of management's decision to curtail or sell certain under-performing locations as part of the reorganization strategy, and (iii) $7.5 million for lease termination, severance of 47 employees and other expenses related to the closure of the Company's Covington, Kentucky corporate office. Interest expense on long-term debt increased by $39.2 million in 1997, primarily as a result of additional borrowings by the Company to finance its expansion programs, as well as the increase in cemetery and funeral pre-need sales program activity. In 1997, the Company refinanced a portion of its long-term debt to achieve a lower interest rate. As a result, the Company incurred a loss on early extinguishment of debt of $7.7 million related to the prepayment of a Cdn. $35 million term credit facility and the prepayment of three series of senior amortizing notes totaling approximately $100 million. In November 1997, the Company completed the sale of its shareholdings in Arbor Memorial Services Inc. for a gain of approximately $24.1 million, $13.9 million after tax. The income tax expense of $0.8 million and an effective tax rate of 1.8%, compares to an income tax expense of $23.5 million for 1996 and an effective tax rate of 26.2%. The change in effective tax rate in 1997 compared to 1996 is explained in Note 19 to the Company's Consolidated Financial Statements. The Company's effective tax rate was historically determined primarily through certain international and intercompany financing arrangements, as well as other tax strategies. Equity and other earnings of associated companies increased to $13.4 million for 1997 from $3.6 million in 1996 due primarily to the inclusion for a full year of payment-in-kind dividends, partially offset by the Company's proportionate share of the full year loss attributable to the Common shares of Prime and Rose Hills, as described further in Note 5 to the 1998 Consolidated Financial Statements. Net earnings decreased to $41.8 million in 1997 from $66.0 million in 1996. Fully diluted earnings per share decreased to $0.48 per share from $1.00 per share in 1996. The Company's statement of cash flows for the year ended December 31, 1997 reflects cash applied to operations of $160.7 million primarily as a result of increased cemetery and funeral pre-need sales programs. ACQUISITIONS, INVESTMENTS, CAPITAL EXPENDITURES AND DISPOSITIONS The Company acquired 89 funeral homes and 65 cemeteries during 1998 for consideration of approximately $278 million. During 1997, the Company acquired 138 funeral homes, 171 cemeteries and one insurance company for consideration of approximately $546 million. However, beginning in the second half of 1998, the Company virtually ceased its acquisition program. The Company expects acquisitions during 1999 to be minimal. In December 1998, the Company completed the sale of its insurance subsidiary, First Capital. The aggregate proceeds from this sale were approximately $24 million, resulting in a gain before taxes of approximately $6.8 million. On March 31, 1999, the Company completed the sale of 124 cemeteries and three funeral homes to an investor group led by McCown De Leeuw & Co., a private investment firm. The Company received gross proceeds of $193.0 million. The investor group included two former officers of the Company. The Company has two smaller groups of properties which are considered probable for sale. The Company has recorded a pre-tax impairment loss of $333.9 million in 1998 on individual properties contained in the above groups. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no additional impairment losses have been recognized since future sales of other properties are not 26 determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. LIQUIDITY AND CAPITAL RESOURCES Over the past three years, the Company's strategic growth plan had emphasized cemetery acquisitions, as compared to its historical emphasis on funeral home acquisitions. Acquisition and the integration of cemeteries has required significant cash due to the pre-need sales of cemetery interment rights, products and services and related interest costs on debt incurred. The Company expects to continue to incur negative cash flow from cemetery operations until it is able to satisfactorily implement various strategies to generate positive cash flow. The Company's indebtedness includes the PATS Senior Notes which are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. Notwithstanding the obligation to refinance the PATS Senior Notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999, the trust has a put option that entitles the trust to redeem the PATS Senior Notes on October 1, 1999 to fund repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. The Company does not expect to have sufficient funds to redeem these notes without further asset sales or proceeds from debt or equity issues. The Company is of the opinion that these notes have a prospect of being refinanced, however there is no certainty of such financing as it will depend primarily on financial market conditions and the Company's credit rating at that time. As a result of expected negative cash flow from operations in 1999, scheduled debt maturities in 1999 and its current financial position, on March 31, 1999 the Company: - Sold 124 cemeteries and three funeral homes for gross proceeds of $193 million of which $126.5 million was used to reduce indebtedness; and - Completed negotiations with the lenders under the Credit Agreements resulting in revised lending agreements. In addition to taking steps to improve profitability and cash flow throughout the organization, the Company has also reviewed its cemetery pre-need sales strategy, and to improve cash flow, began implementing changes to the terms and conditions of cemetery pre-need sales. These changes include: setting minimum contract terms; adjusting sales force compensation for sales with certain terms; and eliminating certain types of contracts in jurisdictions with poor cash flow characteristics after trusting obligations are considered. The Company plans to finance its operations and capital expenditures in 1999 from existing cash balances, cash flow from operations and proceeds from further asset sales. There is no certainty that these and other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS Senior Notes on terms satisfactory to the lenders under the Credit Agreements by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. The Company's past objective has been to maintain its long-term debt/equity ratio, on average, in a range of 1.0:1 to 1.5:1. Accordingly, due to the timing of its acquisition program, the Company's long-term debt/equity ratio typically rose to the high end of the range, and then was reduced substantially by an equity issue. However, as a result of the Company's recent poor operating results and negative cash flow requiring increased borrowing for working capital needs, at December 31, 1998, the Company's long-term debt/equity ratio was 2.5:1. The Company does not have current plans to issue equity in 1999. The Company's balance sheet at December 31, 1998 as compared to December 31, 1997, reflects changes principally from the impairment charges and contingent loss on purchase obligations, as well as acquisitions during the first half of 1998. 27 1998 FINANCINGS In March 1998, the Company amended its $1 billion revolving bank credit agreement (the "Revolving Credit Agreement"). As part of the amendment, the $250 million 364-day tranche was terminated and the $750 million tranche maturing in September 2002 was reduced to a $600 million revolving agreement due March, 2001. In May 1998, LGII completed a private placement in the United States of $200 million of 7.20% Series 6 Senior Guaranteed Notes due 2003 (the "Series 6 Senior Notes") and $250 million of 7.60% Series 7 Senior Guaranteed Notes due 2008 (the "Series 7 Senior Notes"). The net proceeds from the Series 6 and 7 Senior Notes were used to repay indebtedness outstanding under the Revolving Credit Agreement. In September 1998, these notes were exchanged for identical notes registered under the Securities Act of 1933. In September 1998, a subsidiary of the Company obtained a $98.0 million revolving receivables finance facility (the "Receivables Finance Facility") through a subsidiary of one of its bank lenders. Under the terms of the agreement, new receivables are added to the pool each month to offset collections from existing receivables. Another subsidiary of the Company services, administers and collects the receivables. The Receivables Finance Facility contains certain covenants and provides for various events of termination. This facility is secured by a pledge of the cemetery receivables held by the subsidiary and as of September 15, 1999, no further receivables can be added to the pool. At December 31, 1998 the balance outstanding on the Receivables Finance Facility was $66.2 million which represents the maximum amount available. The Receivables Finance Facility bears interest at a floating rate based on commercial paper rates (December 31, 1998 -- 5.51%). The Receivables Finance Facility is also subject to a commitment fee ranging from 1.10% - 3.25% of the total facility amount depending on certain financial ratios. Although there are no assurances, the Company plans to extend the Receivables Finance Facility or replace it with a similar facility with a longer term. In September 1998, the Company terminated its Cdn. $50 million revolving credit agreement. In March 1999, the Company completed negotiations with the lenders under the Credit Agreements resulting in revised lending agreements effective March 31, 1999, including waivers of certain financial covenants as of December 31, 1998. As a result, the Company has not had an event of default of the covenants in the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the Revolving Credit Agreement, including letters of credit, from $600 million to $294 million after application of a portion of the net proceeds from the Company's first major asset sale; - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing the PATS Senior Notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development of cemetery land to $60 million for 1999; and - Permit additional asset sales subject to certain terms and conditions. 28 INDEBTEDNESS On March 31, 1999, the $600 million Revolving Credit Agreement was reduced to a $294 million facility as part of the revised lending agreements relating to the Credit Agreements. The Revolving Credit Agreement is secured in the manner described below under "Collateral Trust Agreement." LGII also has outstanding $300 million of PATS Senior Notes. The PATS Senior Notes are held by a trust for the benefit of the holders of pass-through asset trust securities due October 1, 1999 (the "PATS Trust"). The PATS Senior Notes bear interest at a rate of 6.70% until October 1, 1999 (the "Reset Date"), at which time the interest rate will be reset (the "Reset Rate") for the balance of the term of the PATS Senior Notes at a fixed annual rate of 6.05% plus an adjustment equal to LGII's then-current credit spread to the ten-year U.S. Treasury rate on the Reset Date. In connection with the issuance of the PATS Senior Notes, LGII granted a put option to the PATS Trust that, in effect, entitles the PATS Trust to redeem the PATS Senior Notes, in whole but not in part, on the Reset Date. The PATS Trust will exercise the put option if the interest rate at the Reset Date is greater than the Reset Rate. The PATS Senior Notes are guaranteed by Loewen and secured in the manner described below under "Collateral Trust Agreement." LGII has outstanding six series of senior guaranteed notes aggregating $1.2 billion (the "Senior Notes") issued in March and October of 1996 and May 1998. The Senior Notes are guaranteed by Loewen and bear interest rates ranging from 7.20% to 8.25% and have initial terms of five to ten years. LGII also has outstanding one series of senior amortizing notes (the "Series E Amortizing Notes") in the amount of $43 million. The Series E Amortizing Notes are guaranteed by Loewen, bear an interest rate of 6.49% and have an initial term of ten years. Loewen has outstanding Cdn. $200 million of 6.10% Series 5 Guaranteed Notes, due 2002 (the "Series 5 Senior Notes"). The Series 5 Senior Notes are guaranteed by LGII and secured in the manner described below under "Collateral Trust Agreement." In addition, Loewen also has outstanding one series of senior amortizing notes (the "Series D Amortizing Notes") in the amount of $43 million. The Series D Amortizing Notes are guaranteed by LGII and bear an interest rate of 9.62% and have an initial term of ten years. A subsidiary of Loewen has a $97 million secured bank term credit agreement maturing in July 2000 (the "MEIP Loan"), implemented in connection with the 1994 Management Equity Investment Plan. COLLATERAL TRUST AGREEMENT In 1996, Loewen, LGII and their senior lenders entered into a collateral trust agreement pursuant to which the senior lenders share certain collateral and guarantees on a pari passu basis (the "Collateral Trust Agreement"). The security for lenders under the Collateral Trust Agreement consists of (i) all of LGII's right, title and interest in and to all rights to receive payment under or in respect of accounts, contracts, contractual rights, chattel paper, documents, instruments and general intangibles, (ii) a pledge of the shares of capital stock of substantially all of the subsidiaries in which Loewen directly or indirectly holds more than a 50% voting or economic interest and (iii) a guarantee by each subsidiary that is pledging stock. The security is held by a trustee for the equal and ratable benefit of the senior lending group. This senior lending group consists principally of the lenders under the Series 1-7 Senior Notes, the Series D and E Amortizing Notes, the Revolving Credit Agreement, the MEIP Loan and the PATS Senior Notes, as well as holders of certain letters of credit. In addition, there are various covenants that prohibit liens on the assets of the non-guaranteeing subsidiaries. At December 31, 1998, the indebtedness owed to the senior lending group subject to the Collateral Trust Agreement, including holders of certain letters of credit, aggregated approximately $2.1 billion. RESTRICTIONS Certain of the Company's debt instruments and amended credit facilities contain restrictions, including change of control provisions, provisions requiring the Company to maintain specified financial ratios and provisions limiting the encumbrance of assets, payments to subsidiaries, the redemption or 29 repurchase of shares, disposition of assets, additional debt, transactions with interested persons, sales of preferred stock, sale-leaseback transactions and merger and acquisitions. Under the terms of its Credit Agreements, the Company is prevented from paying dividends on Common shares, Preferred shares and MIPS securities. In connection with the issuance of the Monthly Income Preferred Securities ("MIPS") by Loewen Group Capital, L.P. ("LGC") in August 1994, Loewen is guarantor of a Series A Junior Subordinated Debenture due August 31, 2024 issued by LGII (the "Series A Debenture"). Under the terms of the Series A Debenture, Loewen may not pay dividends on its Common shares if (i) there shall have occurred any event that, with the giving of notice or the lapse of time or both, would constitute an Event of Default (as defined in the Series A Debenture), (ii) Loewen is in default with respect to payment of any obligations under certain related guarantees or (iii) LGII shall have given notice of its election to select an Extension Period (as defined in the Series A Debenture), and such period, or any extension thereof, shall be continuing. For further information regarding the MIPS, see Note 9 to the 1998 Consolidated Financial Statements. Payments of dividends and loans and advances by subsidiaries to Loewen or LGII are not restricted except that the Company's insurance subsidiaries are subject to certain state regulations that restrict distributions, loans and advances from such subsidiaries to the Company. IMPACT OF THE YEAR 2000 ISSUE OVERVIEW The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or other disruption of operations and impede normal business activities. THE COMPANY'S STATE OF READINESS During the past two years, the Company has been evaluating and assessing its existing informational computer systems, as well as non-informational systems, and determined that it will be necessary to modify or replace certain portions of its software so that its systems will function properly beyond December 31, 1999. In particular, certain of the Company's financial reporting and information gathering systems, such as general ledger, fixed assets, payroll, commissions, accounts receivable and payable, etc., required varying degrees of modification or replacement. Continued accurate and timely information processing and reporting is critical to the ongoing operations of the Company. Similarly, non-informational systems, such as communications systems, security systems, etc., are critical to the safe and uninterrupted performance of the Company. The evaluation of the non-informational systems determined that all significant areas are or will be Year 2000 compliant. As systems were evaluated and assessed, a detailed work plan was developed to ensure that each area requiring modification or replacement is adequately and timely addressed. At this time, the Company's work plan continues to indicate that most significant areas have been or are scheduled to be remedied by mid-1999. Such work plan includes adequate time for remediation of the area, as well as testing to ensure the remediation efforts were complete. Additionally, the Company has established a task force and a review process to monitor remaining implementation plans and to determine whether all remaining areas 30 have been assessed and evaluated, resources identified and remediation completed on a timely basis. A summary of the Company's work plan and status is as follows:
EVALUATION YEAR 2000 COMPLETION COMPLETE COMPLIANT DATE ------------- ------------- ----------- Corporate................................................ Yes Yes N/A Funeral Home Operations.................................. Yes No 3Q 1999 Cemetery Operations...................................... Yes No 3Q 1999 Insurance Operations..................................... Yes Yes N/A
In addition, systems improvements and benefits beyond solution of the Year 2000 Issues are expected to be realized as a result of the above initiatives. The Company has also made formal communications with its significant vendors to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. The Company is currently gathering information requested from third parties to complete its evaluation and assessment of what, if any, material relationships exist and whether or not such relationships present significant risks to the continued operations of the Company beyond 1999. This evaluation and assessment is expected to be completed by mid-1999. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company. THE COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES To date, management estimates that the total cost incurred by the Company to evaluate, assess and remedy Year 2000 Issues has been less than $1 million, and is not material to the operating results or financial position of the Company. The expected future cost to complete evaluation, assessment and remediation of Year 2000 Issues, including replacement if necessary, is expected to be less than $2 million. Funding for addressing Year 2000 Issues will be achieved with operating funds of the Company. The cost and the date on which the Company plans to complete the Year 2000 Issue modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Company's total Year 2000 Issue project cost and estimates to complete exclude the estimated costs and time associated with the impact of a third party's Year 2000 Issue, which are not determinable. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES It is difficult to accurately project what the potential risks and ramifications to the Company may be in the event timely remediation efforts are not completed by either the Company or significant third parties. In such an event, it is possible that the ability to maintain accurate and complete financial records of the Company's activities and transactions, and possibly the timely and cost-effective procurement of merchandise, will be impaired. Such events, should they occur, would be likely to significantly impair the Company's ability to operate as it does today, creating business interruption, potential loss of business, and earnings and liquidity difficulties. The Company presently believes that with progress made to date and current and planned modifications to existing software and conversions to new software, the risk of potential loss associated with the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company. 31 In a "worst-case scenario," which is extremely difficult for the Company to predict, the Company may be unable to fulfill its customer service obligations in a timely manner, vendor payments may be delayed and timely and accurate financial reporting might be hindered. All such effects would be temporary, but the Company is not able to predict the exact nature of events and circumstances, extent of time nor cost that might be incurred if a "worst-case scenario" occurred. The Company believes that its Year 2000 initiatives described are adequate to mitigate such potential effects. THE COMPANY'S CONTINGENCY PLANS Though the Company's Year 2000 Issue work plan is believed to be adequate to achieve full system compliance on a timely basis, there may be circumstances that could prevent timely implementation. Accordingly, the Company has designed its work plan to address this potential occurrence. First, the work plan has been designed to ensure that the most critical systems and areas are addressed first, and in a manner that provides adequate time to remediate and test thoroughly. Second, the Company has secured external expert resources to assist in evaluation, assessment, prioritization and implementation of the work plan to further ensure its success. Third, in the event the Company is unable to completely remediate a system, the Company has sought to develop, where necessary, an alternative solution as a back-up plan, such as developing a "parallel" remediation effort (i.e., modifying an existing system to ensure it is Year 2000 compliant at the same time such system is being completely replaced). The Company will continue to monitor and adjust its contingency plan needs in conjunction with the progress made on the primary work plan. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company primarily uses derivatives in the form of interest rate swaps, cross-currency interest rate swaps, and both Canadian and United States dollar borrowings. The objective is to manage the mix of floating and fixed rate debt and to substantially hedge the Company's net investment in foreign assets. The Company's major market risk exposures are to changing interest rates, equity prices and foreign currency fluctuations. The Company's exposure to interest rate fluctuations and equity prices primarily reside in the United States, while the Company's exposure to foreign currency fluctuations primarily resides in Canadian dollar investments. All derivative and other financial instruments described are non-trading and are stated in U.S. dollars. The Company's derivative contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. Fluctuations in interest and currency rates that affect the swaps are generally offset by corresponding movements in the assets or debt being hedged. The Company's market risk exposure, discussed below, provides information about the Company's market sensitive financial instruments and constitute "forward looking statements" which involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company's debt instrument sensitivity to floating interest rates is based on approximately 90% and 10% of the Company's floating rate debt being based in the United States and Canada, respectively. Accordingly, changes in U.S. and Canadian interest rates affect the interest paid on the Company's debt. To reduce the impact of fluctuations in U.S. and Canadian interest rates, the Company generally manages interest rates such that 50% to 80% of the total debt is fixed rate debt. Interest rates are managed either by long-term borrowings or by entering into interest rate swap or option transactions. After allowing for the effect of the interest rate swaps at December 31, 1998, the Company's total debt has been converted into approximately $1.8 billion of fixed rate debt at a weighted average rate of 7.4% and approximately $465 million of floating interest rate debt at a weighted average rate of 7.1%. After allowing for the effect of the interest rate swaps, a one percent increase in the various floating rate debt indices would cause an approximately $4.7 million increase in the Company's annual interest expense. The Company's PATS Senior Notes have an embedded option whereby the PATS trust has the ability to put the $300 million debt back to the Company at October 31, 1999, should the debt not be purchased 32 by investors at the redemption date. Provided the option is exercised the Company will be required to pay the PATS trust the value of the option, if any. The value of the option at December 31, 1998, is approximately $29.3 million and will fluctuate based on the 10-year U.S. Treasury rate and a strike price of 6.05%. Should the debt be purchased by investors the notes will have a 10 year maturity with a fixed rate of 6.05% plus an adjustment equal to the Company's then current credit spread. The countries in which the Company has foreign operations are generally stable politically and economically and are not highly inflationary. The Company hedges a portion of its net investment in foreign assets. The foreign currency denominated debt acts as a hedge on foreign currency denominated earnings provided there is not an operating loss in the foreign currency denominated segment. Approximately 7% of the Company's net assets and 16% of operating loss are denominated in foreign currencies. None of the Company's net assets and approximately 16% of the Company's operating loss are subject to translation risk. EQUITY-PRICE RISK MANAGEMENT The sale of prearranged funeral services, pre-need cemetery merchandise and insurance products result in the Company having significant investment in, or managing trusts that have significant investment in mutual funds and equity securities which are sensitive to current market prices. Fluctuations in interest and equity market rates on investments held in prearranged funeral trusts do not result in significant current income fluctuation as the income is not realized until services are performed. Investments in pre-need cemetery merchandise trusts and insurance invested assets predominately hold fixed income securities. These investments are generally held to maturity. Accordingly, any unrealized gains or losses created by fluctuations in interest rates will not be realized. The Company manages the mix of equities and fixed income securities in accordance with policies set by the Investment Committee which is comprised of members of senior management. The Investment Committee sets and modifies the mix of investments with the assistance of independent professional financial advisors. The policy emphasizes a conservative approach while maintaining acceptable levels of income and capital appreciation. Cost and market values of these investments as of December 31, 1998 and 1997 are presented in Notes 6, 7, 10 and 25 to the Company's Consolidated Financial Statements. MARKET SENSITIVE FINANCIAL INSTRUMENTS RISK MANAGEMENT For certain assets and liabilities, the table presents principal cash flows and the related average interest rates by expected maturity dates for instruments held at December 31, 1998. For interest rate swaps, the table presents the notional amounts and weighted-average interest rates or strike rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. 33 QUANTITATIVE DISCLOSURE OF MARKET RISKS DECEMBER 31, 1998 (THOUSANDS OF US DOLLARS)
YEAR OF MATURITY 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE - -------------------------------- --------- --------- --------- --------- --------- ----------- ----------- ----------- LIABILITIES Fixed rate US $ debt............ $ 444,903 $ 21,906 $ 369,061 $ 12,671 $ 562,173 $ 289,651 $ 1,700,365 $ 1,469,734 Average rate.................. 7.1% 7.9% 7.6% 7.9% 7.9% 7.6% 7.5% Fixed rate Cdn. $ debt.......... 1,082 599 307 130,961 307 1,323 134,579 105,830 Average rate.................. 8.0% 8.0% 8.0% 6.1% 8.0% 8.0% 6.2% Floating rate US $ debt......... 494,360 824 685 504 576 2,343 499,292 499,292 Average rate.................. 7.2% 8.0% 8.0% 8.0% 8.0% 8.0% 7.2% PREFERRED SECURITIES Monthly Income Preferred Securities.................... -- -- -- -- -- 75,000 75,000 57,938 Average rate.................. -- -- -- -- -- 9.5% 9.5% First Preferred Shares, Series C............................. -- -- -- -- -- 157,146 157,146 90,271 Average rate.................. -- -- -- -- -- 6.0% 6.0% INTEREST RATE DERIVATIVES INTEREST RATE SWAPS US$ pay fixed -- US$ receive variable...................... 25,000 -- 50,000 -- -- -- 75,000 (1,428) Average pay rate.............. 5.8% -- 6.2% -- -- -- 6.0% Average receive rate.......... 5.3% -- 5.3% -- -- -- 5.3% Cdn.$ pay fixed -- Cdn.$ receive variable...................... -- -- -- 45,737 -- -- 45,737 590 Average pay rate.............. -- -- -- 6.1% -- -- 6.1% Average receive rate.......... -- -- -- 5.9% -- -- 5.9% INTEREST RATE OPTIONS US$ PATS senior notes put option (10 year) Notional Amount............... 300,000 -- -- -- -- -- 300,000 (29,317) Strike Rate................... 6.1% -- -- -- -- -- 6.1% US$ LIBOR cap (3 month) Notional Amount............... 100,000 -- -- -- -- -- 100,000 (46) Strike Rate................... 6.0% -- -- -- -- -- 6.0% CROSS-CURRENCY INTEREST RATE SWAP US$ floating to GBP floating.... -- -- -- -- 10,921 -- 10,921 (315) Average pay rate.............. -- -- -- -- 7.0% -- 7.0% Average receive rate.......... -- -- -- -- 7.3% -- 7.3%
34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE --------- THE LOEWEN GROUP INC. Report of Independent Accountants........................................................................ 36 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 37 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............... 38 Consolidated Statements of Retained Earnings (Deficit) for the Years Ended December 31, 1998, 1997 and 1996................................................................................................... 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... 40 Notes to Consolidated Financial Statements............................................................... 41 Supplementary Data: Quarterly Financial data (unaudited)................................................. 88 LOEWEN GROUP INTERNATIONAL, INC.(1) Report of Independent Accountants........................................................................ 89 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 90 Consolidated Statements of Operations and Deficit for the Years Ended December 31, 1998, 1997 and 1996... 91 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... 92 Notes to Consolidated Financial Statements............................................................... 93 NEWEOL INVESTMENTS LTD.(1) Report of Independent Accountants........................................................................ 136 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 137 Consolidated Statements of Operations, Comprehensive Income and Retained Earnings (Deficit) for the Years Ended December 31, 1998, 1997 and 1996................................................................. 138 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... 139 Notes to Consolidated Financial Statements............................................................... 140
- ------------------------ (1) FINANCIAL STATEMENTS OF LOEWEN GROUP INTERNATIONAL, INC. ("LGII") AND NEWEOL INVESTMENTS LTD. ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K BECAUSE THE OUTSTANDING SHARES OF EACH OF SUCH COMPANIES CONSTITUTE A "SUBSTANTIAL PORTION" OF THE COLLATERAL (WITHIN THE MEANING OF SECURITIES AND EXCHANGE COMMISSION RULE 3-10 UNDER REGULATION S-X) THAT SECURES THE SERIES 1 THROUGH 4 AND SERIES 6 AND 7 NOTES THAT WERE ISSUED BY LGII AND GUARANTEED BY LOEWEN. 35 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders The Loewen Group Inc. We have audited the consolidated balance sheets of The Loewen Group Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations, retained earnings (deficit) and cash flows for each of the years in the three year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II included in item 14 of the Company's annual report on Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1998, in accordance with generally accepted accounting principles in Canada. As required by the Company Act of the Province of British Columbia, we report that, in our opinion, these principles have been applied, after giving retroactive effect to the change in accounting principles described in Note 3 to the consolidated financial statements, on a consistent basis. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Significant differences between Canadian and United States accounting principles are explained and quantified in Note 25 to the consolidated financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements. Our report to the shareholders dated April 12, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor's report when these are adequately disclosed in the financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 36 THE LOEWEN GROUP INC. CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
DECEMBER 31, -------------------------------- 1998 ------------ 1997 ------------------ (RESTATED -- NOTE 3) ASSETS Current assets Cash and cash equivalents.................................................... $ 94,141 $ 36,767 Receivables, net of allowances............................................... 221,679 251,006 Inventories.................................................................. 34,482 34,885 Prepaid expenses............................................................. 8,916 11,141 ------------ ------------------ 359,218 333,799 Long-term receivables, net of allowances....................................... 647,092 553,663 Cemetery property.............................................................. 1,235,847 1,332,987 Property and equipment......................................................... 825,985 797,178 Names and reputations.......................................................... 748,665 668,578 Investments.................................................................... 3,385 224,008 Insurance invested assets...................................................... 266,661 305,610 Future income tax assets....................................................... 12,003 7,849 Prearranged funeral services................................................... 413,934 410,379 Other assets................................................................... 161,118 156,636 ------------ ------------------ $ 4,673,908 $ 4,790,687 ------------ ------------------ ------------ ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current indebtedness......................................................... $ 66,222 $ -- Accounts payable and accrued liabilities..................................... 170,134 160,208 Long-term debt, current portion.............................................. 874,123 43,507 ------------ ------------------ 1,110,479 203,715 Long-term debt, net of current portion......................................... 1,393,891 1,750,427 Other liabilities.............................................................. 399,304 308,909 Insurance policy liabilities................................................... 166,920 214,492 Future income tax liabilities.................................................. 208,939 309,994 Deferred prearranged funeral services revenue.................................. 413,934 410,379 Preferred securities of subsidiary............................................. 75,000 75,000 Shareholders' equity Common shares................................................................ 1,274,096 1,271,177 Preferred shares............................................................. 157,146 157,146 Retained earnings (deficit).................................................. (539,741) 75,624 Foreign exchange adjustment.................................................. 13,940 13,824 ------------ ------------------ 905,441 1,517,771 ------------ ------------------ $ 4,673,908 $ 4,790,687 ------------ ------------------ ------------ ------------------ FINANCIAL CONDITION (NOTE 1) COMMITMENTS AND CONTINGENCIES (NOTES 5, 8, 13, 16 AND 17)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 ----------- 1997 1996 ------------------ ------------------ (RESTATED -- NOTE (RESTATED -- NOTE 3) 3) Revenue Funeral................................................... $ 631,221 $ 602,112 $ 549,833 Cemetery.................................................. 408,497 422,010 286,652 Insurance................................................. 96,516 89,977 71,900 ----------- ------------------ ------------------ 1,136,234 1,114,099 908,385 Costs and expenses Funeral................................................... 407,302 374,191 326,892 Cemetery.................................................. 357,183 302,965 197,776 Insurance................................................. 80,013 73,304 54,709 ----------- ------------------ ------------------ 844,498 750,460 579,377 ----------- ------------------ ------------------ 291,736 363,639 329,008 Expenses General and administrative................................ 133,289 112,766 71,191 Depreciation and amortization............................. 88,513 65,378 53,147 Asset impairment.......................................... 333,900 -- -- Restructuring costs....................................... -- 33,364 -- ----------- ------------------ ------------------ 555,702 211,508 124,338 ----------- ------------------ ------------------ Earnings (loss) from operations............................. (263,966) 152,131 204,670 Interest on long-term debt.................................. 182,305 132,252 93,028 Investment impairment and contingent loss................... 315,207 -- -- Loss on early extinguishment of debt........................ -- 7,675 -- Gain on sale of investment.................................. -- (24,099) -- Finance and other costs related to hostile takeover proposal.................................................. -- -- 18,678 ----------- ------------------ ------------------ Earnings (loss) before undernoted items..................... (761,478) 36,303 92,964 Dividends on preferred securities of subsidiary............. 7,088 7,088 7,088 ----------- ------------------ ------------------ Earnings (loss) before income taxes and undernoted items.... (768,566) 29,215 85,876 Income taxes Current................................................... 23,118 34,152 22,544 Future.................................................... (187,589) (33,367) 927 ----------- ------------------ ------------------ (164,471) 785 23,471 ----------- ------------------ ------------------ (604,095) 28,430 62,405 Equity and other earnings of associated companies........... 5,126 13,380 3,594 ----------- ------------------ ------------------ Net earnings (loss) for the year............................ $ (598,969) $ 41,810 $ 65,999 ----------- ------------------ ------------------ ----------- ------------------ ------------------ Basic earnings (loss) per Common share...................... $ (8.22) $ 0.48 $ 1.01 Fully diluted earnings (loss) per Common share.............. $ (8.22) $ 0.48 $ 1.00
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 38 THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT) EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 ----------- 1997 1996 ------------------ ------------------ (RESTATED -- NOTE (RESTATED -- NOTE 3) 3) Retained earnings, beginning of year........................ $ 75,624 $ 58,305 $ 12,534 Net earnings (loss)......................................... (598,969) 41,810 65,999 Common share dividends...................................... (7,496) (14,958) (11,354) Preferred share dividends................................... (8,900) (9,533) (8,874) ----------- -------- -------- Retained earnings (deficit), end of year.................... $ (539,741) $ 75,624 $ 58,305 ----------- -------- -------- ----------- -------- -------- Dividend per Common share................................... $ 0.100 $ 0.200 $ 0.200 Dividend per Preferred share................................ $ 1.011 $ 1.083 $ 1.008
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 THE LOEWEN GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ------------ ------------- ------------ (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) CASH PROVIDED BY (APPLIED TO) Operations Net earnings (loss).................................................. $ (598,969) $ 41,810 $ 65,999 Items not affecting cash Depreciation and amortization...................................... 88,513 65,378 53,147 Amortization of debt issue costs................................... 26,581 6,802 4,096 Asset impairment................................................... 333,900 -- -- Investment impairment and contingent loss.......................... 315,207 -- -- Gain on sale of investments........................................ (6,768) (27,208) -- Future income taxes................................................ (187,589) (33,367) 927 Equity and other earnings of associated companies.................. (5,126) (13,380) (3,594) Restructuring costs................................................ -- 15,645 -- Other, including net changes in other non-cash balances.............. (90,247) (216,394) (167,438) ------------ ------------- ------------ (124,498) (160,714) (46,863) ------------ ------------- ------------ Investing Business acquisitions................................................ (252,598) (481,617) (556,921) Construction of new facilities....................................... (19,208) (32,429) (17,719) Investments, net..................................................... (1,422) 14,523 (148,398) Purchase of insurance invested assets................................ (224,145) (261,987) (85,193) Proceeds on disposition and maturities of insurance invested assets............................................................. 180,175 252,626 71,939 Purchase of property and equipment................................... (43,540) (52,830) (54,911) Proceeds on disposition of investments and assets.................... 56,340 70,087 3,685 ------------ ------------- ------------ (304,398) (491,627) (787,518) ------------ ------------- ------------ Financing Issue of Common shares, before income tax recovery................... 1,801 439,429 216,932 Issue of Preferred shares, before income tax recovery................ -- -- 154,094 Increase in long-term debt........................................... 1,105,441 1,343,545 1,037,389 Repayment of long-term debt.......................................... (645,667) (1,082,970) (514,510) Common share dividends............................................... (14,713) (12,340) (6,679) Preferred share dividends............................................ (8,900) (9,533) (6,466) Current note payable................................................. 71,654 -- -- Repayment of current note payable.................................... (5,432) -- (38,546) Debt issue costs..................................................... (17,884) (7,120) (29,158) ------------ ------------- ------------ 486,300 671,011 813,056 ------------ ------------- ------------ Increase (decrease) in cash and cash equivalents during the year....... 57,404 18,670 (21,325) Effect of foreign exchange adjustment.................................. (30) 38 (70) Cash and cash equivalents, beginning of year........................... 36,767 18,059 39,454 ------------ ------------- ------------ Cash and cash equivalents, end of year................................. $ 94,141 $ 36,767 $ 18,059 ------------ ------------- ------------ ------------ ------------- ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION BASIS OF PRESENTATION These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles. The going concern basis of presentation assumes that The Loewen Group Inc. (the "Company") will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Certain conditions, described below, currently exist which cast doubt upon the validity of this assumption. There is substantial doubt about the appropriateness of the use of the going concern assumption because the Company has experienced in 1998 both a significant net loss and negative cash flow. There is also uncertainty as to the Company's ability to refinance the pass-through asset trust senior guaranteed notes (the "PATS senior notes") which may be redeemed on October 1, 1999 and which require refinancing by September 15, 1999 under the terms of amended credit agreements. The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of actions that the Company has taken or plans to take which management believes will mitigate the adverse conditions and events which raise doubt about the validity of the "going concern" assumption. However, there is no certainty that these actions or other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS senior notes on terms acceptable to certain of the Company's lenders by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. The financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" basis was not appropriate for these financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. OPERATIONS The Company reported a loss from operations in 1998 of $263,966,000 after recording a charge for asset impairment of $333,900,000. Over the past three years, the Company's strategic growth plan had emphasized cemetery acquisitions, as compared to its historical emphasis on funeral home acquisitions. Acquisition and the integration of cemeteries has required significant cash due to the pre-need sales of cemetery interment rights, products and services and related interest costs on debt incurred. The Company expects to continue to incur negative cash flow from cemetery operations until it is able to satisfactorily implement various strategies to generate positive cash flow. FINANCING As a result of expected negative cash flow from operations during 1999, scheduled debt maturities in 1999 and its current financial position, on March 31, 1999 the Company: - Sold 124 cemeteries and three funeral homes for gross proceeds of $193,000,000, of which $126,500,000 was used to reduce indebtedness; and 41 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION (CONTINUED) - Completed negotiations with the lenders under its bank credit agreement, Management Equity Investment Plan ("MEIP") bank term credit agreement, Series D and E senior amortizing notes and one privately held note agreements (collectively, the "Credit Agreements"), resulting in revised lending agreements effective March 31, 1999 including waivers of certain financial covenants as of December 31, 1998. As a result, the Company has not had an event of default of the covenants under the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the bank credit agreement, including letters of credit, from $600,000,000 to $293,720,000 after application of a portion of the net proceeds from the Company's first major asset sale; - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing of the PATS senior notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development of cemetery land to $60,000,000 for 1999; and - Permit additional asset sales subject to certain terms and conditions. The Company's indebtedness includes the PATS senior notes which are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. Notwithstanding the obligation to refinance the PATS senior notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999, the trust has a put option that entitles the trust to redeem the PATS senior notes on October 1, 1999 to fund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. The Company does not expect to have sufficient funds to redeem these notes without further asset sales or proceeds from debt or equity issues. The Company is of the opinion that these notes have a prospect of being refinanced, however there is no certainty of such financing as it will depend primarily on financial market conditions and the Company's credit rating at that time. The debt relating to the Credit Agreements and the PATS senior notes has been classified as current liabilities. The Series 1 to 7 Senior Notes have been classified as non-current liabilities but have cross default clauses that could accelerate payment if covenants in the Credit Agreements and PATS senior notes are not met and the lenders thereunder accelerate payment under those agreements. The Company is continuing to review its operations in order to identify additional strategies to those identified above, including further asset sales, that are designed to generate cash flow, improve the Company's financial position, and enable the discharge of the Company's obligations. 42 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada, which in the case of the Company, generally conform with those established in the United States, except as explained in Note 25. The United States dollar is the principal currency of the Company's business and accordingly the consolidated financial statements are expressed in United States dollars. BASIS OF CONSOLIDATION The accounts of all subsidiary companies have been included in the consolidated financial statements from their respective dates of acquisition of control or formation. All subsidiaries are wholly owned at December 31, 1998 except for a few companies with small minority interests. The Company's operating subsidiaries in the United States are held through Loewen Group International, Inc. ("LGII"). The Company accounts for its investment in companies in which it has significant influence by the equity method. The Company's proportionate share of income (loss) as reported, net of amortization of excess purchase price over net assets acquired, is included in income and added to (deducted from) the cost of the investment. Common share dividends received reduce the carrying amount of the investment. The Company accounts for its investment in joint ventures using the proportionate consolidation method. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements. USE OF ESTIMATES The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could significantly differ from those estimates. PREARRANGED FUNERAL SERVICES Prearranged funeral services provide for future funeral services generally determined by prices prevailing at the time the contract is signed. The payments made under the contract, in part, are either placed in trust or are used to pay the premiums of life insurance policies under which the Company will be designated as beneficiary. Except for insurance commissions and amounts not required to be trusted, which are used to defray initial costs of administration, no income is recognized until the performance of a specific funeral. Trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amount together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Direct obtaining costs related to the sale of prearranged funeral services are included in other assets and amortized over a period 43 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of ten years, approximating the period the benefits are expected to be realized. Indirect obtaining costs relating to the sale of prearranged funeral services are expensed in the period incurred. CEMETERY OPERATIONS Pre-need sales of cemetery interment rights and other related products and services are recorded as revenue when customer contracts are signed with concurrent recognition of related costs. Interest is imputed at a market rate for contracts that do not bear a market rate of interest. An allowance for cancellations and refunds is provided at the date of sale based on management's estimates. The allowance is reviewed quarterly and changes in estimates are reflected for current and prior contracts as a result of recent cancellation experience. Actual cancellation rates in the future may result in a change in estimate. A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual or endowment care trust funds. Cemetery revenue is recorded net of the amount to be deposited to perpetual or endowment care trust funds. Earnings of perpetual or endowment care trust funds are used to defray the maintenance costs of cemeteries. Additionally, pursuant to various state and provincial laws, a portion of the proceeds from the sale of preneed merchandise and services may also be required to be paid into trust funds which are recorded as long-term receivables. INSURANCE OPERATIONS (A) INSURANCE REVENUE The Company earns insurance revenue primarily through the sale of industrial life and ordinary life insurance policies. (B) INSURANCE INVESTED ASSETS Bonds and other fixed-term securities are carried at amortized cost. Net realized gains and losses on the disposal of bonds and other fixed-term securities are deferred and amortized to income over the remaining term to maturity of the security sold. Equity securities are carried at moving average market value. Net realized gains and losses on the disposal of equity securities are deferred and amortized to income on a declining balance basis. (C) INSURANCE POLICY LIABILITIES Insurance policy liabilities represent an estimate of the amount which, together with future premiums and investment income, will be sufficient to pay future benefits, dividends and expenses on insurance and annuity contracts. Liabilities are computed using the policy premium method which involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and rates of surrender. Consequently, policy liabilities include reasonable provisions for adverse deviations from those estimates. These assumptions will be revised if it is determined that future experience differs substantially from that previously assumed. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and term deposits with an initial maturity less than or equal to 90 days. 44 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are carried at the lower of cost, determined primarily on a specific identification basis or a first in first out basis, and net realizable value. CEMETERY PROPERTY Cemetery property, including capitalized interest, consists of developed and undeveloped cemetery property and is valued at average cost. Amounts are expensed to costs and expenses as sales of cemetery plots occur. PROPERTY AND EQUIPMENT Property and equipment is recorded initially at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
Buildings and improvements..................................... 10 to 40 years Automobiles.................................................... 6 years Furniture, fixtures and equipment.............................. 6 to 10 years Computer hardware and software................................. 6 years Leasehold improvements......................................... Over the term of the lease plus one renewal
NAMES AND REPUTATIONS The amount paid for the names and reputations of operations acquired is equivalent to the excess of the purchase price over the fair value of identifiable net assets acquired, as determined by management. Amortization is provided on a straight-line basis over 40 years. Covenants not to compete included with names and reputations on the consolidated balance sheet represent amounts capitalized for non-competition agreements with certain key management personnel of acquired operations. Amortization of such prepaid covenants not to compete is provided on a straight-line basis over the terms of the relevant agreements, typically ten years. IMPAIRMENT OF LONG-LIVED ASSETS The Company monitors the recoverability of long-lived assets, including investments, cemetery property, property and equipment, names and reputations and other assets based on estimates using factors such as future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets or realized upon sale. The Company's policy is to write down assets to their net recoverable amount in the period when it is determined that the carrying amount of the asset is not likely to be recoverable. DEBT ISSUE COSTS Debt issue costs included in other assets on the consolidated balance sheet represent the costs of negotiating and securing the Company's long-term debt and preferred securities of subsidiary and are included in interest expense on a straight-line basis over the respective term of the related instrument. These costs include legal fees, accounting fees, underwriting and agency fees and other related costs. 45 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACQUISITION COSTS The Company's policy is to capitalize direct acquisition costs incurred on potential acquisitions. Upon completion of an acquisition, these costs are allocated to the assets acquired and are subject to the accounting policies outlined above. On certain acquisitions, a portion of the consideration is contingent upon future operating results. Such consideration, if any, is allocated to the assets acquired once determinable. Direct acquisition costs related to acquisitions not completed are written off. DERIVATIVE INSTRUMENTS The Company enters into derivative transactions with financial institutions primarily as hedges of other financial transactions. The Company's policies do not allow leveraged transactions and are designed to minimize credit and concentration risk with counterparties. The Company enters into interest rate swap agreements to manage interest rate exposure on its long-term debt. The difference between the amounts paid and received is accrued and accounted for as an adjustment to interest expense over the life of the swap agreement. The Company uses basic swap and option products to manage its exposure to interest rate movements when anticipated financing transactions are probable and the significant characteristics and expected terms are identified. Any gain or loss as a result of the hedging is deferred and amortized as an adjustment to interest expense over the life of the financing instrument hedged. If at any point in time a hedging transaction no longer meets the criteria of a hedge, any gain or loss is recognized in current earnings. The Company also uses foreign exchange forward contracts, cross currency swaps, options and futures to hedge the Company's exposure to fluctuations in foreign exchange rates. Gains or losses as a result of the hedge transaction are accounted for as an adjustment to the related transaction. SHARE ISSUE EXPENSES The costs of issuing shares, net of income tax recoveries thereon, are applied to reduce the stated value of such shares. FUTURE INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes. Future income tax assets and liabilities are measured using substantively 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 future income tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the substantive enactment date. A valuation allowance is recognized to the extent the recoverability of future income tax assets is not considered more likely than not. 46 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Basic earnings (loss) per share figures are calculated based on net earnings (loss) attributable to Common shareholders using the weighted average number of Common shares outstanding during the respective periods. Fully diluted earnings (loss) per share figures assume, if dilutive (a) exercise of employee and other stock options effective on their dates of issue and that the funds derived therefrom were invested at annual after-tax rates of return of 7.1% (1997 -- 6.9%, 1996 -- 6.5%), (b) conversion of the Series C Preferred shares effective on the date of the issue of the Series C Receipts and the add-back of the dividends during the period and (c) exercise of options and purchase rights under the 1994 Management Equity Investment Plan ("MEIP") effective on their dates of issue and the add-back of the interest under the related MEIP loan (see Note 11(d)). FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Canadian operations, which are accounted for as self-sustaining, have been translated into United States dollars at the rates of exchange as at the balance sheet dates, and revenue and expenses are translated at the average rates of exchange for the periods of operation. Gains or losses arising from the translation are deferred and are classified as "Foreign exchange adjustment" within Shareholders' equity. NOTE 3. CHANGE IN ACCOUNTING PRINCIPLES (A) INCOME TAXES Effective with the third quarter of 1998, the Company changed its policy for accounting for income taxes by adopting the provisions of Section 3465, Income Taxes, of the Handbook of the Canadian Institute of Chartered Accountants which is described in the Summary of Significant Accounting Policies. Previously, the Company followed the allocation method of accounting for income taxes. The provisions were applied retroactively with restatement of prior period financial statements to January 1, 1993 which conforms to the effective date that the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, for its financial statement amounts presented under United States generally accepted accounting principles. As a result of adopting the new Canadian standard, the cumulative effect to opening retained earnings at January 1, 1996 was a decrease of $23,905,000. The cumulative effect on the consolidated balance sheet at December 31, 1998 is an increase in cemetery property and names and reputations of approximately $463,000,000 (December 31, 1997 -- $411,000,000) primarily due to effects of acquisition accounting and a corresponding increase in future income tax liability of approximately $486,000,000 (December 31, 1997 -- $433,000,000). The effect on the consolidated statement of operations for the twelve months ended December 31, 1998 was a decrease to net loss of approximately $9,180,000 (1997 -- decrease to net earnings of $918,000; 1996 -- increase to net earnings of $2,093,000). (B) STATEMENT OF CASH FLOWS The Company adopted CICA Handbook Section 1540, Cash Flow Statements for the year ended December 31, 1998. The provisions were applied retroactively with restatement of prior period financial 47 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 3. CHANGE IN ACCOUNTING PRINCIPLES (CONTINUED) statements. Under Section 1540, non-cash investing and financing activities are excluded from the statement of cash flows and are disclosed in a note to the financial statements. NOTE 4. ACQUISITIONS AND DISPOSITIONS (A) ACQUISITIONS During the year ended December 31, 1998, the Company acquired 89 funeral homes and 65 cemeteries. During the year ended December 31, 1997, the Company acquired 138 funeral homes, 171 cemeteries and one insurance company. All of the Company's acquisitions have been accounted for by the purchase method. The preliminary purchase price allocation for certain of these acquisitions has been estimated based on available information at the time and is subject to revision. The effect of acquisitions at dates of purchase on the Consolidated Balance Sheet is shown below.
1998 1997 ---------- ----------- (RESTATED -- NOTE 3) Current assets.......................................................................... $ 6,140 $ 10,138 Prearranged funeral services............................................................ 19,529 37,271 Long-term receivables, net of allowances................................................ 2,914 85,098 Investments............................................................................. 405 36 Cemetery property....................................................................... 185,160 425,320 Property and equipment.................................................................. 45,237 87,587 Names and reputations................................................................... 121,065 113,351 Other assets............................................................................ 12,518 264 ---------- ----------- 392,968 759,065 Current liabilities..................................................................... (3,612) (6,680) Long-term debt.......................................................................... (3,402) (4,948) Other liabilities....................................................................... (5,913) (55,845) Future income taxes..................................................................... (82,519) (107,823) Deferred prearranged funeral services revenue........................................... (19,529) (37,271) ---------- ----------- $ 277,993 $ 546,498 ---------- ----------- ---------- ----------- Consideration Cash, including assumed debt repaid at closing........................................ $ 252,598 $ 481,617 Debt.................................................................................. 24,310 41,880 Common shares......................................................................... 1,085 23,001 ---------- ----------- Purchase Price.......................................................................... $ 277,993 $ 546,498 ---------- ----------- ---------- -----------
48 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 4. ACQUISITIONS AND DISPOSITIONS (CONTINUED) The following table reflects, on an unaudited pro-forma basis, the combined results of the Company's operations acquired during the year ended December 31, 1998 as if all such acquisitions had taken place at the beginning of the respective years presented. Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions. This pro-forma information does not purport to be indicative of the results of operations that would have resulted had the acquisitions been in effect for the entire years presented, and is not intended to be a projection of future results or trends.
1998 1997 ------------ ------------ Revenues.............................................................................. $ 1,156,095 $ 1,180,589 Net earnings (loss)................................................................... $ (600,962) $ 41,588 Basic earnings (loss) per share....................................................... $ (8.24) $ 0.48 Fully diluted earnings (loss) per share............................................... $ (8.24) $ 0.48
(b) DISPOSITIONS During the year, the Company sold First Capital Life Insurance Company of Louisiana, a wholly owned subsidiary, for gross proceeds of $24,522,000 resulting in a pre-tax gain of $6,768,000. The assets and liabilities disposed of were $89,958,000 and $72,204,000 respectively. NOTE 5. INVESTMENTS
1998 1997 --------- ---------- Prime Succession Holdings, Inc. ("Prime")................................................... -- $ 82,972 Rose Hills Holdings Corp. ("Rose Hills").................................................... -- 98,987 Investments of joint venture................................................................ -- 40,113 Other....................................................................................... 3,385 1,936 --------- ---------- $ 3,385 $ 224,008 --------- ---------- --------- ----------
(a) PRIME The Company owns 213.2353 shares of Prime common stock, representing 21.8% of Prime's voting common stock, and 100% of Prime's non-voting preferred stock, with a 10% cumulative annual payment-in-kind dividend. Blackstone Capital Partners II Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone") owns 764.7059 shares of Prime common stock, representing 78.2% of Prime's voting common stock. Prime holds all of the outstanding common shares of Prime Succession, Inc., an operator of funeral homes and cemeteries in the United States. Prime Succession, Inc. was purchased on August 26, 1996 for approximately $320,000,000 of which $52,000,000 was funded by Blackstone and $78,000,000 by the Company, and $190,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $230,000,000, was established as goodwill in Prime Succession, Inc. and is being amortized over 40 years. 49 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) Blackstone and the Company have the right to designate five and three nominees, respectively, to the Prime Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Prime. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its share in Prime to a party other than to an affiliate of itself. Under a Put/Call Agreement entered into with Blackstone in August 1996, the Company has the option to acquire ("Call") Blackstone's Prime common stock commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. Blackstone has the option to sell ("Put") its Prime common stock to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. The prices for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of approximately 12x earnings before interest, taxes, depreciation and amortization ("EBITDA") for the previous year, after deduction of certain liabilities. Any payment to Blackstone under the Call or the Put may be in the form of cash and/or Common shares of the Company, at the Company's option, subject to certain conditions. Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 24.1% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common stock interest is determined on the basis of a formula set forth in the Put/Call Agreement. Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement. The Company provides various administrative services to Prime under an Administrative Services Agreement for an annual fee of $250,000. Prior to the fourth quarter of 1998, the Company evaluated the exercise of the Call on the fourth anniversary date as likely. Due to liquidity concerns of the Company, the performance of Prime and the reduced market values for the Company's and other industry participants' stock, the Company has determined the exercise of the Call on the fourth anniversary as unlikely and the exercise of the Put as likely. Accordingly, the Company assessed that its investment suffered a decline in value that is other than temporary and has written down its investment based on an assumed distribution of Prime's shareholder's equity at December 31, 1998 taking into account Blackstone's return under the Put. In addition, the Company has estimated the expected Put option price on the sixth anniversary, the first date the Put option becomes exercisable by Blackstone, based on the Company's best estimate of EBITDA at that time and the relevant formula in the Put/Call Agreement. The Company has accrued a contingent loss based upon the difference between the estimated option price and the Company's estimate of the fair value of Blackstone's equity in Prime which is based in part on current market conditions. Such amount could change based on changes in the estimated future value of the business. A net liability (see Note 21) has been recorded reflecting an accrual of the expected loss on the option reduced by the remaining carrying value of Prime. 50 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) In 1998, 1997 and 1996 the Company recognized income (loss) of ($1,430,000), $5,073,000 and $1,156,000, relating to its investment in Prime, excluding the 1998 investment impairment and contingent loss. Summarized financial data for Prime are presented as follows:
1998 1997 1996 ---------- ---------- ---------- Income statement information: Revenue.................................................................... $ 98,005 $ 101,139 $ 32,651 Gross margin............................................................... 32,293 38,616 11,066 Earnings from operations................................................... 17,595 24,123 5,492 Payment-in-kind dividend................................................... 7,226 6,542 2,300 Net loss attributable to common shareholders............................... (14,524) (6,739) (5,250) Balance sheet information: Current assets............................................................. $ 22,820 $ 25,694 $ 24,614 Non-current assets......................................................... 368,302 369,412 374,174 ---------- ---------- ---------- Total assets............................................................... 391,122 395,106 398,788 Current liabilities........................................................ 15,952 14,964 22,531 Non-current liabilities.................................................... 256,060 253,734 249,652 ---------- ---------- ---------- Total liabilities.......................................................... 272,012 268,698 272,183 Shareholders' equity....................................................... 119,110 126,408 126,605
(b) ROSE HILLS The Company owns 204.5454 shares of Rose Hills common stock, representing 20.45% of Rose Hills' voting common stock, and 100% of Rose Hills non-voting preferred stock, with a 10% cumulative annual payment-in-kind dividend. Blackstone owns 795.4546 shares of Rose Hills common stock, representing 79.55% of Rose Hills' voting common stock. Rose Hills holds all of the outstanding common stock of Rose Hills Company ("RHC") and the cemetery related assets of Rose Hills Memorial Park Association, representing the largest single location cemetery in the United States. These companies were purchased on November 19, 1996 for approximately $285,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $155,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $130,000,000 was established as goodwill in RHC and is being amortized over 40 years. Blackstone and the Company have the right to designate five and three nominees, respectively, to the Rose Hills' Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Rose Hills. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in Rose Hills to a party other than to an affiliate of itself. Under a Put/Call Agreement entered into with Blackstone in November 1996, the Company has the option to acquire ("Call") Blackstone's Rose Hills common stock commencing on the fourth anniversary of 51 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) the acquisition, and for a period of two years thereafter, at a price to be determined pursuant to the Put/ Call Agreement. Blackstone has the option to sell ("Put") its Rose Hills common stock to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. The prices for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of approximately 13x earnings before interest, taxes, depreciation and amortization ("EBITDA") for the previous year, after deduction of certain liabilities. Any payment to Blackstone under the Call or the Put may be in the form of cash and/or Common shares of the Company, at the Company's option, subject to certain conditions. Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 22.5% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common stock interest will be determined on the basis of a formula set forth in the Put/Call Agreement. Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement. The Company provides various management and administrative services to RHC and subsidiaries under an Administrative Services Agreement for an annual fee of $250,000. If the Administrative Services Agreement becomes terminable by Blackstone due to the Company's material breach thereof or other failure to comply in any material respect, Blackstone under the Put will receive, at a minimum, its original investment plus a 25% compound return per annum thereon which increases to 27.5% in the event of a change in control of the Company, regardless of the calculated equity value. Prior to the fourth quarter of 1998, the Company evaluated the exercise of the Call on the fourth anniversary date as likely. Due to liquidity concerns of the Company, the performance of Rose Hills and the reduced market values for the Company's and other industry participants' stock, the Company has determined the exercise of the Call on the fourth anniversary as unlikely and the exercise of the Put as likely. Accordingly, the Company assesses that its investment suffered a decline in value that was other than temporary and has written down its investment based on an assumed distribution of Rose Hills' shareholder's equity at December 31, 1998 taking into account Blackstone's return under the Put. In addition, the Company has estimated the expected Put option price on the sixth anniversary, the first date the option becomes exercisable, based on the Company's best estimate of EBITDA at that time and the relevant formula in the Put/Call Agreement. The Company has accrued a contingent loss based upon the difference between the estimated option price and the Company's estimate of the fair value of Blackstone's equity in Rose Hills which is based in part on current market conditions. Such amount could change based on changes in the estimated future value of the business. A net liability (see Note 21) has been recorded reflecting an accrual of the expected loss on the option, offset by the remaining carrying value of Rose Hills. In 1998, 1997 and 1996 the Company recognized income of $6,535,000, $6,566,000 and $464,000, relating to its investment in Rose Hills, excluding the 1998 investment impairment and contingent loss. 52 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) Summarized financial data for Rose Hills are presented as follows:
1998 1997 1996 ---------- ---------- ---------- Income statement information: Revenue.................................................................... $ 83,577 $ 70,645 $ 7,080 Gross margin............................................................... 69,814 59,900 5,982 Earnings from operations................................................... 19,538 14,738 1,327 Payment-in-kind dividend................................................... 9,568 8,708 932 Net loss attributable to common shareholders............................... (8,534) (10,476) (1,460) Balance sheet information: Current assets............................................................. $ 23,011 $ 20,400 $ 21,272 Non-current assets......................................................... 298,922 292,198 296,562 ---------- ---------- ---------- Total assets............................................................... 321,933 312,598 317,834 Current liabilities........................................................ 20,488 15,221 15,510 Non-current liabilities.................................................... 173,153 170,119 173,298 ---------- ---------- ---------- Total liabilities.......................................................... 193,641 185,340 188,808 Shareholders' equity....................................................... 128,292 127,258 129,026
(c) INVESTMENTS OF JOINT VENTURE The Company was a party to a joint venture for investment purposes. The investment balance represented the Company's proportionate share of the joint venture's investment in credit card receivables. In 1998, the investment matured, the joint venture's liabilities were repaid and the joint venture was liquidated. NOTE 6. INSURANCE INVESTED ASSETS
DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------- ---------------------- CARRYING MARKET CARRYING MARKET VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- Fixed maturities................................................. $ 246,576 $ 251,454 $ 281,659 $ 290,200 Equity securities................................................ 80 44 110 55 Short-term investments and other................................. 20,005 20,005 23,841 23,841 ---------- ---------- ---------- ---------- $ 266,661 $ 271,503 $ 305,610 $ 314,096 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
On the insurance invested assets, the Company earned $21,349,000 of investment income for the year ended December 31, 1998 (1997 -- $23,847,000). Included in the market value of insurance invested assets are $6,942,000 and $2,100,000 of unrealized gains and losses, respectively (1997 -- $8,947,000 and $461,000, respectively). 53 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 6. INSURANCE INVESTED ASSETS (CONTINUED) Maturities of fixed maturity securities, excluding mortgage-backed securities and collateralized mortgage obligations, are estimated as follows: $6,853,000 due in one year or less (1997 -- $6,081,000), $25,667,000 due in one to five years (1997 -- $30,576,000), $67,598,000 due in five to ten years (1997 -- $81,005,000), and $72,843,000 due after ten years (1997 -- $52,929,000). Maturities on a market value basis are approximately the same as the amortized cost basis at December 31, 1998. The Company had approximately $73,615,000 (1997 -- $111,068,000) in mortgage-backed securities and collateralized mortgage obligations at December 31, 1998 with a market value of $76,649,000 (1997 -- $115,015,000). NOTE 7. PREARRANGED FUNERAL SERVICES Prearranged funeral services represents amounts deposited in accordance with state trusting laws with various financial institutions together with accrued earnings. The Company will receive the prearranged funeral trust amounts when the funeral services are performed. The funds deposited in trust are invested as follows:
1998 1997 ---------- ---------- Short-term investments.................................................................... $ 151,113 $ 145,365 Fixed maturities.......................................................................... 142,385 92,555 Balanced mutual funds..................................................................... 1,419 123,080 Equity securities......................................................................... 65,268 14,970 Insurance policies held by trust.......................................................... 52,844 32,552 Other..................................................................................... 905 1,857 ---------- ---------- $ 413,934 $ 410,379 ---------- ---------- ---------- ----------
The weighted average rate of return on the above prearranged funeral trust assets for the year ended December 31, 1998 was 3.0% (1997 -- 3.8%, 1996 -- 5.2%). NOTE 8. DEBT CURRENT INDEBTEDNESS In September 1998, a subsidiary of the Company obtained a $98,039,000 revolving receivables finance facility (the "Receivables Finance Facility") through a subsidary of one of its bank lenders. Under the terms of the agreement, new receivables are added to the pool each month to offset collections from existing receivables. Another subsidiary of the Company services, administers and collects the receivables. The Receivables Finance Facility contains certain covenants and provides for various events of termination. This facility is secured by a pledge of the cemetery receivables held by the subsidiary and as of September 15, 1999 no further receivables can be added to the pool. At December 31, 1998 the balance outstanding on the Receivables Finance Facility was $66,222,000, which represents the maximum amount available to the Company based on eligible receivables which secure the loan. The Receivables Finance Facility bears interest at a floating rate based on commercial paper rates (December 31, 1998 -- 5.51%). The Receivables Finance Facility is also subject to a commitment fee ranging from 1.10%-3.25% of the total facility amount, depending on certain financial ratios. 54 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 8. DEBT (CONTINUED) LONG-TERM DEBT
1998 1997 ------------ ------------ Bank credit agreement................................................................. $ 330,000 $ 264,729 Management Equity Investment Plan ("MEIP") bank term credit agreement due in 2000..... 97,292 105,140 9.62% Series D senior amortizing notes due in 2003.................................... 42,857 51,429 6.49% Series E senior amortizing notes due in 2004.................................... 42,857 50,000 7.50% Series 1 senior notes due in 2001............................................... 225,000 225,000 7.75% Series 3 senior notes due in 2001............................................... 125,000 125,000 8.25% Series 2 and 4 senior notes due in 2003......................................... 350,000 350,000 6.10% Series 5 senior notes due in 2002 (Cdn. $200,000,000)........................... 130,676 139,948 7.20% Series 6 senior notes due in 2003............................................... 200,000 -- 7.60% Series 7 senior notes due in 2008............................................... 250,000 -- 6.70% PATS senior notes............................................................... 300,000 300,000 Present value of notes issued for legal settlements discounted at an effective interest rate of 7.75%.............................................................. 38,147 39,115 Present value of contingent consideration payable on acquisitions discounted at an effective interest rate of 8.0%, see Note 23........................................ 19,785 24,515 Other, principally arising from vendor financing of acquired operations or long-term debt assumed on acquisitions, bearing interest at fixed and floating rates varying from 4.8% to 14.0%, certain of which are secured by assets of certain subsidiaries........................................................................ 116,400 119,058 ------------ ------------ 2,268,014 1,793,934 Less current portion: Bank credit agreement............................................................... 330,000 -- MEIP bank term credit agreement due in 2000......................................... 97,292 -- 9.62% Series D senior amortizing notes due in 2003.................................. 42,857 7,143 6.49% Series E senior amortizing notes due in 2004.................................. 42,857 8,572 6.70% PATS senior notes............................................................. 300,000 -- Present value of notes issued for legal settlements discounted at an effective interest rate of 7.75%............................................................ 21,450 998 Present value of contingent consideration payable on acquisitions discounted at an effective interest rate of 8.0%, see Note 23...................................... 14,947 4,730 Other............................................................................... 24,720 22,064 ------------ ------------ 874,123 43,507 ------------ ------------ $ 1,393,891 $ 1,750,427 ------------ ------------ ------------ ------------
(a) The Company completed negotiations with the lenders under the Credit Agreements resulting in revised lending agreements, effective March 31, 1999, including waivers of certain financial covenants as of December 31, 1998. As a result, the Company has not had an event of default of the covenants under the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the bank credit agreement, including letters of credit, from $600,000,000 to $293,720,000 after application of a portion of the net proceeds from the Company's first major asset sale; 55 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 8. DEBT (CONTINUED) - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing of the PATS senior notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development of cemetery land to $60,000,000 for 1999; and - Permit additional asset sales subject to certain terms and conditions. The debt relating to the Credit Agreements and the PATS senior notes have been classified as current liabilities. The Series 1 to 7 Senior Notes have been classified as non-current liabilities but have cross default clauses that could accelerate payment if covenants in the Credit Agreements and PATS senior notes are not met and the lenders thereunder accelerate payment under those agreements. (b) In 1996, the Company, LGII and their senior lenders entered into a collateral trust agreement pursuant to which the senior lenders share certain collateral and guarantees on a pari passu basis (the "Collateral Trust Agreement"). The security for lenders under the Collateral Trust Agreement consists of (i) all of LGII's right, title and interest in and to all rights to receive payment under or in respect of accounts, contracts, contractual rights, chattel paper, documents, instruments and general intangibles, (ii) a pledge of the shares of capital stock of substantially all of the subsidiaries in which the Company directly or indirectly holds more than a 50% voting or economic interest and (iii) a guarantee by each subsidiary that is pledging stock. The security is held by a trustee for the equal and ratable benefit of the senior lending group. The senior lending group consists principally of the lenders under the senior amortizing notes, senior notes and bank and term credit agreements as well as the holders of certain letters of credit. At December 31, 1998, the indebtedness owed to the senior lending group subject to the collateral trust agreement, including holders of certain letters of credit, aggregated $2,108,000,000. Certain of the above senior note agreements contain various restrictive provisions, including change of control provisions and provisions restricting payment of dividends on Common and Preferred shares, restricting encumbrance of assets, limiting redemption or repurchase of shares, limiting disposition of assets and limiting the amount of additional debt. The senior notes also provide for a default in the event of the acceleration of certain other debt. (c) In March 1998, the Company amended its $1,000,000,000 bank credit agreement. As part of the amendment, the 364-day tranche was terminated and the $750,000,000 tranche was reduced to a $600,000,000 bank credit agreement with a three-year term. On March 31, 1999 the Company further amended its bank credit agreement (see Note 8(a)). 56 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 8. DEBT (CONTINUED) The Company's bank credit agreement and MEIP bank term credit agreement bear interest at floating rates (7.31% at December 31, 1998), based on U.S. LIBOR rates or the prime lending rates of certain banks, plus an applicable margin. (d) The PATS senior notes are due in 2009, however they are redeemable at the election of the holder, in whole but not in part, at 100% of the principal amount on October 1, 1999. The PATS senior notes bear interest at a rate of 6.70% until October 1, 1999, at which time, if no redemption election occurs, the interest rate will be reset at a fixed annual rate of 6.05% plus an adjustment equal to the Company's then current credit spread to the ten-year United States Treasury rate (see Note 16(h)). (e) In September 1998, the Company's Cdn. $50,000,000 revolving credit agreement was terminated. Repayment of the senior amortizing notes commenced September 1997 for Series D and February 1998 for Series E, all in equal annual amounts to the respective due dates. In March 1999, the Series D senior amortizing notes were amended to defer the September 1999 principal payment of $8,571,000 to January 2000. (f) In May 1998, LGII completed a private placement in the United States of $200,000,000 of 7.20% Series 6 Senior Guaranteed Notes due 2003 (the "Series 6 senior notes") and $250,000,000 of 7.60% Series 7 Senior Guaranteed Notes due 2008 (the "Series 7 senior notes"). The net proceeds from the Series 6 and 7 senior notes were used to repay indebtedness outstanding under the bank credit agreement. In September 1998, these notes were exchanged for identical notes registered under the Securities Act of 1933. (g) The notes issued under legal settlements represent a promissory note in the amount of $80,000,000 payable over 20 years in equal annual installments of $4,000,000, without interest. Interest is accrued on the discounted amount and is included in accounts payable and accrued liabilities. Annual payments will eliminate this accrual and the balance will be applied to the promissory note. (h) Included in interest expense is $26,581,000 of amortization and write-offs of debt issue costs (1997 -- $6,802,000, 1996 -- $4,096,000) (i) Maturities of long-term debt are as follows:
TOTAL ------------ 1999........................................................ $ 874,123 2000........................................................ 23,329 2001........................................................ 370,053 2002........................................................ 144,136 2003........................................................ 563,056 Thereafter.................................................. 293,317 ------------ $ 2,268,014 ------------ ------------
NOTE 9. PREFERRED SECURITIES OF SUBSIDIARY On August 15, 1994, 3,000,000 9.45% Cumulative Monthly Income Preferred Securities, Series A ("MIPS") were issued by Loewen Group Capital, L.P. ("LGC") in a public offering for an aggregate 57 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 9. PREFERRED SECURITIES OF SUBSIDIARY (CONTINUED) amount of $75,000,000. LGC is a limited partnership and LGII as its general partner manages its business and affairs. LGII serves as the holding company for all United States assets and operations of the Company. The consolidated financial statements of LGII are prepared in accordance with Canadian generally accepted accounting principles and are presented in United States dollars. Summarized financial data for LGII are presented as follows:
1997 1996 1998 ------------ ------------ ------------ (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) Income statement information Revenue............................................................... $ 1,072,556 $ 1,035,099 $ 839,352 Gross margin.......................................................... 275,139 305,764 293,636 Earnings (loss) from operations....................................... (217,088) 120,622 179,522 Net loss.............................................................. (635,912) (78,750) (3,107) Balance sheet information Current assets........................................................ $ 236,014 $ 244,552 $ 223,388 Non-current assets.................................................... 3,904,500 3,965,795 3,084,990 ------------ ------------ ------------ Total assets.......................................................... 4,140,514 4,210,347 3,308,378 Current liabilities................................................... 1,207,708 172,371 156,290 Non-current liabilities............................................... 3,237,888 3,737,722 2,958,334 ------------ ------------ ------------ Total liabilities..................................................... 4,445,596 3,910,093 3,114,624 Shareholders' equity (deficiency)..................................... (305,082) 300,254 193,754
The MIPS are due August 31, 2024 and are subject to redemption at par at the option of LGC, in whole or in part, from time to time, on or after August 31, 2004. Holders of the MIPS are entitled to receive cumulative dividends at an annual rate of 9.45% of the liquidation preference of $25 per MIPS. The dividends accrue from the date of original issuance and are payable monthly in arrears. The Company has the right to defer payment of dividends on the MIPS for one or more periods, each not to exceed 60 consecutive months. In this event the Company may not declare or pay dividends on, or redeem, purchase or acquire or make a liquidation payment with respect to any class of its capital stock. In March, 1999 the Company announced that payment of the MIPS dividends had been deferred (see Note 24). The Company has guaranteed certain payment obligations of LGII to LGC and of LGC to the MIPS holders. The guarantees are subordinated to all liabilities of the Company and are unsecured. 58 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company enters into derivative transactions with financial institutions primarily as hedges of other financial transactions. The Company does not trade in financial instruments and is not a party to leveraged derivatives. (a) SWAP AGREEMENTS AND INTEREST RATE OPTIONS The Company has entered into swap agreements and interest rate options with a number of different commercial banks and financial institutions to manage its interest rate exposure on fixed rate long-term debt. At December 31, 1998, such agreements included: (1) Three interest rate swap agreements with commercial banks and financial institutions, each having a notional principal amount of $25,000,000. The Company will receive floating Libor based rates determined quarterly (5.253% at December 31, 1998) and will pay fixed rates of 5.755%, 6.200% and 6.190% under the agreements. The agreements expire in June 1999, June 2001 and June 2001, respectively. (2) Two interest rate swap agreements with commercial banks, having an aggregate notional principal amount of Cdn. $70,000,000. The Company will receive a fixed rate of 6.100% and will pay floating Bankers Acceptance based rates determined quarterly (5.9218% at December 31, 1998). The agreements expire in October 2002. (3) A perpetual cross-currency swap with a commercial bank, having a notional principal amount of $10,921,000 and GBP 6,700,000. The exchange rate is reset every 5 years, beginning November, 2003. The Company will receive floating $US Libor determined quarterly (5.20% at December 31, 1998) and will pay floating GBP Libor plus .04% (6.79% at December 31, 1998) determined quarterly. The Company is exposed to credit losses in the event of non-performance by the other parties to the interest rate and currency swap agreements. However, the Company does not anticipate non-performance by the counterparties. The carrying amounts of the interest rate and currency swap agreements approximate fair values at December 31, 1998. (b) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and term deposits, current receivables, current indebtedness, accounts payable and accrued liabilities and liabilities of joint venture approximates fair value due to the short-term maturities of these instruments. The fair value of insurance policy liabilities has been omitted because it is 59 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) not practicable to determine fair values with sufficient reliability. Financial instruments with a carrying value materially different from their fair value include:
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ------------ ------------ ------------ ------------ (1) Financial assets Prearranged funeral services......................... $ 413,934 $ 415,759 $ 410,379 $ 415,966 Insurance invested assets............................ 266,661 271,503 305,610 314,096 Long-term receivables Practicable to estimate fair value................. 391,842 399,943 275,866 278,415 Not practicable.................................... 255,250 -- 277,797 -- (2) Financial liabilities Long-term debt....................................... $ 2,268,014 $ 2,008,634 $ 1,793,934 $ 1,833,203 Preferred securities of subsidiary................... 75,000 57,938 75,000 81,375
The fair value determination of prearranged funeral services, insurance invested assets and long-term receivables is based on quoted market prices. The long-term receivables for which it is not practicable to estimate fair value comprise primarily installment receivables on cemetery sales, which generally have terms of three to five years and bear interest ranging from 8% to 15%. The fair value of long-term debt subject to fixed interest rates is estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. The fair value of long-term debt subject to floating market rates approximates its carrying value. The fair value of the preferred securities of a subsidiary is estimated based upon quoted market prices. 60 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. SHARE CAPITAL (a) AUTHORIZED 200,000,000 (1997 -- 200,000,000) First Preferred shares without par value 40,000,000 (1997 -- 40,000,000) Class A shares without par value 750,000,000 (1997 -- 750,000,000) Common shares without par value Of the 200,000,000 First Preferred shares, 1,000,000 shares are designated as 7.75% Cumulative Redeemable Convertible First Preferred Shares without par value, Series A, 425,000 shares are designated as Convertible First Preferred Shares, Series B, see Note 11(c), and 8,800,000 shares are designated as 6.00% Cumulative Redeemable Convertible First Preferred Shares, Series C ("Series C Preferred shares") (see Note 11(c)). (b) ISSUED AND OUTSTANDING
NUMBER OF SHARES STATED VALUE ------------ ------------ Common shares and contributed surplus Outstanding December 31, 1995......................................................... 48,167,765 $ 490,055 Issued for cash by public offering, net of expenses of $5,558,000................... 7,700,000 216,576 Issued for legal settlements........................................................ 2,500,000 72,000 Issued for cash on exercise of stock options, including related tax benefits........ 315,583 5,214 Issued for cash under stock purchase plan........................................... 20,850 708 Issued for acquisitions............................................................. 340,537 11,651 Issued under employee stock bonus plan.............................................. 12,280 227 ------------ ------------ Outstanding December 31, 1996......................................................... 59,057,015 796,431 Issued for cash by public offering, net of expenses of $10,402,000.................. 13,800,000 445,136 Issued for cash on exercise of stock options, including related tax benefits........ 181,086 4,813 Issued for cash under stock purchase plan........................................... 56,625 1,630 Issued for acquisitions, see Note 4................................................. 807,161 23,001 Issued under employee stock bonus plan.............................................. 9,010 166 ------------ ------------ Outstanding December 31, 1997......................................................... 73,910,897 1,271,177 Issued for cash on exercise of stock options, including related tax benefits........ 54,876 1,092 Issued for cash under stock purchase plan........................................... 18,425 650 Issued for acquisitions, see Note 4................................................. 64,007 1,085 Issued under employee stock bonus plan.............................................. 7,885 92 ------------ ------------ Outstanding December 31, 1998......................................................... 74,056,090 $ 1,274,096 ------------ ------------ ------------ ------------ Preferred shares Series C Preferred shares........................................................... 8,800,000 $ 157,146 ------------ ------------ ------------ ------------
(c) FIRST PREFERRED SHARES First Preferred shares may be issued from time to time in one or more series and in such numbers and with such special rights and restrictions as the directors of the Company determine. 61 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. SHARE CAPITAL (CONTINUED) During 1994, as part of the Management Equity Investment Plan, 425,000 shares were designated as Convertible First Preferred shares, Series B of the Company. Each Convertible First Preferred share is convertible into ten Common shares at any time prior to July 13, 2011. No Series B Preferred shares have been issued. The Series C Preferred shares were issued for cash of $157,146,000 by public offering, net of expenses of $3,776,000, in 1996. The holders of Series C Preferred shares will have the right at any time before January 1, 2003, to convert each Series C Preferred share into that number of Common shares determined by dividing Cdn. $25.00 by Cdn. $38.125. Thereafter, a holder of Series C Preferred shares will have the right on January 1, 2003, and on the first business day of each quarter thereafter, to convert all or part of such Series C Preferred shares into that number of Common shares determined by dividing Cdn. $25.00 plus accrued and unpaid dividends by the greater of Cdn. $3.00 and 95% of the Current Market Price (as defined) on the date of conversion. The holders of the Series C Preferred shares are entitled, as and when declared by the Board of Directors, to a fixed preferential cumulative cash dividend of 6% per year, payable quarterly. The Series C Preferred shares will not be redeemable by the Company prior to July 1, 1999. On or after July 1, 1999, the Series C Preferred shares will be redeemable by the Company, upon giving not less than 30 days notice, at a redemption price equal to Cdn. $25.00 per share together with accrued and unpaid dividends. Prior to July 1, 2001, the redemption will only be effected by the issuance of Common shares, determined by dividing the redemption price by the greater of Cdn. $3.00 and 95% of the Current Market Price at the date of redemption. On and after July 1, 2001, the redemption may be effected by the issuance of Common shares or payment of a cash amount. In the event of the liquidation, dissolution or winding up of the Company or other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of the Series C Preferred shares shall be entitled to receive the redemption price before any amounts are paid to the holders of Common shares or any other class of shares ranking junior to the Series C Preferred shares. In March 1999, the Company deferred the quarterly dividend payment on the Series C Preferred shares (see Note 24). (d) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP") 4,250,000 Common shares of the Company were reserved upon adoption by the Company of the MEIP on June 15, 1994. Senior Exchangeable Debentures amounting to $127,670,000 were issued by LGII to a wholly-owned subsidiary of LGII formed to act as agent for the MEIP. The Debentures are due July 15, 2001 and bear interest at floating rates. Each $300.40 of principal amount of Debentures will be exchangeable for one Convertible First Preferred share, Series B of the Company, each of which will be convertible into ten Common shares of the Company. As part of the MEIP, the present participants paid $2,869,000 (1997 -- $3,281,000) for option rights to acquire $57,382,000 (1997 -- $65,613,000) of Debentures exercisable as to 50% in 1999, 25% in 2000 and 25% in 2001. If an option expires unexercised, the participant will receive a refund without interest of the amount paid to acquire such option right. In 62 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. SHARE CAPITAL (CONTINUED) addition, the former Chairman paid $2,253,000 for the right and obligation to acquire $45,060,000 of Debentures with the same exercise dates. (e) SHAREHOLDER PROTECTION RIGHTS PLAN The Company has in place a Shareholder Protection Rights Plan (the "Plan"), which is meant to discourage unfair takeover bid tactics and to give the Board of Directors time, if there is an unsolicited bid, to pursue alternatives to maximize shareholder value. To preserve the shareholders' right to consider takeover bids on a fully-informed basis, the Plan provides that a bidder's position may be substantially diluted if it does not make either a "permitted bid" directly to all shareholders or negotiate with the Board for a waiver of the Plan's provisions. The Plan expires on April 20, 2000. Under the Plan, each Common shareholder is entitled to receive one right in certain situations. The rights however will not trade separately from the Common shares unless a takeover bid is announced or someone, excluding "Grandfathered Persons," acquires 20% of the Common shares. To the Company's knowledge, only Raymond L. Loewen and Anne Loewen are Grandfathered Persons. The rights issued to Common shareholders under the Plan entitle the holder, upon the occurrence of certain triggering events, to acquire Common shares in the Company at a 50% discount to the market. Triggering events include the acquisition of 20% or more of the Common shares in a transaction not approved by the Board of Directors. However, the rights are not triggered by certain permitted bids that are made to all holders of Common shares and that are approved by a majority vote of independent shareholders. By creating the potential for substantial dilution of an unfair bidder's position, the Plan encourages an acquirer to proceed by way of a permitted bid or to approach the Board with a view to negotiation. The Plan's permitted bid provision allows bidders to take bids directly to all the shareholders. The Plan thus preserves the shareholder's right to consider such bids on a fully-informed basis. The Company, at the time of the adoption of the Plan, was not aware of any pending or threatened takeover bid for the Company. There are exceptions to the Plan to permit the acquisition of shares by (i) persons who held more than 20% of the Common shares on April 20, 1990, subject to certain restrictions, and (ii) registered pension plans whose governing legislation prohibits them from holding more than 30% and who are acquiring the Common shares independently for investment. (f) STOCK OPTION PLANS The Company has separate fixed stock option plans for its United States and Canadian employees which enable the Company to grant options to its employees and directors. The option plans are administered by the Compensation Committee of the Company's Board of Directors. Each participant enters into an option agreement which sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options. The exercise price of an option may not be less than the market price of the Company's stock on the trading day immediately prior to the grant date and in no event may an option terminate later than ten years after the grant date of such option. 63 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. SHARE CAPITAL (CONTINUED) A summary status of the Company's fixed stock option plans and changes during the two years ended December 31, 1998, are as follows:
1998 1997 ------------------------------ ----------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE - ---------------------------------------------------------- ----------- ----------------- ---------- ----------------- Outstanding beginning of year............................. 5,781,704 $ 26 4,417,517 $ 25 Options granted......................................... 1,139,365 18 1,639,408 30 Options exercised....................................... (58,094) 22 (175,641) 23 Options cancelled....................................... (2,293,902) 21 (99,580) 31 ----------- ---------- Outstanding end of year................................... 4,569,073 $ 26 5,781,704 $ 26 ----------- ---------- ----------- ---------- Options exercisable at end of year........................ 2,272,916 3,043,129
The following table summarizes information about the Company's fixed stock options outstanding at December 31, 1998:
WEIGHTED AVERAGE NUMBER REMAINING OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS OUTSTANDING DECEMBER 31, 1998 (IN YEARS) EXERCISE PRICE - ---------------------------------------------------------------- ----------------- ----------------- ----------------- Range of exercise prices $ 5.50 - $22.28................................................. 794,950 7.3 $ 13 22.29 - 27.85.................................................. 1,686,489 7.6 26 27.86 - 33.42.................................................. 1,822,134 7.4 30 33.43 - 45.00.................................................. 265,500 7.3 36 ----------------- 4,569,073 7.5 $ 26 ----------------- -----------------
NUMBER OUTSTANDING AT WEIGHTED AVERAGE OPTIONS EXERCISABLE DECEMBER 31, 1998 EXERCISE PRICE - ---------------------------------------------------------------- ----------------- ----------------- Range of exercise prices $ 5.50 - $22.28................................................. 349,950 $ 17 22.29 - 27.85.................................................. 993,924 26 27.86 - 33.42.................................................. 802,534 29 33.43 - 45.00.................................................. 126,508 36 ----------------- 2,272,916 $ 26 ----------------- -----------------
NOTE 12. FOREIGN EXCHANGE ADJUSTMENT The foreign exchange adjustment account represents the net changes due to exchange rate fluctuations in the equivalent United States dollar book values of the Company's net investments in self-sustaining non-United States operations since their respective dates of acquisition. 64 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES FELDHEIM ET AL. v. SI-SIFH CORP. ET AL. AND DUFFY ET AL. v. SI-SIFH CORP ET AL. Two complaints were filed in 1997 on behalf of individuals who claim damages in connection with funeral insurance policies allegedly issued to them by insurance companies owned, directly or indirectly, by S.I. Acquisition Associates, L.P. ("S.I."). The Company acquired the assets but not the stock of S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. are affiliates of S.I. In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Orleans, State of Louisiana. Plaintiffs seek a class action. The DUFFY complaint was filed by the same lawyers who filed the complaint in the FELDHEIM case, and is a virtually identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial court and, as of the date hereof, no discovery has taken place. The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also alleged unfair trade practices in violation of Louisiana's trade practices laws. Plaintiffs' petitions seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies. On June 13, 1997, the district court in Jefferson Parish dismissed the FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing of the appeal was completed in December 1997, and oral argument was held on January 15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal affirmed the dismissal of the FELDHEIM plaintiffs' class-action claims except as to a claim by "Sub Class B" plaintiffs (the proposed class of current policyholders who are seeking a declaratory judgment). The appellate court found that the trial court's opinion did not consider the validity of class treatment for the "Sub Class B" plaintiffs' claim for a declaratory judgment when it dismissed plaintiffs' class-action claims, and it remanded the case to the trial court for a hearing on that issue. On September 22, 1998, the trial court ruled that the claim could not go forward as a class action, and granted the exception of no cause of action as to Count IV, sub-class B. On October 20, 1998, plaintiffs noticed a suspensive appeal to the Louisiana Fifth Circuit Court of Appeal from this ruling. No order granting the suspensive appeal has been signed by the trial court and the matter has not been filed with the Court of Appeal. To date, plaintiffs have taken no further action in connection with this filing. On August 26, 1998, defendants sought dismissal of all of plaintiffs' remaining individual claims in FELDHEIM. The trial court has not yet ruled on that request. 65 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) On September 21, 1998, plaintiffs in FELDHEIM filed an "Amended Petition for Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an unspecified sum of attorneys' fees. Defendants will respond shortly to that amended petition. As of the date hereof, no discovery has taken place. On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the defendants' exception seeking to dismiss the plaintiffs' class action allegations on the face of the pleadings. Instead, the court deferred ruling on those issues until the hearing on the class action issues, and the court indicated it would permit some discovery. On April 23, 1998 the defendants filed a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the trial court's April 17, 1998 judgment, and the trial court granted the defendants' motion for a stay of all proceedings pending a ruling by the Court of Appeal on the supervisory writ application. The defendants filed their Application for Supervisory Writs with the Louisiana Fourth Circuit Court of Appeal on June 5, 1998. On July 16, 1998, the trial court lifted its previously entered stay of all proceedings in this case; defendants have filed a motion requesting that the trial court reinstitute its stay. On January 6, 1999, the Fourth Circuit Court of Appeal granted supervisory writs, reversed the trial court judgment overruling the exception of RES JUDICATA, maintained the exception of RES JUDICATA and dismissed the action. On February 5, 1999 the DUFFY plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court. The Company has filed an opposition to the application. The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. LUENING, ET AL. v. SI-SIFH CORP., ET AL. In June 1998, Warren S. Luening and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp, SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of St. Bernard, State of Louisiana. Plaintiffs seek a class action. Defendants in this case are the same entities against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the addition of local counsel in St. Bernard Parish, the same lawyers who filed the FELDHEIM and DUFFY complaints filed the LUENING complaint. Plaintiffs allegedly hold and held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that the defendants failed to provide the funeral services purchased with policies by, among other things, (i) charging them for certain funeral services, including the services of a funeral director and staff, a funeral ceremony, care of the deceased, automotive services and a casket, even though these services were allegedly covered by their policies, and (ii) unjustly enriching themselves through the payment of services allegedly covered under the plaintiffs' policies, and the plaintiffs are therefore entitled to restitution of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages in their complaint. 66 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition for Damages." In response to the First Amended Petition, on October 19, 1998 defendants removed the LUENING case to federal court on diversity-of-citizenship grounds. The federal court subsequently remanded the case to state court. As of the date hereof, no discovery has taken place. On January 29, 1999, the state court heard argument on the plaintiffs' motion to compel discovery and the Company's exceptions of venue and RES JUDICATA. On February 3, 1999, the court denied both exceptions and granted the motion to compel discovery, ruling that the dismissal of the class action claims in the FELDHEIM and DUFFY cases did not operate to bar this particular sub-class of potential plaintiffs. On February 26, 1999, the Company filed supervisory writs on these rulings, and requested a stay of the discovery ruling pending a decision on the writ application. On March 1, 1999, the Fourth Circuit Court of Appeals stayed all further legal proceedings and discovery in the trial court and ordered the plaintiffs to respond to the Company's writ application on an expedited basis. The Fourth Circuit granted the Company's writ application on March 25, 1999, finding that under the RES JUDICATA doctrine as stated in the Fourth Circuit's DUFFY decision, relitigation of the plaintiffs' class action claims was forever barred in Louisiana courts by denial of the class certification in the FELDHEIM case. Accordingly, the Fourth Circuit reversed the trial court's denial of the Company's RES JUDICATA exception, while recognizing that individual plaintiffs' claims could proceed in St. Bernard Parish. It also remanded the case to the trial court for a hearing on the plaintiffs' motion to compel discovery, but it instructed that any discovery requests that are not related to the individual plaintiffs' claims should be denied. On March 29, 1999 the LUENING plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court, and asked that the writ application be consolidated with the application for writ of certiorari filed by the DUFFY plaintiffs. The Company intends to file an opposition to the application. The Company has determined that it is not possible to predict the final outcome of this legal proceeding, including whether a class will be certified, and it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. THE LOEWEN GROUP INC. ET AL. v. THE UNITED STATES OF AMERICA On October 30, 1998, Loewen and an affiliate filed a claim against the United States government for damages under the arbitration provisions of the North American Free Trade Agreement ("NAFTA"). The plaintiffs contend that they were damaged as a result of breaches by the United States of its obligations under NAFTA in connection with certain litigation in the State of Mississippi entitled O'KEEFE v. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege that they were subjected to discrimination, denial of the minimum standard of treatment guaranteed by NAFTA and uncompensated expropriation, all in violation of NAFTA. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of the damages, if any, that may be awarded to the Company. 67 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) SECURITIES CLASS ACTIONS Since December 1998 Loewen has been served with various related lawsuits filed in the United States District Courts for the Eastern District of Pennsylvania and for the Eastern District of New York. Raymond L. Loewen, the former Chairman and Chief Executive Officer, and certain officers and directors have been named as defendants in some of the suits. All but one of these lawsuits were filed as purported class actions on behalf of persons or entities that purchased Loewen common shares during five different time periods ranging from November 3, 1996 through January 14, 1999. LGII and Loewen Group Capital, L.P. are named as defendants in two suits (with Loewen, the "Loewen Defendants"). The plaintiffs in the two lawsuits purport to sue on behalf of a class of purchasers of MIPS from March 5, 1997 through January 14, 1999. The MIPS were issued by Loewen Group Capital, L.P. The complaints generally make allegations concerning, among other things, Loewen's internal controls, accounting practices, financial disclosures and acquisition practices. The Loewen Defendants have filed a motion with the Judicial Panel on Multidistrict Litigation (the "MDL Panel") to consolidation all of the actions for pretrial coordination in the United States District Court for the Eastern District of Pennsylvania. Counsel for the plaintiffs in the actions currently pending in the Eastern District of New York have filed a written stipulation with the MDL Panel agreeing to the transfer of their cases to the Eastern District of Pennsylvania. The MDL Panel has not ruled. By agreement, the Loewen Defendants' responses to all complaints currently are due by April 26, 1999. The complaints filed in the United States District Court for the Eastern District of Pennsylvania are: BERG v. THE LOEWEN GROUP INC., ET AL., 99-CV-321; BRODY v. RAYMOND L. LOEWEN, ET AL., 99-CV-19; CAMUTO ET AL. v. RAYMOND L. LOEWEN, ET AL., 99-CV-640; GILMORE v. RAYMOND L. LOEWEN, ET AL., 99-CV-232; CITY OF PHILADELPHIA v. LOEWEN GROUP, INC. ET AL., 99-CV-1007; HILL v. THE LOEWEN GROUP INC. ET AL., 99-CV-560; JAMISON v. RAYMOND L. LOEWEN, ET AL., 99-CV-98; MCGLATHERY ET AL. v. RAYMOND L. LOEWEN ET AL. 99-CV-665 (the MCGLATHERY suit was filed on behalf of purchasers of MIPS); PASKOWITZ v. RAYMOND L. LOEWEN ET AL., 99-CV-91; SIROTA & SIROTA EMPLOYEES PROFIT SHARING PLAN v. THE LOEWEN GROUP INC. ET AL., 99-CV-585; STEINER v. RAYMOND L. LOEWEN, ET AL., 98-CV-6740; TEKIRAN v. RAYMOND L. LOEWEN ET AL., 99-CV-589; and TRAVIS v. RAYMOND L. LOEWEN, ET AL., No. 99-11340. The complaints filed in the United States District Court for the Eastern District of New York are: COHEN v. THE LOEWEN GROUP INC., ET AL. (the COHEN suit was filed on behalf of purchasers of MIPS); CV 99 553; COLLINS v. THE LOEWEN GROUP INC., ET AL., CV 99 261; CORRADINI, ET AL. v. THE LOEWEN GROUP INC. ET AL., CV 99 443; GERSH v. THE LOEWEN GROUP INC., CV 98 7983; GREAT NECK CAPITAL APPRECIATION PARTNERS v. RAYMOND L. LOEWEN, ET AL., CV 99 164; HARRIS v. THE LOEWEN GROUP INC., ET AL., CV 99 153; and SALEM v. THE LOEWEN GROUP INC., ET AL., CV 99 351. The Pennsylvania cases have all been assigned to Judge Thomas O'Neill. Plaintiffs have filed a stipulated motion seeking appointment of the City of Philadelphia Board of Pensions as lead plaintiff. The Company anticipates that all of the Pennsylvania cases will be consolidated and that, when and if transferred, the New York cases will also be consolidated. It is expected that the lead plaintiff will, when appointed, file a Consolidated and Amended Complaint, to which the defendants will be required to respond. Additional class action complaints containing similar allegations may be filed in the future. 68 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) The Company has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in the Company's consolidated financial statements. F. LEO GROFF, INC. ET AL. v. RESTLAWN MEMORIAL GARDENS, INC. ET AL. This action (No. 96-CV-397, Court of Common Pleas, Erie County, Ohio) was served on the Company and other defendants on September 19, 1996. Plaintiffs allegedly compete with defendants Restlawn Memorial Park Association, Restlawn Memorial Gardens, Inc., and Sinfran, Inc., which were acquired by the Company. Plaintiffs allege thirteen counts, including counts alleging that defendant Restlawn engaged in false and deceptive advertising, misused confidential information, defamed plaintiffs, breached contractual obligations, misappropriated trade secrets, and tortiously interfered with plaintiffs' contractual relationships. Plaintiffs further allege that the Company knew or should have known of Restlawn's conduct and adopted and continued Restlawn's alleged unfair, false, and deceptive practices. Plaintiffs also allege that the defendants conspired to destroy plaintiffs' business and created a "trust in order to prevent competition" in violation of Ohio's antitrust laws. Plaintiffs seek compensatory damages, which are unspecified but alleged to exceed $350,000; punitive damages, which are unspecified but alleged to exceed $300,000; and injunctive relief. Defendants' summary judgment motion was denied as to all but one of plaintiffs' counts. A trial date has been set for July 12, 1999. The Company has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in the Company's consolidated financial statements. FLANAGAN On December 7, 1998, Honorine T. Flanagan filed a complaint in the Superior Court of the State of California in the County of Los Angeles against Loewen and LGII. To date, only LGII has been served with the complaint. The matter was subsequently removed to federal court based on diversity jurisdiction, and it is now pending in the United States District Court in the Central District of California. The complaint alleges that the defendants breached an express warranty contained in the Share Purchase Agreement dated July 17, 1995, between LGII and Ms. Flanagan, her husband John Flanagan (now deceased) and the Flanagan Family Trust. The Share Purchase Agreement was made in connection with LGII's purchase of the Flanagans' mausoleum and mortuary business in exchange for approximately $2,000,000 in cash and $7,800,000 of Loewen stock. The Loewen stock was valued at $36.00 per share at the time of the transaction. Ms. Flanagan alleges that LGII knew of claims, suits or other actions which would materially and adversely affect the financial condition of the Company, yet made false statements to the contrary in the Share Purchase Agreement. Ms. Flanagan alleges that two lawsuits pending at the time of the Share Purchase Agreement did eventually have a material adverse impact on the financial condition of the Company and the value of the stock received by Ms. Flanagan in connection with the Share Purchase Agreement. 69 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) Ms. Flanagan's complaint also contains causes of action for breach of contract in connection with the Share Purchase Agreement and in connection with employment and consulting agreements entered into at the time of the Share Purchase Agreement. Additionally, Ms. Flanagan alleges causes of action for intentional and negligent misrepresentation and declaratory relief. Ms. Flanagan estimates that her damages as a result of the alleged breaches and misrepresentations are not less than $5,000,000. This amount is based on her claim that the shares she received were represented to have a value of $7,800,000 at the time of the agreement, and at the time the complaint was filed those shares had a value that was approximately one third of the original represented value. Her claimed damages may change as the price of Loewen's common shares fluctuates. Further, Ms. Flanagan seeks punitive damages in an unspecified sum. On the declaratory relief cause of action, Ms. Flanagan seeks a declaration that she is to be reimbursed for her losses pursuant to the indemnity provision contained in the Share Purchase Agreement. She also seeks a declaration that until she is indemnified for her losses she is not obligated to transfer property that pursuant to the Agreement LGII has the option to purchase for a specified price pursuant to the Share Purchase Agreement. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiff. Accordingly, no provision with respect to this lawsuit has been made in the Company's consolidated financial statements. OTHER The Company is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operation or liquidity. NOTE 14. RESTRUCTURING COSTS During 1997, the Company recorded pre-tax charges of $33,400,000 ($21,500,000 after tax), for restructuring associated with the Company's efforts to more fully integrate its field and administrative operations and improve long-term financial performance. The restructuring charges primarily consisted of $19,400,000 related to the severance of approximately 545 employees in operating locations where consolidation and clustering synergies were not being achieved, $7,500,000 associated with the closure of the Company's Covington, Kentucky corporate office and $6,000,000 of asset write-downs related to realignment or elimination of under-performing locations. 70 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 14. RESTRUCTURING COSTS (CONTINUED) Actual severance paid, including to the Covington office employees, at December 31, 1997 was $15,900,000. The remaining liability for severance of $5,200,000, which primarily relates to benefit or salary continuance arrangements, was fully extinguished in 1998. NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS Due to severe liquidity constraints and the need to generate cash in late 1998, the Company identified certain properties which it would consider selling at their fair value. On March 31, 1999 one group of properties consisting of 124 cemeteries and three funeral homes was sold for gross proceeds of $193,000,000 (see Notes 1 and 24). Two smaller groups of properties are considered as probable for sale. The Company has recorded a pre-tax impairment loss of $333,900,000 in 1998 on individual properties contained in the above groups. In calculating the impairment loss, the Company has used estimated cash flow from operations and estimated cash proceeds on the sale of these properties. The impairment loss has reduced cemetery property by $319,300,000, property and equipment by $4,000,000 and names and reputations by $10,600,000. The impairment loss is based on management estimates and as a result, actual results could differ significantly from these estimates. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no additional impairment losses have been recognized since future sales of other properties are not determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. During 1997, the Company recorded a charge to general and administrative expenses for an impairment loss of $12,600,000, of which $6,400,000 was non-cash, related to a write down of certain under-performing assets. The impaired assets included $9,400,000 related to the termination of non-competition agreements in markets where restrictive covenants no longer have value to the Company and $3,200,000 of fixed assets and software costs related to the streamlining of general and administrative functions and the change in the Company's operating strategy. 71 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 16. COMMITMENTS AND CONTINGENCIES (a) LEASES At December 31, 1998, the Company was committed to operating lease payments for premises, aircraft, automobiles and office equipment in the following approximate amounts:
TOTAL --------- 1999............................................................................... $ 18,952 2000............................................................................... 15,500 2001............................................................................... 11,808 2002............................................................................... 10,086 2003............................................................................... 8,087 Thereafter......................................................................... 47,783
Total rent expense for each of the years in the three year period ended December 31, 1998 was $16,849,000, $18,268,000 and $12,626,000, respectively. (b) COVENANTS NOT TO COMPETE In connection with various acquisitions, the Company has entered into non-competition agreements ("covenants not to compete") with certain key management personnel of operations acquired. The Company's payments under the agreements may be made at closing or over future periods and are expensed over the terms of the specific contracts. At December 31, 1998, the agreements in place will result in future payments in the following approximate amounts:
TOTAL --------- 1999............................................................................... $ 13,806 2000............................................................................... 14,472 2001............................................................................... 11,636 2002............................................................................... 10,560 2003............................................................................... 8,928 Thereafter......................................................................... 28,416
(c) MANAGEMENT EQUITY INVESTMENT PLAN GUARANTEE The Company has guaranteed indebtedness of certain participants of the 1994 Management Equity Investment Plan aggregating $3,700,000 (1997 -- $3,500,000). The guarantee exists until the termination of the Management Equity Investment Plan on July 15, 2001. (d) ENVIRONMENTAL CONTINGENCIES AND LIABILITIES The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company's policies are designed to control environmental risk upon acquisition 72 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) through extensive due diligence and corrective measures taken prior to and after acquisition. Management endeavors to ensure that environmental issues are identified and addressed in advance of acquisition or are covered by an indemnity by the seller or an offset to the purchase price. On a continuing basis, management assesses and evaluates environmental risk and, when necessary, conducts appropriate corrective measures. The Company provides for environmental liabilities using its best estimates. Actual environmental liabilities could differ significantly from these estimates. (e) EXECUTIVE SEVERANCE AGREEMENTS The Company has executed severance agreements with certain key executives and managers. Under the severance agreements, if there is a change in control of the Company, the executive or manager becomes entitled to severance pay amounting to one to three years compensation, and certain other benefits. (f) CONTINGENCY RELATED TO POTENTIAL SALE OF ADDITIONAL PROPERTIES The Company has identified and is implementing strategies that will generate cash flow and improve its financial position. Such strategies include further asset sales, such as the sale of 124 cemeteries and three funeral homes completed on March 31, 1999 for gross proceeds of $193,000,000. The Company has two smaller groups of properties which are considered probable for sale. The Company has recorded a pre-tax impairment loss of $333,900,000 in 1998 on individual properties contained in the above groups. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no additional impairment losses have been recognized since future sales of other properties are not determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. (g) CONTINGENCY RELATED TO POTENTIAL PURCHASE OF INVESTMENTS The Company has identified and accrued for contingent losses arising from the exercise of the Put/ Call Agreements in connection with its investments in Prime and Rose Hills (see Note 5). (h) CONTINGENCY RELATED TO PATS SENIOR NOTES The PATS senior notes aggregating $300,000,000 are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. The trust has a put option that entitles the trust to redeem the PATS senior notes on October 1, 1999 to refund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. If the put option is exercised, the Company is obligated to pay the trust for any loss with respect of an interest rate option based on a 10 year U.S. treasury rate of 6.05% on October 1, 1999. At December 31, 1998, the option value was $29,300,000. The option value will change based on changes in the 10 year U.S. treasury rate. 73 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to efforts of customers, suppliers, or other third parties, will be fully resolved. NOTE 18. RETIREMENT PLANS The Company has a defined contribution retirement plan covering substantially all United States employees. There are no required future contributions under this plan in respect of past service. The Company has a 401(K) Retirement Savings Plan for United States employees who may defer between 2% and 15% of their compensation. The Company will match 100% of employee contributions to a maximum of 2% of employees' eligible compensation. The Company has a Registered Retirement Savings Plan for Canadian employees who may contribute 3% of their compensation which is matched by an equal contribution to the plan by the Company on behalf of employees. There are no required future contributions under these plans in respect of past service. The total expense for retirement plans for the three years ended December 31, 1998 was $3,271,000, $3,222,000 and $2,318,000, respectively. NOTE 19. INCOME TAXES (a) EFFECTIVE TAX RATE The Company's effective income tax rate is derived as follows:
1998 1997 1996 --------- ------------- ------------- (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) % % % Combined Canadian federal and provincial income tax rate...................... (45.5) 45.5 45.5 Non-deductible costs of hostile takeover proposal............................. -- -- 7.9 Non-deductible amortization of goodwill arising from acquisitions............. 1.5 11.9 4.9 Non-deductible restructuring and other charges................................ 0.2 8.7 -- Equity and other earnings of associated companies at lower rates.............. (0.3) (11.6) (1.8) Change in valuation allowance on future tax assets............................ 21.7 19.0 1.4 Foreign income taxed at lower rates and other taxes not based on income....... (1.2) (73.1) (31.8) Other......................................................................... 2.1 1.4 0.1 --------- ----- ----- (21.5) 1.8 26.2 --------- ----- ----- --------- ----- -----
74 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 19. INCOME TAXES (CONTINUED) (b) FUTURE TAX ASSETS AND LIABILITIES
1998 ----------- 1997 ----------- (RESTATED -- NOTE 3) Future tax liabilities Long-term receivables................................................................ $ 60,384 $ 25,969 Cemetery property.................................................................... 303,003 374,759 Property and equipment............................................................... 61,204 65,465 Investments.......................................................................... -- 4,264 Insurance policy liabilities......................................................... 18,905 7,814 Other................................................................................ 24,522 11,130 ----------- ----------- Total future tax liabilities......................................................... 468,018 489,401 ----------- ----------- Future tax assets Accounts payable and accrued liabilities............................................. $ 17,340 $ 8,249 Cemetery long-term liabilities....................................................... 34,649 34,672 Insurance assets..................................................................... 15,149 3,517 Legal settlements.................................................................... 15,517 15,911 Interest............................................................................. 150,614 82,349 Unrealized losses on investments in Prime and Rose Hills............................. 119,994 -- Deferred costs related to prearranged funeral services............................... 7,198 7,691 Share issue costs.................................................................... 8,414 13,099 Operating loss carryforwards......................................................... 63,050 22,887 Other................................................................................ 16,748 10,457 ----------- ----------- Total future tax assets before valuation allowance................................... 448,673 198,832 Valuation allowance.................................................................. (177,591) (11,576) ----------- ----------- Total future tax assets after valuation allowance.................................... 271,082 187,256 ----------- ----------- Net future tax liabilities........................................................... $ 196,936 $ 302,145 ----------- ----------- ----------- -----------
Although realization of the Company's deferred tax assets is not assured, management believes that it is more likely than not that reversals of future tax liabilities provide sufficient taxable income to realize the future tax assets. The Company's ability to realize its future tax assets is based on several additional factors, including tax planning strategies to realize the benefit of loss carryforwards and other tax assets in the amount of approximately $12,500,000. The extent of valuation allowance required would likely be adversely affected by future sales of subsidiaries. It is reasonably possible that these estimates could change in the near term due to matters such as the timing and manner of reversals of future tax liabilities, sales of operations, and future income. During the year ended December 31, 1998, the Company increased its valuation allowance by approximately $166,015,000 (1997 -- $8,077,000). 75 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 20. CHANGES IN OTHER NON-CASH BALANCES Supplemental disclosures related to statements of cash flows consist of the following:
1997 1998 ----------- ----------- (Restated Note 3) 1996 ----------- (Restated Note 3) (Increase) decrease in assets Receivables, net of allowances........................................... $ 18,516 $ 3,365 $ (32,050) Inventories.............................................................. 671 (1,371) (2,689) Prepaid expenses......................................................... 2,630 892 (2,670) Amounts receivable from cemetery merchandise trusts...................... (98,121) (89,944) (6,672) Installment contracts, net of allowances................................. 6,481 (134,382) (64,652) Cemetery property........................................................ (46,081) (34,924) 13,974 Deferred charges......................................................... (33,062) (42,497) (28,684) Other assets............................................................. 12,753 4,405 (21,844) Increase (decrease) in liabilities Accrued settlements...................................................... -- -- (53,000) Accounts payable and accrued liabilities................................. 14,908 39,746 20,517 Other liabilities........................................................ 8,635 13,887 5,417 Cemetery long-term liabilities........................................... (15,046) 22,268 441 Insurance policy liabilities............................................. 22,935 313 2,332 Other changes in non-cash balances......................................... 14,534 1,848 2,142 ----------- ----------- ----------- $ (90,247) $ (216,394) $ (167,438) ----------- ----------- ----------- ----------- ----------- ----------- Supplemental information Interest paid............................................................ $ 174,628 $ 103,799 $ 91,000 Taxes paid............................................................... 15,226 44,282 21,180 Bad debt expense......................................................... 122,250 58,392 34,750 Non-cash investing and financing activities Non-cash debt and share consideration on acquisitions.................... $ 25,395 $ 64,881 $ 62,711 Note receivable from sale of subsidiaries................................ -- 15,725 -- Common shares and debt issued for legal settlements...................... -- -- 112,000 Properties contributed to Rose Hills including unrealized gain thereon... -- -- 23,000
76 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 21. SUPPLEMENTARY FINANCIAL INFORMATION A summary of certain balance sheet accounts as at December 31, is as follows:
1998 1997 ------------ ------------ (RESTATED -- NOTE 3) Receivables, net of allowances Trade accounts...................................................................... $ 101,051 $ 96,529 Installment contracts............................................................... 158,884 132,701 Other............................................................................... 59,213 72,120 Unearned finance income............................................................. (30,404) (17,475) Allowances for contract cancellations and doubtful accounts......................... (67,065) (32,869) ------------ ------------ $ 221,679 $ 251,006 ------------ ------------ ------------ ------------ Long-term receivables, net of allowances Notes receivable.................................................................... $ 11,999 $ 12,547 Amounts receivable from cemetery merchandise trusts................................. 392,148 297,739 Installment contracts............................................................... 353,054 305,144 Unearned finance income............................................................. (53,217) (41,655) Allowances for contract cancellations and doubtful accounts......................... (56,892) (20,112) ------------ ------------ $ 647,092 $ 553,663 ------------ ------------ ------------ ------------ Cemetery property Developed land and lawn crypts...................................................... $ 216,029 $ 195,597 Undeveloped land.................................................................... 887,161 1,058,989 Mausoleums.......................................................................... 132,657 78,401 ------------ ------------ $ 1,235,847 $ 1,332,987 ------------ ------------ ------------ ------------ Property and equipment Land................................................................................ $ 174,366 $ 171,060 Buildings and improvements.......................................................... 547,218 504,722 Automobiles......................................................................... 80,940 75,970 Furniture, fixtures and equipment................................................... 154,182 138,534 Computer hardware and software...................................................... 41,900 34,486 Leasehold improvements.............................................................. 16,082 14,363 Accumulated depreciation and amortization........................................... (188,703) (141,957) ------------ ------------ $ 825,985 $ 797,178 ------------ ------------ ------------ ------------ Names and reputations Names and reputations............................................................... $ 775,865 $ 672,613 Covenants not to compete............................................................ 81,855 71,666 Accumulated amortization............................................................ (109,055) (75,701) ------------ ------------ $ 748,665 $ 668,578 ------------ ------------ ------------ ------------
77 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 21. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
1998 1997 ------------ ------------ (RESTATED -- NOTE 3) Other assets Deferred debt issue costs........................................................... $ 23,709 $ 33,182 Deferred direct obtaining costs..................................................... 102,632 83,714 Cemetery management contracts....................................................... 13,413 -- Other............................................................................... 21,364 39,740 ------------ ------------ $ 161,118 $ 156,636 ------------ ------------ ------------ ------------ Accounts payable and accrued liabilities Trade payables...................................................................... $ 46,210 $ 42,447 Interest............................................................................ 38,686 38,413 Dividends........................................................................... 2,154 7,391 Insurance, property and business taxes.............................................. 6,353 7,013 Other............................................................................... 76,731 64,944 ------------ ------------ $ 170,134 $ 160,208 ------------ ------------ ------------ ------------ Other liabilities Cemetery long-term liabilities...................................................... $ 211,647 $ 219,663 Accrual for contingent loss (Note 5(a) and (b))..................................... 128,333 -- Covenants not to compete............................................................ 20,540 17,434 Liabilities of joint venture (Note 5(c))............................................ -- 39,660 Regional partnership liabilities.................................................... 9,971 12,145 Participants' deposits in MEIP (Note 11(d))......................................... 5,120 5,508 Other............................................................................... 23,693 14,499 ------------ ------------ $ 399,304 $ 308,909 ------------ ------------ ------------ ------------
NOTE 22. SEGMENTED INFORMATION The Company has adopted Section 1701, Segment Disclosures, of the Handbook of the Canadian Institute of Chartered Accountants, which changes the way the Company reports information about its operating segments. The information in 1997 and 1996 has been restated to conform to the 1998 presentation. The Company's reportable segments are comprised of the three businesses it operates, each of which offers different products and services: funeral homes, cemeteries and insurance. 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 a place of worship, funeral chapel, cemetery or crematorium. In addition to providing at-need funeral services, the Company provides advance funeral planning services to it customers. 78 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 22. SEGMENTED INFORMATION (CONTINUED) The cemeteries assist families in making burial arrangements and offer a complete line of cemetery products (including a selection of burial spaces, burial vaults, lawn crypts, caskets, memorials, niches and mausoleum crypts), the opening and closing of graves and cremation services. The majority of cemetery revenue is from pre-need sales. The insurance companies sell a variety of life insurance products, primarily to fund funeral services purchased through a pre-need arrangement. The funeral home companies sell insurance contracts on behalf of the Company's insurance operations for which they receive commission revenue. In 1998, the inter-company commissions amounted to $3,717,000 and were eliminated in the Company's consolidated financial statements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company sells primarily to external customers, though any intersegment sales or transfers occur at market price. The Company evaluates performance based on earnings from operations of the respective businesses.
FUNERAL CEMETERY INSURANCE OTHER CONSOLIDATED ------------ ------------ ---------- ----------- ------------ Revenue earned from external sales 1998........................................ $ 631,221 $ 408,497 $ 96,516 $ -- $1,136,234 1997........................................ 602,112 422,010 89,977 -- 1,114,099 1996........................................ 549,833 286,652 71,900 -- 908,385 Earnings (loss) from operations 1998........................................ $ 125,242 $ (301,789) $ 16,472 $ (103,891) $ (263,966) 1997........................................ 147,730 100,638 16,508 (112,745) 152,131 1996........................................ 157,461 76,068 17,149 (46,008) 204,670 Investment revenue (included in earnings (loss) from operations) 1998........................................ $ 3,391 $ 34,432 $ 21,351 $ 1,774 $ 60,948 1997........................................ 5,560 29,197 23,519 335 58,611 1996........................................ 3,271 15,836 16,615 1,249 36,971 Depreciation and amortization 1998........................................ $ 62,892 $ 11,384 $ 31 $ 14,206 $ 88,513 1997........................................ 51,085 7,820 36 6,437 65,378 1996........................................ 45,146 4,237 42 3,722 53,147 Total assets 1998........................................ $ 2,033,047 $ 2,202,038 $ 276,098 $ 162,725 $4,673,908 1997........................................ 1,963,099 2,124,409 331,754 371,425 4,790,687 1996........................................ 1,651,186 1,366,399 329,134 372,015 3,718,734 Capital expenditures 1998........................................ $ 74,681 $ 26,370 $ 420 $ 6,513 $ 107,984 1997........................................ 108,691 53,023 208 11,157 173,079 1996........................................ 136,220 36,782 1,274 9,966 184,242
79 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 22. SEGMENTED INFORMATION (CONTINUED) The following table reconciles earnings from operations of reportable segments to earnings (loss) before income taxes and identifies the components of "Other" segment earnings from operations:
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ---------- Earnings (loss) from operations of funeral, cemetery and insurance segments................................................................. $ (160,075) $ 264,876 $ 250,678 Other expenses of operations: General and administrative expenses...................................... (87,659) (72,128) (42,286) Restructuring costs...................................................... -- (33,364) -- Depreciation and amortization............................................ (14,206) (6,437) (3,722) Other.................................................................... (2,026) (816) -- ----------- ----------- ---------- (103,891) (112,745) (46,008) ----------- ----------- ---------- Total earnings (loss) from operations...................................... $ (263,966) $ 152,131 $ 204,670 ----------- ----------- ---------- ----------- ----------- ----------
The following table reconciles total assets of reportable segments and details the components of "Other" segment assets which is mainly comprised of corporate assets:
DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Total assets of funeral, cemetery and insurance segments................ $ 4,511,183 $ 4,419,262 $ 3,346,719 "Other" assets includes: Cash.................................................................. 61,012 2,681 (1,319) Receivables........................................................... 11,492 41,444 11,487 Prepaid expenses...................................................... 3,499 3,216 4,599 Long-term receivables, net of allowances.............................. 7,753 3,957 2,217 Investments........................................................... 2,581 224,008 266,228 Property and equipment................................................ 33,323 42,198 33,818 Names and reputations................................................. 4,358 4,766 5,174 Future income tax assets.............................................. 10,243 7,849 3,971 Deferred debt issue costs............................................. 23,709 33,182 33,199 Other................................................................. 4,755 8,124 12,641 ------------ ------------ ------------ 162,725 371,425 372,015 ------------ ------------ ------------ Total assets............................................................ $ 4,673,908 $ 4,790,687 $ 3,718,734 ------------ ------------ ------------ ------------ ------------ ------------
The Company operates principally in North America. Over 90% of its revenues are earned in the United States, however, the Company also has operations in Canada and the United Kingdom. The 80 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 22. SEGMENTED INFORMATION (CONTINUED) following tables depict the revenues earned and the long term assets held in the reportable geographic segments.
YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ------------ ------------ ---------- Revenue United States........................................................... $ 1,065,074 $ 1,048,236 $ 849,325 Canada.................................................................. 63,979 64,965 58,536 Other................................................................... 7,181 898 524 ------------ ------------ ---------- $ 1,136,234 $ 1,114,099 $ 908,385 ------------ ------------ ---------- ------------ ------------ ----------
DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Property and equipment, names and reputations and cemetery property United States......................................................... $ 2,623,497 $ 2,614,772 $ 2,001,767 Canada................................................................ 163,932 171,680 143,156 Other................................................................. 23,068 12,291 992 ------------ ------------ ------------ $ 2,810,497 $ 2,798,743 $ 2,145,915 ------------ ------------ ------------ ------------ ------------ ------------
NOTE 23. RELATED PARTY TRANSACTIONS During 1996, as part of the normal course of operations, the Company chartered a jet aircraft, a motor vessel and a helicopter at competitive rates from companies owned or controlled by the former Chairman of the Company. The total costs of the related party charters amounted to $605,110. In 1996, the Company purchased all of the shares of 476822 B.C. Ltd., which owned the motor vessel, for an effective purchase price of Cdn. $7,860,000. The motor vessel was sold in 1999 (see Note 24). In addition, in 1996 a company owned by the former Chairman of the Company sold the jet aircraft and helicopter to a third party. Subsequently, the Company has leased the jet aircraft and helicopter from the third party at commercially reasonable terms. As part of the acquisition of Osiris Holding Corporation ("Osiris"), the Company has recorded $14,947,000 as long-term debt at the present value of the total remaining contingent payments of approximately $17,100,000. The Company expected to pay the balance over a five-year period ending in 2001 to the former shareholders of Osiris, two of whom were officers of the Company. Subsequent to year end, the two officers of the Company entered into an agreement with the Company to purchase a number of cemeteries and funeral homes and ended their association with the Company. The balance of the contingent payments were reclassed to current portion of long-term debt as the remaining balance was paid out of the proceeds of the sale in 1999 (see Note 24). In addition, as part of the acquisition of Shipper Management ("Shipper"), the Company has recorded $4,838,000 as a long-term liability, representing the present value of total remaining contingent payments, payable through 2001, to the former shareholders of Shipper, one of whom is an officer of the Company. At December 31, 1998, Company officers, directors and employees were indebted to the Company for approximately $10,800,000 (1997 -- $9,100,000). 81 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 24. SUBSEQUENT EVENTS In February, 1999 the Company sold the motor vessel for proceeds of $4,000,000. The Company recorded an impairment loss of $1,000,000 on the motor vessel in 1998. On March 8, 1999, the Company deferred payment of the quarterly cash dividend of Cdn $0.375 per share on the Company's 6% Cumulative Redeemable Convertible First Preferred Shares, Series C which would have been payable on April 1, 1999. The Company also deferred payment of dividends on the Company's Cumulative Monthly Income Preferred Securities, Series "A". On March 31, 1999, the Company completed the sale of 124 cemeteries and three funeral homes to an investor group led by McCown De Leeuw & Co., a private investment firm. Upon completion of the sale the Company received gross proceeds of $193,000,000 resulting in a pre-tax loss of $301,605,000 which was provided for, as an impairment loss, in 1998. The investor group included two former officers of the Company. On March 31, 1999, the Company completed negotiations with certain lenders resulting in revised lending agreements, including waivers of certain financial covenants at December 31, 1998. As a result, the Company has not had an event of default of certain covenants in its Credit Agreements. 82 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. These principles differ in the following material respects from those in the United States as summarized below: (A) EARNINGS (LOSS) AND EARNINGS (LOSS) PER COMMON SHARE
1998 1997 1996 ----------- --------- --------- EARNINGS (LOSS) Net earnings (loss) in accordance with Canadian GAAP........................... $ (598,969) $ 41,810 $ 65,999 Less effects of differences in accounting for: Insurance operations (c)..................................................... 2,833 1,701 (1,440) Stock options................................................................ (36) (173) -- Foreign exchange loss (e).................................................... -- (1,107) -- Cost of start-up activities (g).............................................. 1,915 -- -- ----------- --------- --------- Net earnings (loss) before cumulative effect of a change in accounting principle.................................................................... $ (594,257) $ 42,231 $ 64,559 Cumulative effect of adopting SOP 98-5 as of January 1, 1998................... (5,000) -- -- ----------- --------- --------- Net earnings (loss) in accordance with United States GAAP...................... $ (599,257) $ 42,231 $ 64,559 Other comprehensive income Foreign currency translations Unrealized foreign currency gains (losses) arising during the period....... 116 998 (1,682) Less: reclassification adjustment for losses included in net income........ -- (1,909) -- Unrealized gains (losses) on securities: Unrealized holding gains arising during the period, net of deferred tax expense of $8,354, $5,992, and $1,222, respectively...................... 10,211 7,323 1,494 Less: reclassification adjustment for gains included in net income......... (8,486) (3,044) (561) ----------- --------- --------- Comprehensive income (loss) in accordance with United States GAAP.............. $ (597,416) $ 45,599 $ 63,810 ----------- --------- --------- ----------- --------- --------- EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE Basic earnings (loss) before cumulative effect of change in accounting principle per Common share................................................. $ (8.15) $ 0.49 $ 0.98 ----------- --------- --------- ----------- --------- --------- Diluted earnings (loss) before cumulative effect of change in accounting principle per Common share................................................. $ (8.15) $ 0.48 $ 0.97 ----------- --------- --------- ----------- --------- ---------
For the year ended December 31, 1998, the earnings per Common share effect of the cumulative effect of the change in accounting principle is $0.07, resulting in basic and diluted loss per Common share of $(8.22). 83 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) Under United States GAAP, basic earnings (loss) per Common share, similar to Canadian GAAP, is based on the weighted average number of Common shares outstanding during the year. Diluted earnings (loss) per Common share is based on the weighted average number of Common shares outstanding during the year plus common stock equivalents. The computation of basic and diluted earnings (loss) before cumulative effect of change in accounting principle per Common share is as follows:
1998 1997 1996 ----------- --------- --------- Basic Net earnings (loss) before cumulative effect of change in accounting principle.................................................................. $ (594,257) $ 42,231 $ 64,559 Less: Preferred share dividends.............................................. 8,900 9,533 8,874 ----------- --------- --------- Net earnings (loss) before cumulative effect of change in accounting principle attributable to Common shareholders.............................. $ (603,157) $ 32,698 $ 55,685 ----------- --------- --------- ----------- --------- --------- Weighted average number of shares outstanding................................ 73,989 67,313 56,743 Basic earnings (loss) before cumulative effect of change in accounting principle per Common share................................................. $ (8.15) $ 0.49 $ 0.98 ----------- --------- --------- ----------- --------- --------- Diluted Net earnings (loss) before cumulative effect of change in accounting principle attributable to Common shareholders.............................. $ (603,157) $ 32,698 $ 55,685 Add: Effect of dilutive securities other than options........................ -- -- -- ----------- --------- --------- Diluted earnings (loss) before cumulative effect of change in accounting principle.................................................................. $ (603,157) $ 32,698 $ 55,685 ----------- --------- --------- ----------- --------- --------- Weighted average number of shares outstanding................................ 73,989 67,313 56,743 Add: Incremental shares from conversion of dilutive options.................. -- 926 610 ----------- --------- --------- Diluted shares............................................................... 73,989 68,239 57,353 ----------- --------- --------- ----------- --------- --------- Diluted earnings (loss) before cumulative effect of change in accounting principle per Common share................................................. $ (8.15) $ 0.48 $ 0.97 ----------- --------- --------- ----------- --------- ---------
84 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (B) BALANCE SHEET The amounts in the consolidated balance sheet that differ from those reported under Canadian GAAP are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- CANADIAN UNITED CANADIAN UNITED GAAP STATES GAAP GAAP STATES GAAP ------------ ------------ ------------ ------------ (RESTATED -- NOTE 3) Assets Receivables, net of allowances........................ $ 221,679 $ 221,920 $ 251,006 $ 251,006 Long-term receivables, net of allowances.............. 647,092 655,193 553,663 555,472 Investments........................................... 3,385 3,385 224,008 184,227 Insurance invested assets............................. 266,661 270,809 305,610 312,073 Other assets.......................................... 161,118 184,374 156,636 181,840 Liabilities and Shareholders' Equity Other liabilities..................................... 399,304 394,377 308,909 266,903 Insurance policy liabilities.......................... 166,920 196,230 214,492 240,750 Future income tax liabilities......................... 208,939 212,378 309,994 313,016 Common shares......................................... 1,274,096 1,300,428 1,271,177 1,297,443 Retained earnings (deficit)........................... (539,741) (536,089) 75,624 79,564 Accumulated other comprehensive income:............... Unrealized gains on securities available for sale, net of tax........................................ -- 6,937 -- 5,212 Foreign exchange adjustment........................... 13,940 (15,057) 13,824 (15,173)
(C) INSURANCE OPERATIONS PRESENT VALUE OF INSURANCE POLICIES Under United States GAAP, the Company recognizes an asset that represents the actuarially-determined present value of the projected future profits of the insurance in-force at dates of acquisition. Canadian GAAP does not recognize such an asset. The asset is being amortized to insurance expense over the estimated life of the insurance in-force at the date of acquisition. DEFERRED POLICY ACQUISITION COSTS Under United States GAAP, the Company defers costs related to the production of new business, which consist principally of commissions, certain underwriting expenses, and the costs of issuing policies. Deferred acquisition costs are amortized over the expected premium-paying periods of the related policies. Canadian GAAP does not permit deferral of such costs. INSURANCE POLICY LIABILITIES Insurance policy liabilities, which represent liabilities for future policy benefits, are accounted for under United States GAAP using the net level premium method which involves different actuarial 85 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) assumptions and methodologies than the policy premium method used for Canadian GAAP. In addition, under Canadian GAAP, all actuarial assumptions are re-evaluated on a periodic basis, resulting in adjustments to insurance policy liabilities and insurance costs and expenses. Under United States GAAP, assumptions established at the time a policy is written are locked in and only revised if it is determined that future experience will worsen from that previously assumed. (D) UNREALIZED GAINS AND LOSSES Amounts receivable from cemetery merchandise trusts and insurance invested assets are subject to the provisions of Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and Equity" under United States GAAP. Under FAS 115, fixed maturity securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Fixed maturity securities classified as held-to-maturity were approximately $30,582,000 at December 31, 1998 (1997 -- $69,243,000). Debt and equity securities that are held with the objective of trading to generate profits on short-term differences in price are carried at fair value, with changes in fair value reflected in the results of operations. At December 31, 1998, the Company had no securities classified as trading (1997 -- $1,380,000). All other fixed maturity and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and carried at fair value which was approximately $619,913,000 at December 31, 1998 (1997 -- $496,922,000). Available-for-sale securities may be sold in response to changes in interest rates and liquidity needs. Unrealized holding gains and losses related to available-for-sale investments, after deducting amounts allocable to income taxes, are reflected as a separate component of stockholders' equity. Unrealized holding gains and losses related to trading investments, after deducting amounts allocable to income taxes, are reflected in earnings. (E) FOREIGN EXCHANGE LOSS Upon the sale of a Canadian equity investment in 1997, the Company recognized a foreign exchange loss of $802,000 for Canadian GAAP purposes. The foreign exchange loss under United States GAAP was $1,909,000 due to differences in the related foreign exchange adjustment on the balance sheet that arose from the Company's change in reporting currency on January 1, 1994. (F) STOCK-BASED COMPENSATION The Company follows the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", for United States GAAP purposes. The Company continues to record compensation expense for United States GAAP purposes following the intrinsic value principles of APB 25 for Accounting for Stock Issued to Employees in accounting for the plans. Under APB 25, no compensation expense has been recognized for its stock-based compensation plans in any of the three years ending December 31, 1998. Had compensation cost been determined based on fair value at the grant dates for awards under those plans consistent with the measurement provisions of FAS 123, net earnings (loss) before cumulative effect of change in accounting principle under United States GAAP would have been $(593,648,000) for the year ended December 31, 1998 (1997 -- $35,781,000, 1996 -- $58,860,000) and basic and diluted earnings (loss) before cumulative effect of change in accounting principle per Common share would have been $(8.14) and $(8.14), respectively (1997 -- $0.39 and $0.38, respectively, 1996 -- $0.88 and $0.87, respectively). For these purposes, the fair value of each 86 THE LOEWEN GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield nil (1997 -- 0.5%, 1996 -- 0.5%), expected volatility 29% (1997 -- 24%, 1996 -- 24%), Canadian risk-free interest rates 4.88% (1997 -- 5.24%, 1996 -- 5.68%) United States risk-free interest rates 5.11% (1997 -- 5.89%, 1996 -- 5.57%) and expected average option term of 3.5 years (1997 -- 5.0 years, 1996 -- 3.4 years). The weighted average fair value of the options granted is $5.51 (1997 -- $9.15, 1996 -- $6.78) per option. (G) REPORTING ON THE COSTS OF START-UP ACTIVITIES The AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") on April 3, 1998, to be effective for fiscal years beginning after December 15, 1998. SOP 98-5 states that the costs of start-up activities, including organization costs, should be expensed as incurred. The Company has elected early adoption of SOP 98-5 to be effective for the year ended December 31, 1998, for United States GAAP purposes. Pursuant to SOP 98-5, the Company has written off the unamortized costs of start-up activities, which are contained in other assets, as a change in accounting principle. SOP 98-5 was adopted in the fourth quarter of 1998, and was effective January 1, 1998. The effects on the previously published year to date interim net earnings (loss) and earnings (loss) per Common share would be decreases of approximately $5,000,000 and $0.07, respectively, resulting from the cumulative effect of the adoption of SOP 98-5. (H) ADVERTISING COSTS Advertising costs were $10,444,000 for the year ended December 31, 1998 (1997 -- $9,509,000, 1996 -- $8,221,237). (I) RECENT ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has not determined the impact of this recent accounting standard on its consolidated financial statements. NOTE 26. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period. 87 THE LOEWEN GROUP INC. SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
FIRST SECOND THIRD FOURTH QUARTER(1) QUARTER(1) QUARTER(1) QUARTER(1) ----------- ----------- ----------- ----------- Year ended December 31, 1998 Revenue....................................................... $ 309,736 $ 301,923 $ 263,887 $ 260,688 Gross profit.................................................. 113,380 93,605 63,593 21,158 Net earnings (loss)........................................... 30,039 10,242 (32,438) (606,812) Fully diluted earnings (loss) per Common share................ $ 0.37 $ 0.11 $ (0.47) (8.22) Year ended December 31, 1997 Revenue....................................................... $ 274,697 $ 275,648 $ 274,136 $ 289,618 Gross profit.................................................. 99,010 97,600 72,489 94,540 Net earnings (loss)........................................... 24,167 27,166 (40,329) 30,806 Fully diluted earnings (loss) per Common share................ $ 0.36 $ 0.39 $ (0.58) $ 0.38
- ------------------------------ (1) Certain of the comparative figures have been restated to conform to the change in accounting for income taxes adopted in 1998 (see Note 3 to the Consolidated Financial Statements). 88 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Loewen Group International, Inc. We have audited the consolidated balance sheets of Loewen Group International, Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations and deficit and cash flows for each of the years in the three year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1998, in accordance with generally accepted accounting principles in Canada. Significant differences between Canadian and United States accounting principles are explained and quantified in Note 25 to the consolidated financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements. Our report to the shareholders dated April 12, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor's report when these are adequately disclosed in the financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 89 LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ (RESTATED-- NOTE 3) ASSETS Current assets Cash and cash equivalents........................................................... $ 84,202 $ 35,563 Receivables, net of allowances...................................................... 114,491 169,758 Inventories......................................................................... 30,137 30,391 Prepaid expenses.................................................................... 7,184 8,840 ------------ ------------ 236,014 244,552 Long-term receivables, net of allowances.............................................. 486,388 387,282 Cemetery property..................................................................... 1,226,358 1,308,128 Property and equipment................................................................ 712,995 679,219 Names and reputations................................................................. 678,576 598,689 Investments........................................................................... 30,245 184,723 Insurance invested assets............................................................. 266,661 305,610 Prearranged funeral services.......................................................... 351,961 345,795 Other assets.......................................................................... 151,316 156,349 ------------ ------------ $ 4,140,514 $ 4,210,347 ------------ ------------ ------------ ------------ LIABILITIES and SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities Accounts payable and accrued liabilities............................................ $ 150,412 $ 138,963 Loans and advances from affiliates, current portion................................. 227,841 -- Long-term debt, current portion..................................................... 829,455 33,408 ------------ ------------ 1,207,708 172,371 Loans and advances from affiliates, net of current portion............................ 784,369 1,013,914 Long-term debt, net of current portion................................................ 1,254,036 1,531,586 Other liabilities..................................................................... 414,319 259,388 Insurance policy liabilities.......................................................... 166,920 214,492 Future income tax liabilities......................................................... 191,283 297,547 Deferred prearranged funeral services revenue......................................... 351,961 345,795 Preferred securities of subsidiary.................................................... 75,000 75,000 Shareholders' equity (deficiency) Share capital....................................................................... 526,058 487,514 Deficit............................................................................. (823,172) (187,260) Foreign exchange adjustment......................................................... (7,968) -- ------------ ------------ (305,082) 300,254 ------------ ------------ $ 4,140,514 $ 4,210,347 ------------ ------------ ------------ ------------
FINANCIAL CONDITION (NOTE 1) COMMITMENTS AND CONTINGENCIES (NOTES 5, 9, 13, 16 AND 17) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 90 LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT EXPRESSED IN THOUSANDS OF U.S. DOLLARS
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 ------------ 1997 1996 ------------ ----------- (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) Revenue Funeral............................................................... $ 559,217 $ 536,926 $ 489,571 Cemetery.............................................................. 416,823 408,196 277,881 Insurance............................................................. 96,516 89,977 71,900 ------------ ------------ ----------- 1,072,556 1,035,099 839,352 ------------ ------------ ----------- Costs and expenses Funeral............................................................... 363,742 336,473 294,033 Cemetery.............................................................. 353,662 319,558 196,974 Insurance............................................................. 80,013 73,304 54,709 ------------ ------------ ----------- 797,417 729,335 545,716 ------------ ------------ ----------- 275,139 305,764 293,636 Expenses General and administrative............................................ 114,397 97,792 68,390 Depreciation and amortization......................................... 76,225 56,358 45,724 Asset impairment...................................................... 301,605 -- -- Restructuring costs................................................... -- 30,992 -- ------------ ------------ ----------- 492,227 185,142 114,114 ------------ ------------ ----------- Earnings (loss) from operations......................................... (217,088) 120,622 179,522 Interest and financing fees paid to affiliates, net..................... 119,571 102,226 71,313 Interest on long-term debt.............................................. 165,403 119,972 80,497 Investment impairment and contingent loss............................... 313,459 -- -- Loss on early extinguishment of debt.................................... -- 4,591 -- Finance and other costs related to hostile takeover proposal............ -- -- 13,019 ------------ ------------ ----------- Earnings (loss) before undernoted items................................. (815,521) (106,167) 14,693 Dividends on preferred securities of subsidiary......................... 7,088 7,088 7,088 ------------ ------------ ----------- Earnings (loss) before income taxes and undernoted items................ (822,609) (113,255) 7,605 Income taxes Current............................................................... 9,629 20,186 11,009 Future................................................................ (185,397) (43,098) 1,323 ------------ ------------ ----------- (175,768) (22,912) 12,332 ------------ ------------ ----------- (646,841) (90,343) (4,727) Equity and other earnings of associated companies....................... 10,929 11,593 1,620 ------------ ------------ ----------- Loss for the year....................................................... (635,912) (78,750) (3,107) Deficit, beginning of year.............................................. (187,260) (108,510) (105,403) ------------ ------------ ----------- Deficit, end of year.................................................... $ (823,172) $ (187,260) $(108,510) ------------ ------------ ----------- ------------ ------------ -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 91 LOEWEN GROUP INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 ------------ 1997 1996 ------------- ------------ (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) CASH PROVIDED BY (APPLIED TO) Operations Loss................................................................. $ (635,912) $ (78,750) $ (3,107) Items not affecting cash Depreciation and amortization...................................... 76,225 56,358 45,724 Amortization of debt issue costs................................... 25,018 6,387 3,672 Asset impairment................................................... 301,605 -- -- Investment impairment and contingent loss.......................... 313,459 -- -- Future income taxes................................................ (185,397) (43,098) 1,323 Gain on sale of investment......................................... (6,768) -- -- Equity and other earnings of associated companies.................. (10,929) (11,593) (1,620) Restructuring costs................................................ -- 12,697 -- Proceeds on factored accounts receivable............................. 142,181 185,179 56,318 Other, including net changes in other non-cash balances.............. (223,157) (229,524) (165,504) ------------ ------------- ------------ (203,675) (102,344) (63,194) ------------ ------------- ------------ Investing Business acquisitions................................................ (236,737) (453,223) (546,615) Construction of new facilities....................................... (17,929) (24,954) (13,756) Investments, net..................................................... 16 (2,275) (140,712) Purchase of insurance invested assets................................ (224,145) (261,987) (85,193) Proceeds on disposition and maturities of insurance invested assets............................................................. 180,175 252,626 71,939 Purchase of property and equipment................................... (34,670) (42,632) (42,634) Proceeds on disposition of assets.................................... 56,202 3,767 3,255 ------------ ------------- ------------ (277,088) (528,678) (753,716) ------------ ------------- ------------ Financing Increase in long-term debt........................................... 1,102,681 1,195,242 1,036,548 Repayment of long-term debt.......................................... (603,978) (1,031,105) (504,586) Issue of Common shares............................................... -- 185,250 175,069 Increase in loans and advances from affiliates....................... 339,527 446,450 192,074 Repayment of loans and advances from affiliates...................... (291,874) (142,763) (36,091) Repayment of current note payable.................................... -- -- (38,546) Debt issue costs..................................................... (16,954) (3,999) (28,770) ------------ ------------- ------------ 529,402 649,075 795,698 ------------ ------------- ------------ Increase (decrease) in cash and cash equivalents during the year...................................................... 48,639 18,053 (21,212) Cash and cash equivalents, beginning of year........................... 35,563 17,510 38,722 ------------ ------------- ------------ Cash and cash equivalents, end of year................................. $ 84,202 $ 35,563 $ 17,510 ------------ ------------- ------------ ------------ ------------- ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 92 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION BASIS OF PRESENTATION These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles. The going concern basis of presentation assumes that Loewen Group International, Inc. (the "Company") will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Certain conditions, described below, currently exist which cast doubt upon the validity of this assumption. There is substantial doubt about the appropriateness of the use of the going concern assumption because the Company has experienced in 1998 a significant loss, negative cash flow and a shareholders' deficiency. There is also uncertainty as to the Company's ability to refinance the pass-through asset trust senior guaranteed notes (the "PATS senior notes") which may be redeemed on October 1, 1999 and which require refinancing by September 15, 1999 under the terms of amended credit agreements. Furthermore, there is uncertainty as to the Company's ability to refinance loans and advances from affiliates, including $206,000,000 due August 15, 1999. The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on the successful completion of actions that the Company has taken or plans to take which management believes will mitigate the adverse conditions and events which raise doubt about the validity of the "going concern" assumption. However, there is no certainty that these actions or other strategies will be sufficient to permit the Company to continue, or that the Company will be able to refinance the PATS senior notes on terms acceptable to certain of the Company's lenders by September 15, 1999. In the event that such actions and strategies are not successful, either the Company or its creditors may initiate proceedings for the liquidation or reorganization of the Company under Canadian or U.S. bankruptcy laws. The financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the "going concern" basis was not appropriate for these financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. OPERATIONS The Company reported a loss from operations in 1998 of $217,088,000 after recording a charge for asset impairment of $301,605,000. Over the past three years, the Company's strategic growth plan had emphasized cemetery acquisitions, as compared to its historical emphasis on funeral home acquisitions. Acquisitions and the integration of cemeteries has required significant cash due to the pre-need sales of cemetery interment rights, products and services and related interest costs on debt incurred. The Company expects to continue to incur negative cash flow from cemetery operations until it is able to satisfactorily implement various strategies to generate positive cash flow. 93 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION (CONTINUED) FINANCING As a result of expected negative cash flow from operations during 1999, scheduled debt maturities in 1999 and its current financial position, on March 31, 1999, the Company: - Sold 124 cemeteries and three funeral homes on March 31, 1999 for gross proceeds of $154,000,000 of which $103,361,000 was used to repay indebtedness; and - Completed negotiations with the lenders under its bank credit agreement, Management Equity Investment Plan ("MEIP") bank term credit agreement, Series D and E senior amortizing notes and one privately held note agreements (collectively, the "Credit Agreements") resulting in revised lending agreements effective March 31, 1999 including waivers of certain financial covenants as of December 31, 1998. As a result, the Company has not had an event of default of the covenants under the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the bank credit agreement, including letters of credit, from $600,000,000 to $293,720,000 after application of a portion of the net proceeds from the Company's first major asset sale; - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing of the PATS senior notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development in respect of cemetery land to $60,000,000 for 1999; and - Permit additional asset sales subject to certain terms and conditions. The Company's indebtedness includes the PATS senior notes which are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. Notwithstanding the obligation to refinance the PATS Senior Notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999, the trust has a put option that entitles the trust to redeem the PATS senior notes on October 1, 1999 to fund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. The Company does not expect to have sufficient funds to redeem these notes without further asset sales or proceeds from debt or equity issues. The Company is of the opinion that these notes have a prospect of being refinanced, however there is no certainty of such financing as it will depend primarily on financial market conditions and the Company's credit rating at that time. 94 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION (CONTINUED) The debt relating to the Credit Agreements and the PATS senior notes has been classified as current liabilities. The Series 1 to 4, 6 and 7 Senior Notes have been classified as non-current liabilities but have cross default clauses that could accelerate payment if covenants in the Credit Agreements and PATS senior notes are not met and the lenders thereunder accelerate payment under those agreements. The Company's indebtedness includes loans and advances due to affiliates of which a term loan of $206,000,000 and revolving credit loans of $21,841 are due in 1999. Repayment of the related party loans is restricted under the revised lending agreements. The Company is continuing to review its operations in order to identify additional strategies to those identified above, including further asset sales, that are designed to generate cash flow, improve the Company's financial position, and enable the discharge of the Company's obligations. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company was incorporated on February 25, 1987 under the laws of the State of Delaware and is directly and indirectly a wholly owned subsidiary of The Loewen Group Inc. (the "Parent Company"). The United States dollar is the principal currency of the Company's business and accordingly the consolidated financial statements are expressed in United States dollars. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada and generally conform with those established in the United States, except as explained in Note 25. BASIS OF CONSOLIDATION The accounts of all subsidiary companies have been included in the consolidated financial statements from their respective dates of acquisition of control or formation. All subsidiaries are wholly owned at December 31, 1998 except for a few companies with small minority interests. The Company accounts for its investment in companies in which it has significant influence by the equity method. The Company's proportionate share of income (loss) as reported, net of amortization of excess purchase price over net assets acquired, is included in income and added to (deducted from) the cost of the investment. Common share dividends received reduce the carrying amount of the investment. Other long-term investments including preferred share investments are accounted for using the cost method. The Company accounts for its investments in joint ventures using the proportionate consolidation method. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements. USE OF ESTIMATES The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported 95 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from those estimates. PREARRANGED FUNERAL SERVICES Prearranged funeral services provide for future funeral services generally determined by prices prevailing at the time the contract is signed. The payments made under the contract, in part, are either placed in trust or are used to pay the premiums of life insurance policies under which the Company will be designated as beneficiary. Except for insurance commissions and amounts not required to be trusted, which are used to defray initial costs of administration, no income is recognized until the performance of a specific funeral. Trust fund principal amounts and insurance contract amounts, together with trust fund investment earnings retained in trust and annual insurance benefits, are deferred until the service is performed. The Company estimates that trust fund investment earnings and annual insurance benefits exceed the increase in cost over time of providing the related services. Upon performance of the specific funeral service, the Company will recognize the trust fund principal amount or insurance contract amount together with the accumulated trust earnings and annual insurance benefits as funeral revenues. Direct obtaining costs related to the sale of prearranged funeral services are included in other assets and amortized over a period of ten years, approximating the period the benefits are expected to be realized. Indirect obtaining costs relating to the sale of prearranged funeral services are expensed in the period incurred. CEMETERY OPERATIONS Pre-need sales of cemetery interment rights and other related products and services are recorded as revenue when customer contracts are signed with concurrent recognition of related costs. Interest is imputed at a market rate for contracts that do not bear a market rate of interest. An allowance for cancellations and refunds is provided at the date of sale based on management's estimates. The allowance is reviewed quarterly and changes in estimates are reflected for current and prior contracts as a result of recent cancellation experience. Actual cancellation rates in the future may result in a change in estimate. A portion of the proceeds from cemetery sales is generally required by law to be paid into perpetual or endowment care trust funds. Cemetery revenue is recorded net of the amount to be deposited to perpetual or endowment care trust funds. Earnings of perpetual or endowment care trust funds are used to defray the maintenance costs of cemeteries. Additionally, pursuant to various state laws, a portion of the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trust funds which are recorded as long-term receivables. INSURANCE OPERATIONS (A) INSURANCE REVENUE The Company earns insurance revenue primarily through the sale of industrial life and ordinary life insurance policies. 96 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) INSURANCE INVESTED ASSETS Bonds and other fixed-term securities are carried at amortized cost. Net realized gains and losses on the disposal of bonds and other fixed-term securities are deferred and amortized to income over the remaining term to maturity of the security sold. Equity securities are carried at moving average market value. Net realized gains and losses on the disposal of equity securities are deferred and amortized to income on a declining balance basis. (C) INSURANCE POLICY LIABILITIES Insurance policy liabilities represent an estimate of the amount which, together with future premiums and investment income, will be sufficient to pay future benefits, dividends and expenses on insurance and annuity contracts. Liabilities are computed using the policy premium method which involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and rates of surrender. Consequently, policy liabilities include reasonable provisions for adverse deviations from those estimates. These assumptions may be revised if it is determined that future experience will differ substantially from that previously assumed. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and term deposits with an initial maturity less than or equal to 90 days. INVENTORIES Inventories are carried at the lower of cost, determined primarily on a specific identification basis or a first in first out basis, and net realizable value. CEMETERY PROPERTY Cemetery property, including capitalized interest, consists of developed and undeveloped cemetery property and is valued at average cost. Amounts are expensed to costs and expenses as sales of cemetery plots occur. PROPERTY AND EQUIPMENT Property and equipment is recorded initially at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements........ 10 to 40 years Automobiles....................... 6 years Furniture, fixtures and equipment....................... 6 to 10 years Computer hardware and software.... 6 years Over the term of the lease plus one Leasehold improvements............ renewal
97 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NAMES AND REPUTATIONS The amount paid for the names and reputations of operations acquired is equivalent to the excess of the purchase price over the fair value of identifiable net assets acquired, as determined by management. Amortization is provided on a straight-line basis over 40 years. Covenants not to compete included with names and reputations on the consolidated balance sheet represent amounts capitalized for non-competition agreements with certain key management personnel of acquired operations. Amortization of such prepaid covenants not to compete is provided on a straight-line basis over the terms of the relevant agreements, typically ten years. IMPAIRMENT OF LONG-LIVED ASSETS The Company monitors the recoverability of long-lived assets, including investments, cemetery properties, property and equipment, names and reputations and other assets, based on estimates using factors such as future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets or realized upon sale. The Company's policy is to write down assets to their net recoverable amount in the period when it is determined that the carrying amount of the asset is not likely to be recoverable. DEBT ISSUE COSTS Debt issue costs included in other assets on the consolidated balance sheet represent the costs of negotiating and securing the Company's long-term debt and preferred securities of subsidiary and are included in interest expense on a straight-line basis over the respective term of the related instrument. These costs include legal fees, accounting fees, underwriting and agency fees and other related costs. ACQUISITION COSTS The Company's policy is to capitalize direct acquisition costs incurred on potential acquisitions. Upon completion of an acquisition, these costs are allocated to the assets acquired and are subject to the accounting policies outlined above. On certain acquisitions, a portion of the consideration is contingent upon future operating results. Such consideration, if any, is allocated to the assets acquired once determinable. Direct acquisition costs related to acquisitions not completed are written off. DERIVATIVE INSTRUMENTS The Company enters into derivative transactions with financial institutions primarily as hedges of other financial transactions. The Company's policies do not allow leveraged transactions and are designed to minimize credit and concentration risk with counterparties. The Company enters into interest rate swap agreements to manage interest rate exposure on its long-term debt. The difference between the amounts paid and received is accrued and accounted for as an adjustment to interest expense over the life of the swap agreement. The Company uses basic swap and option products to manage its exposure to interest rate movements when anticipated financing transactions are probable and the significant characteristics and expected terms 98 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are identified. Any gain or loss as a result of the hedging is deferred and amortized as an adjustment to interest expense over the life of the financing instrument hedged. If at any point in time a hedging transaction no longer meets the criteria of a hedge, any gain or loss is recognized in current earnings. FUTURE INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes. Future income tax assets and liabilities are measured using substantively 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 future income tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the substantive enactment date. A valuation allowance is recognized to the extent the recoverability of future income tax assets is not considered more likely than not. NOTE 3. CHANGE IN ACCOUNTING PRINCIPLES (a) INCOME TAXES Effective with the third quarter of 1998, the Company changed its policy for accounting for income taxes by adopting the provisions of Section 3465, Income Taxes, of the Handbook of the Canadian Institute of Chartered Accountants which is described in the Summary of Significant Accounting Policies. Previously, the Company followed the allocation method of accounting for income taxes. The provisions were applied retroactively with restatement of prior period financial statements to January 1, 1993 which conforms to the effective date that the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, for its financial statement amounts presented under United States generally accepted accounting principles. As a result of adopting the new Canadian standard, the cumulative effect to opening retained earnings at January 1, 1996 was a decrease of $20,657,000. The cumulative effect on the consolidated balance sheet at December 31, 1998 is an increase in cemetery property and names and reputations of approximately $452,278,000 (December 31, 1997 -- $402,301,000) primarily due to effects of acquisition accounting and a corresponding increase in future income tax liability of $472,941,000 (December 31, 1997 -- $422,201,000). The effect on the consolidated statement of operations for the twelve months ended December 31, 1998 was a decrease to net loss of approximately $9,180,000 (1997 -- increase of $1,004,000; 1996 -- decrease of $1,761,000). (b) STATEMENT OF CASH FLOWS The company adopted CICA Handbook Section 1540, Cash Flow Statements for the year ended December 31, 1998. The provisions were applied retroactively with restatement of prior period financial statements. Under Section 1540, non cash investing and financing activities are excluded from the statement of cash flows and are disclosed in a note to the financial statements. 99 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 4. ACQUISITIONS AND DISPOSITIONS (a) ACQUISITIONS During the year ended December 31, 1998 the Company acquired 62 funeral homes and 62 cemeteries. During the year ended December 31, 1997, the Company acquired 105 funeral homes, 171 cemeteries and one insurance company. All of the Company's acquisitions have been accounted for by the purchase method. The preliminary purchase price allocation for certain of these acquisitions has been estimated based on available information at the time and is subject to revision.
1998 1997 ---------- ----------- (RESTATED -- NOTE 3) Current assets.......................................................................... $ 3,570 $ 8,881 Prearranged funeral services............................................................ 19,382 35,093 Long-term receivables, net of allowances................................................ 1,317 85,191 Investments............................................................................. 405 36 Cemetery property....................................................................... 175,643 424,230 Property and equipment.................................................................. 41,688 75,470 Names and reputations................................................................... 108,234 87,916 Other assets............................................................................ 13,338 93 ---------- ----------- 363,577 716,910 Current liabilities..................................................................... (1,704) (6,042) Long-term debt.......................................................................... (2,106) (3,087) Other liabilities....................................................................... (3,574) (55,673) Future income taxes..................................................................... (78,451) (105,724) Deferred prearranged funeral services revenue........................................... (19,382) (35,093) ---------- ----------- $ 258,360 $ 511,291 ---------- ----------- ---------- ----------- Consideration Cash, including assumed debt repaid at closing........................................ $ 236,737 $ 453,223 Debt.................................................................................. 20,538 39,411 Share capital of Parent Company....................................................... 1,085 18,657 ---------- ----------- Purchase Price.......................................................................... $ 258,360 $ 511,291 ---------- ----------- ---------- -----------
The following table reflects, on an unaudited pro-forma basis, the combined results of the Company's operations acquired during the period ended December 31, 1998 as if all such acquisitions had taken place at the beginning of the respective years presented. Appropriate adjustments have been made to reflect the accounting basis used in recording these acquisitions. This pro-forma information does not purport to be 100 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 4. ACQUISITIONS AND DISPOSITIONS (CONTINUED) indicative of the results of operations that would have resulted had the acquisitions been in effect for the entire years presented, and is not intended to be a projection of future results or trends.
1998 1997 ------------ ------------ Revenues.............................................................................. $ 1,087,490 $ 1,094,043 Net loss.............................................................................. $ (649,835) $ (81,664)
(b) DISPOSITIONS During the year, the Company sold First Capital Life Insurance Company of Louisiana, a wholly owned subsidiary, for gross proceeds of $24,522,000 resulting in a pre-tax gain of $6,768,000. The assets and liabilities disposed of were $89,958,000 and $72,204,000 respectively. NOTE 5. INVESTMENTS
1998 1997 --------- ---------- 4103 Investments Ltd. ("4103")............................................................. $ -- $ 148,914 Prime Succession Holdings, Inc. ("Prime").................................................. -- 6,102 Rose Hills Holdings Corp. ("Rose Hills")................................................... -- 28,223 TLGI Management Corp. 70,586,000 Preferred shares (1997 -- nil) representing 40.34%............................ 28,626 -- Other...................................................................................... 1,619 1,484 --------- ---------- $ 30,245 $ 184,723 --------- ---------- --------- ----------
(a) 4103 INVESTMENTS In March 1997, the Company transferred 100 Common shares and 6,668 Preferred shares in Prime at their carrying value of $72,279,000 to 4103 Investments, a Canadian company under common control. The Company also transferred 100 Common shares and 6,300 Preferred shares in Rose Hills at their carrying value of $65,976,000 to 4103 Investments. In exchange, the Company received 189,475,132 Class B non-voting Common shares representing 48.68% of 4103 Investments common shares. 4103 Investments cannot declare dividends on the Class A voting Common shares without first paying an equal dividend on the Class B Common shares. On November 25, 1998, the Company's investment became a joint venture when the Company received, as a capital contribution 1,000 Class A Common voting shares of 4103 Investments, representing 50% of the voting rights, from the Parent Company. Effective from that date, the Company has accounted for its investment in 4103 Investments common shares by the proportionate consolidation method. The net loss recorded by 4103 Investments subsequent to November 25, 1998 was $205,944,000, which included an investment impairment charge of $209,323,000. Prior to November 25, 1998, the Company accounted for its investment in 4103 Investments by the equity method. Accordingly, the Company's proportionate share of the assets and liabilities are reflected in the Company's balance sheet at December 31, 1998. For the period to November 25, 1998, equity income of $14,107,000 (1997 -- income of $10,659,000) was recorded which includes $4,455,000 of income related to equity earnings from Prime and Rose Hills. 101 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) Summarized financial data for 4103 Investments for the year ended December 31, 1998, with comparatives for the period from inception on March 24, 1997 to December 31, 1997, are presented as follows:
1998 1997 ----------- ---------- Income statement information: Earnings before income taxes and equity loss of associated company..................... $ 35,147 $ 25,237 Net earnings (loss).................................................................... (176,965) 21,455 Balance sheet information: Current assets......................................................................... $ -- $ 9,032 Non-current assets..................................................................... 111,425 292,634 ----------- ---------- Total assets........................................................................... 111,425 301,666 Current liabilities.................................................................... 49 579 Non-current liabilities................................................................ -- 1,984 ----------- ---------- Total liabilities...................................................................... 49 2,563 Shareholders' equity................................................................... 111,376 299,103
(b) PRIME The Company owns 163.0475 shares of Prime common stock, representing 16.67% of Prime's voting common stock, and 48.68% of Prime's non-voting preferred stock, with a 10% cumulative annual payment-in-kind dividend. Blackstone Capital Partners II Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone") owns 764.7059 shares of Prime common stock, representing 78.2% of Prime's voting common stock. Prime holds all of the outstanding common shares of Prime Succession, Inc., an operator of funeral homes and cemeteries in the United States. Prime Succession, Inc. was purchased on August 26, 1996 for approximately $320,000,000 of which $52,000,000 was funded by Blackstone and $78,000,000 by the Company, and $190,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $230,000,000, was established as goodwill in Prime Succession, Inc. and is being amortized over 40 years. Blackstone and the Company have the right to designate five and three nominees, respectively, to the Prime Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Prime. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its share in Prime to a party other than to an affiliate of itself. Under a Put/Call Agreement entered into with Blackstone in August 1996, the Company has the option to acquire ("Call") Blackstone's Prime common stock commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. Blackstone has the option to sell ("Put") its Prime common stock to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. 102 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) The prices for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of approximately 12x earnings before interest, taxes, depreciation and amortization ("EBITDA") for the previous year, after deduction of certain liabilities. Any payment to Blackstone under the Call or the Put may be in the form of cash and/or Common shares of the Parent Company, at the Parent Company and the Company's option, subject to certain conditions. Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 24.1% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common stock interest is determined on the basis of a formula set forth in the Put/Call Agreement. Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement. The Parent Company provides various administrative services to Prime under an Administrative Services Agreement for an annual fee of $250,000. Prior to the fourth quarter of 1998, the Company evaluated the exercise of the Call on the fourth anniversary date as likely. Due to liquidity concerns of the Parent Company and the Company, the performance of Prime and the reduced market values for the Parent Company's and other industry participants' stock, the Company has determined the exercise of the Call on the fourth anniversary as unlikely and the exercise of the Put as likely. Accordingly, the Company assessed that its investment suffered a decline in value that is other than temporary and has written down its investment based on an assumed distribution of Prime's shareholder's equity at December 31, 1998 taking into account Blackstone's return under the Put. In addition, the Company has estimated the expected Put option price on the sixth anniversary, the first date the Put option becomes exercisable by Blackstone, based on the Company's best estimate of EBITDA at that time and the relevant formula in the Put/Call Agreement. The Company has accrued a contingent loss based upon the difference between the estimated option price and the Company's estimate of the fair value of Blackstone's equity in Prime which is based in part on current market conditions. Such amount could change based on changes in the estimated future value of the business. A net liability (see Note 21) has been recorded reflecting an accrual of the expected loss on the option reduced by the remaining carrying value of Prime. In 1998, 1997 and 1996 the Company recognized income (loss) of $(3,100,000), $(133,000) and $1,156,000, relating to its investment in Prime, excluding the 1998 investment impairment and contingent loss. 103 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) Summarized financial data for Prime are presented as follows:
1998 1997 1996 ---------- ---------- ---------- Income statement information: Revenue.................................................................... $ 98,005 $ 101,139 $ 32,651 Gross margin............................................................... 32,293 38,616 11,066 Earnings from operations................................................... 17,595 24,123 5,492 Payment-in-kind dividend................................................... 7,226 6,542 2,300 Net loss attributable to common shareholders............................... (14,524) (6,739) (5,250) Balance sheet information: Current assets............................................................. $ 22,820 $ 25,694 $ 24,614 Non-current assets......................................................... 368,302 369,412 374,174 ---------- ---------- ---------- Total assets............................................................... 391,122 395,106 398,788 Current liabilities........................................................ 15,952 14,964 22,531 Non-current liabilities.................................................... 256,060 253,734 249,652 ---------- ---------- ---------- Total liabilities.......................................................... 272,012 268,698 272,183 Shareholders' equity....................................................... 119,110 126,408 126,605
(c) ROSE HILLS The Company owns 153.2143 shares of Rose Hills common stock, representing 15.32% of Rose Hills' voting common stock, and 62.4% of Rose Hills non-voting preferred stock, with a 10% cumulative annual payment-in-kind dividend. Blackstone owns 795.4546 shares of Rose Hills common stock, representing 79.55% of Rose Hills' voting common stock. Rose Hills holds all of the outstanding common stock of Rose Hills Company ("RHC") and the cemetery related assets of Rose Hills Memorial Park Association, representing the largest single location cemetery in the United States. These companies were purchased on November 19, 1996 for approximately $285,000,000 of which $130,000,000 was funded by Blackstone and the Company, and $155,000,000 was financed through bank borrowings and the issuance of senior subordinated notes. The excess of the purchase price over the fair value of net assets of approximately $130,000,000 was established as goodwill in RHC and is being amortized over 40 years. Blackstone and the Company have the right to designate five and three nominees, respectively, to the Rose Hills' Board of Directors. Blackstone controls the strategic operating, investing and financing policies of Rose Hills. Neither Blackstone nor the Company can, without the consent of the other party, sell or transfer its shares in Rose Hills to a party other than to an affiliate of itself. Under a Put/Call Agreement entered into with Blackstone in November 1996, the Company has the option to acquire ("Call") Blackstone's Rose Hills common stock commencing on the fourth anniversary of the acquisition, and for a period of two years thereafter, at a price to be determined pursuant to the Put/ Call Agreement. Blackstone has the option to sell ("Put") its Rose Hills common stock to the Company commencing on the sixth anniversary of the acquisition, and for a period of two years thereafter, at a price determined pursuant to the Put/Call Agreement. 104 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) The prices for the Call and the Put are based on a formula that calculates the equity value attributable to Blackstone's common share interest. The calculated equity value is determined at the Put or Call date based on a multiple of approximately 13x earnings before interest, taxes, depreciation and amortization ("EBITDA") for the previous year, after deduction of certain liabilities. Any payment to Blackstone under the Call or the Put may be in the form of cash and/or Common shares of the Parent Company, at the Parent Company's and Company's option, subject to certain conditions. Upon a Call, Blackstone will receive, at a minimum, its original investment plus a 22.5% compound return per annum thereon regardless of the calculated equity value. Any additional equity value attributable to Blackstone common stock interest will be determined on the basis of a formula set forth in the Put/Call Agreement. Upon a Put by Blackstone, there is no guaranteed return to Blackstone. Any payment to Blackstone is limited to Blackstone's share of the calculated equity value based on a formula set forth in the Put/Call Agreement. The Company provides various management and administrative services to RHC and subsidiaries under an Administrative Services Agreement for an annual fee of $250,000. If the Administrative Services Agreement becomes terminable by Blackstone due to the Company's material breach thereof or other failure to comply in any material respect, Blackstone under the Put will receive, at a minimum, its original investment plus a 25% compound return per annum thereon which increases to 27.5% in the event of a change in control of the Company, regardless of the calculated equity value. Prior to the fourth quarter of 1998, the Company evaluated the exercise of the Call on the fourth anniversary date as likely. Due to liquidity concerns of the Parent Company and the Company, the performance of Rose Hills and the reduced market values for the Parent Company's and other industry participants' stock, the Company has determined the exercise of the Call on the fourth anniversary as unlikely and the exercise of the Put as likely. Accordingly, the Company assesses that its investment suffered a decline in value that was other than temporary and has written down its investment based on an assumed distribution of Rose Hills' shareholder's equity at December 31, 1998 taking into account Blackstone's return under the Put. In addition, the Company has estimated the expected Put option price on the sixth anniversary, the first date the option becomes exercisable, based on the Company's best estimate of EBITDA at that time and the relevant formula in the Put/Call Agreement. The Company has accrued a contingent loss based upon the difference between the estimated option price and the Company's estimate of the fair value of Blackstone's equity in Rose Hills the value of which is based in part on current market conditions. Such amount could change based on changes in the estimated future value of the business. A net liability (see Note 21) has been recorded reflecting an accrual of the expected loss on the option, offset by the remaining carrying value of Rose Hills. In 1998, 1997 and 1996 the Company recognized income of $3,699,000, $1,023,000 and $464,000, relating to its investment in Rose Hills, excluding the 1998 investment impairment and contingent loss. 105 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 5. INVESTMENTS (CONTINUED) Summarized financial data for Rose Hills are presented as follows:
1998 1997 1996 ---------- ---------- ---------- Income statement information: Revenue.................................................................... $ 83,577 $ 70,645 $ 7,080 Gross margin............................................................... 69,814 59,900 5,982 Earnings from operations................................................... 19,538 14,738 1,327 Payment-in-kind dividend................................................... 9,568 8,708 932 Net loss attributable to common shareholders............................... (8,534) (10,476) (1,460) Balance sheet information: Current assets............................................................. $ 23,011 $ 20,400 $ 21,272 Non-current assets......................................................... 298,922 292,198 296,562 ---------- ---------- ---------- Total assets............................................................... 321,933 312,598 317,834 Current liabilities........................................................ 20,488 15,221 15,510 Non-current liabilities.................................................... 173,153 170,119 173,298 ---------- ---------- ---------- Total liabilities.......................................................... 193,641 185,340 188,808 Shareholders' equity....................................................... 128,292 127,258 129,026
(c) TLGI MANAGEMENT CORP The Company owns 70,586,000 Class A redeemable preferred shares of TLGI Management Corp., a Canadian subsidiary of the Parent Company that owns and operates funeral homes in Canada. In December 1998, the Company recorded its share of an impairment charge against its preferred share investment in TLGI Management Corp. of $41,960,000. NOTE 6. INSURANCE INVESTED ASSETS
DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------- ---------------------- CARRYING MARKET CARRYING MARKET VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- Fixed maturities................................................. $ 246,576 $ 251,454 $ 281,659 $ 290,200 Equity securities................................................ 80 44 110 55 Short-term investments and other................................. 20,005 20,005 23,841 23,841 ---------- ---------- ---------- ---------- $ 266,661 $ 271,503 $ 305,610 $ 314,096 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
On the insurance invested assets, the Company earned $21,349,000 of investment income for the year ended December 31, 1998 (1997 -- $23,847,000). Included in the market value of insurance invested assets are $6,942,000 and $2,100,000 of unrealized gains and losses, respectively (1997 -- $8,947,000 and $461,000, respectively). Maturities of fixed maturity securities, excluding mortgage-backed securities and collateralized mortgage obligations, are estimated as follows: $6,853,000 due in one year or less (1997 -- $6,081,000), 106 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 6. INSURANCE INVESTED ASSETS (CONTINUED) $25,677,000 due in one to five years (1997 -- $30,576,000), $67,598,000 due in five to ten years (1997 -- $81,005,000), and $72,843,000 due after ten years (1997 -- $52,929,000). Maturities on a market value basis are approximately the same as the amortized cost basis at December 31, 1998. The Company had approximately $73,615,000 (1997 -- $111,068,000) in mortgage-backed securities and collateralized mortgage obligations at December 31, 1998 with a market value of $76,649,000 (1997 -- $115,015,000). NOTE 7. PREARRANGED FUNERAL SERVICES Prearranged funeral services represent amounts deposited in accordance with state trusting laws with various financial institutions together with accrued earnings. The Company will receive the prearranged funeral trust amounts when the funeral services are performed. The funds deposited in trust are invested as follows:
1998 1997 ---------- ---------- Short-term investments.................................................................... $ 94,043 $ 89,280 Fixed maturities.......................................................................... 137,482 84,056 Balanced mutual funds..................................................................... 1,419 123,080 Equity securities......................................................................... 65,268 14,970 Insurance policies held by trust.......................................................... 52,844 32,552 Other..................................................................................... 905 1,857 ---------- ---------- $ 351,961 $ 345,795 ---------- ---------- ---------- ----------
The weighted average rate of return on the above prearranged funeral trust assets for the year ended December 31, 1998 was 3.0% (1997 -- 3.5%, 1996 -- 5.1%). NOTE 8. LOANS AND ADVANCES FROM AFFILIATES
1998 1997 ------------ ------------ Term loan from affiliated company Interest at 11.50%.................................................................. $ 889,905 $ 889,905 Revolving credit loans from affiliated companies Interest at U.S. treasury rate plus 5% due in 2002.................................. 137,594 87,821 Interest at 11.25% due in 1999...................................................... 10,291 -- Interest at U.S. treasury rate plus 5.36% due in 1999............................... -- 45,233 Interest at prime plus 2% due in 1999............................................... 11,550 21,013 Other demand loans to affiliates Demand loan to Parent Company....................................................... (16,958) (22,569) Non-interest bearing and due on demand.............................................. (20,172) (7,489) ------------ ------------ 1,012,210 1,013,914 ------------ ------------ Current portion of loans and advances from affiliates............................... (227,841) -- ------------ ------------ $ 784,369 $ 1,013,914 ------------ ------------ ------------ ------------
107 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 8. LOANS AND ADVANCES FROM AFFILIATES (CONTINUED) The term loan and certain revolving credit loans from an affiliated company are secured by a junior lien, under a collateral trust arrangement with a group of senior lenders to the Company and Parent Company (see Note 9). The $889,905,000 term loan is comprised of $206,000,000 due August 15, 1999, $199,650,000 due April 11, 2000, $184,390,000 due February 1, 2001 and $299,865,000 due June 5, 2002. NOTE 9. LONG-TERM DEBT
1998 1997 ------------ ------------ Bank credit agreement............................................................... $ 330,000 $ 234,500 Management Equity Investment Plan ("MEIP") bank term credit agreement due in 2000... 97,292 105,140 6.49% Series E senior amortizing notes due in 2004.................................. 42,857 50,000 7.50% Series 1 senior notes due in 2001............................................. 225,000 225,000 7.75% Series 3 senior notes due in 2001............................................. 125,000 125,000 8.25% Series 2 and 4 senior notes due in 2003....................................... 350,000 350,000 7.20% Series 6 senior notes due in 2003............................................. 200,000 -- 7.60% Series 7 senior notes due in 2008............................................. 250,000 -- 6.70% PATS senior notes............................................................. 300,000 300,000 Present value of notes issued for legal settlements discounted at an effective interest rate of 7.75%............................................................ 38,147 39,115 Present value of contingent consideration payable on acquisitions discounted at an effective interest rate of 8.0%, see Note 23...................................... 19,785 24,515 Other, principally arising from vendor financing of acquired operations or long-term debt assumed on acquisitions, bearing interest at fixed and floating rates varying from 4.8% to 14.0%, certain of which are secured by assets of certain subsidiaries...................................................................... 105,410 111,724 ------------ ------------ 2,083,491 1,564,994 Less current portion: Bank credit agreement............................................................... 330,000 -- MEIP bank term credit agreement due in 2000......................................... 97,292 -- 6.49% Series E senior amortizing notes due in 2004.................................. 42,857 7,143 6.70% PATS senior notes............................................................. 300,000 -- Present value of notes issued for legal settlements discounted at an effective interest rate of 7.75%............................................................ 21,450 988 Present value of contingent consideration payable on acquisitions discounted at an effective interest rate of 8.0%, see Note 23...................................... 14,947 4,730 Other............................................................................... 22,909 20,547 ------------ ------------ 829,455 33,408 ------------ ------------ $ 1,254,036 $ 1,531,586 ------------ ------------ ------------ ------------
(a) The Company completed negotiations with the lenders under the Credit Agreements resulting in revised lending agreements effective March 31, 1999, including waivers of certain financial covenants 108 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 9. LONG-TERM DEBT (CONTINUED) as of December 31, 1998. As a result, the Company has not had an event of default of the covenants under the Credit Agreements. The revised lending agreements: - Provide for no further borrowings and reduce the bank credit agreement, including letters of credit, from $600,000,000 to $293,720,000 after application of a portion of the net proceeds from the Company's first major asset sale; - Increase effective interest rates or applicable margins; - Amend certain existing financial covenants and add other financial covenants; - Require refinancing of the PATS senior notes on terms satisfactory to the lenders party to the Credit Agreements by September 15, 1999; - Require the appointment of a financial advisor on behalf of lenders and increased reporting and monitoring; - Require the suspension of all Common share, Preferred share and MIPS dividend payments; - Restrict further acquisitions and equity repurchases; - Limit capital expenditures and expenditures for development of cemetery land to $60,000,000 for 1999; and - Permit additional asset sales subject to certain terms and conditions. The debt relating to the Credit Agreements and the PATS senior notes have been classified as current liabilities. The Series 1 to 4, 6 and 7 Senior Notes have been classified as non-current liabilities but have cross default clauses that could accelerate payment if covenants in the Credit Agreements and PATS senior notes are not met and the lenders thereunder accelerate payment under those agreements. (b) In 1996, the Company, its Parent Company and their senior lenders entered into a collateral trust agreement pursuant to which the senior lenders share certain collateral and guarantees on a pari passu basis (the "Collateral Trust Agreement"). The security for lenders under the Collateral Trust Agreement consists of (i) all of the Company's right, title and interest in and to all rights to receive payment under or in respect of accounts, contracts, contractual rights, chattel paper, documents, instruments and general intangibles, (ii) a pledge of the shares of capital stock of substantially all of the subsidiaries in which the Company directly or indirectly holds more than a 50% voting or economic interest and (iii) a guarantee by each subsidiary that is pledging stock. The security is held by a trustee for the equal and ratable benefit of the senior lending group. The senior lending group consists principally of the lenders under the senior amortizing notes, senior notes and bank and term credit agreements as well as the holders of certain letters of credit. At December 31, 1998, the indebtedness of the Company owed to the senior lending group subject to the collateral trust agreement, including holders of certain letters of credit, aggregated $1,934,000,000. Certain of the above senior note agreements contain various restrictive provisions, including change of control provisions and provisions restricting payment by the Parent Company of dividends on Common and Preferred shares, restricting encumbrance of assets, limiting redemption or repurchase 109 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 9. LONG-TERM DEBT (CONTINUED) of shares, limiting disposition of assets and limiting the amount of additional debt. The senior notes also provide for a default in the event of the acceleration of certain other debt. (c) In March 1998, the Company amended its $1,000,000,000 bank credit agreement. As part of the amendment, the 364-day tranche was terminated and the $750,000,000 tranche was reduced to a $600,000,000 bank credit agreement with a three-year term. On March 31, 1999 the Company further amended its bank credit agreement (see Note 9(a)). The Company's bank credit agreement and MEIP bank term credit agreement bear interest at floating rates (7.31% at December 31, 1998), based on U.S. LIBOR rates or the prime lending rates of certain banks, plus an applicable margin. (d) The PATS senior notes are due in 2009, however they are redeemable at the election of the holder, in whole but not in part, at 100% of the principal amount on October 1, 1999. The PATS senior notes bear interest at a rate of 6.70% until October 1, 1999, at which time, if no redemption election occurs, the interest rate will be reset at a fixed annual rate of 6.05% plus an adjustment equal to the Company's then current credit spread to the ten year United States Treasury rate (see Note 16(g)). (e) In May 1998, the Company completed a private placement in the United States of $200,000,000 of 7.20% Series 6 Senior Guaranteed Notes due 2003 (the "Series 6 senior notes") and $250,000,000 of 7.60% Series 7 Senior Guaranteed Notes due 2008 (the "Series 7 senior notes"). The net proceeds from the Series 6 and 7 senior notes were used to repay indebtedness outstanding under the bank credit agreement. In September 1998, these notes were exchanged for identical notes registered under the Securities Act of 1933. (f) The notes issued under legal settlements represent a promissory note in the amount of $80,000,000 payable over 20 years in equal annual installments of $4,000,000, without interest. Interest is accrued on the discounted amount and is included in accounts payable and accrued liabilities. Annual payments will eliminate this accrual and the balance will be applied to the promissory note. (g) Included in interest expense is $25,018,000 of amortization and write-offs of debt issue costs (1997 -- $6,387,000, 1996 -- $3,672,000) (h) Maturities of long-term debt are as follows:
1999................................................... $ 829,455 2000................................................... 19,464 2001................................................... 368,911 2002................................................... 13,102 2003................................................... 560,694 Thereafter............................................. 291,865 ------------ $ 2,083,491 ------------ ------------
110 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 10. PREFERRED SECURITIES OF SUBSIDIARY On August 15, 1994, 3,000,000 9.45% Cumulative Monthly Income Preferred Securities, Series A ("MIPS") were issued by Loewen Group Capital, L.P. ("LGC") in a public offering for an aggregate amount of U.S. $75,000,000. LGC is a limited partnership and the Company as its general partner manages its business and affairs. The MIPS are due August 31, 2024 and are subject to redemption at par at the option of LGC, in whole or in part, from time to time, on or after August 31, 2004. Holders of the MIPS are entitled to receive cumulative dividends at an annual rate of 9.45% of the liquidation preference of U.S. $25 per MIPS. The dividends accrue from the date of original issuance and are payable monthly in arrears. The Company has the right to defer payment of dividends on the MIPS for one or more periods, each not to exceed 60 consecutive months. In this event the Parent Company may not declare or pay dividends on, or redeem, purchase or acquire or make a liquidation payment with respect to any class of its capital stock. The Parent Company has guaranteed certain payment obligations of the Company to LGC and of LGC to the MIPS holders. The guarantees are subordinated to all liabilities of the Parent Company and are unsecured. In March, 1999 the Company announced that payment of the quarterly MIPS dividends had been deferred. 111 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company enters into derivative transactions with financial institutions primarily as hedges of other financial transactions. The Company does not trade in financial instruments and is not a party to leveraged derivatives. (A) SWAP AGREEMENTS AND INTEREST RATE OPTIONS The Company has entered into swap agreements and interest rate options with a number of different commercial banks and financial institutions to manage its interest rate exposure on fixed rate long-term debt. At December 31, 1998, such agreements included three interest rate swap agreements with commercial banks and financial institutions, each having a notional principal amount of $25,000,000. The Company will receive floating Libor based rates determined quarterly (5.253% at December 31, 1998) and will pay fixed rates of 5.755%, 6.200% and 6.190% under the agreements. The agreements expire in June 1999, June 2001 and June 2001, respectively. The Company is exposed to a credit loss in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparties. The carrying amounts of the interest rate swap agreements approximate fair values at December 31, 1998. (B) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and term deposits, current receivables and accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these instruments. The fair value of insurance policy liabilities, and loans and advances from affiliates have been omitted because it is not practicable to determine fair values with sufficient reliability. Financial instruments with a carrying value materially different from their fair value include:
DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------------- --------------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ------------- ------------ ------------- ------------ (1) Financial assets Prearranged funeral services...................... $ 351,961 $ 353,696 $ 345,795 $ 351,382 Insurance invested assets......................... 266,661 271,503 305,610 314,096 Long-term receivables Practicable to estimate fair value.............. 391,842 399,943 275,866 278,415 Not practicable................................. 94,546 -- 111,416 -- (2) Financial liabilities Long-term debt.................................... $ 2,083,491 $ 1,856,123 $ 1,564,994 $ 1,604,970 Preferred securities of subsidiary................ 75,000 57,938 75,000 81,375
The fair value determination of prearranged funeral services, insurance invested assets and long-term receivables is based on quoted market prices. The long-term receivables for which it is not practicable to estimate fair value comprise primarily installment receivables on cemetery sales, which generally have terms of three to five years and bear interest ranging from 8% to 15%. 112 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair value of long-term debt subject to fixed interest rates is estimated by discounting the future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity, based on the Company's credit standing and other market factors. The fair value of long-term debt, subject to floating market rates, approximate their carrying values. The fair value of the preferred securities of a subsidiary is estimated based upon quoted market prices. It is not practicable to determine the fair value of loans and advances from affiliates. NOTE 12. SHARE CAPITAL (A) AUTHORIZED 3,000 Common shares with a par value of $0.01 (B) ISSUED AND OUTSTANDING
NUMBER OF SHARES STATED VALUE -------------------- ------------------------------ 1998 1997 1998 1997 --------- --------- -------------- -------------- Common shares................................................... 1,521 1,455 $ 15 $ 15 Contributed surplus............................................. 526,058,352 487,514,320 -------------- -------------- $ 526,058,367 $ 487,514,335 -------------- -------------- -------------- --------------
During 1998, the Company issued 66 Common shares to affiliated companies for gross proceeds of $38,544,000. During 1997, the Company issued 247 Common shares to affiliated companies for gross proceeds of $185,250,000. NOTE 13. LEGAL CONTINGENCIES FELDHEIM ET AL. V. SI-SIFH CORP. ET AL. AND DUFFY ET AL. V. SI-SIFH CORP ET AL. Two complaints were filed in 1997 on behalf of individuals who claim damages in connection with funeral insurance policies allegedly issued to them by insurance companies owned, directly or indirectly, by S.I. Acquisition Associates, L.P. ("S.I."). The Company acquired the assets but not the stock of S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and the Company in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. are affiliates of S.I. In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and the Company in the Parish of Orleans, State of Louisiana. Plaintiffs seek a class action. The DUFFY complaint was filed by the same lawyers who filed the complaint in the 113 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) FELDHEIM case, and is a virtually identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial court and, as of the date hereof, no discovery has taken place. The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also alleged unfair trade practices in violation of Louisiana's trade practices laws. Plaintiffs' petitions seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies. On June 13, 1997, the district court in Jefferson Parish dismissed the FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing of the appeal was completed in December 1997, and oral argument was held on January 15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal affirmed the dismissal of the FELDHEIM plaintiffs' class-action claims except as to a claim by "Sub Class B" plaintiffs (the proposed class of current policyholders who are seeking a declaratory judgment). The appellate court found that the trial court's opinion did not consider the validity of class treatment for the "Sub Class B" plaintiffs' claim for a declaratory judgment when it dismissed plaintiffs' class-action claims, and it remanded the case to the trial court for a hearing on that issue. On September 22, 1998, the trial court ruled that the claim could not go forward as a class action, and granted the exception of no cause of action as to Count IV, sub-class B. On October 20, 1998, plaintiffs noticed a suspensive appeal to the Louisiana Fifth Circuit Court of Appeal from this ruling. No order granting the suspensive appeal has been signed by the trial court and the matter has not been filed with the Court of Appeal. To date, plaintiffs have taken no further action in connection with this filing. On August 26, 1998, defendants sought dismissal of all of plaintiffs' remaining individual claims in FELDHEIM. The trial court has not yet ruled on that request. On September 21, 1998, plaintiffs in FELDHEIM filed an "Amended Petition for Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an unspecified sum of attorneys' fees. Defendants will respond shortly to that amended petition. As of the date hereof, no discovery has taken place. On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the defendants' exception seeking to dismiss the plaintiffs' class action allegations on the face of the pleadings. Instead, the court deferred ruling on those issues until the hearing on the class action issues, and the court indicated it would permit some discovery. On April 23, 1998 the defendants filed a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the trial court's April 17, 1998 judgment, and the trial court granted the defendants' motion for a stay of all proceedings pending a ruling by the Court of Appeal on the supervisory writ application. The defendants filed their Application for Supervisory Writs with the Louisiana Fourth Circuit Court of Appeal on June 5, 1998. On July 16, 1998, the trial court lifted its previously entered stay 114 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) of all proceedings in this case; defendants have filed a motion requesting that the trial court reinstitute its stay. On January 6, 1999, the Fourth Circuit Court of Appeal granted supervisory writs, reversed the trial court judgment overruling the exception of RES JUDICATA, maintained the exception of RES JUDICATA and dismissed the action. On February 5, 1999 the DUFFY plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court. The Company has filed an opposition to the application. The Company has determined that it is not possible at this time to predict the final outcome of these legal proceedings, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's consolidated financial statements. LUENING, ET AL. V. SI-SIFH CORP., ET AL. In June 1998, Warren S. Luening and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp, SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and the Company in the Parish of St. Bernard, State of Louisiana. Plaintiffs seek a class action. Defendants in this case are the same entities against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the addition of local counsel in St. Bernard Parish, the same lawyers who filed the FELDHEIM and DUFFY complaints filed the LUENING complaint. Plaintiffs allegedly hold and held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that the defendants failed to provide the funeral services purchased with policies by, among other things, (i) charging them for certain funeral services, including the services of a funeral director and staff, a funeral ceremony, care of the deceased, automotive services and a casket, even though these services were allegedly covered by their policies, and (ii) unjustly enriching themselves through the payment of services allegedly covered under the plaintiffs' policies, and the plaintiffs are therefore entitled to restitution of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages in their complaint. On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition for Damages." In response to the First Amended Petition, on October 19, 1998 defendants removed the LUENING case to federal court on diversity-of-citizenship grounds. The federal court subsequently remanded the case to state court. As of the date hereof, no discovery has taken place. On January 29, 1999, the state court heard argument on the plaintiffs' motion to compel discovery and the Company's exceptions of venue and RES JUDICATA. On February 3, 1999, the court denied both exceptions and granted the motion to compel discovery, ruling that the dismissal of the class action claims in the FELDHEIM and DUFFY cases did not operate to bar this particular sub-class of potential plaintiffs. On February 26, 1999, the Company filed supervisory writs on these rulings, and requested a stay of the discovery ruling pending a decision on the writ application. On March 1, 1999, the Fourth Circuit Court of Appeals stayed all further legal proceedings and discovery in the trial court and ordered the plaintiffs to 115 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) respond to the Company's writ application on an expedited basis. The Fourth Circuit granted the Company's writ application on March 25, 1999, finding that under the RES JUDICATA doctrine as stated in the Fourth Circuit's DUFFY decision, relitigation of the plaintiffs' class action claims was forever barred in Louisiana courts by denial of the class certification in the FELDHEIM case. Accordingly, the Fourth Circuit reversed the trial court's denial of the Company's RES JUDICATA exception, while recognizing that individual plaintiffs' claims could proceed in St. Bernard Parish. It also remanded the case to the trial court for a hearing on the plaintiffs' motion to compel discovery, but it instructed that any discovery requests that are not related to the individual plaintiffs' claims should be denied. On March 29, 1999 the LUENING plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court, and asked that the writ application be consolidated with the application for writ of certiorari filed by the DUFFY plaintiffs. The Company intends to file an opposition to the application. The Company has determined that it is not possible to predict the final outcome of this legal proceeding, including whether a class will be certified, and it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's consolidated financial statements. THE LOEWEN GROUP INC. ET AL. V. THE UNITED STATES OF AMERICA On October 30, 1998, Loewen and an affiliate filed a claim against the United States government for damages under the arbitration provisions of the North American Free Trade Agreement ("NAFTA"). The plaintiffs contend that they were damaged as a result of breaches by the United States of its obligations under NAFTA in connection with certain litigation in the State of Mississippi entitled O'KEEFE V. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege that they were subjected to discrimination, denial of the minimum standard of treatment guaranteed by NAFTA and uncompensated expropriation, all in violation of NAFTA. The Parent Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of the damages that may be awarded to the Company. SECURITIES CLASS ACTIONS Since December 1998 Loewen has been served with various related lawsuits filed in the United States District Courts for the Eastern District of Pennsylvania and for the Eastern District of New York. Raymond L. Loewen, the former Chairman and Chief Executive Officer, and certain officers and directors have been named as defendants in some of the suits. All but one of these lawsuits were filed as purported class actions on behalf of persons or entities that purchased Loewen common shares during five different time periods ranging from November 3, 1996 through January 14, 1999. The Company and Loewen Group Capital, L.P. are named as defendants in two suits (with Loewen, the "Loewen Defendants"). The plaintiffs in the two lawsuits purport to sue on behalf of a class of purchasers of MIPS from March 5, 1997 through January 14, 1999. The MIPS were issued by Loewen Group Capital, L.P. The complaints generally make allegations concerning, among other things, Loewen's internal controls, accounting practices, financial disclosures and acquisition practices. The Loewen Defendants 116 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) have filed a motion with the Judicial Panel on Multidistrict Litigation (the "MDL Panel") to consolidation all of the actions for pretrial coordination in the United States District Court for the Eastern District of Pennsylvania. Counsel for the plaintiffs in the actions currently pending in the Eastern District of New York have filed a written stipulation with the MDL Panel agreeing to the transfer of their cases to the Eastern District of Pennsylvania. The MDL Panel has not ruled. By agreement, the Loewen Defendants' responses to all complaints currently are due by April 26, 1999. The complaints filed in the United States District Court for the Eastern District of Pennsylvania are: BERG V. THE LOEWEN GROUP INC., ET AL., 99-CV-321; BRODY V. RAYMOND L. LOEWEN, ET AL., 99-CV-19; CAMUTO ET AL. V. RAYMOND L. LOEWEN, ET AL., 99-CV-640; GILMORE V. RAYMOND L. LOEWEN, ET AL., 99-CV-232; CITY OF PHILADELPHIA V. LOEWEN GROUP, INC. ET AL., 99-CV-1007; HILL V. THE LOEWEN GROUP INC. ET AL., 99-CV-560; JAMISON V. RAYMOND L. LOEWEN, ET AL., 99-CV-98; MCGLATHERY ET AL. V. RAYMOND L. LOEWEN ET AL. 99-CV-665 (the MCGLATHERY suit was filed on behalf of purchasers of MIPS); PASKOWITZ V. RAYMOND L. LOEWEN ET AL., 99-CV-91; SIROTA & SIROTA EMPLOYEES PROFIT SHARING PLAN V. THE LOEWEN GROUP INC. ET AL., 99-CV-585; STEINER V. RAYMOND L. LOEWEN, ET AL., 98-CV-6740; TEKIRAN V. RAYMOND L. LOEWEN ET AL., 99-CV-589; and TRAVIS V. RAYMOND L. LOEWEN, ET AL., No. 99-11340. The complaints filed in the United States District Court for the Eastern District of New York are: COHEN V. THE LOEWEN GROUP INC. (the COHEN suit was filed on behalf of purchasers of MIPS), ET AL.; CV 99 553; COLLINS V. THE LOEWEN GROUP INC., ET AL., CV 99 261; CORRADINI, ET AL. V. THE LOEWEN GROUP INC. ET AL., CV 99 443; GERSH V. THE LOEWEN GROUP INC., CV 98 7983; GREAT NECK CAPITAL APPRECIATION PARTNERS V. RAYMOND L. LOEWEN, ET AL., CV 99 164; HARRIS V. THE LOEWEN GROUP INC., ET AL., CV 99 153; and SALEM V. THE LOEWEN GROUP INC., ET AL., CV 99 351. The Pennsylvania cases have all been assigned to Judge Thomas O'Neill. Plaintiffs have filed a stipulated motion seeking the appointment of the City of Philadelphia Board of Pensions as lead plaintiff. The Parent Company anticipates that all of the Pennsylvania cases will be consolidated and that, when and if transferred, the New York cases will also be consolidated. It is expected that the lead plaintiff will, when appointed, file a Consolidated and Amended Complaint, to which the defendants will be required to respond. Additional class action complaints containing similar allegations may be filed in the future. The Company has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in the Parent Company's or the Company's consolidated financial statements. F. LEO GROFF, INC. ET AL. V. RESTLAWN MEMORIAL GARDENS, INC. ET AL. This action (No. 96-CV-397, Court of Common Pleas, Erie County, Ohio) was served on the Parent Company and other defendants on September 19, 1996. Plaintiffs allegedly compete with defendants Restlawn Memorial Park Association, Restlawn Memorial Gardens, Inc., and Sinfran, Inc., which were acquired by the Company. Plaintiffs allege thirteen counts, including counts alleging that defendant Restlawn engaged in false and deceptive advertising, misused confidential information, defamed plaintiffs, 117 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) breached contractual obligations, misappropriated trade secrets, and tortiously interfered with plaintiffs' contractual relationships. Plaintiffs further allege that the Parent Company knew or should have known of Restlawn's conduct and adopted and continued Restlawn's alleged unfair, false, and deceptive practices. Plaintiffs also allege that the defendants conspired to destroy plaintiffs' business and created a "trust in order to prevent competition" in violation of Ohio's antitrust laws. Plaintiffs seek compensatory damages, which are unspecified but alleged to exceed $350,000; punitive damages, which are unspecified but alleged to exceed $300,000; and injunctive relief. Defendants' summary judgment motion was denied as to all but one of plaintiffs' counts. A trial date has been set for July 12, 1999. The Company has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's consolidated financial statements. FLANAGAN On December 7, 1998, Honorine T. Flanagan filed a complaint in the Superior Court of the State of California in the County of Los Angeles against Loewen and the Company. To date, only the Company has been served with the complaint. The matter was subsequently removed to federal court based on diversity jurisdiction, and it is now pending in the United States District Court in the Central District of California. The complaint alleges that the defendants breached an express warranty contained in the Share Purchase Agreement dated July 17, 1995, between the Company and Ms. Flanagan, her husband John Flanagan (now deceased) and the Flanagan Family Trust. The Share Purchase Agreement was made in connection with the Company's purchase of the Flanagans' mausoleum and mortuary business in exchange for approximately $2,000,000 in cash and $7,800,000 of Loewen stock. The Loewen stock was valued at $36.00 per share at the time of the transaction. Ms. Flanagan alleges that the Company knew of claims, suits or other actions which would materially and adversely affect the financial condition of the Parent Company, yet made false statements to the contrary in the Share Purchase Agreement. Ms. Flanagan alleges that two lawsuits pending at the time of the Share Purchase Agreement did eventually have a material adverse impact on the financial condition of the Parent Company and the value of the stock received by Ms. Flanagan in connection with the Share Purchase Agreement. Ms. Flanagan's complaint also contains causes of action for breach of contract in connection with the Share Purchase Agreement and in connection with employment and consulting agreements entered into at the time of the Share Purchase Agreement. Additionally, Ms. Flanagan alleges causes of action for intentional and negligent misrepresentation and declaratory relief. Ms. Flanagan estimates that her damages as a result of the alleged breaches and misrepresentations are not less than $5,000,000. This amount is based on her claim that the shares she received were represented to have a value of $7,800,000 million at the time of the agreement, and at the time the complaint was filed those shares had a value that was approximately one third of the original represented value. Her claimed damages may change as the price of the Parent Company's common shares fluctuates. Further, Ms. Flanagan seeks punitive damages in an unspecified sum. On the declaratory relief cause of action, Ms. Flanagan seeks a declaration that she is to be reimbursed for her losses pursuant to the 118 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 13. LEGAL CONTINGENCIES (CONTINUED) indemnity provision contained in the Share Purchase Agreement. She also seeks a declaration that until she is indemnified for her losses she is not obligated to transfer property that, pursuant to the Agreement, the Company has the option to purchase for a specified price pursuant to the Share Purchase Agreement. The Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiff. Accordingly, no provision with respect to this lawsuit has been made in the Parent Company's or the Company's consolidated financial statements. OTHER The Company is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operation or liquidity. NOTE 14. RESTRUCTURING COSTS During 1997, the Company recorded pre-tax charges of $31,000,000 ($19,800,000 after tax), for restructuring associated with the Company's efforts to more fully integrate its field and administrative operations and improve long-term financial performance. The restructuring charges primarily consisted of $19,000,000 related to the severance of approximately 523 employees in operating locations where consolidation and clustering synergies were not being achieved, $7,500,000 associated with the closure of the Company's Covington, Kentucky corporate office and $4,100,000 of asset write-downs related to realignment or elimination of under-performing locations. Actual severance paid, including to the Covington office employees, at December 31, 1997 was $15,800,000. The remaining liability for severance of $4,800,000 primarily relates to benefit or salary continuance arrangements and was fully extinguished in 1998. NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS Due to severe liquidity constraints and the need to generate cash in late 1998, the Company identified certain properties which it would consider selling at their fair value. On March 31, 1999 one group of properties consisting of 124 cemeteries and three funeral homes was sold for gross proceeds of $154,000,000 (see Notes 1 and 24). A smaller group is considered probable for sale. The Company has recorded a pre-tax impairment loss of $301,605,000 in 1998 on individual properties contained in the above groups. In calculating the impairment loss, the Company has used estimated cash flow from operations and estimated cash proceeds on the sale of these properties. The impairment loss has reduced cemetery property by $295,957,000, property and equipment by $2,284,000 and names and reputations by $3,364,000. The impairment loss is based on management estimates and as a result, actual results could differ significantly from these estimates. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no 119 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED) additional impairment losses have been recognized since future sales of other properties are not determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. During 1997, the Company recorded a charge to general and administrative expenses for an impairment loss of $11,600,000, of which $5,400,000 was non-cash, related to a write down of certain under-performing assets. The impaired assets included $9,400,000 related to the termination of non-competition agreements in markets where restrictive covenants no longer have value to the Company and $2,200,000 of fixed assets and software costs related to the streamlining of general and administrative functions and the change in the Company's operating strategy. NOTE 16. COMMITMENTS AND CONTINGENCIES (A) LEASES At December 31, 1998, the Company was committed to operating lease payments for premises, automobiles and office equipment in the following approximate amounts:
TOTAL --------- 1999........................................................... $ 16,099 2000........................................................... 12,872 2001........................................................... 10,161 2002........................................................... 9,396 2003........................................................... 7,510 Thereafter..................................................... 42,360
Total rent expense for each of the years in the three year period ended December 31, 1998 was $13,462,000, $15,258,000 and $11,144,000, respectively (B) COVENANTS NOT TO COMPETE In connection with various acquisitions, the Company has entered into non-competition agreements ("covenants not to compete") with certain key management personnel of operations acquired. The Company's payments under the agreements may be made at closing or over future periods and are expensed over the terms of the specific contracts. At December 31, 1998, the agreements in place will result in future payments in the following approximate amounts:
TOTAL --------- 1999........................................................... $ 13,806 2000........................................................... 14,472 2001........................................................... 11,636 2002........................................................... 10,560 2003........................................................... 8,928 Thereafter..................................................... 28,416
120 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) (C) MANAGEMENT EQUITY INVESTMENT PLAN GUARANTEE The Company has guaranteed indebtedness of participants of the 1994 Management Equity Investment Plan totaling approximately $3,700,000 (1997 -- $3,500,000). The guarantee exists until the termination of the Management Equity Investment Plan on July 15, 2001. (D) ENVIRONMENTAL CONTINGENCIES AND LIABILITIES The Company's operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. The Company's policies are designed to control environmental risk upon acquisition through extensive due diligence and corrective measures taken prior to and after acquisition. Management endeavors to ensure that environmental issues are identified and addressed in advance of acquisition or are covered by an indemnity by the seller or an offset to the purchase price. On a continuing basis, management assesses and evaluates environmental risk and, when necessary, conducts appropriate corrective measures. The Company provides for environmental liabilities using its best estimates. Actual environmental liabilities could differ significantly from these estimates. (e) CONTINGENCY RELATED TO POTENTIAL SALE OF ADDITIONAL PROPERTIES The Company has identified and is implementing strategies that will generate cash flow and improve its financial position. Such strategies include further asset sales, such as the sale of 124 cemeteries and three funeral homes completed on March 31, 1999 for gross proceeds of $154,000,000. The Company has a smaller group of properties which is also considered probable for sale. The Company has recorded a pre-tax impairment loss of $301,605,000 in 1998 on individual properties contained in the above groups. Although the Company intends to consummate additional asset sales, it is not committed to sell and has not identified any other properties for which sale is probable, other than noted above. As a result, no additional impairment losses have been recognized since future sales of other properties are not determinable. Should additional properties be sold, losses, if any, could be small or significant depending upon the type of property, location, cash flow and prevailing market conditions. (f) CONTINGENCY RELATED TO POTENTIAL PURCHASE OF INVESTMENTS The Company has identified and accrued for contingent losses arising from the exercise of the Put/Call Agreements in connection with its investments in Prime and Rose Hills (see Note 5). (g) CONTINGENCY RELATED TO PATS SENIOR NOTES The PATS senior notes aggregating $300,000,000 are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. The trust has a put option that entitles the trust to redeem the PATS senior notes on October 1, 1999 to refund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. If the put option is exercised, the Company is obligated to pay the trust for any loss with respect of an interest rate option based on a 10 year U.S. treasury rate of 6.05% on October 1, 1999. At December 31, 121 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) 1998, the option value was $29,300,000. The option value will change based on changes in the 10 year U.S. treasury rate. NOTE 17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to efforts of customers, suppliers, or other third parties, will be fully resolved. NOTE 18. RETIREMENT PLAN The Company has a defined contribution retirement plan covering substantially all United States employees. There are no required future contributions under this plan in respect of past service. The Company has a 401(K) Retirement Savings Plan for United States employees who may defer between 2% and 15% of eligible compensation. The Company will match 100% of employee contributions to a maximum of 2% of employees' eligible compensation. The total expense for the retirement plan for the three years ended December 31, 1998 was $2,622,000, $2,356,000 and $1,802,000, respectively. 122 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 19. INCOME TAXES (A) EFFECTIVE TAX RATE The Company's effective income tax rate is derived as follows:
1998 1997 1996 --------- ------------- ------------- (RESTATED -- (RESTATED -- NOTE 3) NOTE 3) % % % Combined United States federal and state income tax rate...................... (40.0) (40.0) 44.6 Non-deductible amortization of goodwill arising from acquisitions............. 0.8 3.9 41.7 Non-deductible costs of hostile takeover proposal............................. -- -- 47.3 Non-deductible restructuring and other charges................................ 0.1 0.6 -- Change in valuation allowance on future tax assets............................ 15.5 7.8 13.8 Other......................................................................... 1.9 5.2 (13.7) --------- ----- ----- (21.7) (22.5) 133.7 --------- ----- ----- --------- ----- -----
123 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 19. INCOME TAXES (CONTINUED) (B) FUTURE TAX ASSETS AND LIABILITIES
1998 1997 ----------- ---------------- (RESTATED -- NOTE 3) Future tax liabilities Long-term receivables............................................................ $ 62,563 $ 18,564 Cemetery property................................................................ 303,145 372,676 Property and equipment........................................................... 54,149 53,901 Investments...................................................................... -- 4,264 Insurance policy liabilities..................................................... 18,905 7,814 Other............................................................................ 14,535 5,358 ----------- ---------------- Total future tax liabilities....................................................... 453,297 462,577 ----------- ---------------- Future tax assets Accounts payable and accrued liabilities......................................... $ 16,206 $ 8,312 Cemetery long-term liabilities................................................... 34,649 34,672 Legal settlements................................................................ 15,517 15,911 Insurance assets................................................................. 15,149 3,517 Interest......................................................................... 150,614 82,349 Unrealized losses on investments in Prime and Rose Hills......................... 101,842 -- Deferred costs related to prearranged funeral services........................... 7,198 7,691 Operating loss carryforwards..................................................... 41,795 14,564 Other............................................................................ 16,647 9,432 ----------- ---------------- Total future tax assets before valuation allowance............................... 399,617 176,448 Valuation allowance.............................................................. (137,603) (11,418) ----------- ---------------- Total future tax assets after valuation allowance................................ 262,014 165,030 ----------- ---------------- Net future tax liabilities....................................................... $ 191,283 $ 297,547 ----------- ---------------- ----------- ----------------
Although realization of the Company's deferred tax assets is not assured, management believes that it is more likely than not that reversals of future tax liabilities provide sufficient taxable income to realize the future tax assets. The extent of valuation allowance required would likely be adversely affected by future sales of subsidiaries. It is reasonably possible that these estimates could change in the near term due to matters such as the timing and manner of reversals of future tax liabilities, sales of operations, and future income. During the year ended December 31, 1998, the Company increased its valuation allowance by approximately $126,185,000 (1997 -- $7,919,000). 124 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 20. CHANGES IN OTHER NON-CASH BALANCES Supplemental disclosures related to statements of cash flow:
1998 1997 1996 --------- ---------- ---------- (RESTATED (RESTATED -- NOTE 3) -- NOTE 3) (Increase) decrease in assets Receivables, net of allowances.................. $ 20,279 $ 8,945 $ (32,536) Inventories..................................... 565 (689) (2,400) Prepaid expenses................................ 1,771 1,627 (3,246) Amounts receivable from cemetery merchandise trusts........................................ (98,114) (89,893) (6,703) Installment contracts, net of allowances........ (119,759) (143,599) (62,900) Cemetery property............................... (47,286) (31,045) 13,922 Deferred charges................................ (30,520) (39,668) (27,253) Other assets.................................... 11,193 (9,467) (16,051) Increase (decrease) in liabilities Accrued settlements............................. -- -- (53,000) Accounts payable and accrued liabilities........ 9,684 40,232 17,755 Other liabilities............................... 8,597 10,900 112 Cemetery long-term liabilities.................. (15,448) 19,261 619 Insurance policy liabilities.................... 22,935 5,786 747 Other changes in non-cash balances................ 12,946 (1,914) 5,430 --------- ---------- ---------- $(223,157) $ (229,524) $ (165,504) --------- ---------- ---------- --------- ---------- ---------- Supplemental information Interest paid................................... $ 160,012 $ 88,796 $ 78,800 Taxes paid...................................... 80 33,067 9,965 Bad debt expense................................ 82,333 52,635 27,731 Non-cash investing and financing activities Non-cash debt and share consideration on acquisitions.................................. 21,623 58,068 62,711 Note receivable from sale of subsidiary......... -- 15,725 -- Increases in loans and advances from affiliates and debt arising from legal settlements....... -- -- 111,800 Properties contributed to Rose Hills including unrealized gain thereon....................... -- -- 23,000 Exchange of common and preferred shares of Prime and Rose Hills for shares of 4103 Investments................................... -- 138,255 -- Increases in loans and advances from affiliates in consideration for share issuances.......... 38,544 185,250 175,069
125 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 21. SUPPLEMENTARY FINANCIAL INFORMATION A summary of certain balance sheet accounts as at December 31, is as follows:
1998 1997 ---------- ----------- (RESTATED -- NOTE 3) Receivables, net of allowances Trade accounts............................................ $ 46,593 $ 87,402 Installment contracts..................................... 50,001 40,825 Other..................................................... 55,450 69,602 Unearned finance income................................... (7,884) (4,846) Allowances for contract cancellations and doubtful accounts................................................ (29,669) (23,225) ---------- ----------- $ 114,491 $ 169,758 ---------- ----------- ---------- ----------- Long-term receivables, net of allowances Notes receivable.......................................... $ 11,942 $ 12,547 Amounts receivable from cemetery merchandise trusts....... 392,000 297,688 Installment contracts..................................... 116,973 95,512 Unearned finance income................................... (19,147) (11,505) Allowances for contract cancellations and doubtful accounts................................................ (15,380) (6,960) ---------- ----------- $ 486,388 $ 387,282 ---------- ----------- ---------- ----------- Cemetery property Developed land and lawn crypts............................ $ 206,743 $ 189,177 Undeveloped land.......................................... 889,257 1,042,885 Mausoleums................................................ 130,358 76,066 ---------- ----------- $1,226,358 $ 1,308,128 ---------- ----------- ---------- ----------- Property and equipment Land...................................................... $ 145,674 $ 146,681 Buildings and improvements................................ 479,097 431,342 Automobiles............................................... 69,346 65,875 Furniture, fixtures and equipment......................... 132,775 117,164 Computer hardware and software............................ 26,510 20,342 Leasehold improvements.................................... 13,818 12,405 Accumulated depreciation and amortization................. (154,225) (114,590) ---------- ----------- $ 712,995 $ 679,219 ---------- ----------- ---------- ----------- Names and reputations Names and reputations..................................... $ 698,009 $ 598,819 Covenants not to compete.................................. 81,070 70,933 Accumulated amortization.................................. (100,503) (71,063) ---------- ----------- $ 678,576 $ 598,689 ---------- ----------- ---------- -----------
126 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 21. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
1998 1997 ---------- ----------- (RESTATED -- NOTE 3) Other assets Deferred debt issue costs................................. $ 21,137 $ 29,201 Deferred direct obtaining costs........................... 97,254 79,846 Cemetery management contracts............................. 13,413 -- Other..................................................... 19,512 47,302 ---------- ----------- $ 151,316 $ 156,349 ---------- ----------- ---------- ----------- Accounts payable and accrued liabilities Trade payables............................................ $ 38,852 $ 35,900 Interest.................................................. 34,727 34,689 Insurance, property and business taxes.................... 5,593 6,059 Other..................................................... 71,240 62,315 ---------- ----------- $ 150,412 $ 138,963 ---------- ----------- ---------- ----------- Other liabilities Cemetery long-term liabilities............................ $ 202,267 $ 212,958 Accrual for contingent loss (Note 5(b) and (c))........... 155,338 -- Covenants not to compete.................................. 20,540 17,734 Regional partnership liabilities.......................... 9,836 12,149 Participants' deposits in MEIP............................ 5,120 5,508 Other..................................................... 21,218 11,039 ---------- ----------- $ 414,319 $ 259,388 ---------- ----------- ---------- -----------
NOTE 22. SEGMENTED INFORMATION The Company has adopted Section 1701, Segment Disclosures, of the Handbook of the Canadian Institute of Chartered Accountants, which changes the way the Company reports information about its operating segments. The information in 1997 and 1996 has been restated to conform to the 1998 presentation. The Company's reportable segments are comprised of the three businesses it operates, each of which offers different products and services: funeral homes, cemeteries and insurance. All of the Company's operations are located in the United States. 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 a place of worship, funeral chapel, cemetery or crematorium. In addition to providing at-need funeral services, the Company provides advance funeral planning services to it customers. 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 127 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 22. SEGMENTED INFORMATION (CONTINUED) mausoleum crypts), the opening and closing of graves and cremation services. The majority of cemetery revenue is from pre-need sales. The insurance companies sell a variety of life insurance products, primarily to fund funeral services purchased through a pre-need arrangement. The funeral home companies sell insurance contracts on behalf of the Company's insurance operations for which they receive commission revenue. In 1998, the inter-company commissions amounted to $3,717,000 and were eliminated in the Company's consolidated financial statements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company sells primarily to external customers, though any intersegment sales or transfers occur at market price. The Company evaluates performance based on earnings from operations of the respective businesses.
FUNERAL CEMETERY INSURANCE OTHER CONSOLIDATED ------------ ------------ ---------- ---------- ------------ Revenue earned from external sales 1998......................................... $ 559,217 $ 416,823 $ 96,516 $ -- $1,072,556 1997......................................... 536,926 408,196 89,977 -- 1,035,099 1996......................................... 489,571 277,881 71,900 -- 839,352 Earnings (loss) from operations 1998......................................... $ 113,608 $ (262,366) $ 16,472 $ (84,802) $ (217,088) 1997......................................... 126,865 70,709 16,508 (93,460) 120,622 1996......................................... 135,864 68,399 17,151 (41,892) 179,522 Investment revenue (included in earnings (loss) from operations) 1998......................................... $ 3,197 $ 33,602 $ 21,351 $ 1,590 $ 59,740 1997......................................... 5,354 28,647 23,518 275 57,794 1996......................................... 3,156 15,379 16,615 1,038 36,188 Depreciation and amortization 1998......................................... $ 56,146 $ 10,668 $ 31 $ 9,380 $ 76,225 1997......................................... 45,531 7,391 36 3,400 56,358 1996......................................... 40,022 3,987 40 1,675 45,724 Total assets 1998......................................... $ 1,790,679 $ 1,923,540 $ 276,098 $ 150,197 $4,140,514 1997......................................... 1,734,321 1,850,223 331,754 294,049 4,210,347 1996......................................... 1,486,514 1,259,821 311,406 250,637 3,308,378 Capital expenditures 1998......................................... $ 64,845 $ 25,574 $ 420 $ 3,448 $ 94,287 1997......................................... 83,381 52,893 208 6,807 143,289 1996......................................... 116,676 36,187 1,274 9,828 163,965
128 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 22. SEGMENTED INFORMATION (CONTINUED) The following table reconciles earnings from operations of reportable segments to earnings (loss) before income taxes and identifies the components of "Other" segment earnings from operations:
YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ----------- ---------- ---------- Earnings (loss) from operations of funeral, cemetery and insurance segments.................................................................. $ (132,286) $ 214,082 $ 221,414 Other expenses of operations: General and administrative expenses....................................... (74,846) (58,252) (40,217) Restructuring costs....................................................... -- (30,922) -- Depreciation and amortization............................................. (9,380) (3,400) (1,675) Other..................................................................... (576) (886) -- ----------- ---------- ---------- (84,802) (93,460) (41,892) ----------- ---------- ---------- Total earnings (loss) from operations....................................... $ (217,088) $ 120,622 $ 179,522 ----------- ---------- ---------- ----------- ---------- ----------
The following table reconciles total assets of reportable segments and details the components of "Other" segment assets which is mainly comprised of corporate assets:
DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Total assets of funeral, cemetery and insurance segments................ $ 3,990,317 $ 3,916,298 $ 3,057,741 "Other" assets includes: Cash.................................................................. 52,007 1,884 (1,187) Receivables........................................................... 16,233 41,359 17,927 Prepaid expenses...................................................... 2,362 1,472 3,713 Long-term receivables, net of allowance............................... 7,696 3,957 2,217 Investments........................................................... 30,245 184,723 170,245 Property and equipment................................................ 13,338 19,240 11,420 Names and reputations................................................. 4,358 4,766 5,174 Deferred debt issue costs............................................. 21,137 29,201 31,588 Other................................................................. 2,821 7,447 9,540 ------------ ------------ ------------ 150,197 294,049 250,637 ------------ ------------ ------------ Total assets.......................................................... $ 4,140,514 $ 4,210,347 $ 3,308,378 ------------ ------------ ------------ ------------ ------------ ------------
NOTE 23. RELATED PARTY TRANSACTIONS During 1998, the Company entered into agreements, through a series of transactions, to sell cemetery installment contract receivables to an affiliate of the Company for approximately $112,861,000 resulting in a loss of $11,189,000, and funeral home contract receivables for $23,674,000 resulting in a loss of $1,903,000. During 1997, the Company entered into agreements, through a series of transactions, to sell cemetery installment contract receivables to an affiliate of the Company for approximately $185,179,000 (1996-- $57,483,000) resulting in a loss of $22,066,000 (1996--$5,225,000). 129 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 23. RELATED PARTY TRANSACTIONS (CONTINUED) For the year ended December 31, 1998, the Company paid management fees to the Parent Company of $23,264,000 (1997 -- $18,961,000; 1996 -- $15,884,000). During the year ended December 31, 1997, the Company paid approximately $10,800,000 for insurance and other services to a related company. There were no such expenditures in 1998. During 1996, as part of the normal course of operations, the Company chartered a jet aircraft, a motor vessel and a helicopter at competitive rates from companies owned or controlled by the former Chairman of the Company. The total costs of the related party charters amounted to $605,110. In 1996, the Company purchased all of the shares of 476822 B.C. Ltd., which owned the motor vessel, for an effective purchase price of Cdn. $7,860,000. The motor vessel was sold in 1999 (see Note 24). In addition, in 1996 a company owned by the former Chairman of the Company sold the jet aircraft and helicopter to a third party. Subsequently, the Company has leased the jet aircraft and helicopter from the third party at commercially reasonable terms. As part of the acquisition of Osiris Holding Corporation ("Osiris"), the Company has recorded $14,947,000 as a long-term liability which is the present value of the total remaining contingent payments of approximately $17,100,000. The Company expected to pay the balance over a five-year period ending in 2001 to the former shareholders of Osiris, two of whom were officers of the Company. Subsequent to year end the two officers of the Company entered into an agreement with the Company to purchase a number of cemeteries and funeral homes and ended their association with the Company. The balance of the contingency payment was reclassified to current liabilities as the remaining balance was agreed to be paid out of the proceeds of the sale in 1999 (see Note 24). In addition, as part of the acquisition of Shipper Management ("Shipper"), the Company has recorded $4,838,000 as a long-term liability, representing the present value of total remaining contingent payments, payable through 2001, to the former shareholders of Shipper, one of whom is an officer of the Company. At December 31, 1998, Company officers, directors and employees were indebted to the Company for approximately $10,400,000 (1997 -- $9,000,000). NOTE 24. SUBSEQUENT EVENTS In Febuary, 1999 the Parent Company sold the motor vessel for proceeds of $4,000,000. The Parent Company recorded an impairment loss of $1,000,000 on the motor vessel in 1998. On March 8, 1999, the Company deferred payment of the dividends on the Company's Cumulative Monthly Income Preferred Securities, Series "A". On March 31, 1999, the Company completed the sale of 124 cemeteries and three funeral homes to an investor group led by McCown De Leeuw & Co., a private investment firm. The Company received gross proceeds of $154,000,000. The investor group included two former officers of the Company. The Company has recorded a pre-tax impairment loss of $301,605,000 in 1998 on individual properties contained in the above groups. 130 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 24. SUBSEQUENT EVENTS (CONTINUED) On March 31, 1999, the Company completed negotiations with certain lenders resulting in revised lending agreements, including waivers of certain financial covenants at December 31, 1998. As a result, the Company has not had an event of default of certain covenants in its Credit Agreements. NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles("GAAP") in Canada. These principles differ in the following material respects from those in the United States as summarized below: (a) LOSS
1998 1997 1996 ----------- ---------- --------- Loss in accordance with Canadian GAAP......................................... $ (635,912) $ (78,750) $ (3,107) Less effects of differences in accounting for: Factoring transactions (d).................................................. 604 12,314 -- Insurance operations (e).................................................... 2,833 1,701 (1,440) Cost of start-up activities (h)............................................. 2,302 -- -- ----------- ---------- --------- Loss before cumulative effect of a change in accounting principle............. (630,173) (64,735) (4,547) Cumulative effect of adopting SOP 98-5 as of January 1, 1998.................. (3,940) -- -- ----------- ---------- --------- Loss in accordance with United States GAAP.................................... (634,113) (64,735) (4,547) Other comprehensive income.................................................... Foreign currency translations............................................... (7,968) -- -- Unrealized gains (losses) on securities: Unrealized holding gains arising during the period, net of deferred tax expense of $8,354, $5,992, and $1,222, respectively..................... 10,211 7,323 1,494 Less: reclassification adjustment for gains included in net income........ (8,486) (3,044) (561) ----------- ---------- --------- Comprehensive income (loss) in accordance with United States GAAP............. $ (640,356) $ (60,456) $ (3,614) ----------- ---------- --------- ----------- ---------- ---------
131 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (b) BALANCE SHEET The amounts in the consolidated balance sheet that differ from those reported under Canadian GAAP are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- CANADIAN UNITED CANADIAN UNITED GAAP STATES GAAP GAAP STATES GAAP ------------ ------------ ------------ ------------ (RESTATED -- NOTE 3) Assets Receivables, net of allowances........................ $ 114,491 $ 200,078 $ 169,758 $ 229,314 Long-term receivables, net of allowances.............. 486,388 633,951 387,282 528,015 Insurance invested assets............................. 266,661 270,809 305,610 312,073 Other assets.......................................... 151,316 176,984 156,349 181,556 Liabilities and Shareholders' Equity Loans and advances from affiliates, current portion... 227,841 288,824 -- 53,399 Loans and advances from affiliates.................... 784,369 926,666 1,013,914 1,138,511 Other liabilities..................................... 414,319 409,392 259,388 257,128 Insurance policy liabilities.......................... 166,920 196,230 214,492 240,750 Future income tax liabilities......................... 191,283 205,275 297,547 309,725 Share capital......................................... 526,058 527,732 487,514 489,188 Deficit............................................... (823,172) (810,472) (187,260) (176,359) Accumulated other comprehensive income Unrealized gains on securities available for sale, net of tax........................................ -- 6,937 -- 5,212
(c) INSURANCE OPERATIONS PRESENT VALUE OF INSURANCE POLICIES Under United States GAAP, the Company recognizes an asset that represents the actuarially-determined present value of the projected future profits of the insurance in-force at dates of acquisition. Canadian GAAP does not recognize such an asset. The asset is being amortized to insurance expense over the estimated life of the insurance in-force at the date of acquisition. DEFERRED POLICY ACQUISITION COSTS Under United States GAAP, the Company defers costs related to the production of new business, which consist principally of commissions, certain underwriting expenses, and the costs of issuing policies. Deferred acquisition costs are amortized over the expected premium-paying periods of the related policies. Canadian GAAP does not permit deferral of such costs. 132 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) INSURANCE POLICY LIABILITIES Insurance policy liabilities, which represent liabilities for future policy benefits, are accounted for under United States GAAP using the net level premium method which involves different actuarial assumptions and methodologies than the policy premium method used for Canadian GAAP. In addition, under Canadian GAAP, all actuarial assumptions are re-evaluated on a periodic basis, resulting in adjustments to insurance policy liabilities and insurance costs and expenses. Under United States GAAP, assumptions established at the time a policy is written are locked in and only revised if it is determined that future experience will worsen from that previously assumed. (d) SALES OF RECEIVABLES The Company adopted Financial Accounting Standard No. 125 ("FAS 125"), "Accounting for Transfers and Servicing of Financial Assets", for transfers of financial assets after December 31, 1996. Under FAS 125, the Company does not recognize the sales of receivables until the transferred receivables are put beyond the reach of the Company's creditors. The Company's cemetery installment contract receivables have been sold to an affiliate whose capital stock is pledged as collateral for the benefit of the Company's senior lenders, see Note 9. Accordingly, for United States GAAP purposes, the Company continues to carry the transferred receivables on its financial statements, the proceeds from the sales of receivables have been reflected in loans and advances from affiliates and the related losses are deferred and recognized as interest expense over the life of the loan. (e) UNREALIZED GAINS AND LOSSES Amounts receivable from cemetery merchandise trusts and insurance invested assets are subject to the provisions of Financial Accounting Standard No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and Equity" under United States GAAP. Under FAS 115, fixed maturity securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Fixed maturity securities classified as held-to-maturity were approximately $30,582,000 at December 31, 1998 (1997 -- $69,243,000). Debt and equity securities that are held with the objective of trading to generate profits on short-term differences in price are carried at fair value, with changes in fair value reflected in the results of operations. At December 31, 1998, the Company had no securities classified as trading (1997 -- $1,380,000). All other fixed maturity and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and carried at fair value which was approximately $619,913,000 at December 31, 1998 (1997 -- $496,922,000). Available-for-sale securities may be sold in response to changes in interest rates and liquidity needs. Unrealized holding gains and losses related to available-for-sale investments, after deducting amounts allocable to income taxes, are reflected as accumulated other comprehensive income, a separate component of stockholders' equity. Unrealized holding gains and losses related to trading investments, after deducting amounts allocable to income taxes, are reflected in earnings. 133 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (f) ACCOUNTING FOR JOINT VENTURE Beginning in November 1998, the Company proportionately consolidates, for Canadian GAAP purposes, its investment in 4103 Investments, which is a joint venture. Under United States GAAP, the investment in 4103 Investments is recorded under the equity method. (g) STOCK-BASED COMPENSATION The Company has separate fixed stock option plans for its United States and Canadian employees which enable the Company to grant options to its employees and directors. The option plans are administered by the Compensation Committee of the Company's Board of Directors. Each participant enters into an option agreement which sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options. The exercise price of an option may not be less than the market price of the Company's stock on the trading day immediately prior to the grant date and in no event may an option terminate later than ten years after the grant date of such option. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", for United States GAAP purposes. The Company continues to record compensation expense for United States GAAP purposes following the intrinsic value principles of APB 25 for Accounting for Stock Issued to Employees in accounting for the plans. Under APB 25, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost been determined based on fair value at the grant dates for awards under those plans consistent with the measurement provisions of FAS 123, net earnings (loss) under United States GAAP would have been charged an additional $2,133,000 for the year ended December 31, 1998 (1997 -- $2,756,000, 1996 -- $2,828,000). For these purposes, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield nil (1997 -- 0.5%, 1996 -- 0.5%), expected volatility 29% (1997 -- 24%, 1996 -- 24%), United States risk-free interest rates 5.11% (1997 -- 5.89%, 1996 -- 5.57%) and expected average option term of 3.4 years (1997 -- 4.6 years, 1996 -- 2.9 years). The weighted average fair value of the options granted is $6.41(1997 -- $8.92, 1996 -- $6.25) per option. (h) REPORTING ON THE COSTS OF START-UP ACTIVITIES The AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") on April 3, 1998, to be effective for fiscal years beginning after December 15, 1998. SOP 98-5 states that the costs of start-up activities, including organization costs, should be expensed as incurred. The Company has elected early adoption of SOP 98-5 to be effective for the year ended December 31, 1998. Pursuant to SOP 98-5, the Company has written off the unamortized costs of start-up activities, which are contained in other assets, as a change in accounting principle. SOP 98-5 was adopted in the fourth quarter of 1998, and was effective January 1, 1998. The effect on the loss for the year ended December 31, 1998 would be a decrease of $3,940,000. 134 LOEWEN GROUP INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES NOTE 25. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (i) ADVERTISING COSTS Advertising costs were $8,796,000 for the year ended December 31, 1998 (1997 -- $7,896,000; 1996 -- $6,796,000). (j) RECENT ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has not determined the impact of this recent accounting standard on its consolidated financial statements. NOTE 26. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period. 135 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Neweol Investments Ltd. We have audited the consolidated balance sheets of Neweol Investments Ltd., as defined in Note 2 to the financial statements, as at December 31, 1998 and 1997 and the consolidated statements of operations, comprehensive income and retained earnings (deficit) and cash flows for each of the years in the three year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Neweol Investments Ltd. as at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1998, in accordance with generally accepted accounting principles in the United States. As required by the Company Act of the Province of British Columbia, we report that, in our opinion, these principles have been applied on a consistent basis. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements. Our report to the shareholders dated April 12, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor's report when these are adequately disclosed in the financial statements. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 136 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) CONSOLIDATED BALANCE SHEETS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ ASSETS Current assets Cash................................................................................ $ 916 $ 181 Accounts receivable, net of allowances.............................................. 23,708 -- Installment contract receivables, net of allowances................................. 57,959 61,549 Note receivable from affiliate...................................................... 39,938 -- ------------ ------------ 122,521 61,730 Long-term installment contract receivables, net of allowances......................... 135,076 143,420 Investments........................................................................... -- 13,358 Investment in affiliate............................................................... -- 47,441 Notes receivable from affiliates...................................................... 170,976 1,032,516 Due from affiliates................................................................... 5,186 387 Due from Parent Company............................................................... 37,830 -- Deferred income taxes................................................................. 12,003 -- Other assets.......................................................................... 558 1,244 ------------ ------------ $ 484,150 $ 1,300,096 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current indebtedness................................................................ $ 66,222 $ -- Accounts payable and accrued liabilities............................................ 4,365 3,444 Due to affiliates................................................................... 2,894 7,868 ------------ ------------ 73,481 11,312 Note payable.......................................................................... 5,756 2,517 Due to Parent Company................................................................. -- 3,701 Accrued equity loss in associated company............................................. 43,987 -- Minority interest and redeemable shares of subsidiary................................. 9,422 21,999 Shareholders' equity Capital stock, no par value, 1,000,000,000 shares authorized, 267,706 shares issued and outstanding (1997 -- 264,839)................................................. 1,190,576 1,177,787 Retained earnings (deficit)......................................................... (838,476) 82,660 Accumulated other comprehensive income: Foreign currency translation adjustment........................................... (596) 120 ------------ ------------ 351,504 1,260,567 ------------ ------------ $ 484,150 $ 1,300,096 ------------ ------------ ------------ ------------ FINANCIAL CONDITION (NOTE 1) COMMITMENTS AND CONTINGENCIES (NOTES 3, 5, 15 AND 17)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 137 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND RETAINED EARNINGS (DEFICIT) EXPRESSED IN THOUSANDS OF U.S. DOLLARS
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ----------- ---------- --------- Revenue Interest income from affiliates............................................. $ 120,398 $ 99,145 $ 59,403 Revenue earned from purchased receivables................................... 26,690 7,384 979 Other revenue............................................................... -- 807 1,900 ----------- ---------- --------- 147,088 107,336 62,282 Expenses General and administrative.................................................. 6,621 2,709 1,513 Contract cancellation and bad debt expense.................................. 35,213 -- -- Interest expense............................................................ 1,354 -- -- Impairment loss on notes receivable from affiliate.......................... 837,790 -- -- ----------- ---------- --------- Earnings (loss) before income tax expense and undernoted items................ (733,890) 104,627 60,769 Income taxes Current..................................................................... 6,727 6,070 6,633 Deferred.................................................................... (12,003) -- -- ----------- ---------- --------- (5,276) 6,070 6,633 ----------- ---------- --------- (728,614) 98,557 54,136 Equity in earnings (losses) of associated companies........................... (91,428) (9,129) 1,650 Minority interest............................................................. (212) (5,202) (6,366) ----------- ---------- --------- Net earnings (loss)........................................................... $ (820,254) $ 84,226 $ 49,420 ----------- ---------- --------- ----------- ---------- --------- Other comprehensive income, net of tax: Net earnings (loss)......................................................... $ (820,254) $ 84,226 $ 49,420 Foreign currency translation................................................ 596 (120) (5,573) ----------- ---------- --------- Comprehensive income (loss)................................................... $ (819,658) $ 84,106 $ 43,847 ----------- ---------- --------- ----------- ---------- --------- Retained earnings, beginning of period........................................ $ 82,660 $ 54,163 $ 10,415 Net earnings (loss)........................................................... (820,254) 84,226 49,420 Dividends on common shares.................................................... (100,882) (53,669) -- Dividends on redeemable preferred shares...................................... -- (2,060) (5,672) ----------- ---------- --------- Retained earnings (deficit), end of period.................................... $ (838,476) $ 82,660 $ 54,163 ----------- ---------- --------- ----------- ---------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 138 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) CONSOLIDATED STATEMENTS OF CASH FLOWS EXPRESSED IN THOUSANDS OF U.S. DOLLARS
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- CASH PROVIDED BY (APPLIED TO) Operations Net earnings (loss)...................................................... $ (820,254) $ 84,226 $ 49,420 Items not affecting cash Minority interest...................................................... 212 5,202 6,366 Deferred income taxes.................................................. (12,003) -- -- Impairment loss on notes receivable from affiliate..................... 837,790 -- -- Equity in losses (earnings) of associated companies.................... 91,428 9,129 (1,650) Collections of purchased receivables from affiliate...................... 91,188 -- -- Net changes in other non-cash balances................................... 14,737 (5,614) 9,280 ----------- ----------- ----------- 203,098 92,943 63,416 ----------- ----------- ----------- Investing Loans to affiliate....................................................... (154,658) (474,853) (251,171) Repayments of notes receivable from affiliate............................ 138,469 142,763 36,091 Purchase of receivables from affiliate................................... (117,036) (177,748) (57,483) Investments.............................................................. -- (9,732) (2,212) Investment in affiliate.................................................. 387 (24,473) -- Advances to affiliates................................................... (5,529) -- -- ----------- ----------- ----------- (138,367) (544,043) (274,775) ----------- ----------- ----------- Financing Capital contributions from Parent Company................................ -- 431,805 40,792 Advances from Parent Company............................................. -- 16,267 190,130 Repayment of advances from Parent Company................................ (35,092) -- (19,673) Advances on note payable................................................. 71,654 -- -- Repayments on note payable............................................... (5,432) -- -- Common share dividends................................................... (95,126) -- -- Increase in minority interest............................................ -- 3,126 -- ----------- ----------- ----------- (63,996) 451,198 211,249 ----------- ----------- ----------- Increase in cash during the year........................................... 735 98 (110) Cash, beginning of year.................................................... 181 83 193 ----------- ----------- ----------- Cash, end of year.......................................................... $ 916 $ 181 $ 83 ----------- ----------- ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 139 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 1. FINANCIAL CONDITION BASIS OF PRESENTATION These consolidated financial statements have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States. The going concern basis of presentation assumes that Neweol Investments Ltd. ("the Company") will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Certain conditions, described below, currently exist which cast doubt upon the validity of this assumption. During the year, the Company incurred a loss of $820,254,000 primarily the result of the impairment loss on notes receivable from its affiliate Loewen Group International, Inc. ("LGII") and an accrual of the equity in LGII's loss in excess of the Company's investment. There is substantial doubt about the appropriateness of the use of the going concern assumption because of uncertainty as regards The Loewen Group Inc.'s ("Parent Company") and LGII's financial condition due to both a significant net loss and negative cash flow experienced in 1998. There is also uncertainty as to LGII's ability to refinance its pass-through asset trust senior guaranteed notes ("PATS senior notes") which may be redeemed on October 1, 1999 and which require refinancing on terms satisfactory to certain of the Parent Company's and LGII's lenders by September 15, 1999 under the terms of certain of the Parent Company's and LGII's debt agreements. The shares held by the Parent Company of its subsidiaries are pledged under a collateral trust arrangement as collateral for among other debt, the PATS senior notes. The Company is economically dependent upon its Parent Company and its subsidiaries. The ability of the Company to continue as a going concern and to realize the carrying value of their assets and discharge their liabilities when due is dependent on the successful completion of actions that the Parent Company and its subsidiaries have taken or plan to take which management believes will mitigate the adverse conditions and events which raise doubt about the validity of the "going concern" assumption. However, there is no certainty that the actions or other strategies carried out by the Parent Company and its subsidiaries will be sufficient to permit the Company to continue. The consolidated financial statements do not reflect adjustments that would be necessary if the "going concern" assumption were not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Neweol Investments Ltd. was incorporated on November 6, 1992 under the federal laws of Canada and continued on June 3, 1993 under the laws of the Province of British Columbia as a wholly owned subsidiary of the Parent Company. The principal activities of the Company are to provide financing to and hold investments in other subsidiaries of the Parent Company ("affiliates"). The consolidated financial statements have been prepared in United States dollars in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of 140 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from those estimates. BASIS OF CONSOLIDATION The accompanying consolidated financial statements have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements exclude certain subsidiaries of the Company which were transferred to an affiliate in a reorganization that was effective July 19 and August 13, 1996 and accordingly are not intended to be a complete presentation of the historical consolidated financial position, results of operations, and cash flows of the Company. To the extent interests in those subsidiaries were not transferred as a result of the reorganization, such interests are reflected in the accompanying financial statements. These consolidated financial statements include the following principal subsidiaries: Loewen Luxembourg (No. 1) S.A., 4166 Investments Ltd., their subsidiaries and predecessors and Neweol's equity investment in its affiliate LGII. All subsidiaries are wholly owned at December 31, 1998, except for redeemable shares of a subsidiary which are held by an affiliate. The Company initially records investments acquired from third parties at cost and investments acquired from entities under common control at the transferor's carrying value. The Company accounts for its investment in companies in which it has significant influence by the equity method. The Company's proportionate share of income (loss) as reported is included in income and added to (deducted from) the cost of the investment. Common share dividends received reduce the carrying amount of the investment. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. The Company receives administrative support from the Parent Company at no charge to the Company. Direct costs of the Company's operations are recorded as expenses. The Company has no operations independent of those carried on by its subsidiaries. The Company is dependent on future remittances from its subsidiaries or capital contributions from its Parent Company to satisfy its obligations, primarily all of which are to affiliates. REVENUE EARNED FROM PURCHASED ACCOUNTS RECEIVABLE Unearned finance income and unamortized purchase discount, representing the financing cost to the affiliates, are established at the time of the purchase. Unearned finance income and unamortized purchase discount are recognized as revenue earned from purchased receivables over the collection period of the contract receivables. ALLOWANCE FOR CONTRACT CANCELLATIONS AND DOUBTFUL ACCOUNTS An allowance for cancellations and refunds is provided at the date of sale based on management's estimates. The allowance is reviewed quarterly and changes in estimates are reflected for current and prior 141 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) contracts as a result of recent cancellation experience. Actual cancellation rates in the future may result in a change in estimate. CONCENTRATION OF CREDIT RISK All of the Company's installment contract receivables are from the sale of pre-need cemetery interment rights, merchandise and services to consumers. All of the Company's accounts receivable are from the at-need sale of funeral services to consumers. The installment contract receivables and the accounts receivable individually are relatively small dollar amounts and originated at multiple locations throughout the U.S. All of the Company's notes receivable from affiliates are due from LGII, with the exception of a note receivable from a United Kingdom affiliate (see note 3). ACCOUNTING FOR INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which these 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 in income in the period that includes the enactment date. FOREIGN CURRENCY The assets and liabilities denominated in foreign currencies have been translated into United States dollars at the rates of exchange at the balance sheet dates, and revenues and expenses are translated at the average rates of exchange for the periods of operation. Exchange gains and losses arising from foreign currency transactions are included in income in the current year. Unrealized gains and losses arising from the translation are classified as "Foreign currency translation adjustment" within shareholders' equity. No exchange gains or losses have been incurred in the years presented. 142 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Current Secured term credit agreement due in 1999....................... $ 206,000 $ -- Allowance for credit losses..................................... (166,062) -- ------------ ------------ Net current notes receivable from affiliate....................... $ 39,938 $ -- ------------ ------------ ------------ ------------ Long-term Unsecured revolving credit agreement due in 1999................ $ -- $ 54,790 Unsecured revolving credit agreement due in 2003................ 10,291 -- Unsecured revolving credit agreement due in 2003................ 10,914 -- Secured revolving credit agreements due in 2002................. 137,594 87,821 Secured term credit agreement due in 1999....................... -- 206,000 Secured term credit agreement due in 2000....................... 199,650 199,650 Secured term credit agreement due in 2001....................... 184,390 184,390 Secured term credit agreement due in 2002....................... 299,865 299,865 ------------ ------------ Total long-term investment in notes receivable.................... 842,704 1,032,516 Allowance for credit losses....................................... (671,728) -- ------------ ------------ Net long-term notes receivable from affiliates.................... $ 170,976 $ 1,032,516 ------------ ------------ ------------ ------------
All of the Company's notes receivable are due from LGII, with the exception of the unsecured revolving credit agreement due in 2003, which is due from a United Kingdom affiliate. The Company has determined there is no impairment related to the note receivable from the United Kingdom affiliate. At December 31, 1998, the Company has determined that the notes receivable from LGII were impaired based upon the affiliate's negative cash flow and its deteriorating operational and financial condition. The Company has measured impairment using the estimated fair value of the collateral associated with the notes receivable. Accordingly, the Company has recognized a $837,790,000 allowance for credit losses against the notes receivable from LGII. The Company has not changed its method of recognizing interest income and will evaluate collectibility of interest receivable balances on an ongoing basis. The first unsecured revolving credit agreement due in 2003 bears interest at a fixed rate of 11.25%. The second unsecured revolving agreement due in 2003 bears interest at a floating rate based on the mean of the London interbank offered rates for deposits of similar duration to the interest accrual period plus 2.5% (10.0% at December 31, 1998; 9.93% at December 31, 1997). The secured revolving credit agreements due in 2002 bear interest at a floating rate based on U.S. Treasury rates adjusted to a constant maturity of three months plus 5% (9.09% at December 31, 1998). The current and long-term secured term credit agreements bear interest at a fixed rate of 11.5% per annum. The maximum credit available under the unsecured revolving credit agreements and the secured revolving credit agreements is $99,500,000 and $300,000,000, respectively. In 1996, the Parent Company, LGII and their senior lenders entered into a collateral trust agreement pursuant to which the senior lenders share certain collateral and guarantees on a pari passu basis (the 143 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (CONTINUED) "Collateral Trust Agreement"). The security for lenders under the Collateral Trust Agreement consists of (i) all of LGII's right, title and interest in and to all rights to receive payment under or in respect of accounts, contracts, contractual rights, chattel paper, documents, instruments and general intangibles, (ii) a pledge of the shares of capital stock of substantially all of the subsidiaries in which the Parent Company directly or indirectly holds more than a 50% voting or economic interest and (iii) a guarantee by each subsidiary that is pledging stock. The security is held by a trustee for the equal and ratable benefit of the senior lending group. Accordingly, the secured revolving and term credit agreements are secured under the Collateral Trust Agreement, subordinated to the senior lending group. At December 31, 1998, the indebtedness of the Parent Company and its subsidiaries owed to the senior lending group subject to the Collateral Trust Agreement, including holders of certain letters of credit aggregated $2,108,000,000. NOTE 4. INVESTMENTS On November 15, 1994, a subsidiary of the Company made an investment of $99,600 representing a 24.9% interest in a partnership. The investment was carried at the equity method. The partnership's profits were $nil for the year ended December 31, 1998 (1997 -- $411,000; 1996 -- $373,000). The partnership's principal asset was credit card receivables. Equity income of $nil has been netted into general and administrative expense at December 31, 1998 (1997 -- $102,000; 1996 -- $93,000). On January 15, 1998, the partnership was wound up with the partnership's liabilities being repaid and the assets liquidated. NOTE 5. INVESTMENT IN AFFILIATE The Company has a 14% (1997 -- 15%) interest in LGII. LGII serves as the holding company for the Parent Company's United States funeral, cemetery and insurance operations. The Company follows the equity method of accounting for this investment because it has significant influence over LGII as a result of its affiliate relationship and related party transactions. As a result of a transaction being settled by LGII issuing shares to the Parent Company, the Company's investment has been diluted to 14% during the year. The Company has recorded its equity in the loss of LGII in excess of the net book value of its investment 144 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) due to the Company's guarantee of LGII's debt and pledge of the shares of its subsidiaries as collateral for debt of LGII. Summarized financial data for LGII on a U.S. GAAP basis are presented as follows:
1998 1997 1996 ------------ ------------ ------------ Income statement information: Revenue........................................... $ 1,059,783 $ 1,036,882 $ 840,103 Net loss.......................................... (634,113) (64,735) (4,547) Balance sheet information: Current assets.................................... $ 321,603 $ 304,108 $ 223,388 Non-current assets................................ 4,081,877 4,138,197 3,107,273 ------------ ------------ ------------ Total assets...................................... 4,403,480 4,442,305 3,330,661 Current liabilities............................... 1,268,691 225,770 156,290 Non-current liabilities........................... 3,418,560 3,898,495 2,981,124 ------------ ------------ ------------ Total liabilities................................. 4,687,251 4,124,265 3,137,414 Shareholders' equity (deficiency)................. (283,771) 318,040 193,247 The Company's equity in the loss of LGII............ $ 91,428 $ 9,627 $ 321
LGII is subject to material contingencies, as disclosed below: FELDHEIM ET AL. V. SI-SIFH CORP. ET AL. AND DUFFY ET AL. V. SI-SIFH CORP ET AL. Two complaints were filed in 1997 on behalf of individuals who claim damages in connection with funeral insurance policies allegedly issued to them by insurance companies owned, directly or indirectly, by S.I. Acquisition Associates, L.P. ("S.I."). LGII acquired the assets but not the stock of S.I. in March 1996. In January 1997, Elmer C. Feldheim and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Jefferson, State of Louisiana. Plaintiffs seek a class action. SI-SIFH Corp. and SI-SI Insurance Company, Inc. are affiliates of S.I. In June 1997, Lloyd Duffy, Sr. and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp., SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of Orleans, State of Louisiana. Plaintiffs seek a class action. The DUFFY complaint was filed by the same lawyers who filed the complaint in the FELDHEIM case, and is a virtually identical copy of the FELDHEIM complaint. The DUFFY case is pending in the trial court and, as of the date hereof, no discovery has taken place. The FELDHEIM and DUFFY plaintiffs allegedly hold or held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. The plaintiffs allege that (i) the defendants failed to provide the funeral services purchased with the policies by, among other things, offering a casket of inferior quality upon presentation of a policy, and (ii) in connection with the sale of the insurance policy, the insurance companies negligently or fraudulently represented and interpreted the scope and terms of the policies and omitted to provide material information regarding the policy benefits and limitations. Plaintiffs also alleged unfair trade practices in violation of Louisiana's trade practices laws. 145 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) Plaintiffs' petitions seek damages, penalties and attorneys fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages. Plaintiffs also seek a declaratory judgment compelling defendants to honor the policies. On June 13, 1997, the district court in Jefferson Parish dismissed the FELDHEIM plaintiffs' claim to a class action, and plaintiffs appealed. Briefing of the appeal was completed in December 1997, and oral argument was held on January 15, 1998. On June 30, 1998, the Louisiana Fifth Circuit Court of Appeal affirmed the dismissal of the FELDHEIM plaintiffs' class-action claims except as to a claim by "Sub Class B" plaintiffs (the proposed class of current policyholders who are seeking a declaratory judgment). The appellate court found that the trial court's opinion did not consider the validity of class treatment for the "Sub Class B" plaintiffs' claim for a declaratory judgment when it dismissed plaintiffs' class-action claims, and it remanded the case to the trial court for a hearing on that issue. On September 22, 1998, the trial court ruled that the claim could not go forward as a class action, and granted the exception of no cause of action as to Count IV, sub-class B. On October 20, 1998, plaintiffs noticed a suspensive appeal to the Louisiana Fifth Circuit Court of Appeal from this ruling. No order granting the suspensive appeal has been signed by the trial court and the matter has not been filed with the Court of Appeal. To date, plaintiffs have taken no further action in connection with this filing. On August 26, 1998, defendants sought dismissal of all of plaintiffs' remaining individual claims in FELDHEIM. The trial court has not yet ruled on that request. On September 21, 1998, plaintiffs in FELDHEIM filed an "Amended Petition for Attorneys Fees," which contends that the plaintiffs' lawyers are entitled to an unspecified sum of attorneys' fees. Defendants will respond shortly to that amended petition. As of the date hereof, no discovery has taken place. On April 17, 1998 the trial court in the DUFFY lawsuit declined to grant the defendants' exception seeking to dismiss the plaintiffs' class action allegations on the face of the pleadings. Instead, the court deferred ruling on those issues until the hearing on the class action issues, and the court indicated it would permit some discovery. On April 23, 1998 the defendants filed a Notice of Intent to Seek Supervisory Writs with the Court of Appeal from the trial court's April 17, 1998 judgment, and the trial court granted the defendants' motion for a stay of all proceedings pending a ruling by the Court of Appeal on the supervisory writ application. The defendants filed their Application for Supervisory Writs with the Louisiana Fourth Circuit Court of Appeal on June 5, 1998. On July 16, 1998, the trial court lifted its previously entered stay of all proceedings in this case; defendants have filed a motion requesting that the trial court reinstitute its stay. On January 6, 1999, the Fourth Circuit Court of Appeal granted supervisory writs, reversed the trial court judgment overruling the exception of RES JUDICATA, maintained the exception of RES JUDICATA and dismissed the action. On February 5, 1999 the DUFFY plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court. LGII has filed an opposition to the application. LGII has determined that it is not possible at this time to predict the final outcome of these legal proceedings, including whether a class will be certified, and that it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be 146 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in LGII's consolidated financial statements. LUENING, ET AL. V. SI-SIFH CORP., ET AL. In June 1998, Warren S. Luening and four other individuals filed a lawsuit on behalf of themselves and a class of similarly situated individuals and/or entities against SI-SIFH Corp, SI-SI Insurance Company, Inc., Loewen Louisiana Holdings, Inc., and LGII in the Parish of St. Bernard, State of Louisiana. Plaintiffs seek a class action. Defendants in this case are the same entities against whom complaints were filed in Jefferson Parish, Louisiana (the FELDHEIM case) and in Orleans Parish, Louisiana (the DUFFY case), and, aside from the addition of local counsel in St. Bernard Parish, the same lawyers who filed the FELDHEIM and DUFFY complaints filed the LUENING complaint. Plaintiffs allegedly hold and held funeral insurance policies issued by insurance companies owned, directly or indirectly, by the defendants. Plaintiffs allege that the defendants failed to provide the funeral services purchased with policies by, among other things, (i) charging them for certain funeral services, including the services of a funeral director and staff, a funeral ceremony, care of the deceased, automotive services and a casket, even though these services were allegedly covered by their policies, and (ii) unjustly enriching themselves through the payment of services allegedly covered under the plaintiffs' policies, and the plaintiffs are therefore entitled to restitution of those payments. Plaintiffs' complaint seeks compensatory and nonpecuniary damages and attorneys' fees. Louisiana law prohibits plaintiffs from alleging specific amounts of damages in their complaint. On October 22, 1998, plaintiffs in LUENING filed a "First Amended Petition for Damages." In response to the First Amended Petition, on October 19, 1998 defendants removed the LUENING case to federal court on diversity-of-citizenship grounds. The federal court subsequently remanded the case to state court. As of the date hereof, no discovery has taken place. On January 29, 1999, the state court heard argument on the plaintiffs' motion to compel discovery and LGII's exceptions of venue and RES JUDICATA. On February 3, 1999, the court denied both exceptions and granted the motion to compel discovery, ruling that the dismissal of the class action claims in the FELDHEIM and DUFFY cases did not operate to bar this particular sub-class of potential plaintiffs. On February 26, 1999, LGII filed supervisory writs on these rulings, and requested a stay of the discovery ruling pending a decision on the writ application. On March 1, 1999, the Fourth Circuit Court of Appeals stayed all further legal proceedings and discovery in the trial court and ordered the plaintiffs to respond to LGII's writ application on an expedited basis. The Fourth Circuit granted the LGII's writ application on March 25, 1999, finding that under the RES JUDICATA doctrine as stated in the Fourth Circuit's DUFFY decision, relitigation of the plaintiffs' class action claims was forever barred in Louisiana courts by denial of the class certification in the FELDHEIM case. Accordingly, the Fourth Circuit reversed the trial court's denial of the LGII's RES JUDICATA exception, while recognizing that individual plaintiffs' claims could proceed in St. Bernard Parish. It also remanded the case to the trial court for a hearing on the plaintiffs' motion to compel discovery, but it instructed that any discovery requests that are not related to the individual plaintiffs' claims should be denied. 147 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) On March 29, 1999, the LUENING plaintiffs filed an application for writ of certiorari with the Louisiana Supreme Court, and asked that the writ application be consolidated with the application for writ of certiorari filed by the DUFFY plaintiffs. LGII intends to file an opposition to the application. LGII has determined that it is not possible to predict the final outcome of this legal proceeding, including whether a class will be certified, and it is not possible to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to plaintiffs. Accordingly, no provision with respect to this lawsuit has been made in LGII's consolidated financial statements. THE LOEWEN GROUP INC. ET AL. V. THE UNITED STATES OF AMERICA On October 30, 1998, the Parent Company and an affiliate filed a claim against the United States government for damages under the arbitration provisions of the North American Free Trade Agreement ("NAFTA"). The plaintiffs contend that they were damaged as a result of breaches by the United States of its obligations under NAFTA in connection with certain litigation in the State of Mississippi entitled O'KEEFE V. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege that they were subjected to discrimination, denial of the minimum standard of treatment guaranteed by NAFTA and uncompensated expropriation, all in violation of NAFTA. The Parent Company has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of the damages that may be awarded to LGII. SECURITIES CLASS ACTIONS Since December 1998 the Parent Company has been served with various related lawsuits filed in the United States District Courts for the Eastern District of Pennsylvania and for the Eastern District of New York. Raymond L. Loewen, the former Chairman and Chief Executive Officer, and certain officers and directors have been named as defendants in some of the suits. All but one of these lawsuits were filed as purported class actions on behalf of persons or entities that purchased the Parent Company's common shares during five different time periods ranging from November 3, 1996 through January 14, 1999. LGII and Loewen Group Capital, L.P. are named as defendants in two suits (with the Parent Company, the "Loewen Defendants"). The plaintiffs in the two lawsuits purport to sue on behalf of a class of purchasers of the Monthly Income Preferred Securities, Series A (MIPS) from March 5, 1997 through January 14, 1999. The MIPS were issued by Loewen Group Capital, L.P. The complaints generally make allegations concerning, among other things, the Parent Company's internal controls, accounting practices, financial disclosures and acquisition practices. The Loewen Defendants have filed a motion with the Judicial Panel on Multidistrict Litigation (the "MDL Panel") to consolidation all of the actions for pretrial coordination in the United States District Court for the Eastern District of Pennsylvania. Counsel for the plaintiffs in the actions currently pending in the Eastern District of New York have filed a written stipulation with the MDL Panel agreeing to the transfer of their cases to the Eastern District of Pennsylvania. The MDL Panel has not ruled. By agreement, the Loewen Defendants' responses to all complaints currently are due by April 26, 1999. The complaints filed in the United States District Court for the Eastern District of Pennsylvania are: BERG V. THE LOEWEN GROUP INC., ET AL., 99-CV-321; BRODY V. RAYMOND L. LOEWEN, ET AL., 99-CV-19; CAMUTO ET 148 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) AL. V. RAYMOND L. LOEWEN, ET AL., 99-CV-640; GILMORE V. RAYMOND L. LOEWEN, ET AL., 99-CV-232; CITY OF PHILADELPHIA V. LOEWEN GROUP, INC. ET AL., 99-CV-1007; HILL V. THE LOEWEN GROUP INC. ET AL., 99-CV-560; JAMISON V. RAYMOND L. LOEWEN, ET AL., 99-CV-98; MCGLATHERY ET AL. V. RAYMOND L. LOEWEN ET AL. 99-CV-665 (the MCGLATHERY suit was filed on behalf of purchasers of MIPS); PASKOWITZ V. RAYMOND L. LOEWEN ET AL., 99-CV-91; SIROTA & SIROTA EMPLOYEES PROFIT SHARING PLAN V. THE LOEWEN GROUP INC. ET AL., 99-CV-585; STEINER V. RAYMOND L. LOEWEN, ET AL., 98-CV-6740; TEKIRAN V. RAYMOND L. LOEWEN ET AL., 99-CV-589; and TRAVIS V. RAYMOND L. LOEWEN, ET AL., No. 99-11340. The complaints filed in the United States District Court for the Eastern District of New York are: COHEN V. THE LOEWEN GROUP INC., ET AL. (the COHEN suit was filed on behalf of purchasers of MIPS); CV 99 553; COLLINS V. THE LOEWEN GROUP INC., ET AL., CV 99 261; CORRADINI, ET AL. V. THE LOEWEN GROUP INC. ET AL., CV 99 443; GERSH V. THE LOEWEN GROUP INC., CV 98 7983; GREAT NECK CAPITAL APPRECIATION PARTNERS V. RAYMOND L. LOEWEN, ET AL., CV 99 164; HARRIS V. THE LOEWEN GROUP INC., ET AL., CV 99 153; and SALEM V. THE LOEWEN GROUP INC., ET AL., CV 99 351. The Pennsylvania cases have all been assigned to Judge Thomas O'Neill. Plaintiffs filed a stipulated motion seeking the appointment of the City of Philadelphia Board of Pensions as lead plaintiff. LGII anticipates that all of the Pennsylvania cases will be consolidated and that, when and if transferred, the New York cases will also be consolidated. It is expected that the lead plaintiff will, when appointed, file a Consolidated and Amended Complaint, to which the defendants will be required to respond. Additional class action complaints containing similar allegations may be filed in the future. LGII has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in the LGII's consolidated financial statements. F. LEO GROFF, INC. ET AL. V. RESTLAWN MEMORIAL GARDENS, INC. ET AL. This action (No. 96-CV-397, Court of Common Pleas, Erie County, Ohio) was served on LGII and other defendants on September 19, 1996. Plaintiffs allegedly compete with defendants Restlawn Memorial Park Association, Restlawn Memorial Gardens, Inc., and Sinfran, Inc., which were acquired by LGII. Plaintiffs allege thirteen counts, including counts alleging that defendant Restlawn engaged in false and deceptive advertising, misused confidential information, defamed plaintiffs, breached contractual obligations, misappropriated trade secrets, and tortiously interfered with plaintiffs' contractual relationships. Plaintiffs further allege that defendants knew or should have known of Restlawn's conduct and adopted and continued Restlawn's alleged unfair, false, and deceptive practices. Plaintiffs also allege that the defendants conspired to destroy plaintiffs' business and created a "trust in order to prevent competition" in violation of Ohio's antitrust laws. Plaintiffs seek compensatory damages, which are unspecified but alleged to exceed $350,000; punitive damages, which are unspecified but alleged to exceed $300,000; and injunctive relief. Defendants' summary judgment motion was denied as to all but one of plaintiffs' counts. A trial date has been set for July 12, 1999. LGII has determined that it is not possible at this time to predict the final outcome of these proceedings or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the 149 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) range of possible damages that may be awarded to the plaintiffs. Accordingly, no provision with respect to these lawsuits has been made in LGII's consolidated financial statements. FLANAGAN On December 7, 1998, Honorine T. Flanagan filed a complaint in the Superior Court of the State of California in the County of Los Angeles against the Parent Company and LGII. To date, only LGII has been served with the complaint. The matter was subsequently removed to federal court based on diversity jurisdiction, and it is now pending in the United States District Court in the Central District of California. The complaint alleges that the defendants breached an express warranty contained in the Share Purchase Agreement dated July 17, 1995, between LGII and Ms. Flanagan, her husband John Flanagan (now deceased) and the Flanagan Family Trust. The Share Purchase Agreement was made in connection with LGII's purchase of the Flanagans' mausoleum and mortuary business in exchange for approximately $2,000,000 in cash and $7,800,000 of Loewen stock. The Loewen stock was valued at $36.00 per share at the time of the transaction. Ms. Flanagan alleges that LGII knew of claims, suits or other actions which would materially and adversely affect the financial condition of the Parent Company, yet made false statements to the contrary in the Share Purchase Agreement. Ms. Flanagan alleges that two lawsuits pending at the time of the Share Purchase Agreement did eventually have a material adverse impact on the financial condition of the Parent Company and the value of the stock received by Ms. Flanagan in connection with the Share Purchase Agreement. Ms. Flanagan's complaint also contains causes of action for breach of contract in connection with the Share Purchase Agreement and in connection with employment and consulting agreements entered into at the time of the Share Purchase Agreement. Additionally, Ms. Flanagan alleges causes of action for intentional and negligent misrepresentation and declaratory relief. Ms. Flanagan estimates that her damages as a result of the alleged breaches and misrepresentations are not less than $5,000,000. This amount is based on her claim that the shares she received were represented to have a value of $7,800,000 million at the time of the agreement, and at the time the complaint was filed those shares had a value that was approximately one third of the original represented value. Her claimed damages may change as the price of the Parent Company's common shares fluctuates. Further, Ms. Flanagan seeks punitive damages in an unspecified sum. On the declaratory relief cause of action, Ms. Flanagan seeks a declaration that she is to be reimbursed for her losses pursuant to the indemnity provision contained in the Share Purchase Agreement. She also seeks a declaration that until she is indemnified for her losses she is not obligated to transfer property that pursuant to the Agreement LGII has the option to purchase for a specified price pursuant to the Share Purchase Agreement. LGII has determined that it is not possible at this time to predict the final outcome of this proceeding or to establish a reasonable estimate of possible damages, if any, or reasonably to estimate the range of possible damages that may be awarded to the plaintiff. Accordingly, no provision with respect to this lawsuit has been made in LGII's consolidated financial statements. 150 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 5. INVESTMENT IN AFFILIATE (CONTINUED) OTHER LGII is a party to other legal proceedings in the ordinary course of its business but does not expect the outcome of any other proceedings, individually or in the aggregate, to have a material adverse effect on the LGII's financial position, results of operation or liquidity. CONTINGENCY RELATED TO POTENTIAL PURCHASE OF INVESTMENTS LGII has identified and accrued for contingent losses arising from the exercise of the Put/Call Agreements in connection with its investments in Prime Succession Holdings, Inc. and Rose Hills Holdings Corp. CONTINGENCY RELATED TO PATS SENIOR NOTES The PATS senior notes aggregating $300,000,000 are held by a trust for the benefit of the holders of the pass-through asset trust securities due October 1, 1999. The trust has a put option that entitles the trust to redeem the PATS senior notes on October 1, 1999 to refund the repayment of the pass-through asset trust securities under circumstances where no funding is tendered pursuant to a competitive bidding process. If the put option is exercised, LGII is obligated to pay the trust for any loss with respect of an interest rate option based on a 10 year U.S. treasury rate of 6.05% on October 1, 1999. At December 31, 1998, the option value was $29,300,000. The option value will change based on changes in the 10 year U.S. treasury rate. NOTE 6. MINORITY INTEREST AND REDEEMABLE SHARES OF SUBSIDIARY A subsidiary of the Company has issued 40 Class B Ordinary non-voting redeemable shares ("Class B shares") to an affiliate. The Class B shares are redeemable on demand at their carrying amount of $9,433,000. The Class B shares have no right to earnings of the subsidiary, in excess of the redemption amount, in the ordinary course or in connection with the winding up of the Company, unless such dividend or other distribution shall be specifically resolved and declared payable to the Class B shareholders. NOTE 7. INCOME TAXES All income tax expense represent income taxes payable outside Canada. Income tax differed from amounts computed by applying Canadian federal and provincial income tax rates of 45.5% on earnings before income taxes and undernoted items as a result of the following:
1998 1997 1996 ----------- ---------- ---------- Expected income tax expense (benefit).................... $ (333,920) $ 47,605 $ 27,649 Foreign income taxed at different rates.................. 328,644 (41,535) (21,016) ----------- ---------- ---------- $ (5,276) $ 6,070 $ 6,633 ----------- ---------- ---------- ----------- ---------- ----------
During 1998, the Company paid $6,071,543 of income taxes (1997 -- $7,166,000; 1996 -- $12,650,000). The temporary difference which creates the deferred tax asset arose from the provision for bad debts and contract cancellations. Management believes that it is more likely than not that the results of future 151 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 7. INCOME TAXES (CONTINUED) operations will generate sufficient taxable income to realize the deferred tax asset. Accordingly, the Company has not recorded a valuation allowance. The Company's ability to realize its deferred tax asset is based on several factors, including future profitability and is subject to some degree of uncertainty. NOTE 8. DUE FROM PARENT COMPANY The amount due from Parent Company is unsecured, non-interest bearing, due on demand and is denominated in Canadian dollars. NOTE 9. CURRENT INDEBTEDNESS In September 1998, a subsidiary of the Company obtained a $98,039,000 revolving receivables finance facility (the "Receivables Finance Facility") through a subsidiary of one of the Parent Company's bank lenders. Under the terms of the agreement, new receivables are added to the pool each month to offset collections from existing receivables. Another subsidiary of the Company services, administers and collects the receivables. The Receivables Finance Facility contains certain covenants and provides for various events of termination. This facility is secured by a pledge of the cemetery receivables held by the subsidiary with a book value of $189,206,000 and as of September 15, 1999 no further receivables can be added to the pool. At December 31, 1998 the balance outstanding on the Receivables Finance Facility was $66,222,000 which represents the maximum amount available to the Company based on eligible receivables which secure the loan. The Receivables Finance Facility bears interest at a floating rate based on commercial paper rates (December 31, 1998--5.51%). The Receivables Finance Facility is also subject to a commitment fee ranging from 1.10%-3.25% of the total facility amount depending on certain financial ratios. NOTE 10. NOTE PAYABLE The note payable is due to an affiliate, is unsecured, bears interest at 8%, and is due on demand. NOTE 11. SHAREHOLDERS' EQUITY (a) CAPITAL STOCK AUTHORIZED 1,000,000,000 (1997 -- 1,000,000,000) Common shares without par value. 500,000,000 (1997 -- 500,000,000) non-voting, non-cumulative, redeemable and retractable Preferred share with par value of $1 Canadian. 152 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED) (b) CAPITAL STOCK ISSUED AND OUTSTANDING
NUMBER OF CAPITAL SHARES STOCK ----------- ------------ Common shares and additional paid-in capital: Outstanding December 31, 1995........................................ 80,401 $ 214,539 Contributed by Parent Company...................................... -- 66,973 ----------- ------------ Outstanding December 31, 1996........................................ 80,401 281,512 Issued during the year............................................. 184,438 872,889 Contributed on transfer of investment.............................. -- 23,386 ----------- ------------ Outstanding December 31, 1997........................................ 264,839 1,177,787 Issued during the year (see Note 14)............................... 2,867 12,789 ----------- ------------ Outstanding December 31, 1998...................................... 267,706 $ 1,190,576 ----------- ------------ ----------- ------------
During the year, the Company declared and paid dividends aggregating $100,882,000 (approximately $377 per share) on the outstanding common shares. As at December 31, 1998, there were no declared and unpaid dividends outstanding. (c) DEFICIT Substantially all the Company's deficit represents losses incurred in foreign subsidiaries. (d) FOREIGN EXCHANGE ADJUSTMENT The foreign exchange adjustment arose due to changes in the exchange rate applicable to the Canadian dollar amount due to or from Parent Company between the dates of borrowing and the balance sheet date. NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, current indebtedness and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these instruments. It is not practicable to determine the fair value of the notes receivable from affiliates, the amount due from Parent Company, due from and to affiliates, the note payable or redeemable preferred shares due to their related party nature. It is not practicable to estimate the fair value of installment contract receivables, which comprise installment receivables on cemetery sales, which generally have terms of three to five years and bear interest ranging from 8% to 15%. NOTE 13. INSTALLMENT CONTRACT RECEIVABLES AND ACCOUNTS RECEIVABLE During the year, the Company purchased cemetery installment contract receivables from affiliates under common control for approximately $112,861,000 (1997 -- $185,179,000) of which $93,328,000 was paid in cash and $19,533,000 is included in due to affiliates. The Company has recorded the purchase at 153 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 13. INSTALLMENT CONTRACT RECEIVABLES AND ACCOUNTS RECEIVABLE (CONTINUED) the gross amount of the installment contract receivables of $182,497,000 net of the allowance for contract cancellations and doubtful accounts of $27,411,000, unearned finance income of $31,036,000 and unamortized purchase discount of $11,189,000 representing the financing cost to the affiliates. The purchase discount and unearned finance income are recognized in revenue over the collection period of the installment contract receivables. During 1998, the Company has recognized interest income of $15,906,000 (1997 -- $4,409,000) related to purchased cemetery installment contract receivables. During the year, the Company purchased funeral home accounts receivable from affiliates under common control for approximately $23,674,000 all of which was paid in cash. The Company has recorded the purchase at the gross amount of the accounts receivable of $43,033,000 net of the allowance for doubtful accounts of $17,456,000 and unamortized purchase discount of $1,903,000 representing the financing cost to the affiliates. The purchase discount is recognized in revenue over the collection period of the accounts receivable. The Company has entered into management and receivable servicing agreements with affiliates. The affiliates perform specified collection services in return for servicing fees of 108.2% of the affiliate's cost of servicing the cemetery installment contract receivables and 0.25% of the average outstanding balance under collection for funeral home accounts receivable. NOTE 14. NON-CASH TRANSACTIONS The Company entered into the following non-cash transactions:
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- ---------- --------- Issuance of a promissory note to an affiliate in settlement of a dividend....... $ 5,756 $ -- $ -- Increase in due to affiliates on purchase of installment contract receivables... 19,533 -- -- Decrease in amounts due to Parent Company for payments made by Parent Company on the Company's behalf, including $2,315,000 of receivable purchases and $1,065,000 of deferred finance costs.......................................... 4,015 -- -- Issuance of 2,867 common shares upon acquisition of minority interest in Eagle from Parent Company........................................................... 12,789 -- -- Increase in amounts due from Parent Company resulting from the sale of a subsidiary.................................................................... 10,454 -- -- Repayment of notes payable as a result of the sale of subsidiary................ 2,517 -- -- Receipt of note receivable from affiliate upon redemption of 80 preferred shares of affiliate held as an investment............................................ -- 8,000 -- Issuance of 21,346 common shares upon acquisition of minority interest in Loewen Finance Delaware, LLC from Parent Company..................................... -- 100,911 -- Sale of subsidiary in exchange for redeemable preferred shares of affiliate, the subsequent redemption of the preferred shares for a note receivable, and distribution of the note receivable to Parent Company......................... -- 53,669 --
154 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 14. NON-CASH TRANSACTIONS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- ---------- --------- Increase in amounts due to Parent Company for payments made by Parent Company on the Company's behalf, including $722,000 of acquisition costs................. -- 3,599 -- Dividends declared on preferred shares and settled by issuance of notes payable to affiliate.................................................................. -- 2,060 5,672 Issuance of notes payable upon redemption of redeemable preferred shares........ -- 55,174 -- Reduction of amount due to Parent Company and assumption of liabilities by Parent Company, net of notes receivable from Parent Company and unrealized foreign exchange gain thereon upon issuance of common shares.................. -- 340,173 -- Increase in receivables advanced to affiliate resulting from collections and repurchases of installment contract receivables............................... -- 41,554 3,679 Increase in investment in affiliate funded by contribution from Parent Company....................................................................... -- -- 26,181 Sale of 13% interest in units of Loewen Finance (Wyoming), LLC in exchange for notes receivable from Parent Company.......................................... -- -- 78,633 Issuance of notes payable as consideration in an acquisition.................... -- 2,517 -- Increase in due to affiliate for purchase of accounts receivable from affiliate..................................................................... -- 7,431 --
NOTE 15. COMMITMENTS AND CONTINGENCIES The shares held by the Company are pledged under a collateral trust arrangement whereby the senior lenders of the Parent Company and an affiliate under common control would share certain collateral on a pari passu basis. This collateral is held by a trustee for equal and ratable benefit of the various holders of senior indebtedness. In addition the Company guarantees all affiliate debt secured by the Collateral Trust Agreement. At December 31, 1998, the indebtedness owed to the senior lending group subject to the Collateral Trust Agreement, including holders of certain letters of credit aggregated $2,108,000,000. 155 NEWEOL INVESTMENTS LTD. (SEE NOTE 2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT NUMBER OF SHARES NOTE 16. SUPPLEMENTARY FINANCIAL INFORMATION
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Summary of accounts receivable: Accounts receivable................................................... $ 43,067 $ -- Unamortized purchase discount......................................... (1,903) -- Allowance for doubtful accounts....................................... (17,456) -- ---------- ---------- Outstanding December 31,.............................................. $ 23,708 $ -- ---------- ---------- ---------- ---------- Summary of installment contract receivables: Installment contracts................................................. $ 316,660 $ 293,599 Unearned finance income............................................... (47,844) (40,790) Unamortized purchase discount......................................... (21,327) (23,211) Allowance for contract cancellations and doubtful accounts............ (54,454) (24,629) ---------- ---------- 193,035 204,969 Current portion....................................................... (57,959) (61,549) ---------- ---------- Outstanding December 31,.............................................. $ 135,076 $ 143,420 ---------- ---------- ---------- ----------
NOTE 17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operation and financial reporting may range from minor errors to significant systems failure which could affect the Company's or a subsidiary's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to efforts of customers, suppliers, or other third parties, will be fully resolved. NOTE 18. SUBSEQUENT EVENT On March 31, 1999, the Company purchased and cancelled 18,825 common shares held by the Parent Company. NOTE 19. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period. 156 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. In accordance with General Instruction G(3), the information required by Item 10 (with the exception of certain information pertaining to executive officers, which is included in Part I hereof) has been omitted and is incorporated by reference from the Registrant's definitive proxy statement and information circular relating to its 1999 annual general meeting of shareholders (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION. In accordance with General Instruction G(3), the information required by Item 11 has been omitted and is incorporated by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. In accordance with General Instruction G(3), the information required by Item 12 has been omitted and is incorporated by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In accordance with General Instruction G(3), the information required by Item 13 has been omitted and is incorporated by reference from the Proxy Statement. 157 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS THE LOEWEN GROUP INC. Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Retained Earnings (Deficit) for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Supplementary Data: Quarterly Financial data (unaudited) LOEWEN GROUP INTERNATIONAL, INC. Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations and Deficit for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements NEWEOL INVESTMENTS LTD. Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations, Comprehensive Income and Retained Earnings (Deficit) for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE Schedule II--Valuation and Qualifying Accounts 158 (3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 3 CHARTER DOCUMENTS 3.1 Certificate of Incorporation of The Loewen Group Inc. ("Loewen") issued by the British Columbia Registrar of Companies (the Registrar) on October 30, 1985(1) 3.2 Altered Memorandum of Loewen, filed with the Registrar on June 21, 1996(2) 3.3 Articles of Loewen, restated, filed with the Registrar on March 1, 1988, as amended on March 30, 1988, April 21, 1988, May 19, 1989, May 28, 1992, May 20, 1993, June 29, 1994, December 21, 1995 and February 7, 1996(3) 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1.1 Note Agreement, dated for reference September 1, 1993, by and between Loewen and LGII re 9.62% Senior Guaranteed Notes, Series D, due September 11, 2003, issued by Loewen ("Series D Notes"), as amended on June 10, 1994(1) 4.1.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference September 1, 1993, among Loewen, LGII and institutions named therein, re Series D Notes(4) 4.1.3 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party 4.2 Guaranty Agreement by LGII re Series D Notes, dated for reference April 1, 1993(1) 4.3.1 Note Agreement by LGII and Loewen re 6.49% Senior Guaranteed Notes, Series E, due February 25, 2004, issued by LGII ("Series E Notes"), dated for reference February 1, 1994(1) 4.3.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference February 1, 1994, among Loewen, LGII and Teachers Insurance and Annuity Association of America, re Series E Notes(4) 4.3.3 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3) 4.4 Guaranty Agreement by Loewen re Series E Notes, dated for reference February 1, 1994(1) 4.5.1 Amended and Restated 1994 MEIP Credit Agreement, dated as of June 14, 1994, amended and restated as of May 15, 1996 (the "MEIP Credit Agreement"), by and between Loewen Management Investment Corporation, in its capacity as agent for LGII ("LMIC"), Loewen and the banks listed therein (the "MEIP Banks") and Wachovia Bank of Georgia, N.A., as agent for the MEIP Banks ("MEIP Agent")(5) 4.5.2 First Amendment to the MEIP Credit Agreement, dated as of December 2, 1996(6) 4.5.3 Second Amendment to the MEIP Credit Agreement, dated as of April 30, 1997(6) 4.5.4 Third Amendment to the MEIP Credit Agreement, dated as of May 21, 1997(7) 4.5.5 Fourth Amendment to the MEIP Credit Agreement, dated as of September 29, 1997(7) 4.5.6 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3)
159
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 4.6 Security Agreement, dated as of June 14, 1994, by and between LMIC and the MEIP Agent(1) 4.7 Guaranty dated as of June 14, 1994, by LGII in favor of the MEIP Agent for the ratable benefit of the MEIP Banks(1) 4.8 Guaranty dated as of June 14, 1994, by Loewen in favor of the MEIP Agent for the ratable benefit of the MEIP Banks(1) 4.9 Exchange Acknowledgment by Loewen, with respect to the 1994 Exchangeable Floating Rate Debentures due July 1, 2001 issued by LGII, dated June 15, 1994(1) 4.10 Indenture, dated as of August 15, 1994, by and between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee with respect to 9.45% Junior Subordinated Debentures, Series A, due 2024, issued by LGII and guaranteed by Loewen(8) 4.11 MIPS Guarantee Agreement, dated August 15, 1994(8) 4.12 Indenture, dated as of March 20, 1996, by and between LGII, as issuer, Loewen, as guarantor of the obligations of LGII under the Indenture, and Fleet National Bank as Trustee, with respect to Series 1 and 2 Senior Guaranteed Notes of LGII(3) 4.13 Form of Senior Guarantee of LGII's Series 1 and 2 Notes (included in Exhibit 4.13) 4.14 Form of Global Series 1 and 2 Exchange Notes of LGII(4) 4.15 Form of Physical Series 1 and 2 Exchange Notes of LGII(4) 4.16 Form of Senior Guarantee of LGII's Series 1 and 2 Exchange Notes (included in Exhibit 4.14 or 4.15) 4.17.1 Amended and Restated Credit Agreement, dated as of March 27, 1998 ("BMO Credit Agreement"), among LGII, as borrower, Loewen, as a guarantor, the lenders named therein, as the lenders, Goldman, Sachs & Co., as the documentation agent, and Bank of Montreal, as issuer, swingline lender and administrative and syndication agent(7) 4.17.2 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3) 4.18 Collateral Trust Agreement, dated as of May 15, 1996, among Bankers Trust Company, as trustee, Loewen, LGII and various other pledgors(4) 4.19 Indenture, dated as of October 1, 1996, by and between LGII, Loewen and Fleet National Bank, as trustee, with respect to the Series 3 and 4 Notes(5) 4.20 Form of Senior Guarantee of LGII's Series 3 and 4 Notes (included in Exhibit 4.22) 4.21 Form of Global Series 3 and 4 Exchange Notes of LGII(9) 4.22 Form of Physical Series 3 and 4 Exchange Notes of LGII(9) 4.23 Form of Senior Guarantee of LGII's Series 3 and 4 Exchange Notes (included in Exhibit 4.21 or 4.22)
160
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 4.24 Indenture, dated as of September 26, 1997, between Loewen, as issuer, LGII, as guarantor, and The Trust Company of Bank of Montreal, as trustee, with respect to the Series 5 Guaranteed Notes(10) 4.25 Form of Series 5 Guaranteed Notes of LGII(10) 4.26 Form of Loewen Guarantee of LGII's Series 5 Notes(10) 4.27 Indenture, dated as of September 30, 1997, between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee, with respect to the Series 5 Senior Guaranteed Notes due 2009(10) 4.28 Form of Global "PATS" Senior Guaranteed Notes due 2009 of LGII(10) 4.29 Form of Physical "PATS" Senior Guaranteed Notes due 2009 of LGII(10) 4.30 Form of Senior Guarantee of LGII's "PATS" Senior Guaranteed Notes due 2009(10) 4.31 Shareholder Protection Rights Plan, dated as of April 20, 1990, as amended on May 24, 1990 and April 7, 1994 and reconfirmed on May 17, 1995(1) 4.32 Form of Indenture by and between LGII, as issuer, Loewen, as guarantor, and Fleet National Bank, as trustee, relating to the Debt Securities that may be issued pursuant to Registration Statement No. 333-29443(11) 4.33 Indenture dated as of May 28, 1998, between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee, with respect to the Series 6 and 7 Notes(12) 4.34 Form of Senior Guarantee of Series 6 and 7 Notes of LGII (included in Exhibit 4.37) 4.35 Form of Global Series 6 and 7 Exchange Notes of LGII(13) 4.36 Form of Physical Series 6 and 7 Exchange Notes of LGII(13) 4.37 Form of Senior Guarantee of LGII's Series 6 and 7 Exchange Notes (included in Exhibit 4.35 or 4.36) 4.38 Loewen and LGII hereby agree to furnish to the Commission, upon request, a copy of the instruments which define the rights of holders of long-term debt of Loewen and LGII. None of such instruments not included as exhibits herein collectively represents long-term debt in excess of 10% of the consolidated total assets of Loewen or LGII. 10 MATERIAL CONTRACTS 10.1 Receipt Agreement, dated as of January 3, 1996, for the Cumulative Redeemable Convertible First Preferred Shares, Series C, of Loewen ("Series C Shares")(3) 10.2 Undertaking by Raymond L. Loewen and Anne Loewen, dated as of January 3, 1996, to vote in favor of the motion to subdivide the Series C Shares(3) 10.3 Letter Agreement, dated August 8, 1997, by and between Loewen and Service Corporation International(7) *10.4 Form of Indemnification Agreement with Outside Directors(15) *10.5 Form of Indemnification Agreement with Officers(15) *10.6 Form of Loewen Severance Agreement(15) *10.7 Loewen Severance Pay Plan(15)
161
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- *10.8 1994 Management Equity Investment Plan (the MEIP)(15) *10.9 Form of Executive Agreement executed by participants in the MEIP(8) *10.10 1994 Outside Director Compensation Plan, as restated and amended as at January 9, 1997, and further amended as at June 25, 1998 *10.11 Employee Stock Option Plan (International), as restated and amended as at September 17, 1998 *10.12 Employee Stock Option Plan (Canada), as restated and amended as at September 17, 1998 *10.13 Form of Stay Put Bonus Plan Letters, dated February 26, 1999 *10.14 Employment Agreement, dated August 19, 1988, by and between Loewen and Tim Hogenkamp(1) *10.15 Employment Agreement, and Covenant Not to Compete, dated November 14, 1990, by and between LGII and Albert S. Lineberry, Sr.(1) *10.16 Employment Agreement, dated April 12, 1991, by and between Loewen and Dwight Hawes(1) *10.17 Consulting Agreement, dated July 18, 1994, by and between Loewen and Charles B. Loewen, LGII, and Corporate Services International Inc.(1) *10.18 Employment Letter, dated March 10, 1995, by Raymond L. Loewen to Paul Wagler(5) *10.19 Employment Agreement, dated March 17, 1995, by and between Loewen, LGII and Lawrence Miller(1) *10.20.1 Employment Agreement, dated March 17, 1995, by and between Loewen and William R. Shane ("Shane Employment Agreement")(1) *10.20.2 Amendment No. 1 to Shane Employment Agreement, dated February 23, 1998, by and between Loewen and William R. Shane(7) *10.21 Resignation and Release Agreement, effective June 10, 1996, by and between Loewen, LGII and Robert O. Wienke(5) *10.22 Employment Agreement, dated March 21, 1997, by and between Loewen and Thomas C. Hardy *10.23 Employment Agreement, dated October 31, 1997, by and between Loewen and Michael G. Weedon(7) *10.24 Severance Agreement, dated November 4, 1997, by and between Loewen and Douglas J. McKinnon(7) *10.25 Employment Agreement, dated January 30, 1998, by and between Loewen and Brad Stam(7) *10.26 Employment Agreement, dated October 26, 1998, by and between Loewen and Peter S. Hyndman *10.27.1 Employment Agreement, dated November 30, 1998, by and between Loewen and Robert Lundgren *10.27.2 Severance Agreement, dated as of November 30, 1998, by and between Loewen and Robert Lundgren
162
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- *10.27.3 Indemnification Agreement, dated February 3, 1999, by and between Loewen and Robert Lundgren 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 12 STATEMENT RE COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO 12.1 Statement re Computation of Earnings to Fixed Charges Ratio (Canadian GAAP) 12.2 Statement re Computation of Earnings to Fixed Charges Ratio (U.S. GAAP) 21 SUBSIDIARIES OF LOEWEN 23 CONSENTS OF EXPERTS 23.1 Consent of KPMG LLP 24 POWERS OF ATTORNEY (INCLUDED IN THE SIGNATURE PAGES TO THIS REPORT) 27 FINANCIAL DATA SCHEDULE 99 ADDITIONAL EXHIBITS 99.1 Stock Purchase Agreement, dated as of June 14, 1996, by and among Prime Succession, Inc. the other individuals or entities listed on the signature pages thereof, Loewen and Blackhawk Acquisition Corp.(16) 99.2 Put/Call Agreement, dated as of August 26, 1996, by and among Blackstone, Blackstone Offshore Capital Partners II L.P. ("Blackstone Offshore"), Blackstone Family Investment Partnership II L.P. ("Blackstone Family"), PSI Management Direct L.P. ("PSI"), LGII and Loewen(17) 99.3 Stockholders' Agreement, dated as of August 26, 1996, by and among Prime Succession, inc. (to be renamed Prime Succession Holdings, Inc.), Blackstone, Blackstone Offshore, Blackstone Family, PSI and LGII(16) 99.4 Subscription Agreement, dated as of November 19, 1996, by and among Rose Hills Holdings Corp. ("Rose Hills"), Blackstone, Blackstone Rose Hills Offshore Capital Partners L.P. ("Blackstone Rose Hills"), Blackstone Family, Roses Delaware, Inc. ("RDI"), Loewen, LGII and RHI Management Direct, L.P. ("RHI")(18) 99.5 Put/Call Agreement, dated as of November 19, 1996, by and among Blackstone, Blackstone Offshore, Blackstone Family, Blackstone Rose Hills, LGII, RDI, Loewen and RHI(18) 99.6 Stockholders' Agreement, dated as of November 19, 1996, by and among Rose Hills, Blackstone, Blackstone Rose Hills, Blackstone Family, RDI, LGII and RHI(18) 99.7 Form of Letter of Transmittal(19) 99.8 Form of Notice of Guaranteed Delivery(19)
- ------------------------ * Compensatory plan or management contract (1) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 0-18429) (2) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed on August 14, 1996 (File No. 0-18429) 163 (3) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1995, filed on March 28, 1996, as amended (File No. 0-18429) (4) Incorporated by reference from the Registration Statement on Form S-4 filed by Loewen on May 3, 1996, as amended by the Registration Statement on Form S-4/A filed by Loewen on June 20, 1996 and the Registration Statement on Form S-4/A filed by Loewen on August 26, 1996 (File No. 333-03135) (5) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed on November 14, 1996 (File No. 1-12163) (6) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997 (File No. 1-12163) (7) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 30, 1998 (File No. 1-12163) (8) Incorporated by reference from the combined Registration Statement on Form F-9/F-3 filed by LGII and Loewen on July 1, 1994, as amended (File Nos. 33-81032 and 33-81034) (9) Incorporated by reference from the Registration Statement on Form S-4 filed by LGII and Loewen on November 18, 1996, as amended (File Nos. 333-16319 and 333-16319-01) (10) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, filed on November 14, 1997 (File No. 1-12163) (11) Incorporated by reference from the Registration Statement on Form S-3 filed by Loewen and LGII on March 21, 1997, as amended (File Nos. 333-23747 and 333-23747-01) (12) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998, filed on August 13, 1998 (File No. 1-12163) (13) Incorporated by reference from the Registration Statement on Form S-4 filed by LGII and Loewen on August 26, 1998, as amended (File No. 333-62239-01) (14) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No. 1, dated April 18, 1995, filed May 5, 1995 (File No. 0-18429) (15) Incorporated by reference from Loewen's Solicitation/Recommendation Statement on Schedule 14D-9, filed on October 10, 1996, as amended (16) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated August 26, 1996, filed October 11, 1996, as amended October 29, 1996 (File No. 1-12163) (17) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No. 1, dated August 26, 1996, filed October 29, 1996 (File No. 1-12163) (18) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated November 19, 1996, filed December 27, 1996 (File No. 1-12163) (19) Incorporated by reference from Amendment No. 1 to the Registration Statement on Form S-4 filed by LGII and Loewen on September 21, 1998 (File No. 333-62239-01) 164 (b) REPORTS ON FORM 8-K The following Current Reports on Form 8-K were filed by Loewen during the last quarter of fiscal 1998:
FILING DATE ITEM NUMBER DESCRIPTION - ------------------------------ ------------------------ --------------------------------------------- October 7, 1998 (dated October Item 5. Other Events Press release announcing the formation of the 6, 1998) Company's Special Committee to supervise the Company's process for maximizing shareholder value October 9, 1998 (dated October Item 5. Other Events Press release announcing the resignation of 8, 1998) Raymond L. Loewen as Chief Executive Officer and the election of Robert Lundgren as Chief Executive Officer and President November 9, 1998 (dated Item 5. Other Events Press release announcing the transfer of November 3, 1998) 10,062,125 Common shares to Canadian Imperial Bank of Commerce by Raymond L. Loewen November 9, 1998 (dated Item 5. Other Events Press release announcing third quarter November 5, 1998) financial results November 20, 1998 (dated Item 5. Other Events Press release announcing the realignment of November 20, 1998) the Company's senior management team November 23, 1998 (dated Item 5. Other Events Press release announcing a cash dividend on November 23, 1998) Preferred Shares December 1, 1998 (dated Item 5. Other Events Press release announcing the expansion of the December 1, 1998) Company's Search Committee to identify and recommend three new members to the Board of Directors December 4, 1998 (dated Item 5. Other Events Press release announcing the addition of two December 3, 1998) shareholder representatives to the Company's Special Committee to identify and recommend three new members to the Board of Directors December 30, 1998 (dated Item 5. Other Events Press release announcing a cash dividend on December 23, 1998) Preferred Shares and no dividend on Common Shares
(d) Financial statements of Loewen Group International, Inc. ("LGII") and Neweol Investments Ltd. are included in this Annual Report on Form 10-K because the outstanding shares of each of such companies constitute a "substantial portion" of the collateral (within the meaning of Securities and Exchange Commission Rule 3-10 under Regulation S-X) that secures the Series 1 through 4 Notes and Series 6 and 7 Notes that were issued by LGII and guaranteed by Loewen. 165 THE LOEWEN GROUP INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1998 (IN THOUSANDS OF US $)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD - --------------------------------------------- ----------- ----------- ----------- ------------- ------------ Current -- Allowance for contract cancellations and doubtful accounts Year ended December 31, 1998................. $ 32,869 $ 56,581 $ 1,060 $ (23,445) $ 67,065 Year ended December 31, 1997................. 27,717 32,350 2,802 (30,000) 32,869 Year ended December 31, 1996................. 19,666 16,427 9,468 (17,844) 27,717 Due after one year -- Allowance for contract cancellations and doubtful accounts Year ended December 31, 1998................. $ 20,112 $ 65,669 $ 1,338 $ (30,227) $ 56,892 Year ended December 31, 1997................. 19,848 26,042 2,372 (28,150) 20,112(3) Year ended December 31, 1996................. 10,861 18,323 10,564 (19,900) 19,848
- ------------------------------ (1) Primarily the opening balance for acquired companies (2) Uncollected receivables written off, net of recoveries (3) The 1997 deductions have been reclassified to conform with the presentation adopted in 1998. 166 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE LOEWEN GROUP INC. Dated: April 13, 1999 By: /s/ ROBERT B. LUNDGREN ----------------------------------------- Robert B. Lundgren PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each person whose signature appears below hereby appoints Robert B. Lundgren and Paul Wagler, and each of them severally, acting alone and without the other, his true and lawful attorney-in-fact with authority to execute in the name of each such person, and to file with the Securities and Exchange Commission, together with any exhibits thereto and other documents therewith, any and all amendments (including without limitation post-effective amendments) to this report necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in this report as the aforesaid attorney-in-fact deems appropriate. 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. Dated: April 13, 1999 /s/ ROBERT B. LUNDGREN -------------------------- Robert B. Lundgren President, Chief Executive Officer and Director (Principal Executive Officer) Dated: April 13, 1999 /s/ PAUL WAGLER -------------------------- Paul Wagler Executive Vice-President, Chief Operating Officer and Acting Chief Financial Officer (Principal Financial Officer) Dated: April 13, 1999 /s/ DWIGHT K. HAWES -------------------------- Dwight K. Hawes Senior Vice-President, Corporate Controller (Principal Accounting Officer) Dated: April 13, 1999 /s/ JOHN S. LACEY -------------------------- John S. Lacey Chairman of the Board
167 Dated: April 13, 1999 /s/ CHARLES B. LOEWEN -------------------------- Charles B. Loewen Director Dated: April 13, 1999 /s/ JAMES D. MCLENNAN -------------------------- James D. McLennan Director Dated: April 13, 1999 /s/ WILLIAM R. RIEDL -------------------------- William R. Riedl Director Dated: April 13, 1999 /s/ THOMAS M. TAYLOR -------------------------- Thomas M. Taylor Director Dated: April 13, 1999 /s/ JOHN N. TURNER -------------------------- The Right Honourable John N. Turner, P.C., C.C., Q.C. Director
AUTHORIZED REPRESENTATIVE IN THE UNITED STATES The undersigned is the Registrant's authorized representative in the United States. Dated: April 13, 1999 /s/ TIMOTHY R. HOGENKAMP -------------------------- Timothy R. Hogenkamp
168 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 3 CHARTER DOCUMENTS 3.1 Certificate of Incorporation of The Loewen Group Inc. ("Loewen") issued by the British Columbia Registrar of Companies (the Registrar) on October 30, 1985(1) 3.2 Altered Memorandum of Loewen, filed with the Registrar on June 21, 1996(2) 3.3 Articles of Loewen, restated, filed with the Registrar on March 1, 1988, as amended on March 30, 1988, April 21, 1988, May 19, 1989, May 28, 1992, May 20, 1993, June 29, 1994, December 21, 1995 and February 7, 1996(3) 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1.1 Note Agreement, dated for reference September 1, 1993, by and between Loewen and LGII re 9.62% Senior Guaranteed Notes, Series D, due September 11, 2003, issued by Loewen ("Series D Notes"), as amended on June 10, 1994(1) 4.1.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference September 1, 1993, among Loewen, LGII and institutions named therein, re Series D Notes(4) 4.1.3 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party 4.2 Guaranty Agreement by LGII re Series D Notes, dated for reference April 1, 1993(1) 4.3.1 Note Agreement by LGII and Loewen re 6.49% Senior Guaranteed Notes, Series E, due February 25, 2004, issued by LGII ("Series E Notes"), dated for reference February 1, 1994(1) 4.3.2 Second Amendment, dated for reference May 15, 1996, to Note Agreement, dated for reference February 1, 1994, among Loewen, LGII and Teachers Insurance and Annuity Association of America, re Series E Notes(4) 4.3.3 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3) 4.4 Guaranty Agreement by Loewen re Series E Notes, dated for reference February 1, 1994(1) 4.5.1 Amended and Restated 1994 MEIP Credit Agreement, dated as of June 14, 1994, amended and restated as of May 15, 1996 (the "MEIP Credit Agreement"), by and between Loewen Management Investment Corporation, in its capacity as agent for LGII ("LMIC"), Loewen and the banks listed therein (the "MEIP Banks") and Wachovia Bank of Georgia, N.A., as agent for the MEIP Banks ("MEIP Agent")(5) 4.5.2 First Amendment to the MEIP Credit Agreement, dated as of December 2, 1996(6) 4.5.3 Second Amendment to the MEIP Credit Agreement, dated as of April 30, 1997(6) 4.5.4 Third Amendment to the MEIP Credit Agreement, dated as of May 21, 1997(7) 4.5.5 Fourth Amendment to the MEIP Credit Agreement, dated as of September 29, 1997(7) 4.5.6 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3)
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 4.6 Security Agreement, dated as of June 14, 1994, by and between LMIC and the MEIP Agent(1) 4.7 Guaranty dated as of June 14, 1994, by LGII in favor of the MEIP Agent for the ratable benefit of the MEIP Banks(1) 4.8 Guaranty dated as of June 14, 1994, by Loewen in favor of the MEIP Agent for the ratable benefit of the MEIP Banks(1) 4.9 Exchange Acknowledgment by Loewen, with respect to the 1994 Exchangeable Floating Rate Debentures due July 1, 2001 issued by LGII, dated June 15, 1994(1) 4.10 Indenture, dated as of August 15, 1994, by and between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee with respect to 9.45% Junior Subordinated Debentures, Series A, due 2024, issued by LGII and guaranteed by Loewen(8) 4.11 MIPS Guarantee Agreement, dated August 15, 1994(8) 4.12 Indenture, dated as of March 20, 1996, by and between LGII, as issuer, Loewen, as guarantor of the obligations of LGII under the Indenture, and Fleet National Bank as Trustee, with respect to Series 1 and 2 Senior Guaranteed Notes of LGII(3) 4.13 Form of Senior Guarantee of LGII's Series 1 and 2 Notes (included in Exhibit 4.13) 4.14 Form of Global Series 1 and 2 Exchange Notes of LGII(4) 4.15 Form of Physical Series 1 and 2 Exchange Notes of LGII(4) 4.16 Form of Senior Guarantee of LGII's Series 1 and 2 Exchange Notes (included in Exhibit 4.14 or 4.15) 4.17.1 Amended and Restated Credit Agreement, dated as of March 27, 1998 ("BMO Credit Agreement"), among LGII, as borrower, Loewen, as a guarantor, the lenders named therein, as the lenders, Goldman, Sachs & Co., as the documentation agent, and Bank of Montreal, as issuer, swingline lender and administrative and syndication agent(7) 4.17.2 Summary of Terms and Conditions, dated March 30, 1999, amending certain credit agreements to which Loewen is a party (see Exhibit 4.1.3) 4.18 Collateral Trust Agreement, dated as of May 15, 1996, among Bankers Trust Company, as trustee, Loewen, LGII and various other pledgors(4) 4.19 Indenture, dated as of October 1, 1996, by and between LGII, Loewen and Fleet National Bank, as trustee, with respect to the Series 3 and 4 Notes(5) 4.20 Form of Senior Guarantee of LGII's Series 3 and 4 Notes (included in Exhibit 4.22) 4.21 Form of Global Series 3 and 4 Exchange Notes of LGII(9) 4.22 Form of Physical Series 3 and 4 Exchange Notes of LGII(9) 4.23 Form of Senior Guarantee of LGII's Series 3 and 4 Exchange Notes (included in Exhibit 4.21 or 4.22)
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 4.24 Indenture, dated as of September 26, 1997, between Loewen, as issuer, LGII, as guarantor, and The Trust Company of Bank of Montreal, as trustee, with respect to the Series 5 Guaranteed Notes(10) 4.25 Form of Series 5 Guaranteed Notes of LGII(10) 4.26 Form of Loewen Guarantee of LGII's Series 5 Notes(10) 4.27 Indenture, dated as of September 30, 1997, between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee, with respect to the Series 5 Senior Guaranteed Notes due 2009(10) 4.28 Form of Global "PATS" Senior Guaranteed Notes due 2009 of LGII(10) 4.29 Form of Physical "PATS" Senior Guaranteed Notes due 2009 of LGII(10) 4.30 Form of Senior Guarantee of LGII's "PATS" Senior Guaranteed Notes due 2009(10) 4.31 Shareholder Protection Rights Plan, dated as of April 20, 1990, as amended on May 24, 1990 and April 7, 1994 and reconfirmed on May 17, 1995(1) 4.32 Form of Indenture by and between LGII, as issuer, Loewen, as guarantor, and Fleet National Bank, as trustee, relating to the Debt Securities that may be issued pursuant to Registration Statement No. 333-29443(11) 4.33 Indenture dated as of May 28, 1998, between LGII, as issuer, Loewen, as guarantor, and State Street Bank and Trust Company, as trustee, with respect to the Series 6 and 7 Notes(12) 4.34 Form of Senior Guarantee of Series 6 and 7 Notes of LGII (included in Exhibit 4.37) 4.35 Form of Global Series 6 and 7 Exchange Notes of LGII(13) 4.36 Form of Physical Series 6 and 7 Exchange Notes of LGII(13) 4.37 Form of Senior Guarantee of LGII's Series 6 and 7 Exchange Notes (included in Exhibit 4.35 or 4.36) 4.38 Loewen and LGII hereby agree to furnish to the Commission, upon request, a copy of the instruments which define the rights of holders of long-term debt of Loewen and LGII. None of such instruments not included as exhibits herein collectively represents long-term debt in excess of 10% of the consolidated total assets of Loewen or LGII. 10 MATERIAL CONTRACTS 10.1 Receipt Agreement, dated as of January 3, 1996, for the Cumulative Redeemable Convertible First Preferred Shares, Series C, of Loewen ("Series C Shares")(3) 10.2 Undertaking by Raymond L. Loewen and Anne Loewen, dated as of January 3, 1996, to vote in favor of the motion to subdivide the Series C Shares(3) 10.3 Letter Agreement, dated August 8, 1997, by and between Loewen and Service Corporation International(7) *10.4 Form of Indemnification Agreement with Outside Directors(15) *10.5 Form of Indemnification Agreement with Officers(15) *10.6 Form of Loewen Severance Agreement(15) *10.7 Loewen Severance Pay Plan(15)
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- *10.8 1994 Management Equity Investment Plan (the MEIP)(15) *10.9 Form of Executive Agreement executed by participants in the MEIP(8) *10.10 1994 Outside Director Compensation Plan, as restated and amended as at January 9, 1997, and further amended as at June 25, 1998 *10.11 Employee Stock Option Plan (International), as restated and amended as at September 17, 1998 *10.12 Employee Stock Option Plan (Canada), as restated and amended as at September 17, 1998 *10.13 Form of Stay Put Bonus Plan Letters, dated February 26, 1999 *10.14 Employment Agreement, dated August 19, 1988, by and between Loewen and Tim Hogenkamp(1) *10.15 Employment Agreement, and Covenant Not to Compete, dated November 14, 1990, by and between LGII and Albert S. Lineberry, Sr.(1) *10.16 Employment Agreement, dated April 12, 1991, by and between Loewen and Dwight Hawes(1) *10.17 Consulting Agreement, dated July 18, 1994, by and between Loewen and Charles B. Loewen, LGII, and Corporate Services International Inc.(1) *10.18 Employment Letter, dated March 10, 1995, by Raymond L. Loewen to Paul Wagler(5) *10.19 Employment Agreement, dated March 17, 1995, by and between Loewen, LGII and Lawrence Miller(1) *10.20.1 Employment Agreement, dated March 17, 1995, by and between Loewen and William R. Shane ("Shane Employment Agreement")(1) *10.20.2 Amendment No. 1 to Shane Employment Agreement, dated February 23, 1998, by and between Loewen and William R. Shane(7) *10.21 Resignation and Release Agreement, effective June 10, 1996, by and between Loewen, LGII and Robert O. Wienke(5) *10.22 Employment Agreement, dated March 21, 1997, by and between Loewen and Thomas C. Hardy *10.23 Employment Agreement, dated October 31, 1997, by and between Loewen and Michael G. Weedon(7) *10.24 Severance Agreement, dated November 4, 1997, by and between Loewen and Douglas J. McKinnon(7) *10.25 Employment Agreement, dated January 30, 1998, by and between Loewen and Brad Stam(7) *10.26 Employment Agreement, dated October 26, 1998, by and between Loewen and Peter S. Hyndman *10.27.1 Employment Agreement, dated November 30, 1998, by and between Loewen and Robert Lundgren *10.27.2 Severance Agreement, dated as of November 30, 1998, by and between Loewen and Robert Lundgren
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- *10.27.3 Indemnification Agreement, dated February 3, 1999, by and between Loewen and Robert Lundgren 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 12 STATEMENT RE COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO 12.1 Statement re Computation of Earnings to Fixed Charges Ratio (Canadian GAAP) 12.2 Statement re Computation of Earnings to Fixed Charges Ratio (U.S. GAAP) 21 SUBSIDIARIES OF LOEWEN 23 CONSENTS OF EXPERTS 23.1 Consent of KPMG LLP 24 POWERS OF ATTORNEY (INCLUDED IN THE SIGNATURE PAGES TO THIS REPORT) 27 FINANCIAL DATA SCHEDULE 99 ADDITIONAL EXHIBITS 99.1 Stock Purchase Agreement, dated as of June 14, 1996, by and among Prime Succession, Inc. the other individuals or entities listed on the signature pages thereof, Loewen and Blackhawk Acquisition Corp.(16) 99.2 Put/Call Agreement, dated as of August 26, 1996, by and among Blackstone, Blackstone Offshore Capital Partners II L.P. ("Blackstone Offshore"), Blackstone Family Investment Partnership II L.P. ("Blackstone Family"), PSI Management Direct L.P. ("PSI"), LGII and Loewen(17) 99.3 Stockholders' Agreement, dated as of August 26, 1996, by and among Prime Succession, inc. (to be renamed Prime Succession Holdings, Inc.), Blackstone, Blackstone Offshore, Blackstone Family, PSI and LGII(16) 99.4 Subscription Agreement, dated as of November 19, 1996, by and among Rose Hills Holdings Corp. ("Rose Hills"), Blackstone, Blackstone Rose Hills Offshore Capital Partners L.P. ("Blackstone Rose Hills"), Blackstone Family, Roses Delaware, Inc. ("RDI"), Loewen, LGII and RHI Management Direct, L.P. ("RHI")(18) 99.5 Put/Call Agreement, dated as of November 19, 1996, by and among Blackstone, Blackstone Offshore, Blackstone Family, Blackstone Rose Hills, LGII, RDI, Loewen and RHI(18) 99.6 Stockholders' Agreement, dated as of November 19, 1996, by and among Rose Hills, Blackstone, Blackstone Rose Hills, Blackstone Family, RDI, LGII and RHI(18) 99.7 Form of Letter of Transmittal(19) 99.8 Form of Notice of Guaranteed Delivery(19)
- ------------------------ * Compensatory plan or management contract (1) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 0-18429) (2) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed on August 14, 1996 (File No. 0-18429) (3) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1995, filed on March 28, 1996, as amended (File No. 0-18429) (4) Incorporated by reference from the Registration Statement on Form S-4 filed by Loewen on May 3, 1996, as amended by the Registration Statement on Form S-4/A filed by Loewen on June 20, 1996 and the Registration Statement on Form S-4/A filed by Loewen on August 26, 1996 (File No. 333-03135) (5) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed on November 14, 1996 (File No. 1-12163) (6) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997 (File No. 1-12163) (7) Incorporated by reference from Loewen's Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 30, 1998 (File No. 1-12163) (8) Incorporated by reference from the combined Registration Statement on Form F-9/F-3 filed by LGII and Loewen on July 1, 1994, as amended (File Nos. 33-81032 and 33-81034) (9) Incorporated by reference from the Registration Statement on Form S-4 filed by LGII and Loewen on November 18, 1996, as amended (File Nos. 333-16319 and 333-16319-01) (10) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, filed on November 14, 1997 (File No. 1-12163) (11) Incorporated by reference from the Registration Statement on Form S-3 filed by Loewen and LGII on March 21, 1997, as amended (File Nos. 333-23747 and 333-23747-01) (12) Incorporated by reference from Loewen's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998, filed on August 13, 1998 (File No. 1-12163) (13) Incorporated by reference from the Registration Statement on Form S-4 filed by LGII and Loewen on August 26, 1998, as amended (File No. 333-62239-01) (14) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No. 1, dated April 18, 1995, filed May 5, 1995 (File No. 0-18429) (15) Incorporated by reference from Loewen's Solicitation/Recommendation Statement on Schedule 14D-9, filed on October 10, 1996, as amended (16) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated August 26, 1996, filed October 11, 1996, as amended October 29, 1996 (File No. 1-12163) (17) Incorporated by reference from Loewen's Periodic Report on Form 8-K/A No. 1, dated August 26, 1996, filed October 29, 1996 (File No. 1-12163) (18) Incorporated by reference from Loewen's Periodic Report on Form 8-K, dated November 19, 1996, filed December 27, 1996 (File No. 1-12163) (19) Incorporated by reference from Amendment No. 1 to the Registration Statement on Form S-4 filed by LGII and Loewen on September 21, 1998 (File No. 333-62239-01) EX-4.1-3 2 EXHIBIT 4.1.3 Exhibit B to Request for Waivers and Consents THE LOEWEN GROUP, INC. SUMMARY OF TERMS AND CONDITIONS ATTACHED TO REQUEST FOR WAIVERS AND CONSENTS DATED MARCH 30, 1999 FROM THE LOEWEN GROUP, INC. AND LOEWEN GROUP INTERNATIONAL, INC. (THE "REQUEST FOR WAIVERS AND CONSENTS") THIS SUMMARY OF TERMS AND CONDITIONS IS NOT INTENDED TO BE INCLUSIVE OF ALL CHANGES, PROVISIONS OR CONDITIONS WHICH MAY BE REQUIRED BY EACH OF THE LENDERS WITHIN THE VARIOUS COVENANT LENDER GROUPS IN THE DEFINITIVE AMENDMENTS WHICH ARE MADE TO THEIR RESPECTIVE FACILITY DOCUMENTS. EACH OF THE DOCUMENTS PERTAINING TO THE VARIOUS CREDIT FACILITIES WILL BE AMENDED TO CONFORM TO THIS TERM SHEET. COMPANY: Loewen Group International, Inc. ("LGII") and The Loewen Group, Inc. ("TLGI") (collectively, "LOEWEN" or the "COMPANY"). COVENANT LENDER GROUPS: Lenders under the Bank of Montreal Facility ("BANK OF MONTREAL SYNDICATE"); Lenders under the MEIP Facility ("WACHOVIA SYNDICATE"); Holders of the Series D Notes and the Series E Notes ("NOTEHOLDERS"; members of the Bank of Montreal Syndicate, the Wachovia Syndicate and the Noteholders are hereinafter sometimes referred to collectively as the "COVENANT LENDERS" and individually as a "COVENANT LENDER"). DEFINITIONS: Terms which are defined in the Request for Waivers and Consents will have the same meanings in this Term Sheet. FINANCIAL ADVISOR: Bank of Montreal/Mayer, Brown & Platt ("BMO/MBP") have appointed Ernst & Young ("E&Y") as financial advisor. Such appointment is subject to the following sharing arrangements: 1. BMO/MBP agree that all information received by E&Y from the Company in E&Y's current capacity will be made equally and contemporaneously available by E&Y to all Covenant Lenders and to the holders of the TIAA O'Keefe Notes (as defined below) who will have full and equal access to E&Y and reports generated by E&Y in respect thereto. 1 2. At such time as BMO/MBP or any other Covenant Lender in its sole discretion determines that this sharing arrangement is no longer appropriate, BMO/MBP agree that E&Y will fully cooperate with another financial adviser selected by such other Covenant Lender in sharing and discussing all previously received financial data. The purpose will be to minimize any disadvantage the other Covenant Lenders or the holders of the TIAA O'Keefe Notes may have by virtue of not having their financial advisers from the outset. The Company will provide access and cooperate fully with such financial advisers. 3. In such event, the Company will acknowledge its obligation to pay the expenses of any such other financial adviser in addition to the expenses of E&Y including the potential additional costs in "bringing it up to speed". 4. The other Covenant Lenders and the holders of the TIAA O'Keefe Notes agree that they will not seek to disqualify E&Y from representing BMO/MBP by virtue of this arrangement. COVENANT LENDER CREDIT A. The Second Amended and Restated Credit FACILITIES: Agreement, dated as of March 27, 1998, among Loewen Group International, Inc., The Loewen Group Inc., the Lenders named therein, and Bank of Montreal (as amended, the "BANK OF MONTREAL FACILITY"); B. The Amended and Restated 1994 MEIP Credit Agreement, dated as of June 14, 1994, among Loewen Management Investment Corporation, in its capacity as agent for Loewen Group International, Inc., The Loewen Group Inc., The Banks Listed Therein, and Wachovia Bank, N.A. (as amended, the "MEIP FACILITY"); C. The Note Agreement, dated for reference September 1, 1993, between The Loewen Group Inc. and Loewen Group International, Inc., Re: U.S. $60,000,000 9.62% Senior Guaranteed Notes, Series D, Due September 11, 2003 of The Loewen Group, Inc. (as amended, "the SERIES D NOTES"); and D. The Note Agreement, dated for reference February 1, 1994, between Loewen Group International, Inc. and the Loewen Group Inc., Re: U.S. $50,000,000 6.49% Senior Guaranteed Notes, Series E, Due February 25, 2004 (as amended, the "SERIES E NOTES"). 2 The aggregate of the principal amounts (and in the case of the Bank of Montreal Facility, letter of credit face amounts) which are outstanding under the Covenant Lender Credit Facilities as of the date of this term sheet are as follows: Bank of Montreal Facility - $344,706,739 MEIP Facility - $ 97,291,839 Series D Notes - $ 42,857,143 Series E Notes - $ 35,714,286
ALLOCATION OF INITIAL It is a condition of the effectiveness of this Term ASSET SALE PROCEEDS: Sheet and the waivers and amendments set forth herein and in the Request for Waivers and Consents to which this Term Sheet is attached (but not to the effectiveness of the Consent) that the Northeast Cemetery Sale have been completed and that each of the Covenant Lender Groups have received in immediately available funds as a permanent reduction to its respective Covenant Lender Credit Facility the following amounts: Bank of Montreal Facility: $76,987,223 MEIP Facility: $14,390,901 Series D Notes: $ 6,339,205 Series E Notes: $ 5,282,671
The remaining $48.9 million of proceeds from the Northeast Cemetery Sale shown on Schedule C to the Consent (or such other amount as may be remaining after the payments to Covenant Lenders set forth above and the payment to Fairway Finance Corporation shown on such Schedule C of the Consent) will be paid directly to the Company and will be available to the Company for the purpose of investment in properties and assets to be used in the business of the Company and paying up to $46 million of interest on public bond and other debt of the Company that becomes due and payable in April, 1999. The holders of the Series D Notes and Series E Notes will receive ratable payments in respect of makewhole for the above prepayments in an aggregate amount of $708,689. $277,278 of this amount will be paid at the time of the Northeast Cemetery Sale and $431,411 will be deferred until June 14, 1999. 3 Any amounts payable to the Company in respect of any holdback by the purchaser under the Northeast Cemetery Sale will be paid ratably to the Covenant Lenders. PERMANENT REDUCTION OF After giving effect to the payments from the proceeds COVENANT LENDER CREDIT of the Northeast Cemetery Sale set forth in the FACILITIES preceding section, the Covenant Lender Credit Facilities shall be permanently reduced to the following levels: Bank of Montreal Facility - $293,719,516 MEIP Facility - $ 82,900,938 Series D Notes - $ 36,517,938 Series E Notes - $ 30,431,615
No further borrowings of any kind may be made under any of the Covenant Lender Credit Facilities. The Bank of Montreal Facility will cease to be a revolving credit facility except with respect to the issuance of certain letters of credit as provided below. ISSUANCE OF LETTERS OF Subject to the prior receipt by the lenders under the CREDIT UNDER BANK OF Bank of Montreal Facility in immediately available MONTREAL FACILITY: funds of the $76,987,223 set forth above under "Allocation of Initial Asset Sale Proceeds," additional letters of credit will be made available to the Company under the Bank of Montreal Facility in an aggregate face amount not to exceed $26 million at any time outstanding. Such additional letters of credit will be issued to support payment of deductibles under the Company's liability insurance policies (in an aggregate face amount for such purpose not to exceed $15 million at any time outstanding) and to secure banks which make cash management services available to the Company and its subsidiaries. To the extent that such letters of credit expire or are canceled, replacement letters of credit may be issued for such purposes, subject to such $26 million limit. 4 If the Company requires further letters of credit in the future for the purposes set forth above in excess of $26 million outstanding at any time, the Company may make a principal payment of the loans under the Bank of Montreal Facility from sources other than asset sale proceeds or other payments which are required to be made ratably to the Covenant Lenders (without being required to make a ratable payment to the other Covenant Lenders) and additional letters of credit may be made available to the Company under the Bank of Montreal Facility to the extent of such principal payments, subject to the prior consent of each Covenant Lender Group. The overall letter of credit subfacility limit under the Bank of Montreal Facility will be reduced from $300 million to $41 million. Notwithstanding anything to the contrary herein, the aggregate principal amount of all loans and the face amount of all outstanding letters of credit under the Bank of Montreal Facility shall not exceed $293,719,516, as further reduced from time to time consistently with the terms of this Term Sheet. CONDITIONS TO ISSUANCE As set forth above under "Issuance of Letters of OF LETTERS OF CREDIT: Credit under Bank of Montreal Facility". Other conditions to issuance will be as set forth in the current Bank of Montreal Credit Facility, and will also include the following: - With respect to letters of credit requested for issuance after September 15,1999, the Notes under the Indenture, dated as of September 30, 1997, among the Company and State Street Bank and Trust Company, relating to $300,000,000 Senior Guaranteed Notes (the "PATS") shall have been refinanced, on terms satisfactory to each Covenant Lender Group and the holders of the TIAA O'Keefe Notes by September 15, 1999. WAIVERS Upon receipt by the Covenant Lender Groups of the amounts set forth above under "Allocation of Initial Asset Sale Proceeds" and the receipt by the holders of the TIAA O'Keefe Notes of the $2,000,000 payment referred to below and satisfaction of the other conditions to effectiveness set forth in the Request for Waivers and Consents, the financial covenant default waiver requested by the Company in clause (3) of the second paragraph of the Request for Waivers and Consents will become effective. 5 SCHEDULED MATURITIES The final maturities and other scheduled or presently contemplated mandatory prepayment dates of the Covenant Lender Credit Facilities and the TIAA O'Keefe Notes shall be re-set to the dates set forth on SCHEDULE A attached hereto. All scheduled repayments and maturities of the Covenant Lender Credit Facilities and TIAA O'Keefe Notes due prior to January 15, 2000 shall be deferred until such date. After January 15, 2000 (prior to any bankruptcy filing regarding the Company or any acceleration of any indebtedness of the Company), if any scheduled or other mandatory repayment becomes due under any of the Covenant Lender Credit Facilities or the TIAA O'Keefe Notes (the "PAID FACILITY") and the Company makes such payment or any portion thereof, the Company shall simultaneously be required to make a mandatory prepayment of all other Covenant Lender Credit Facilities in an amount which is ratably proportionate to the amount paid to the Paid Facility. If, however, the Covenant Lender Group or holder of the TIAA O'Keefe Notes that is due such scheduled or other mandatory repayment agrees with the Company to defer such scheduled or other mandatory repayment, then the ratable payment that would otherwise be due to the other Covenant Lender Groups shall be automatically deferred to the same date, but not past the final maturity of such Covenant Lender's debt shown on SCHEDULE A. If the Covenant Lender Group or holder of the TIAA O'Keefe Notes that is due such scheduled or other mandatory repayment receives, directly or indirectly, any fee or other compensation in respect of such deferment, then the other Covenant Lender Groups or holder of the TIAA O'Keefe Notes shall simultaneously therewith receive from the Company a ratable payment as a fee. CERTAIN REVISED AND - Interest Charge Coverage covenants in the Bank of ADDITIONAL COVENANTS Montreal Facility, the MEIP Facility, the Series E Notes, the Series D Notes and the Note Agreement, dated for reference November 15, 1997, between Loewen Group International, Inc. and The Loewen Group Inc., Re: U.S. $41,800,000 Promissory Note, Due February 2, 2016 (the "TIAA O'KEEFE NOTES"), will be amended to read as follows: 6 INTEREST CHARGES COVERAGE. TLGI will at all times maintain (i) a ratio of EBITDAR for the most recently ended period of four consecutive fiscal quarters of TLGI to Consolidated Interest Charges for such period of four consecutive fiscal quarters (a) for the four quarter period ending March 31, 1999 of not less than 1.60 to 1.00, (b) for the four quarter period ending June 30, 1999 of not less than 1.50 to 1.00, (c) for the four quarter period ending September 30, 1999 of not less than 1.60 to 1.00, and (d) for the four quarter period ending December 31, 1999 of not less than 1.80 to 1.00; and (ii) a ratio of EBITDAR for the most recently ended fiscal quarter to Consolidated Interest Charges for such fiscal quarter (a) for the quarter ending March 31, 1999 of not less than 1.80 to 1.00, (b) for the quarter ending June 30, 1999 of not less than 1.60 to 1.00, (c) for the quarter ending September 30, 1999 of not less than 1.70 to 1.00 , and (d) for the quarter ending December 31, 1999 of not less than 2.00 to 1.00. TLGI will at all times after December 31, 1999 maintain (i) a ratio of EBITDAR for the most recently ended period of four consecutive fiscal quarters of TLGI to Consolidated Interest Charges for such period of four consecutive fiscal quarters of not less than 2.350 to 1.00 and (ii) a ratio of EBITDAR for the most recently ended fiscal quarter to Consolidated Interest Charges for such fiscal quarter of not less than 2.00 to 1.00. All defined terms in the above covenant will be used as defined in the Bank of Montreal Facility on the date hereof. - Maximum Consolidated Indebtedness to Adjusted EBITDAR covenants in the Bank of Montreal Facility, the MEIP Facility, the Series E Notes, the Series D Notes and the O'Keefe Notes will be amended to read as follows: 7 MAXIMUM CONSOLIDATED INDEBTEDNESS TO ADJUSTED EBITDAR. TLGI will not permit at any time the ratio of Consolidated Indebtedness determined at such time to Adjusted EBITDAR determined for the fiscal quarter then most recently ended (i) to be greater than (a) 8.30 to 1.00 during each of the first two fiscal quarters of 1999, (b) 7.80 to 1.00 during the third fiscal quarter of 1999, and (c) 7.00 to 1.00 during the fourth fiscal quarter of 1999, or (ii) to be greater than 5.50 to 1.00 at any time after December 31, 1999. All defined terms in the above covenant will be used as defined in the Bank of Montreal Facility on the date hereof. For purposes of the foregoing two covenants, the Adjusted EBITDAR and EBITDAR for the fourth quarter of 1998 shall be deemed to be $56,000,000. - Minimum Consolidated Net Worth covenants in the Bank of Montreal Facility, the MEIP Facility, the Series E Notes, the Series D Notes and the TIAA O'Keefe Notes will be amended to read as follows: - CONSOLIDATED NET WORTH. TLGI will maintain at all times a Consolidated Net Worth of not less than $700,000,000. All defined terms in the above covenant will be used as defined in the Bank of Montreal Facility on the date hereof. - The financial covenants listed below contained in the Bank of Montreal Facility, the MEIP Facility, the Series E Notes, the Series D Notes and the TIAA O'Keefe Notes will be deleted and replaced with, or amended to conform to, the above referenced covenants, which will be common to all such agreements. None of the above documents shall contain financial covenants other than those stated above. The financial covenants to be deleted and replaced with, or amended to comply with, the above (as applicable) will be the following: Sections 7.11(g), 7.19, 7.20, 7.21, 7.22 and 7.23 of the Bank of Montreal Facility; Sections 5.03, 5.04, 5.05, 5.24, 5.25 and 5.27 of the MEIP Facility; Sections 5.6 and 5.7 of the Series D Notes; 8 Sections 5.6 and 5.7 of the Series E Notes; and Sections 5.6 and 5.7 of the TIAA O'Keefe Notes. - The PATS shall be refinanced, on terms satisfactory to each Covenant Lender Group and the holders of the TIAA O'Keefe Notes by September 15, 1999. - Suspension of all common, preferred and MIPS dividend payments. - Interest payments on debt owed to the Covenant Lender Groups and under the TIAA O'Keefe Notes (after conversion to cash pay) shall occur monthly on the last business day of each calendar month. The TIAA O'Keefe Notes will be converted to cash pay effective on July 1, 1999. The outstanding principal amount of the TIAA O'Keefe Notes after such conversion to cash pay using a discount factor of 7.75% and after giving effect to the $2 million payment referred to below will be $19,087,004. - No further acquisitions or equity repurchases except within the basket for $2,000,000 to buy out Regional Partnerships described below. - Absent acceleration following an Event of Default, no principal payments will be due on any Covenant Lender Group Debt or the TIAA O'Keefe Notes prior to January 15, 2000 except for ratable payments to the Covenant Lender Groups from proceeds of asset sales or the issuance of debt or equity as provided in the following paragraph, and payments in respect of the TIAA O'Keefe Notes to the extent permitted by each of the Covenant Lender Groups in connection with their approvals of such asset sales. 9 - The Company and its subsidiaries may not issue any equity or indebtedness; provided that the Company may issue equity or indebtedness if the net proceeds thereof are immediately applied to ratably repay the indebtedness under the Covenant Lender Credit Facilities; and provided that the Company or any subsidiary may issue indebtedness constituting purchase money indebtedness or capital leases. - The Company and its subsidiaries will not make any principal prepayments on any Covenant Lender Credit Facilities, the TIAA O'Keefe Notes or any other Indebtedness (as defined in the Bank of Montreal Facility on the date hereof) other than ratable payments to the Covenant Lender Groups or other payments on the O'Keefe Notes to the extent permitted by each of the Covenant Lender Groups at the time of negotiation of such prepayments, except that the Company may make prepayments on vendor notes and to buy out Regional Partners in connection with bona fide anticipated asset sales in an aggregate amount not to exceed $2,000,000 in any twelve month period. The Company will provide prior notice of such payment to the Covenant Lender Groups and holders of the TIAA O'Keefe Notes in the semi-monthly reports described below. The Company warrants that (after this Term Sheet becomes effective) no principal payments will be due on Indebtedness of the Company or any of its subsidiaries prior to January 15, 2000 other than: (i) payments which may become due on the $300 million PATS on October 1, 1999, and (ii) payments in respect of vendor notes of the Company and its Subsidiaries in an aggregate amount not exceeding $17,000,000 in any twelve month period for all such payments. Nothing in the Term Sheet will restrict advances and requirements under the Fairway Finance Corporation receivables securitization facility; provided that it is a condition to the amendment that the maturity date of such facility shall have been extended to at least September 15, 1999 with a maximum amount of not less than $50,000,000. 10 Notwithstanding the foregoing, simultaneously with payments to the Covenant Lenders set forth above under "Allocation of Initial Asset Sale Proceeds", the Company shall make payment of an amount not to exceed $2 million to Teachers Insurance and Annuity Association of America ("Teachers") as current holder of the TIAA O'Keefe Notes. Such payment shall be made from the Company's general corporate funds and shall not be made from any proceeds of Asset Sales. The Company and its subsidiaries will not make or incur any liability to make capital expenditures or expenditures in development in respect of cemetery land if the total of all such expenditures shall exceed $60,000,000 for the year ending December 31, 1999 or any year thereafter. - The Company shall deliver standard information packages to the Covenant Lenders and the holders of the TIAA O'Keefe Notes in accordance with the following: On a semi-monthly basis, within 5 days after the 15th and last day of each calendar month, a report that contains the following information and calculations with regard to the most recently ended semi-monthly period, beginning with the semi-monthly periods ending March 31 and April 15, 1999 (both of which initial reports shall be due on April 20, 1999): (i) a rolling three month semi-monthly cash flow forecast and supporting assumptions; (ii) analysis of actual results to forecast; (iii) analysis of the current bank position; (iv) analysis of the current working capital position; (v) update on all material changes in the status of the Company (including, but not limited to management changes and relationships with stakeholders); (vi) status of divestiture process (subject to applicable confidentiality restrictions) and other strategic initiatives of the Company; (vii) description and amount of all fees and expenses paid to any of the Covenant Lenders or holder of the TIAA O'Keefe Notes by the Company; and (viii) any other material items which may affect the Company's restructuring initiative. 11 As soon as possible and in any event within 30 days after the end of each calendar month, beginning with the month end occurring at March 31, 1999, a report that contains the following information and calculations: (i) monthly income statement; (ii) management discussion and analysis of operating results; (iii) status of public and private debt, including ownership thereof (to the extent that the Company has knowledge of such ownership); and (iv) update on covenant calculations, including calculations of all ratios relevant for any purpose to any provision in the Company's credit or financing documents as of the most recent date applicable for such calculations under such document, whether or not required to be calculated at such time by the applicable credit or financing document. The Company agrees no later than May 15, 1999 to deliver to each of the Covenant Lender Groups and to the holders of the TIAA O'Keefe Notes a copy of a business plan, proposed budget and cash flow projections for the 21 month period ending September 30, 2000, such business plan to be in form and level of detail reasonably satisfactory to each of the Covenant Lender Groups, but subject to applicable confidentiality restrictions with respect to proposed asset sales. Upon reasonable notice and during business hours, the Company agrees to provide access for informational purposes to senior management of the Company to each of the Covenant Lender Groups. DEFAULT: It shall be a default under the Covenant Lender Credit Facilities and the TIAA O'Keefe Notes if, for any reason, any payment made to any of the Covenant Lender Groups pursuant to any of the Covenant Lender Credit Facilities is required to be refunded or repaid to the Company or paid to any other creditor of the Company or to any other person or entity. 12 PROCEEDS FROM Additional asset sales (other than of inventory in ADDITIONAL ASSET SALES: the ordinary course of business and receivables sales under the Fairway Finance Corporation securitization facility) after the Northeast Cemetery Sale shall be conducted only with the prior written approval of designated committees of the Covenant Lender Groups and the TIAA O'Keefe Notes. All net proceeds from such additional asset sales shall be used to ratably pay the Covenant Lender Groups unless otherwise agreed by the "Required Banks", "Required Lenders" (or equivalent applicable term) of each Covenant Lender Group. Notwithstanding the foregoing, the Company may sell assets other than collateral subject to the Company's Collateral Trust Agreement, dated as of May 15, 1996, as amended, in single transactions or groups of related transactions in which the total assets subject to such transaction(s) have a fair market value less than $1,000,000 ("SMALL SALES") without being required to obtain prior consents of such designated committees or to immediately pay the net proceeds to the Covenant Lenders. Within 45 days after each quarter-end, the Company shall report the details of all such Small Sales to the Covenant Lender Group committees. If the aggregate net proceeds of such Small Sales exceeds $5,000,000 for any twelve month period, commencing on April 1, 1999, then the Company will be required to pay the excess to the Covenant Lender Groups at the time of delivering such report. The Company may retain such net proceeds up to such $5,000,000 amount. PAYMENT OF ASSET SALES All asset sales proceeds will be paid directly by the PROCEEDS: purchasers to the applicable Covenant Lender Groups, unless otherwise agreed by each Covenant Lender Group. ADDITIONAL COLLATERAL: During the 90-day period following the closing of the Initial Asset Sale, the Company will negotiate in good faith with designated representatives of the Covenant Lender Groups to identify additional collateral over which the Company is able to grant security interests to the Covenant Lender Groups (the "ADDITIONAL COLLATERAL"). As soon as practicable following the end of such 90-day period, the Company will, and will cause any applicable subsidiary of it to, grant security interests in the Additional Collateral ratably to the Covenant Lender Groups to the extent reasonably practicable and as permitted by applicable law, the Company's indentures and other applicable documents. 13 INTEREST: Interest rates will be as set forth on the attached Schedule B. The Bank of Montreal Facility Applicable Letter of Credit Fee Rate shall be 3.5% per annum. AMENDMENT FEE: For each Covenant Lender Group and the TIAA O'Keefe Notes, 50 basis points times the dollar amount of the outstanding amounts under such Covenant Lender Group's Credit Facility set forth above under "Covenant Lender Credit Facilities" and the implicit principal amount (before giving effect to the $2,000,000 payment), which is $20,655,593, of the TIAA O'Keefe Notes. ASSIGNMENTS: No consents of TLGI or LGII will be required for any assignments by any lenders or L/C issuers under the Covenant Lender Credit Facilities. COUNSEL FOR BANK Without limiting its other obligations under the Bank SYNDICATE: of Montreal Facility in respect of fees and expenses, the Company agrees to pay the reasonable fees and expenses of one firm of legal counsel approved by the Lenders under the Bank of Montreal Facility to act as counsel for such Lenders (as contrasted with counsel for the Agent). PAYMENT OF EXPENSES The Company will be responsible for the prompt and prior payment of all legal, business and financial advisor expenses incurred by the Agent under the Bank of Montreal Facility, the Agent under the Wachovia Facility, and Teachers in connection with the granting of this waiver and consent, the Term Sheet and the execution and delivery of any definitive documentation. 14 EX-10.10 3 EXHIBIT 10.10 THE LOEWEN GROUP INC. 1994 OUTSIDE DIRECTOR COMPENSATION PLAN (RESTATED AND AMENDED AS AT JANUARY 9, 1997 AND FURTHER AMENDED AS AT AUGUST 15, 1997 AND JUNE 25, 1998) SECTION 1. PURPOSE The purpose of the 1994 Outside Director Compensation Plan (the "Plan") is to promote the interests of The Loewen Group Inc. ("TLGI") by attracting and retaining qualified individuals who are neither employees nor officers of TLGI or a Subsidiary (as defined below) to serve as directors of TLGI or a Subsidiary. The Plan is intended to further align the interests of outside directors with the shareholders of TLGI, thereby promoting long-term growth and performance of TLGI. SECTION 2. DEFINITIONS "ANNUAL FEES" means (i) the annual retainer, (ii) the fees for serving on a Committee, (iii) the fees for serving as Chairman of a Committee and (iv) any other fees for serving as a director of TLGI with respect to an Annual Service Period (other than Meeting Fees), to be paid by TLGI to a TLGI Participant during or in respect of any Annual Service Period, at the rates determined by the Board of Directors in advance of such period. "ANNUAL FEES ELECTION" means an irrevocable election made in accordance with Section 5(a). "ANNUAL SERVICE PERIOD" means an annual period determined by the Board of Directors, which annual period shall be January 1 through December 31 or such other annual period as may be designated from time to time by the Board of Directors. "APPLICABLE STOCK EXCHANGE" means, with respect to Common Shares issued or Options granted (i) to a Participant who is a resident of Canada, the TSE; and (ii) to a Participant who is a resident of any country other than Canada, the New York Stock Exchange; provided, however, that the Board of Directors may, subject to any required stock exchange approval, from time to time, designate another Stock Exchange as the Applicable Stock Exchange for purposes of clause (i) or clause (ii). "BOARD OF DIRECTORS" means the Board of Directors of TLGI. "BUSINESS DAY" means any day on which the principal executive offices of TLGI in Burnaby, British Columbia, are open for business and all of the Stock Exchanges are open for trading. "COMMITTEE" means a committee of the Board of Directors. "COMMON SHARES" means the Common shares without par value of TLGI. "DETERMINATION DATE" means (i) with respect to Common Shares issued pursuant to Section 5(a), the first Business Day of the Annual Service Period to which the Annual Fee Election relates, (ii) with respect to Common Shares granted pursuant to Section 5(b), the first Business Day of the Quarterly Service Period immediately following the Quarterly Service Period to which the Meeting Fees Election relates, (iii) with respect to Options granted pursuant to Section 6, the Grant Date, and (iv) with respect to Options granted pursuant to Section 7, the first Business Day of the first full calendar month that a Participant first serves as a director. "GRANT DATE" means the date that an Option is granted; provided, however, that if the date the Option is granted is not a Business Day, the Grant Date shall be deemed to be the Business Day immediately following such date of grant. "MEETING FEES" means the aggregate fee compensation actually earned during a Quarterly Service Period by a TLGI Participant for attending (in person, by telephone, or by videoconference) Board of Director and Committee meetings. "MEETING FEES ELECTION" means an irrevocable election made in accordance with Section 5(b). "OPTION" means an option to acquire Common Shares granted pursuant to Section 6 or Section 7. "PARTICIPANT" means a TLGI Participant or a Subsidiary Participant. "PLAN" means this 1994 Outside Director Compensation Plan, as amended and restated. "QUARTERLY SERVICE PERIOD" means each of the quarters ended March 31, June 30, September 30 and December 31, or such other quarterly periods as may be designated by the Board of Directors from time to time. "SECURITIES LAWS" means the securities laws of the United States, Canada, the states and territories of the United States, the provinces and territories of Canada, the securities laws of the jurisdiction of residence of any Subsidiary Participant, and applicable laws, rules and regulations promulgated thereunder. "SHARE PRICE" means (i) with respect to Common Shares, the Weighted Average Trading Price or (ii) with respect to Options, the greater of (A) the weighted average of the trading prices on the Determination Date of the Common Shares on the Applicable Stock Exchange and (B) the Weighted Average Trading Price. "SHARES" means the Common Shares and any security convertible into or exchangeable for Common Shares. -2- "STOCK EXCHANGES" means the New York Stock Exchange (or, if the Common Shares are not traded on the New York Stock Exchange, any United States national securities exchange or quotation system on which the Common Shares are traded) and any securities exchange outside of the United States on which the Common Shares are traded. "SUBSIDIARY" means a direct or indirect subsidiary of TLGI. "SUBSIDIARY PARTICIPANT" means an individual duly elected or appointed as a director of a Subsidiary who is (i) not an officer or employee of TLGI or any Subsidiary or (ii) not a resident of the United States or Canada. "TLGI" means The Loewen Group Inc., a body corporate under the laws of British Columbia, Canada. "TLGI PARTICIPANT" means an individual duly elected or appointed as a director of TLGI who is not also an officer or employee of TLGI or any Subsidiary. Absent action by the Board of Directors to the contrary, an honorary director or a director emeritus shall be deemed to be TLGI Participant. "TSE" means The Toronto Stock Exchange. "WEIGHTED AVERAGE TRADING PRICE" means the weighted average trading price of the Common Shares on the Applicable Stock Exchange for the five trading days on which such shares are traded immediately preceding the Determination Date. "1934 ACT" means the Securities Exchange Act of 1934, as amended. SECTION 3. ADMINISTRATION The Plan shall be administered by the Board of Directors. SECTION 4. COMMON SHARES SUBJECT TO THE PLAN The total number of Common Shares that may be issued under the Plan shall not exceed 500,000. The number of Common Shares reserved for issuance to any one person pursuant to options (whether granted under this Plan or otherwise) shall not exceed 5% of the total issued and outstanding Common Shares on a non-diluted basis. If any Options granted under this Plan are surrendered before exercise or lapse without exercise, in whole or in part, then the Common Shares reserved therefor shall continue to be available under the Plan. -3- SECTION 5. ELECTIONS (a) ANNUAL FEES ELECTION. Not later than ten Business Days prior to the first day of an Annual Service Period, each TLGI Participant may, by filing a written election with TLGI, direct TLGI to pay to such TLGI Participant, in the form of Common Shares, some or all of the Annual Fees payable to such TLGI Participant for the related Annual Service Period (the "Annual Fees Election"). An Annual Fees Election filed with TLGI shall be effective for the entire Annual Service Period to which the Annual Fees Election relates. The number of Common Shares to be issued pursuant to Section 5(a) shall be equal to the Annual Fees or such portion thereof to which the Annual Fee Election relates, divided by the Share Price as at the Determination Date. Such Common Shares shall be issued as soon as is reasonably possible after the last day of the Annual Service Period to which the Annual Fees Election relates. Cash shall be paid in lieu of fractional shares. If actual fees to be paid with respect to any component of Annual Fees is increased during the Annual Service Period, TLGI Participants shall receive such increase in cash and not Common Shares, regardless of whether an Annual Fees Election has been made. (b) MEETING FEES ELECTION. Each TLGI Participant may deliver a notice to TLGI directing TLGI to pay to such TLGI Participant, in the form of Common Shares, some or all of the Meeting Fees for the immediately preceding Quarterly Service Period (the "Meeting Fees Election"); provided, however, that the first Quarterly Service Period for which a Meetings Fees Election may be filed is the quarter ended March 31, 1997. The Meeting Fees Election shall be delivered to TLGI between the 40th and 60th day following the relevant Quarterly Service Period. The number of Common Shares to be issued pursuant to Section 5(b) shall be equal to the Meeting Fees to which the Meeting Fee Election relates, divided by the Share Price as at the Determination Date. Such Common Shares shall be issued as soon as is reasonably possible after the due date of the relevant Meetings Fee Election. Cash shall be paid in lieu of fractional shares. SECTION 6. ANNUAL GRANT OF OPTIONS On June 1 of each year or such other date as the Board of Directors shall determine, each TLGI Participant who is a Board member immediately following the last meeting of shareholders in which directors have been elected (a "Shareholders' Meeting") shall receive an annual grant of Options; provided, however, that with respect to the year commencing June 1, 1996, the annual grant of Options shall occur on January 9, 1997. In addition, each TLGI Participant who is a Committee member immediately following the Shareholders' Meeting shall receive a grant of Options for service as a Committee member. The number of Options to be granted for Board service and Committee service shall be determined annually by the Board of Directors by no later than the last physical Board meeting held prior to June 1 of the relevant year. SECTION 7. INITIAL AND ONE-TIME GRANTS A TLGI Participant who is initially appointed (rather than elected at a Shareholders' Meeting) to the Board of Directors shall, on the first Business Day of the first full calendar month after the date during which such appointment occurred, receive an initial grant of Options in an amount to -4- be determined by the Board of Directors. In addition, the Board of Directors shall have the discretion to make a one-time grant of up to 2,000 Options to a Subsidiary Participant, such grant to be made as of the first Business Day of the first full calendar month after the date on which a Subsidiary Participant is initially elected or appointed to a Subsidiary board of directors. SECTION 8. OPTION AGREEMENT Each Option granted under the provisions of this Plan shall be evidenced by an option agreement ("Option Agreement") in such form as may be approved by the Board of Directors, which agreement shall be duly executed and delivered on behalf of TLGI and by the Participant to whom such Option is granted. The Option Agreement shall contain such terms, provisions and conditions not inconsistent with the Plan as may be determined by the Board of Directors. SECTION 9. TERMS OF OPTIONS (a) EXERCISE PRICE. The Option exercise price shall be the Share Price. (b) TERM. Except as determined pursuant to Section 12 hereof, each Option shall expire ten years after the Grant Date. (c) VESTING; EXERCISE. Each Option Agreement shall specify the dates upon which all or any installment of the Option will be exercisable. An Option may be exercised when installments vest and at any time and from time to time thereafter with respect to all or a portion of the Common Shares covered by such vested installments. In addition, if an Offer (as hereinafter defined) is made, the Board of Directors may while the Offer remains outstanding: (i) determine that each Option granted by TLGI to purchase Common Shares shall, notwithstanding any vesting period or deferral of the right to exercise otherwise applicable, be immediately exercisable effective on and after a date declared by the Board of Directors, or Committee, to be an advanced exercise date ("Advanced Exercise Date"); and (ii) rescind any declaration of an Advanced Exercise Date but no such rescission shall affect the validity of the exercise of such Option if validly exercised on or after a particular Advanced Exercise Date and before the date of rescission of the declaration of the particular Advanced Exercise Date. For the purposes hereof, "Offer" means an offer to acquire Shares made to the holders of Shares where the Shares which are the subject of the offer to purchase, together with the offeror's then presently owned Shares, will in the aggregate exceed twenty percent (20%) of the outstanding Shares and where two or more persons or companies make offers jointly or in concert or intending to exercise jointly or in concert any voting rights attaching to the Shares to be acquired, then the Shares owned by each of them shall be included in the calculation of the percentage of -5- the Shares owned by each of them. Paragraphs (i) and (ii) shall apply to each Option granted or to be granted by TLGI, which is outstanding at the time of any such declaration regardless of the date of grant thereof, provided that all other terms and conditions of the Option shall continue to apply and nothing herein shall operate to extend, enlarge or revise any Option which has expired, has been exercised, has been canceled or otherwise has ceased to exist. (d) PAYMENT. An Option shall be exercised by delivery of a written notice of such exercise to TLGI at its principal executive office, together with full payment of the aggregate exercise price for the Common Shares with respect to which the Option is exercised. (e) SHARE ISSUANCE. Upon payment of the aggregate exercise price, TLGI shall issue the Common Shares so acquired as soon as is reasonably possible. SECTION 10. OPTIONS NOT TRANSFERABLE An Option granted under the Plan shall not be transferred, pledged or assigned except to the extent permitted by applicable Securities Laws and the applicable rules and regulations of the Stock Exchanges and (i) only as hereinafter provided or (ii) with the approval of the Board of Directors. SECTION 11. PROTECTION AGAINST DILUTION The Board of Directors shall adjust the number of Common Shares covered by the Plan and any Option in a manner which it considers equitable to reflect any change in the capitalization of TLGI including, but not limited to, such changes as stock dividends, consolidations and subdivisions of shares or changes resulting from an amalgamation of TLGI with one or more corporations. No fractional shares or rights to acquire a fractional share will be created as a result of an adjustment made pursuant to this section. The Board of Directors shall also adjust the exercise price under any Option in a manner which it considers equitable if the number of Common Shares covered by the Option is adjusted pursuant to this section. SECTION 12. PERSONAL HOLDING COMPANY To the extent permitted by applicable Securities Laws and the applicable rules and regulations of the Stock Exchanges, a Participant shall be entitled to direct TLGI (i) to issue Shares or Options to a personal holding company of which the Participant holds all of the direct and indirect interests ("PHC") or (ii) to permit the transfer by a Participant of his or her Options to a PHC. SECTION 13. EFFECT OF TERMINATION OF DIRECTORSHIP (a) DEATH. In the event of the death of a Participant, the Participant's personal legal representatives (the "Successors") or PHC, as the case may be, may exercise any Options previously issued to the extent that such Options are exercisable at the date of death, but no further vesting shall occur. Absent the prior written consent of the Board of Directors, any such -6- Option must be exercised prior to the earlier to occur of (i) two years after the date of death and (ii) the expiration date of the Option. In addition, the Successors or the PHC, as the case may be, shall be entitled to receive, on behalf of a deceased TLGI Participant, a pro rata amount of the Common Shares that the TLGI Participant elected to receive pursuant to Section 5(a), and all of the Common Shares that the TLGI Participant elected to receive pursuant to Section 5(b). (b) TERMINATION BY BOARD RESOLUTION. If a Participant's directorship is terminated by resolution of the Board of Directors or the board of directors of a Subsidiary, all Options previously issued to such Participant or PHC, as the case may be, shall expire on a date to be determined by the Board of Directors. Until such date, any Options previously issued may be exercised to the extent that such Options are exercisable on the termination date, but no further vesting shall occur. The Board of Directors shall also determine the extent, if at all, that such TLGI Participant or PHC, as the case may be, shall receive any Common Shares with respect to the Annual Service Period during which such termination occurs. (c) OTHER TERMINATION. In the event that a Participant's directorship terminates for any reason other than by death or by resolution, any Options previously issued may be exercised, to the extent that such Options are exercisable on the termination date, but no further vesting shall occur. Any such Options must be exercised prior to the earlier to occur of (i) forty-five days after the date of termination and (ii) the expiration date of the Option. A TLGI Participant or PHC, as the case may be, shall be entitled to receive a pro rata amount of the Common Shares that the TLGI Participant elected to receive pursuant to Section 5(a), and all of the Common Shares that the TLGI Participant elected to receive pursuant to Section 5(b). (d) HONORARY/EMERITUS DIRECTOR. Notwithstanding Sections 13(a) and 13(b) above, a director who becomes an honorary director or director emeritus shall not be deemed to be terminated as a result of assuming such status. (e) SHARE CERTIFICATES. A certificate representing Common Shares to be acquired pursuant to this Section 13 shall be issued in accordance with Section 5(a), 5(b) or 9(e), as the case may be. SECTION 14. RESTRICTIONS ON ISSUANCE OF SHARES TLGI shall have no obligation to issue any Common Shares or deliver any certificate representing Common Shares until the following conditions shall be satisfied: (i) At the time of the issue, (A) such shares effectively shall have been registered or qualified by prospectus, as the case may be, under applicable Securities Laws as now in force or hereafter amended or (B) counsel for TLGI shall have given an opinion that such shares are exempt from registration or qualification by prospectus, as the case may be, under Securities Laws as now in force or hereafter amended; and -7- (ii) TLGI shall have complied with all regulations imposed by the Stock Exchanges. In addition, any such certificate shall bear such restrictive legends as TLGI determines are necessary or desirable, from time to time, in order to comply with applicable Securities Laws and all regulations imposed by the Stock Exchanges. SECTION 15. TERMINATION OR AMENDMENT Subject to regulatory approval and, where required, approval of the shareholders of TLGI, the Board of Directors may, at any time and for any reason, amend or terminate the Plan. The Plan shall remain in effect until it is so terminated by the Board of Directors. No Options may be granted under this Plan after its termination, but no termination or amendment of the Plan shall affect any previously granted Option. SECTION 16. GENERAL LIMITATIONS Neither the Participant, the Participant's Successors nor the Participant's PHC shall have any rights as a shareholder of TLGI with respect to Common Shares covered by Options until the Participant, Participant's Successors or PHC, as the case may be, becomes the holder of record of such shares. SECTION 17. RISK EACH PARTICIPANT ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE COMMON SHARES. SECTION 18. APPLICABLE LAW All questions concerning the interpretation, validity and construction of this Plan and the instruments evidencing Options shall be governed by the internal law, and not the law of conflicts, of the Province of British Columbia. SECTION 19. COMPLIANCE WITH CERTAIN U.S. LAWS So long as TLGI is subject to Section 16 of the 1934 Act, any equity security, as defined in the rules and regulations under the 1934 Act, offered pursuant to the Plan may not be sold for at least six months after the date of grant thereof, and any derivative security, as defined in the rules and regulations promulgated under Section 16, offered pursuant to the Plan may not be sold for at least six months after the acquisition thereof, except in the event of the death or disability of the holder thereof. To the extent that any provision of this Plan or action by the Board of Directors fails to comply with the rules and regulations promulgated under Section 16, it shall be null and void to the extent permitted by law and deemed advisable by the Board of Directors. -8- EX-10.11 4 EXHIBIT 10.11 THE LOEWEN GROUP INC. EMPLOYEE STOCK OPTION PLAN (INTERNATIONAL) (RESTATED AND AMENDED AS AT APRIL 7, 1994 AND FURTHER AMENDED AS AT APRIL 7, 1995, SEPTEMBER 19, 1995, APRIL 2, 1996, NOVEMBER 20, 1996, APRIL 2, 1997, APRIL 8, 1997, AUGUST 15, 1997, MARCH 11, 1998 AND SEPTEMBER 17, 1998) SECTION 1 - GENERAL (a) The purpose of the Employee Stock Option Plan (International) (the "Plan") is to promote the interests of The Loewen Group Inc. (the "Company") by: (i) furnishing Eligible Participants (as defined below) with greater incentive to develop and promote the business and financial success of the Company; and (ii) further associate the interests of Eligible Participants with those of the shareholders of the Company by encouraging such participants to acquire share ownership in the Company. (b) The Plan is not qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and is not subject to any of the provisions of the Employment Retirement Income Security Act of 1974. (c) Any questions concerning the Plan should be directed to the Corporate Secretary of the Company, at the Company's principal executive office located at 4126 Norland Avenue, Burnaby, British Columbia, Canada V5G 3S8, telephone number (604) 299-9321. (d) The Plan shall be governed by, and construed in accordance with, the laws of the province of British Columbia. SECTION 2 - ELIGIBILITY (a) Under the Plan, the following persons (collectively, "Eligible Participants") are eligible to be granted options ("Options") to purchase Common shares without par value of the Company ("Shares"): (i) employees of the Company or any of its direct or indirect subsidiaries ("Subsidiaries") other than employees who are residents of Canada ("Eligible Employees"); and (ii) persons, other than Eligible Employees, who, (A) perform services for the Company and/or any of its Subsidiaries on an on-going basis and are not insiders (as defined in the Securities Act (Ontario), as amended from time to time) of the Company ("Service-Providers"), and (B) are not residents of Canada; provided that there is an available exemption from the prospectus or registration requirements under the securities laws of the applicable jurisdictions. (b) The Compensation Committee of the Company (the "Committee") or such officer as the Committee may designate shall determine from time to time those Eligible Participants to be granted Options under the Plan, and the number of Shares subject to each such Option. Each grant of an Option pursuant to the Plan shall be evidenced by a stock option agreement ("Option Agreement") executed by the employee to whom the Option is granted (the "Optionee") and the Company. Each Option Agreement shall incorporate such terms and conditions as the Committee, in its discretion, deems consistent with the terms of the Plan. (c) Each Option Agreement shall specify the dates upon which all or any instalment of the Option will be exercisable. An Option may be exercised when instalments vest at any time and from time to time thereafter with respect to all or a portion of the Shares covered by such vested instalments. In addition, if an Offer (as hereinafter defined) is made, the Board of Directors, or Committee, may while the Offer remains outstanding: (i) determine that each Option granted by the Company to purchase Shares shall, notwithstanding any vesting period or deferral of the right to exercise otherwise applicable, be immediately exercisable effective on and after a date declared by the Board of Directors, or Committee, to be an advanced exercise date ("Advanced Exercise Date"); and (ii) rescind any declaration of an Advanced Exercise Date but no such rescission shall affect the validity of the exercise of such Option if validly exercised on or after a particular Advanced Exercise Date and before the date of rescission of the declaration of the particular Advanced Exercise Date. For the purposes hereof, "Offer" means an offer to acquire the Shares made to the holders of the Company's Shares where the Shares which are the subject of the offer to purchase, together with the offeror's then presently owned Shares, will in the aggregate exceed twenty percent (20%) of the outstanding Shares of the Company and where two or more persons or companies make offers jointly or in concert or intending to exercise jointly or in concert any voting rights attaching to the Shares to be acquired, then the Shares owned by each of them shall be included in the calculation of the percentage of the Shares of the Company owned by each of them. Paragraphs (i) and (ii) shall apply to each Option granted or to be granted by the Company, which is outstanding at the time of any such declaration regardless of the date of grant thereof, provided that all other terms -2- and conditions of the Option shall continue to apply and nothing herein shall operate to extend, enlarge or revise any Option which has expired, has been exercised, has been cancelled or otherwise has ceased to exist. SECTION 3 - NUMBER OF SHARES SUBJECT TO PLAN (a) The number of Shares issuable pursuant to the exercise of Options after the effective date of the restatement and amendment of the Plan is limited as follows: (i) subject to adjustment pursuant to Section 9, the aggregate number of Shares issuable pursuant to Options under the Plan shall not exceed 4,800,000 Shares (including 1,178,457 Shares under Options previously granted but not exercised as of April 7, 1994); and (ii) the number of Shares reserved for issuance to any one person pursuant to options (whether granted under this Plan or otherwise) shall not exceed 5% of the total issued and outstanding Shares on a non-diluted basis. (b) The maximum number of Shares for which Options are granted after the effective date of restatement and amendment of the Plan in any one calendar year under the Plan to any one Eligible Participant shall not exceed 600,000 Shares, subject to adjustment pursuant to Section 9. (c) If an Option granted under the Plan expires for any reason without being exercised in full, the number of Shares that would have been issuable upon the exercise of such Option shall continue to be available under the Plan. (d) Subject to the maximum limits described in subsections (a) and (b) above, the Board of Directors of the Company (the "Board") shall reserve the number of Shares required to honor Options granted from time to time to Optionees pursuant to the Plan, and shall reserve from time to time additional Shares, if any, to ensure that a sufficient number of Shares are available for purchase under Options granted in the future. SECTION 4 - ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Committee which shall be comprised of two or more members of the Board who are "outside directors" within the meaning of Section 162(m) of the United States Internal Revenue Code of 1986, as amended; provided, however, that, with respect to Options that may be granted to Eligible Participants who are not subject to Section 16 of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Committee may delegate its responsibilities to a subcommittee consisting of one or more executive officers of the Company. The address of the Committee is care of the Company's -3- principal executive office at 4126 Norland Avenue, Burnaby, British Columbia, Canada, V5G 3S8. (b) The Committee shall have all powers and discretion necessary or appropriate to administer the Plan, consistent with and subject to the parameters set forth in the Plan, including but not limited to the power (1) to determine from time to time the Eligible Participants to be granted Options under the Plan, (2) to determine the number of Shares subject to each Option granted under the Plan, (3) to set or amend the terms of each Option Agreement, (4) to interpret the Plan, (5) to adopt such rules or guidelines as it deems appropriate to administer the Plan, including, without limitation, rules or guidelines contained in one or more subplans applicable to specified Eligible Participants, (6) to amend any such rules, guidelines and/or subplans as it deems appropriate to administer the Plan, and (7) to make all other decisions, and take or cause to be taken all other actions, relating to the operation of the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. No member of the Committee shall be liable to any person for any action or decision made in good faith in connection with the performance of the Committee's duties or the exercise of its powers under the Plan. SECTION 5 - OPTION PRICE AND EXERCISABILITY (a) The exercise price of an Option shall not be less than the closing price of a Share on the trading day immediately prior to the date of grant, as quoted on The Toronto Stock Exchange (with respect to Options denominated in Canadian currency) and on the Nasdaq National Market or a United States national securities exchange or quotation system on which the Shares are then traded (with respect to Options denominated in United States currency). (b) Except as otherwise provided in an Option Agreement, no Options shall be exercised by an Optionee until at least 6 months after the date of the grant. An Optionee may exercise an Option by delivering to the Company a duly completed form of notice of such exercise together with full payment for the Shares being purchased under the Option. The form of notice must identify the Option being exercised, state the exercise price, be signed by the Optionee and be dated the date of exercise. The Company shall promptly notify the Optionee as to any taxes required to be withheld and collected from the Optionee. Unless otherwise provided in the Option Agreement or consented to by the Company, payment for the Shares must be made in the currency in which the Option is denominated. (c) The sale of the Shares to the Optionee shall be deemed to have occurred, and the Optionee shall be deemed to be the holder of such Shares, on the date that both the form of notice and the payment in a manner acceptable to the Company of the exercise price and any applicable taxes have been received by the Company. A certificate representing the Shares acquired by the Optionee shall be issued and delivered to the Optionee by the Company as soon is reasonably possible after the sale. -4- SECTION 6 - TERMINATION OF OPTIONS (a) Any Option granted pursuant to the Plan shall terminate upon the earlier of: (i) not later than ten years after the date of grant; and (ii) such event(s) of termination as are provided in the Option Agreement or as are determined from time to time by the Committee. (b) A change in the duties or position of the Optionee, or the transfer of the Optionee from one position with the Company to another, or the transfer of an Optionee from one employer to another employer shall not trigger the termination of such Optionee's Option so long as such Optionee remains a bona fide employee or a Service-Provider of the Company or any Subsidiary. SECTION 7 - NON-TRANSFERABILITY OF OPTIONS (a) Except as hereafter provided, an Option granted under the Plan may not be transferred, pledged or assigned otherwise than by will or the laws of descent and distribution and may be exercised only by the Optionee during his or her lifetime. (b) Options that are exercisable at the date of an Optionee's death may be exercised by the Optionee's heirs entitled thereto or by the administrator or the executor or trustee of his or her last will and testament. Any such exercise may not take place after the earlier of: (i) the expiration of the Option in accordance with Section 6(a)(i) above; and (ii) two years after the date of the Optionee's death without the prior written consent of the Company. (c) To the extent permitted by applicable Laws, an Optionee shall be permitted to transfer Options to a personal holding company of which the Optionee holds all direct and indirect interests. For purposes of this paragraph, "Laws" means (i) the securities laws of the United States, Canada, the states and territories of the United States, the provinces and territories of Canada, the securities laws of the jurisdiction of residence of any Optionee, and applicable laws, rules and regulations promulgated thereunder, (ii) Section 162(m) of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder and (iii) the rules and regulations of the New York Stock Exchange (or, if the Shares are not traded on the New York Stock Exchange, any United States national securities exchange or quotation system on which the Shares are traded) and any securities exchange outside of the United States on which the Shares are traded. SECTION 8 - TERMINATION OR AMENDMENT Subject to regulatory approval and, where required, approval of the shareholders of the Company, the Committee may, at any time and for any reason, amend or terminate the Plan, subject to ratification by the Board. The Plan shall remain in effect until it is terminated by the Committee, subject to ratification by the Board. No Options may be granted under the Plan -5- after its termination, but no termination or amendment of the Plan shall affect any previously granted Option. SECTION 9 - PROTECTION AGAINST DILUTION The Committee shall adjust the number of Shares covered by the Plan and any Option in a manner it considers equitable to reflect any change in the capitalization of the Company including, but not limited to, such changes as stock dividends, consolidations and subdivisions of shares or changes resulting from an amalgamation of the Company with one or more corporations. No fractional shares or rights to acquire a fractional share will be created as a result of an adjustment made pursuant to this section. The Committee shall also adjust the exercise price under any Option in a manner it considers equitable if the number of Shares covered by the Option is adjusted pursuant to this section. SECTION 10 - RIGHTS AS SHAREHOLDERS An Optionee shall have no rights as a shareholder (including the right to vote and to receive dividends) of the Company with respect to Shares covered by Options until such participant becomes the holder of record of such Shares. SECTION 11 - COMPLIANCE WITH CERTAIN U.S. SECURITIES LAWS With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. If any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. SECTION 12 - RESTRICTIONS ON RESALE Under United States federal law, Shares purchased pursuant to Options granted under the Plan by Optionees who are not "affiliates" of the Company within the meaning of the Securities Act of 1933, as amended (the "Act"), generally may be resold without registration or other restriction under the Act. Generally, Shares purchased by "affiliates" pursuant to Options granted under the Plan may not be resold to the public in the United States without registration under the Act, except pursuant to an exemption from such registration. One such exemption from registration is Rule 144 under the Act, which permits resales by affiliates so long as certain volume, manner of sale and other requirements have been satisfied. An "affiliate" is a person who directly or indirectly controls, or is controlled by, or is under common control with, the Company. -6- SECTION 13 - GENERAL LIMITATIONS Neither the Plan nor any Option granted hereunder is to be interpreted as giving any person a right to remain an employee or Service-Provider of the Company or any of its Subsidiaries. The Company and its Subsidiaries reserve the right to terminate anyone's service at any time, with or without cause, and neither the Plan nor any Option granted hereunder affects that right. THE ELIGIBLE PARTICIPANT ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE SHARES. -7- EX-10.12 5 EXHIBIT 10.12 THE LOEWEN GROUP INC. EMPLOYEE STOCK OPTION PLAN (CANADA) (RESTATED AND AMENDED AS AT APRIL 7, 1994 AND FURTHER AMENDED AS AT APRIL 7, 1995, SEPTEMBER 19, 1995, APRIL 2, 1996, NOVEMBER 20, 1996, APRIL 2, 1997, APRIL 8, 1997, AUGUST 15, 1997, MARCH 11, 1998 AND SEPTEMBER 17, 1998) SECTION 1 - GENERAL (a) The purpose of the Employee Stock Option Plan (Canada) (the "Plan") is to promote the interests of The Loewen Group Inc. (the "Company") by: (i) furnishing Eligible Participants (as defined below) with greater incentive to develop and promote the business and financial success of the Company; and (ii) further associate the interests of Eligible Participants with those of the shareholders of the Company by encouraging such participants to acquire share ownership in the Company. (b) Any questions concerning the Plan should be directed to the Corporate Secretary of the Company, at the Company's principal executive office located at 4126 Norland Avenue, Burnaby, British Columbia, Canada, V5G 3S8, telephone number (604) 299-9321. (c) The Plan shall be governed by, and construed in accordance with, the laws of the province of British Columbia. SECTION 2 - ELIGIBILITY (a) Under the Plan, the following persons (collectively, "Eligible Participants") are eligible to be granted options ("Options") to purchase Common shares without par value of the Company ("Shares"): (i) employees of the Company or any of its direct or indirect subsidiaries ("Subsidiaries") who are residents of Canada ("Eligible Employees"); and (ii) persons, other than Eligible Employees, who, (A) perform services for the Company and/or any of its Subsidiaries on an on-going basis and are not insiders (as defined in the Securities Act (Ontario), as amended from time to time) of the Company ("Service-Providers"), and (B) are residents of Canada; provided that there is an available exemption from the prospectus or registration requirements under the securities laws of the applicable jurisdictions. (b) The Compensation Committee of the Company (the "Committee") or such officer as the Committee may designate shall determine from time to time those Eligible Participants to be granted Options under the Plan, and the number of Shares subject to each such Option. Each grant of an Option pursuant to the Plan shall be evidenced by a stock option agreement ("Option Agreement") executed by the employee to whom the Option is granted (the "Optionee") and the Company. Each Option Agreement shall incorporate such terms and conditions as the Committee, in its discretion, deems consistent with the terms of the Plan. (c) Each Option Agreement shall specify the dates upon which all or any instalment of the Option will be exercisable. An Option may be exercised when instalments vest at any time and from time to time thereafter with respect to all or a portion of the Shares covered by such vested installments. In addition, if an Offer (as hereinafter defined) is made, the Board of Directors, or Committee, may while the Offer remains outstanding: (i) determine that each Option granted by the Company to purchase Shares shall, notwithstanding any vesting period or deferral of the right to exercise otherwise applicable, be immediately exercisable effective on and after a date declared by the Board of Directors, or Committee, to be an advanced exercise date ("Advanced Exercise Date"); and (ii) rescind any declaration of an Advanced Exercise Date but no such rescission shall affect the validity of the exercise of such Option if validly exercised on or after a particular Advanced Exercise Date and before the date of rescission of the declaration of the particular Advanced Exercise Date. For the purposes hereof, "Offer" means an offer to acquire the Shares made to the holders of the Company's Shares where the Shares which are the subject of the offer to purchase, together with the offeror's then presently owned Shares, will in the aggregate exceed twenty percent (20%) of the outstanding Shares of the Company and where two or more persons or companies make offers jointly or in concert or intending to exercise jointly or in concert any voting rights attaching to the Shares to be acquired, then the Shares owned by each of them shall be included in the calculation of the percentage of the Shares of the Company owned by each of them. Paragraphs (i) and (ii) shall apply to each Option granted or to be granted by the Company, which is outstanding at the time of any such declaration regardless of the date of grant thereof, provided that all other terms and conditions of the Option shall continue to apply and nothing herein shall operate to extend, enlarge or revise any Option which has expired, has been exercised, has been cancelled or otherwise has ceased to exist. -2- SECTION 3 - NUMBER OF SHARES SUBJECT TO PLAN (a) The number of Shares issuable pursuant to the exercise of Options after the effective date of restatement and amendment of the Plan is limited as follows: (i) subject to adjustment pursuant to Section 9, the aggregate number of Shares issuable pursuant to Options under the Plan shall not exceed 3,400,000 Shares (including 1,051,025 Shares under Options previously granted but not exercised as of April 7, 1994); and (ii) the number of Shares reserved for issuance to any one person pursuant to options (whether granted under this Plan or otherwise) shall not exceed 5% of the total issued and outstanding Shares on a non-diluted basis. (b) The maximum number of Shares for which Options are granted after the effective date of restatement and amendment of the Plan in any one calendar year under the Plan to any one Eligible Participant shall not exceed 600,000 Shares, subject to adjustment pursuant to Section 9. (c) If an Option granted under the Plan expires for any reason without being exercised in full, the number of Shares that would have been issuable upon the exercise of such Option shall continue to be available under the Plan. (d) Subject to the maximum limits described in subsections (a) and (b) above, the Board of Directors of the Company (the "Board") shall reserve the number of Shares required to honour Options granted from time to time to Optionees pursuant to the Plan, and shall reserve from time to time additional Shares, if any, to ensure that a sufficient number of Shares are available for purchase under Options granted in the future. SECTION 4 - ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Committee which shall be comprised of two or more members of the Board who are "outside directors" within the meaning of Section 162(m) of the United States Internal Revenue Code of 1986, as amended; provided, however, that, with respect to Options that may be granted to Eligible Participants who are not subject to Section 16 of the United States Securities Exchange Act of 1934, as amended, the Committee may delegate its responsibilities to a subcommittee consisting of one or more executive officers of the Company. The address of the Committee is care of the Company's principal executive office at 4126 Norland Avenue, Burnaby, British Columbia, Canada, V5G 3S8. (b) The Committee shall have all powers and discretion necessary or appropriate to administer the Plan, consistent with and subject to the parameters set forth in the Plan, including but not limited to the power (1) to determine from time to time the Eligible Participants to be granted Options under the Plan, (2) to determine the number of Shares subject to each Option granted under the Plan, (3) to set or amend the terms of each Option Agreement, (4) to interpret the Plan, (5) to adopt such rules or guidelines as it deems appropriate to administer the Plan, and -3- (6) to make all other decisions, and take or cause to be taken all other actions, relating to the operation of the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. No member of the Committee shall be liable to any person for any action or decision made in good faith in connection with the performance of the Committee's duties or the exercise of its powers under the Plan. SECTION 5 - OPTION PRICE AND EXERCISABILITY (a) The exercise price of an Option shall not be less than the closing price of the Shares as quoted on The Toronto Stock Exchange on the trading day immediately prior to the date of the grant. (b) Except as otherwise provided in an Option Agreement, no Options shall be exercised by an Optionee for at least 6 months after the date of the grant. An Optionee may exercise an Option by delivering to the Company a duly completed form of notice of such exercise together with full payment for the Shares being purchased under the Option. The form of notice must identify the Option being exercised, state the exercise price, be signed by the Optionee and be dated the date of exercise. The Company shall promptly notify the Optionee as to any taxes required to be collected from the Optionee. Unless otherwise provided in the Option Agreement or consented to by the Company, payment for the Shares must be made in the currency in which the Option is denominated. (c) The sale of the Shares to the Optionee shall be deemed to have occurred, and the Optionee shall be deemed to be the holder of such Shares, on the date that both the form of notice and the payment in a manner acceptable to the Company of the exercise price and any applicable taxes have been received by the Company. A certificate representing the Shares acquired by the Optionee shall be issued and delivered to the Optionee by the Company as soon as is reasonably possible after the sale. SECTION 6 - TERMINATION OF OPTIONS (a) Any Option granted pursuant to the Plan shall terminate upon the earlier of: (i) not later than ten years after the date of grant; and (ii) such event(s) of termination as are provided in the Option Agreement or as are determined from time to time by the Committee. (b) A change in the duties or position of the Optionee, or the transfer of the Optionee from one position with the Company to another, or the transfer of an Optionee from one employer to another employer shall not trigger the termination of such Optionee's Option so long as such Optionee remains a bona fide employee or a Service-Provider of the Company or any Subsidiary. -4- SECTION 7 - NON-TRANSFERABILITY OF OPTIONS (a) Except as hereafter provided, an Option granted under the Plan may not be transferred, pledged or assigned otherwise than by will or the laws of descent and distribution and may be exercised only by the Optionee during the Optionee's lifetime. (b) Options that are exercisable at the date of an Optionee's death may be exercised by the Optionee's heirs entitled thereto or by the administrator or the executor or trustee of his or her last will and testament. Any such exercise may not take place after the earlier of: (i) the expiration of the Option in accordance with Section 6(a)(i) above; and (ii) two years after the date of the Optionee's death without the prior written consent of the Company. (c) To the extent permitted by applicable Laws, an Optionee shall be permitted to transfer Options to a personal holding company of which the Optionee holds all direct and indirect interests. For purposes of this paragraph, "Laws" means (i) the securities laws of the United States, Canada, the states and territories of the United States, the provinces and territories of Canada, the securities laws of the jurisdiction of residence of any Optionee, and applicable laws, rules and regulations promulgated thereunder, (ii) Section 162(m) of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder and (iii) the rules and regulations of the New York Stock Exchange (or, if the Shares are not traded on the New York Stock Exchange, any United States national securities exchange or quotation system on which the Shares are traded) and any securities exchange outside of the United States on which the Shares are traded. SECTION 8 - TERMINATION OR AMENDMENT Subject to regulatory approval and, where required, approval of the shareholders of the Company, the Committee may, at any time and for any reason, amend or terminate the Plan, subject to ratification by the Board. The Plan shall remain in effect until it is terminated by the Committee, subject to ratification by the Board. No Options may be granted under the Plan after its termination, but no termination or amendment of the Plan shall affect any previously granted Option. SECTION 9 - PROTECTION AGAINST DILUTION The Committee shall adjust the number of Shares covered by the Plan and any Option in a manner which it considers equitable to reflect any change in the capitalization of the Company including, but not limited to, such changes as stock dividends, consolidations and subdivisions of shares or changes resulting from an amalgamation of the Company with one or more corporations. No fractional shares or rights to acquire a fractional share will be created as a result of an adjustment made pursuant to this section. The Committee shall also adjust the exercise price under any Option in a manner it considers equitable if the number of Shares covered by the Option is adjusted pursuant to this section. -5- SECTION 10 - RIGHTS AS SHAREHOLDERS An Optionee shall have no rights as a shareholder (including the right to vote and to receive dividends) of the Company with respect to Shares covered by Options until such participant becomes the holder of record of such Shares. SECTION 11 - SECURITIES REGULATION Where necessary to effect an exemption from the registration or distribution requirements applicable to the Options or the Shares under applicable securities laws or policies, the Committee may take such action or require such action or agreement by any Optionee as may from time to time be necessary to comply with such applicable securities laws and policies. The directors may decline to grant some or all of the Options or to issue some or all of the Shares pursuant to the Plan unless the grant of such Options or the issuance of such Shares is exempt from such requirements, upon the advice of counsel to the Company. SECTION 12 - GENERAL LIMITATIONS Neither the Plan nor any Option granted hereunder is to be interpreted as giving any person a right to remain an employee or Service-Provider of the Company or any of its Subsidiaries. The Company and its Subsidiaries reserve the right to terminate anyone's service at any time, with or without cause, and neither the Plan nor any Option granted hereunder affects that right. THE ELIGIBLE PARTICIPANT ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE SHARES. -6- EX-10.13 6 EXHIBIT 10.13 February 26, 1999 PERSONAL AND CONFIDENTIAL Mr. Dear: In October, 1998 the Company confirmed to you your inclusion in a Retention Bonus Plan (or "Stay Put" Plan) for senior management designed to encourage key executives to continue with the Company during upcoming times that were expected to be both demanding and unpredictable. The October Retention Bonus Plan made you eligible to be considered for a possible bonus from a bonus pool; such bonus (if awarded) would be paid in April, 1999 based upon a subjective review of your performance for the six month period October 1, 1998 to March 31, 1999. As expected, our Company has been through a demanding and unpredictable time. The Company greatly appreciates the very obvious effort and commitment which has been displayed by all members of senior management since October 1, 1998. The Company thanks you most sincerely for your individual effort and your individual commitment as part of the senior management team. THE COMPANY IS NOW PLEASED TO NOT ONLY RE-CONFIRM THE OCTOBER RETENTION BONUS PLAN BUT ALSO NOW TO CONFIRM TO YOU ADDITIONAL AND IMPROVED FEATURES OF THE PLAN: a retention bonus entitlement is now guaranteed to you; a further term for the Plan is added; and you are offered a further guaranteed retention bonus for the further term. IN SUMMARY, THE NOW RE-CONFIRMED BUT IMPROVED RETENTION BONUS PLAN PROVIDES FOR YOU: (a) 50% of your current base salary will be paid to you promptly after March 31, 1999 as your retention bonus for the period October 1, 1998 to March 31, 1999; (b) a further term of the Plan will run from March 31 to June 30, 1999 (the "further term"); (c) providing you continue your senior management duties during the further term with the same level of energy and commitment as displayed from October 1, 1998 to March 31, 1999, then on June 30 you will be paid a further retention bonus of 25% of your base salary; (d) should you have a Severance/Change-in-Control Agreement with the Company and should you have (i) received or (ii) have become eligible for payment prior to August 11, 1999 of a Change in Control "Retention Bonus Payment" pursuant to such Agreement, then that Change in Control Retention Bonus Payment will be paid in lieu of the 25% further retention bonus specified in (c) preceding. Thank you very much for your continuing loyal and effective service to The Loewen Group. Yours truly, Robert B. Lundgren President and Chief Executive Officer February 26, 1999 PERSONAL AND CONFIDENTIAL Mr. Dear: As you may know, in October, 1998 the Company established a Retention Bonus Plan (or "Stay Put" Plan) for senior management designed to encourage specified key executives to continue with the Company during upcoming times that were expected to be both demanding and unpredictable. As expected, our Company has been through a demanding and unpredictable time. The Company greatly appreciates the very obvious effort and commitment which you have displayed. THE COMPANY IS MOST APPRECIATIVE OF YOUR INDIVIDUAL EFFORT AND YOUR INDIVIDUAL COMMITMENT. ACCORDINGLY, THE COMPANY NOW WISHES TO INCLUDE YOU ON A RETENTION OR "STAY PUT" BONUS PLAN COVERING THE PERIOD JANUARY 1 TO JUNE 30, 1999. In your individual case, the Retention Bonus Plan provides as follows: (a) providing you continue your management duties from this date through June 30, 1999 with the same level of energy and commitment as displayed from January 1, 1999 to date, then promptly after June 30 you will be paid a Retention Bonus covering the period January 1 to June 30, 1999; (b) the amount of this Retention Bonus will be 50% of your current base salary; (c) should you have a Severance/Change-in-Control Agreement with the Company and should you have (i) received or (ii) have become eligible for payment of a Change in Control "Retention Bonus Payment" prior to August 11, 1999 pursuant to such Agreement, then the Retention Bonus specified in (a) and (b) preceding will be reduced to 25% of your base salary, rather than being the 50% of your base salary specified in (b) preceding. Thank you very much for your continuing loyal and effective service to The Loewen Group. Yours truly, Robert B. Lundgren President and Chief Executive Officer EX-10.22 7 EXHIBIT 10.22 [LETTERHEAD OF THE LOEWEN GROUP INC.] March 21, 1997 Mr. Tom Hardy 216 Stephenson Avenue Lookout Mountain, Tennessee 37350 Dear Tom, RE: EMPLOYMENT AGREEMENT ------------------------- Further to our conversations in New Orleans on Tuesday and Wednesday February 18 and 19, 1997 and subsequent conversations with Dan Nakagawa and myself I am pleased to submit our proposal outlining the terms for an employment agreement between yourself, the Loewen Group Inc., Loewen Group International, Inc. (hereinafter collectively referred to as "Loewen") and a wholly-owned life insurance subsidiary (the "Company"), The Company will own or control, and operate all life insurance operations presently owned, or hereafter acquired, by Loewen. 1. You will be employed as President and Chief Executive Officer of the Company. Your employment will be deemed to commence March 17, 1997. 2. In order to facilitate consolidation of the life insurance operations and start-up of the Company it is agreed that you will relocate to the metropolitan New Orleans, Louisiana area and operate from the offices of First Capital Life Insurance Co. At 2240 Magazine Street, New Orleans, Louisiana. The Company will reimburse all reasonable relocation costs including normal sales commissions actually paid on the sale of your home located in Lookout Mountain, Tennessee, moving costs,. furniture storage, etc. In addition, the Company will reimburse the reasonable costs of temporary housing in New Orleans and reasonable costs of travel between New Orleans and Chattanooga, Tennessee until your home is sold or for a period of six months after commencement of employment, whichever occurs first. Original receipts or invoices will be provided by you in support of all such reimbursement claims. Loewen or the Company may require that you subsequently relocate your normal office to 2 a location other than the metropolitan New Orleans area, in which case the Company will again provide reimbursement for reasonable location and temporary housing costs. 3. Your agreed duties and responsibilities will be those described in the attached Job Description (Schedule "A"). 4. Your compensation (in U.S. dollars) will consist of the following: (a) A beginning initial base bi-weekly salary of $7,693.00 ($200,000 annual equivalent) payable on the Company's normal payroll basis. Your bi-weekly salary for 1998 will be $9,615.00 ($250,000 annual equivalent). For 1999 and subsequent years your salary will be subject to review on January 1 of each year with any adjustments subject to the sole discretion of Loewen. (b) Inclusion in all Loewen fringe benefit programs provided to Executives of Loewen with duties and responsibilities comparable to yourself, including: Group Life Insurance, Accidental Death and Dismemberment Insurance, 401(K), Dental, Medical and Long Term Disability. Costs of these benefits are to be shared between you and the Company in the same manner as with Loewen Executives of similar ranking. These benefits will be effective upon commencement of employment. In the event that Loewen or the Company is unable to obtain waiver of a qualification period for any of the benefits provided the Company will reimburse your reasonable out-of-pocket costs to secure similar benefits. Specifically, Loewen's executive medical plan requires a non-waivable 90 day waiting period. Consequently, the Company will reimburse you for the costs of your existing medical plan during this period. (c) Four weeks vacation per annum. The Company acknowledges and agrees to your vacation planned for August 27 to September 14, 1997. (d) Reasonable operating expenses for your automobile including gas, oil, insurance and maintenance, contingent upon your presentation of original receipts or invoices in support. (e) Upon your becoming an employee of Loewen, senior management of Loewen is prepared to recommend to the Compensation Committee of the Board of Directors that you be granted a stock option under and in accordance with the Employee Stock Option Plan (United States) of The Loewen Group Inc. with respect to 50,000 common shares of The Loewen Group Inc. common stock, vesting in equal annual amounts of 10,000 shares per year over a five year period at a share price which is the market price of the shares at the close of trade on the day before the subject stock option agreement is executed. If this recommendation is approved by the Compensation Committee, the terms and conditions of these stock options will be set forth in a formal stock option agreement with provisions in accordance with the Employee Stock Option Plan (United States) or as may be required by the Compensation Committee, and the formal stock option agreement will control all aspects of the options including, but not limited to, vesting, exercise and termination. The stock option grant provided in this clause (e) is 3 further subject to shareholder approval at the next annual general meeting of The Loewen Group Inc. which is presently scheduled for May 15, 1997. (f) You will be eligible to participate in a bonus program similar to that offered to Executives of Loewen. For reference purposes your target bonus is 40% of your prorated annual salary based on performance criteria to be established solely by Loewen. At the election of Loewen these bonuses may be paid in cash or stock options of equivalent value. It is further understood that there is no guarantee of a bonus applicable to any year succeeding Loewen's 1997 fiscal year, and any subsequent annual fiscal year bonus entitlement shall be solely at Loewen's discretion. The granting of the stock options referred to in 5(e) and (f) are subject to the signing of a formal option agreement. This option agreement, as with all other currently issued stock option agreements, will be subject to approval by disinterested shareholders at the next TLGI shareholders' meeting (presently scheduled for May 15, 1997) and no options may be exercised prior to this approval. (g) Supplementary incentive compensation - Upon formation or acquisition of the Company, LGII agrees to contribute the operations of its existing life insurance companies to the Company and to execute, and to cause the Company to execute, and deliver the Equity Incentive Agreement attached hereto as "Schedule B". 5. The Company will provide a cellular telephone and appropriate computer equipment for business purposes. 6. The Company will reimburse you for reasonable and prudent expenses incurred directly in relation to your duties, upon presentation of original receipts or invoices in support thereof. 7. This Agreement may be terminated by Loewen or the Company for cause at any time by providing written notice. "Cause" shall include: gross negligence; dishonesty; incompetence; your material failure or inability to perform your duties and responsibilities hereunder; any activity or inactivity by you that materially and adversely affects the business operations of Loewen or the Company or its affiliates; or any other material breach by you of this Agreement. This Agreement may be terminated at any time by either party without cause, on six months written notice. In the event of termination by Loewen or the Company, the Company shall provide normal salary and fringe benefits for six months from the date of notice. 8. In consideration of the stock option benefit provided to you in paragraph 5(e) herein, you covenant as follows: upon termination of this Agreement by either party for any reason you will not, directly or indirectly, for a period of twelve (12) months from termination, compete with Loewen or the Company in the funeral, cemetery, pre-need life insurance or 4 related businesses anywhere in the United States or Canada. In providing this covenant you acknowledge that the activities of Loewen and the Company extend across the United States and Canada; that Loewen and the Company are engaged in an intensely competitive industry; that Loewen and the Company's main competitors seek acquisitions and operate competing businesses throughout the United States and Canada; and that your employment duties and knowledge cover both the United States and Canada. "Compete" includes serving as an employee, shareholder, officer, director, consultant or advisor, directly or indirectly, and includes the giving of financial assistance or acting as broker, directly or indirectly. "Business" includes either directly or indirectly, research or negotiation for acquisition, development or operation of funeral homes, cemeteries and related businesses, including but not limited to the related businesses of funeral and cemetery insurance of an types. 9. With respect to your duties and responsibilities on behalf of the Company: (a) At all times you will act in the best interests of the Company; you will engage in no activity which is detrimental or prejudicial to the Company, its reputation, or its business; (b) At no time will you represent, directly or indirectly, parties or interests that are prejudicial to or in conflict with the best interests of the Company, its operations or Loewen's acquisition program; (c) You will at all times act honestly and faithfully in carrying out the Company's policies and instructions; (d) You will at all times represent the Company in a professional manner and use your best efforts to promote the Company's interests. 10. During the currency of this Agreement and following its termination you will at all times keep strictly confidential all internal, private information, data, materials and knowledge relating to Loewen and the Company or their respective businesses; nor during such times will you make any unauthorized use of any proprietary information, data or analysis of Loewen or the Company, or of specific corporate opportunities developed or in the process of development by Loewen or the Company. 11. Any dispute concerning the content or effect of this letter agreement or the terms and conditions or any other aspect of your employment with Loewen or the Company shall be resolved through binding, compulsory, private arbitration and both you and the Company and Loewen hereby consent to such arbitration and waive any right to pursue litigation in any court concerning your employment. 12. This letter outlines the understanding of Loewen and the Company as to the terms and conditions of our agreement with yourself. To confirm your acceptance of and agreement with the employment proposal as outlined in this letter, please sign both copies and return one copy for our records. The remaining copy is for your files. This mutually signed 5 letter will then constitute the employment agreement between yourself, Loewen and the Company. We look forward to you joining our organization and assuming a leadership role in the growing of our pre-need life insurance business. Yours truly, THE LOEWEN GROUP INC. and LOEWEN GROUP INTERNATIONAL, INC. and the COMPANY Per /s/ PAUL WAGLER -------------------------------------------- Paul Wagler Senior Vice President and Chief Financial Officer ACCEPTED AND AGREED as of this 31st day of March, 1997. /s/ TOM HARDY /s/ JEANNINE U. ALLEN -------------------------------- ----------------------------------- Tom Hardy Witness SCHEDULE B AMENDED AND RESTATED EQUITY INCENTIVE AGREEMENT THIS AMENDED AND RESTATED EQUITY INCENTIVE AGREEMENT (this "Agreement"), dated as of September 24, 1998 is entered into by and between Loewen Life Insurance Group, Inc., a Delaware corporation having its principal offices at 2240 Magazine Street, New Orleans, Louisiana 70130 (the "Company"), Loewen Group International, Inc., a Delaware corporation having its principal place of business at 3190 Tremont Avenue, Trevose, Pennsylvania 19053 ("LGII") and Thomas Hardy, an individual residing at 920 State Street, New Orleans, Louisiana 70118 (the "Executive"). WITNESSETH WHEREAS, LGII and the Executive have entered into an Employment Agreement, dated as of March 17,1997, by and between the Company and the Executive (the "Employment Agreement"), which sets forth the terms and conditions upon which the Company will employ the Executive; WHEREAS, LGII is the owner of all the issued and outstanding capital stock of the Company; WHEREAS, the Company desires to provide the Executive with additional incentive compensation related to the financial performance of the Company; NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the Company and the Executive hereby agree as follows: 1. AWARD OF PERCENTAGE INTEREST. In consideration of the Executive's services to the Company and the delivery of the Participation Payment by the Executive to LGII pursuant to Section 2 hereof, LGII shall establish an account in the name of the Executive on the books and records of LGII (the "Account") and credit the Account with an amount equal to 9.86% of the Company's Book Value (as hereinafter defined) (as adjusted from time to time hereunder, the "Percentage Interest"), which Percentage Interest may be exercised from time to time in accordance with the terms and conditions hereof. The award of Percentage Interest shall be entered an the LGII's books and records as a grant of deferred compensation to the Executive and shall not constitute the Executive as the owner or holder of shares of Common Stock of the Company or any equity interest therein. The term "Company's Book Value" shall mean the total net worth, calculated in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"), of the Company, Mayflower National Life Insurance Company. Security Industrial Insurance Company, First Capital Life Insurance Company of Louisiana, National Capital Life Insurance Company, and subsidiaries of each of the above companies, without double counting and subject to adjustment per Section 4 hereof in the case of future acquisitions. After completion of an anticipated reorganization involving all of the above companies, it is expected that the consolidated net worth of the Company will equal the Company's Book Value. 2. PARTICIPATION PAYMENT. In exchange for the right to receive the Percentage Interest, the Executive shall deliver to LGII a note in the form attached as EXHIBIT A hereto in the original principal amount of Ten Million Dollars ($10,000,000), subject to adjustment as set forth therein (the "Note"). 3. VESTING OF PERCENTAGE INTEREST. The Executive's right to exercise the Percentage Interest hereunder for a Cash Award (as hereinafter defined and determined by Section 6 hereof) shall be fully vested. 4. ADJUSTMENT OF PERCENTAGE INTEREST. (a) The Percentage Interest deemed to be owned by Executive and the principal amount of the Promissory Note shall be adjusted, based on the Company's ROE for the fiscal year ended December 31, 2001, as set forth on EXHIBIT B attached hereto. In the event that the Executive ceases for any reason to be employed by the Company during the period commencing January 1, 1999 and ending December 31, 2001, the Percentage Interest deemed to be owned by Executive and the principal amount of the Promissory Note shall be adjusted, based on the Company's ROE for the previous fiscal year (determined as of the end of the fiscal year immediately preceding the date that Executive ceases for any reason to be employed by the Company) extrapolated to December 31, 2001, as set forth on EXHIBIT B hereto. For purposes of this Agreement, "ROE" shall mean the Company's return on equity expressed as a percentage, (i) the numerator of which is earnings before state and federal income taxes and bonuses for such fiscal year and (ii) the denominator of which is the sum of (A) the consolidated shareholders equity of the Company as of the last day of the prior fiscal year of the Company and its subsidiaries as shown on the consolidated financial statements of the Company ("Book Value"), plus (B) the product of (x) the increase in Book Value for such fiscal year attributable to capital contributions, times (y) a fraction the numerator of which is the number of days in such fiscal year which have elapsed since the date of such capital contribution and the denominator of which is 365, in every case determined in accordance with Canadian GAAP. (b) If during the term of this Agreement, LGII or any affiliate of LGII shall purchase a life insurance company or life insurance assets of a company or a line of business thereof (an "Acquisition"), LGII shall cause the Company to purchase such Acquisition from LGII or such affiliate at a fair market value as determined in good faith by the Board of Directors of LGII. In the event such purchase would not be allowed by applicable regulatory matters or would cause the Company's A.M. Best rating to be lowered below "B" as a result of such purchase, LGII will contribute such Acquisition to the Company as a contribution of capital equal to the fair market value of such Acquisition as determined in good faith by the Board of Directors of LGII (the "Affiliate Contribution"). In the event that LGII contributes such Acquisition to the Company as a contribution of capital, the Executive shall have the option to maintain up to his Percentage Interest by electing to make an additional participation payment to LGII in an amount equal to the product of the Percentage Interest, or part thereof, times the amount of the Affiliate Contribution. Such payment shall be made by an increase in the principal amount of the Promissory Note. In the event that the Executive shall not elect to maintain up to his Percentage Interest, his Percentage Interest shall be reduced to the percentage determined (i) by the product 2 of (x), the Percentage Interest immediately prior to such Affiliate Contribution, times (y), the Book Value immediately prior to such Affiliate Contribution plus the additional participation payment (if any) made by the Executive to LGII, (ii) divided by the Book Value immediately following such Affiliate Contribution. In the event that Executive's Percentage Interest is reduced pursuant to the previous sentence, the Percentage Interest, referred to on EXHIBIT B, which applies for the fiscal year ended December 31, 2001, shall be reduced proportionately. (c) If the financial statements of the Company are impacted by litigation relating to funeral policies written prior to March 17, 1997, both the numerator and the denominator of the ROE calculation in Section 4(a) above shall be equitably adjusted to eliminate all uninsured costs associated with such litigation including, without limitation, all attorneys fees, costs and expenses (including any interest thereon) and all costs and expenses associated with a settlement or judgment (including any interest thereon). The Company's Book Value shall also be adjusted on an equitable basis for purposes of making the calculations and determinations pursuant to this Agreement to eliminate the effect of such charges on the Company's Book Value. 5. EXERCISE OF PERCENTAGE INTEREST. The Executive may exercise, or LGII may require the Executive to exercise, his Percentage Interest for a Cash Award on the following basis: (a) In the event that the Executive ceases for any reason to be employed by the Company, he, or his legal representative, if applicable, shall exercise all but not less than all of the Percentage Interest held by the Executive. (b) At any time after December 31, 2001, or in the event that the Executive ceases for any reason to be employed by the Company, LGII may require the Executive, or his legal representative, if applicable, to exercise all or any part of the Percentage Interest then held by the Executive. (c) At any time after December 31, 2001, Executive, or his legal representative, if applicable, may exercise all or any part of the Percentage Interest then held by Executive. (d) Immediately prior to any merger or consolidation with, or sale of all or substantially all the assets or Common Stock of the Company, to any other person not affiliated with LGII, LGII may require the Executive, or his legal representative, if applicable, to exercise all but not less than all of the Percentage Interest held by Executive. (e) If neither party requests an exercise of the Percentage Interest before January 1, 2003, the ROE goals, Promissory Note amounts, and the Percentage Interest shown in Exhibit B for the year 2001 will remain in effect. 6. DETERMINATION OF CASH AWARD. (a) The cash award payable to the Executive upon exercise of the Percentage Interest hereunder (each, a "Cash Award") shall be equal to (i) the product of (x) the Book Value, 3 times (y) Percentage Interest or part thereof being exercised by Executive, plus (ii) an amount equal to (x) the product of (A) the aggregate amount of cash dividends declared and paid by the Company on its outstanding common stock (other than Extraordinary Dividends (as defined below) declared and paid pursuant to section 6(b) hereof) during the term of this Agreement, (B) times the Percentage Interest deemed to be owned by Executive at the time of payment of such dividend, times (y) the percentage of the Percentage Interest being exercised by Executive, less (iii) the principal amount of and accrued interest on the Promissory Note times the percentage of the Percentage Interest being exercised by the Executive, in each case determined as of the Calculation Date, plus (iv) an amount equal to 113,917 plus interest thereon at the rate of 9% per annum calculated from the date hereof until the date of the Cash Award. For purposes of this Agreement, "Calculation Date" shall mean the last day of the last full month immediately preceding the exercise of the Percentage Interest. (b) In the event of a sale of assets by the Company outside the ordinary course of business and the declaration and payment of an Extraordinary Dividend resulting from such sale of assets to the shareholders of the Company, LGII, simultaneously with the payment of such Extraordinary Dividend, shall reduce the principal amount of the Promissory Note in an amount equal to such Extraordinary Dividend times the Percentage Interest deemed to be owned by the Executive at the time of payment of such Extraordinary Dividend. The term "Extraordinary Dividend" shall mean any payment from the Company to LGII that results in a decrease in the book value of the Company, including, without limitation, any payment made as a result of the Company's sale of substantially all of the assets of, or all of the capital stock of, First Capital Life Insurance Company of Louisiana. (c) In the event of any exercise being made hereunder, the Company shall provide as promptly as practicable to the Executive (i) its audited financial statements and operating statements in respect of the last two (2) consecutive fiscal periods or such shorter period for which audited financials are available, (ii) unaudited financial statements and operating statements, as of the Calculation Date, prepared on a basis consistent with the audited financial statements and operating statements, and (iii) a statement demonstrating the calculation of the applicable Cash Award to be paid to the Executive in connection with the exercise of such Percentage Interest (each, a "Cash Award Statement"). The calculation of the amount of the Cash Award, as set forth in the Cash Award Statement, shall be conclusive and binding upon the parties hereto except for any fraud or error discovered within thirty (30) days of the making of such reports. (d) Although LGII may, in its discretion, make such provision as it deems advisable for funding the ultimate payment of such Cash Award, no assets of the Company shall be segregated for that purpose or held in trust for the benefit of the Executive, it being the intention that the Cash Award shall constitute at all times a general unsecured obligation of the Company. (e) On June 25, 1997, the insurance companies paid $6,885,100 of dividends to LGII. On December 2, 1997, LGII made a capital contribution of $6,885,100 to the Company. Since the insurance group has an average investment yield of 7%, the lost investment income for 4 1997 was $213,173, which for the purposes of this Agreement will be treated as a 1997 dividend, with the Executive's Percentage Interest to be paid when a Cash Award is made. 7. EXERCISE OF PERCENTAGE INTEREST UPON TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) In the event of (i) the occurrence of a Change in Control (as defined herein), and (ii) the occurrence of a Triggering Event (as defined herein), prior to January 1, 2000, Executive shall have an immediate right to exercise the Percentage Interest for a Cash Award. For purposes of this Section 7(a), Executive shall be deemed to own a Percentage Interest equal to the greater of 9.86% or such Percentage Interest that would result using Exhibit B and an average ROE for the six months prior to exercise. (b) The term "Change in Control" shall mean the occurrence of any of the following events: (i) The Loewen Group, Inc. ("TLGI") is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than two-thirds of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of TLGI immediately prior to such transaction; (ii) TLGI sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than two-thirds of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of TLGI immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than Raymond L. Loewen, a person including Raymond L. Loewen, or a person whose beneficial ownership of Voting Stock of TLGI is shared with Raymond L. Loewen, has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 25% or more of the combined voting power of the then-outstanding Voting Stock of TLGI; (iv) TLGI files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item 5 therein) that a change in control of TLGI has occurred or will occur in the future pursuant to any then-existing contract or transaction; or (v) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of TLGI cease for any reason to constitute at least a majority thereof; PROVIDED, HOWEVER, that for purposes of this clause (v) each director who is first elected, or first nominated for election of TLGI's stockholders, by a vote of at least two-thirds of the directors of TLGI (or a committee thereof) then still in office who were directors of TLGI at the beginning of any such period will be deemed to have been a director of TLGI at the beginning of such period. Notwithstanding the foregoing provisions, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred solely because (A) TLGI, (B) an entity in which TLGI directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock (a "Subsidiary"), or (C) any TLGI-sponsored employee stock ownership plan or any other employee benefit plan of TLGI or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 25% or otherwise, or because TLGI reports that a change in control of TLGI has occurred or will occur in the future by reason of such beneficial ownership. (c) The term "Triggering Event" shall mean: (i) The Company's termination of Executive other than as a result of Cause (as defined herein), the Executive's death, or permanent disability within the meaning of and the actual receipt of benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; (ii) The Executive's termination of his employment because of the failure to elect or reelect or otherwise maintain Executive in the office or the position or a substantially equivalent office or position of or with the Company to that which the Executive held immediately prior to a Change in Control, or the removal of Executive as a director of the Company (or any successor thereto) if Executive shall have been a director of the Company immediately prior to the Change in Control; or (iii) (A) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive's Base Pay (as defined herein) and Incentive Pay (as defined herein) other than a reduction based on objective performance criteria, or (C) the termination or denial of the Executive's 6 rights to Employee Benefits (as defined herein) or a reduction in the scope or value thereof, any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from Executive of such change, reduction or termination, as the case may be. (d) The term "Cause" shall mean that the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board of Directors of the Company ("Board") then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (e) The term "Base Pay" shall mean the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof. (f) The term "Employee Benefits" shall mean the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or 7 welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the company, providing prerequisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. (g) The term "Incentive Pay" shall mean an annual amount equal to not less than the greatest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits payable thereunder prior to a Change in Control. 8. CLOSING . The Closing of the transactions contemplated by an exercise of the Percentage Interest hereunder (each, a "Closing") shall be completed within thirty (30) days of the delivery of the Cash Award Statement. Notwithstanding Section 6 above, the payment of all or any portion of the amount payable under Section 6 above will be deferred to the extent that any amount payable under Section 6 when added to any other compensation received or to be received by Executive (or otherwise accrued with respect to Executive) in the same calendar year, would not be deductible by the Company by reason of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), but in no event greater than the total amount payable under Section 6. The deferred amount shall become payable on the earlier of (i) December 31 of the first succeeding calendar year in which such amount, when added to all other compensation received or to be received by Executive (or otherwise accrued with respect to Executive) in such calendar year, would not be non-deductible by the Company by reason of section 162(m) of the Code or (ii) the first December 31 on which Executive is not employed by the Company or an affiliate of the Company. The Company, exercising reasonable judgment, shall make all determinations under this paragraph. Any amount deferred under this paragraph shall accrue interest at 9% per annum if payment of such amount is deferred beyond thirty days from delivery of the Cash Award Statement. 9. NO EXTRAORDINARY CHARGES. LGII covenants and agrees that during the term of this Agreement, it will not make extraordinary intercompany charges to the Company other than (i) intercompany charges customarily made to subsidiaries of LGII, including insurance company subsidiaries of LGII, in accordance with past practices, and (ii) intercompany charges for the direct benefit of the Company and its subsidiaries. 10. NON-ALIENABILITY OF BENEFITS. Except as permitted by this Agreement, no right or interest of the Executive shall, without the written consent of LGII, be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner liable for or subject to the debts or liabilities of the Executive. If the Executive shall attempt to or shall transfer, assign, alienate, anticipate, sell, 8 pledge or otherwise encumber his benefits hereunder or any part hereof, or if by reason of his bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him, then LGII, in its discretion, may terminate his interest in any such benefit to the extent LGII considers necessary or advisable to prevent or limit the effects of such occurrence. Notwithstanding the foregoing, nothing herein shall prevent Executive from disposing of the proceeds of any Cash Award after the date of any such Cash Award. 11. AMENDMENT OR MODIFICATION WAIVER. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver is authorized by the Board of Directors of LGII and the Company and is agreed to in writing, signed by the Executive and by an officer of LGII and the Company thereunto duly authorized. Except as otherwise specifically provided in this Agreement, no waiver by any party hereto of any breach by any other party hereto or any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a subsequent breach of such condition or provision of this Agreement or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. 12. WITHHOLDING TAXES. LGII or the Company shall have the right to deduct from all compensation payments made pursuant to this Agreement such federal, state and local taxes as are required to be withheld by LGII or the Company in respect of such payments. 13. NO CONTINUED EMPLOYMENT. This Agreement shall not confer upon Executive any right with respect to continuance of employment with the Company nor shall it interfere in any way with any right such Executive or the Company would otherwise have to terminate such Executive's employment. 9 IN WITNESS WHEREOF, the Executive and LGII and the Company, by a duly authorized officer of LGII and the Company, respectively, have executed this Equity Incentive Agreement as of the 24th day of September, 1998. LOEWEN GROUP INTERNATIONAL, INC. LOEWEN LIFE INSURANCE GROUP, INC. By: /s/ PAUL WAGLER By: /s/ PAUL WAGLER ------------------------ ------------------------------ Name: Paul Wagler Name: Paul Wagler ---------------------- ---------------------------- Title: Title: ---------------------- --------------------------- /s/ THOMAS HARDY ------------------------------------ THOMAS HARDY EXHIBIT A PROMISSORY NOTE --------------- Dated: September 24, 1998 Amount: $10,000,000.00 FOR VALUE RECEIVED, the undersigned hereby promises to pay to or to the order of Loewen Group International, Inc., at 4126 Norland Ave., Burnaby, BC V5G 3S8, the sum of Ten Million Dollars ($10,000,000.00), as adjusted pursuant to the provisions of that certain Equity Incentive Agreement, dated as of September 24, 1998, by and between the undersigned, Loewen Life Insurance Group, Inc. and Loewen Group International, Inc. (the "Agreement") with interest accruing on the principal amount from February 12, 1998 through the time of repayment, at a rate of 9% per annum, simple interest, payable upon payment of this Promissory Note pursuant to the terms and conditions set forth in the Agreement with interest for any partial year to be calculated on the basis of 365 days per year; provided that, notwithstanding the repayment provisions aforesaid, this Promissory Note shall be payable solely by reduction, from time to time, of any Cash Award pursuant to Section 6(a)(iii) of the Agreement; and further provided that this note shall be without personal recourse and shall be payable as provided in the Agreement. /s/ THOMAS HARDY --------------------------------- THOMAS HARDY EX-26 8 EXHIBIT 10-26 [LETTERHEAD OF THE LOEWEN GROUP INC.] October 26, 1998 STRICTLY PRIVATE AND CONFIDENTIAL Peter S. Hyndman 4126 Norland Ave. Burnaby, BC V5G 3S8 Dear Peter: This letter will confirm your revised employment arrangement with The Loewen Group Inc. and subsidiaries (the "Company") in accordance with the following terms and conditions, effective from October 27, 1998: 1. You are employed as Corporate Secretary. Your agreed duties and responsibilities (expected to be approximately half-time) will be as described on the attached Schedule "A." 2. Your compensation (in Canadian dollars) will be made up of the following: (a) An annual remuneration of $140,000 per annum payable on the Company's normal payroll basis. (b) Continuation of all your existing Company fringe benefits with the exception of the annual senior executive financial consulting allowance. (c) Continuation of your present car allowance of $500.00 per month plus reimbursement for all reasonable operating expenses. (d) 4 weeks vacation per annum. 3. The Company will reimburse you for reasonable and prudent expenses incurred directly in relation to your duties, upon presentation of receipts or invoices in support. -2- 4. The Company will provide and pay for: a cellular telephone; fax machine at home; and any appropriate computer equipment for business purposes. 5. The Company will provide to you the same liability insurance coverage and indemnity protection as is made available to senior executives of the Company. 6. This Agreement replaces and supersedes your Employment Agreement with the Company dated March 6, 1990. 7. Nothing in this Agreement, modifies, amends or changes any of the terms and provisions of the Severance Agreement made between you and the Company as of October 31, 1996. 8. Subject to the approval of the Compensation Committee, section 3(b) of your Option Agreements shall be amended to read "24 months" in place of "45 days." 9. With respect to the Management Equity Incentive, Plan ("MEIP"): (i) subject to approval by the Compensation Committee, your participation in the MEIP will become fully vested [2500 units] at the time you cease to be employed by the Company; (ii) exercise capability remains as outlined in the Investment Option Agreement; (iii) you will receive the same form of treatment as other Loewen executives with respect to any changes in or additions to bank financing arrangements for Canadian MEIP participants which are of a beneficial nature to such participants (such treatment to include any guarantee by the Company or its affiliates), until the exercise of all of your options pursuant to the MEIP or June 15, 2001, whichever the first occurs. -3- 10. At your election and as you may direct in writing, some or all of your remuneration maybe paid to your personal consulting company. 11. Your employment Pursuant to this Agreement is as Corporate Secretary. Your position as Corporate Secretary is not a full time position; apart from Corporate Secretarial duties, you will additionally be available to the Company at the request of the Company to provide legal or consulting or advisory services to the Company, at competitive rates. 12. (a) This Agreement may be terminated by the Company for cause at any time by providing written notice. "Cause" means: gross negligence; dishonesty; incompetence; your material failure or inability to perform your duties and responsibilities hereunder following reasonable written warning; or any other material breach by you of this Agreement. (b) This Agreement may be terminated by the Company at any time following July 25, 1999 upon the giving, of one month's written notice. 13. In consideration of the benefits provided to you in herein, you covenant as follows: upon termination of this agreement by either party for any reason you will not, directly or indirectly, for a period of twelve months from termination, compete with the Company in the funeral, cemetery or related businesses anywhere in the United States or Canada or the United Kingdom. In providing this covenant you acknowledge that the acquisition and general activities of the Company extend across the United States and Canada and into the United Kingdom; that the Company is engaged in an intensely competitive industry; that the Company's main competitors seek acquisitions and operate competing businesses throughout the United States and Canada and in the United Kingdom; and that your employment duties and knowledge cover the United States and Canada and in the United Kingdom. "Compete" includes serving as an employee, shareholder, officer, director, consultant or advisor, directly or indirectly, and includes the giving of financial assistance or acting as broker, directly or indirectly. -4- "Business" or "businesses" includes either direct or indirect research or negotiation or work for, or in relation to, the acquisition, development or operation of funeral homes, cemeteries and related businesses. "Related businesses" includes funeral and cemetery insurance of all types. 14. With respect to your duties and responsibilities on behalf of the Company: (a) At all times you will act in the best interests of the Company; you will engage in no activity which is detrimental or prejudicial to the Company, its reputation, or any of its business; (b) At no time will you represent, directly or indirectly, parties or interests that are prejudicial to or in conflict with the best interests of the Company, its operations, or the Company's acquisition program; (c) You will at all times act honestly and faithfully in carrying out the Company's instructions; (d) You will at all times represent the Company in a professional manner and use your best efforts to promote the Company's interests. 15. During the currency of this Agreement and following its termination you will at all times keep strictly confidential all internal, private information, data, materials and knowledge relating to the Company or its business; nor during such times will you make any unauthorized use of any proprietary information, data or analysis of the Company, or of specific corporate opportunities developed or in the process of development by the Company. 16. The Agreement is the entire Agreement between the parties with respect to the subject matter hereof. This Agreement may be amended only by a written instrument signed by both parties. -5- 17. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 18. This Agreement shall be governed by the laws of the Province of British Columbia. In the event of any dispute arising as to the content, meaning, or effect of this Agreement, the same shall be resolved by private arbitration pursuant to the rules of the British Columbia International Commercial Arbitration Center, with no provision for punitive damages. Notwithstanding the foregoing, Company shall be entitled to bring Court proceedings seeking injunctive relief in respect of an alleged breach of clauses 12, 13 or 14. 19. This letter confirms the Company's agreement with the content hereof. To confirm your acceptance of and agreement with the content hereof please sign both copies and return one copy for our records, keeping a copy for yourself. Yours truly, THE LOEWEN GROUP INC. Per: /s/ Bradley D. Stam ____________________________ Authorized Signatory ACCEPTED AND AGREED as of this 27th day of October, 1998. /s/ Peter Hyndman --------------------------------- PETER HYNDMAN Attachment EX-10.27-1 9 EXHIBIT 10.27.1 [LETTERHEAD OF THE LOEWEN GROUP INC.] November 30, 1998 STRICTLY PRIVATE AND CONFIDENTIAL Mr. Robert B. Lundgren c/o The Loewen Group Inc. 4126 Norland Avenue Burnaby, BC VSG 3S8 Dear Bob: Pursuant to the authority and direction of the Board of Directors of The Loewen Group Inc. ("TLGI"), I am pleased to confirm your proposed employment arrangement with TLGI and subsidiaries and affiliates in accordance with the following terms and conditions: 1. You are employed as Chief Executive Officer and President of TLGI as of October 8, 1998. 2. Your agreed mandate, authority, duties and responsibilities are as described on Schedule "A" attached. 3. Your compensation will be made up of the following: (a) A beginning annual base salary of $425,000.00 (US) per annum payable on TLGI's normal payroll basis. Your base salary and compensation package will be reviewed annually between September 30 and December 31 by the Compensation Committee of the Board of Directors. (b) Inclusion on all TLGI benefit programmes provided to senior executives of TLGI. -2- (c) An automobile allowance of $600.00 (Cdn.) per month plus reimbursement for all reasonable operating expenses for your automobile including gas, oil, insurance and maintenance. (d) Four weeks' vacation per annum. (e) TLGI will include you in its Directors and Officers' liability insurance coverage and in addition will provide indemnities to you as appropriate and as are permitted by applicable corporate law. (f) TLGI will pay initiation fees and annual dues for your membership in a club chosen by you and agreed upon by TLGI. TLGI will also pay the annual membership dues for such professional or business associations as may be appropriate. (g) TLGI will provide and pay for a cellular telephone and any additional appropriate computer or fax or other technological equipment intended primarily for business use. (h) TLGI will reimburse you for all reasonable expenses incurred directly in relation to your duties, upon presentation of receipts or invoices in support. (i) TLGI will reimburse you for your reasonable legal expenses incurred in connection with your negotiation of an employment arrangement with TLGI. (j) The provision of an employee stock option agreement pursuant to TLGI's Canadian employee stock option plan whereby you will have an option to purchase a total of 400,000 common shares of TLGI, vesting in five equal annual installments of 80,000 shares over a five-year period at an exercise price per share pursuant to the plan. (k) You will be eligible to participate in any bonus programmes offered to senior executives of TLGI. In the case of bonus programmes with a percentage of base salary target, your target shall be 50 to 100% of base salary on the same parameters as applicable to other senior executives. It is understood that there is no guarantee of a bonus with respect to any fiscal year and any bonus entitlement shall be solely as determined by the Compensation Committee and Board of Directors of TLGI in accordance with the stated compensation policies of TLGI. -3- 4. You will within 10 days be provided a Change-In-Control/Severance Agreement similar to that provided to other senior executives of TLGI, providing protection and benefits in the event of a change in control as defined in such Agreement. 5. With respect to your duties and responsibilities on behalf of TLGI: (a) At all times you will act in the best interests of TLGI; you will engage in no activity which is detrimental or prejudicial to TLGI, its reputation, or any of its business; (b) At no time will you represent, directly or indirectly, parties or interests that are prejudicial to or in conflict with the best interests of TLGI, its operations, or TLGI's acquisition programme; (c) You will at all times act honestly and faithfully in carrying out TLGI's instructions; (d) You will at all times represent TLGI in a professional manner and use your best efforts to promote TLGI's interests. 6. During the currency of this Agreement and following its termination you will at all times keep strictly confidential all internal, private information, data, materials and knowledge relating to TLGI or its business; nor during such times will you make any unauthorized use of any proprietary information, data or analysis of TLGI, or of specific corporate opportunities developed or in the process of development by TLGI. 7. In consideration of the stock option benefit provided to you in paragraph 3(j) herein, you covenant as follows: upon termination of this agreement by either party for any reason you will not, directly or indirectly, for a period of 24 months from termination, compete with TLGI in the funeral, cemetery or related businesses anywhere in the United States or Canada or the United Kingdom ("U.K."). In providing this covenant you acknowledge that the acquisition and general activities of TLGI extend across the United States and Canada and include the U.K.; that TLGI is engaged in an intensely competitive industry; that TLGI's main competitors seek acquisitions and operate competing businesses throughout the United States and Canada and the U.K.; and that your employment responsibilities, duties and knowledge cover the United States, Canada and the U.K. -4- "Compete" includes directly or indirectly serving as an employee, shareholder, officer, director, consultant or advisor, and includes, directly or indirectly, the giving of financial assistance or acting as broker. "Business" or "businesses" includes either direct or indirect research or negotiation or work for, or in relation to, the acquisition, development or operation of funeral homes, cemeteries and related businesses. "Related businesses" includes funeral and cemetery insurance of all types. 8. (a) TLGI may terminate this Agreement only by resolution of the Board of Directors. (b) This Agreement may be terminated by TLGI for cause at any time by providing written notice. "Cause" shall include: gross negligence; dishonesty; incompetence; your material failure or inability to perform your duties and responsibilities hereunder; any activity or inactivity by you that materially and adversely affects the business operations or image of TLGI or its subsidiaries or affiliates; or any other material breach by you of this Agreement. (c) This Agreement may be terminated by TLGI without cause at any time by providing written notice. In the event of such termination by TLGI, and such termination not being subject to the agreement referenced in clause 4 preceding, TLGI shall provide to you normal compensation including all benefits for 12 months from the date of termination without obligation on your part to provide services. 9. This Agreement may be terminated by you on three months' written notice to TLGI. 10. In the event of termination of this Agreement for any reason, the provisions of clauses 6 and 7 hereof shall survive such termination. 11. This Agreement shall be governed by the laws of the Province of British Columbia. In the event of any dispute arising as to the content, meaning, or effect of this Agreement, the same shall be resolved by private arbitration pursuant to the rules of the British Columbia International Commercial Arbitration Center, with no provision for punitive damages. Notwithstanding the foregoing, TLGI shall be entitled to bring court proceedings seeking injunctive relief in respect of an alleged breach of clauses 6 or 7. 12. This Agreement may be amended only by a written instrument signed by both parties. -5- 13. This Agreement and the agreements referenced in clauses 3(j) and 4 hereof constitute the entire agreement between the parties concerning the subject matter hereof and the agreements referenced in this clause 13 together supersede and replace any previous agreements, arrangements or understandings between the parties, written or otherwise. 14. This letter confirms TLGI's agreement with this employment proposal. To confirm your acceptance of and agreement with the employment proposal as outlined in this letter, please sign both copies and return one copy for our records, keeping a copy for yourself. This mutually signed letter will then constitute the employment agreement between us. We look forward to your leadership of our Company. Yours truly, THE LOEWEN GROUP INC. Per: /s/ BRADLEY D. STAM ------------------------------------ Bradley D. Stam Senior Vice President, Law ACCEPTED AND AGREED as of this 30th day of November, 1998. /s/ ROBERT B. LUNDGREN ---------------------------------------- Robert B. Lundgren Attachment SCHEDULE "A" THE LOEWEN GROUP INC. ("TLGI") MANDATE, AUTHORITY, DUTIES AND RESPONSIBILITIES CHIEF EXECUTIVE OFFICER The Chief Executive Officer ("CEO") is appointed by the Board of Directors. All senior executives of the Corporation report to him. The CEO reports to the Board of Directors. This mandate includes all the authority, duties and responsibilities normally attaching to the office of the CEO of a public company. This mandate of the CEO includes providing the senior executive leadership necessary for TLGI to achieve its short and long term financial and non-financial goals within an entrepreneurial corporate culture of integrity and excellence. This mandate embraces a range of CEO activity from hands on management to strategic planning together with the regular review and re-evaluation of short and long term TLGI goals. The CEO is also responsible for providing the senior executive leadership necessary for TLGI to maximize shareholder value. The CEO is also the President of TLGI and as President has all of the authority, duties and responsibilities normally attaching to the office of the President. The position of CEO includes the position of Co-Chair as outlined following. However, the position of CEO is not conditioned upon the CEO also being Co-Chair. CEO AS CO-CHAIR The CEO while a Director of TLGI is also Co-Chair of the Board of Directors of TLGI. Because the CEO plays a central role in the Corporation's operations and in setting its strategic direction, and because of his special knowledge for TLGI's history and the industry in which TLGI operates, in the view of the Board the CEO provides unique leadership to the Board and is uniquely suited to be Co-Chair. The CEO as Co-Chair is deemed and agreed to be the "Chairman" or "Chairman of the Board" as referenced in the Articles of TLGI and accordingly Chairs meetings of the Board. The Board may appoint additional persons as Co-Chair, but such additional appointments shall be of an honorary nature only. The Board is satisfied that the fact that the CEO also serves as Co-Chair does not in any way constraint the Board's access to information, its assessment of management's performance, or its ability otherwise to discharge the duties to the Board to the Corporation. EX-10.27-2 10 EXHIBIT 10.27.2 SEVERANCE AGREEMENT This Severance Agreement (this "Agreement"), is made and entered into as of November 30, 1998, by and between The Loewen Group Inc., a British Columbia corporation (the "Company"), and Robert B. Lundgren (the "Executive"). WITNESSETH: WHEREAS, the Executive is a senior executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company desires to assure itself of both present and future continuity of management and to establish certain retention bonus and severance benefits for certain of its senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company desires to ensure that its senior executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company. NOW, THEREFORE, the Company and the Executive agree as follows: 1. CERTAIN DEFINED TERMS: In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in affect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a committee thereof. (b) "Cause" means that, prior to any termination pursuant to Section 3(b) or Section 3(c), the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. 2 (c) "Change in Control" means the occurrence during the Term of any of the following events: (i) The Company is merged, consolidated of reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than two-thirds of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors ("Voting Stock") of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (ii) The Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than two-thirds of the combined voting power of the then-outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than Raymond L. Loewen, a person including Raymond L. Loewen, or a person whose beneficial ownership of Voting Stock of the Company is shared with Raymond L. Loewen, has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 25% or more of the combined voting power of the then-outstanding Voting Stock of the Company; (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, 3 form or report or item therein) that a charge in control of the Company has occurred or will occur in the future pursuant to any then-existing contract or transaction; or (v) If, during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company, cease for any reason to constitute at least a majority thereof; PROVIDED, HOWEVER, that for purposes of this clause (v) each director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the directors of the Company (or a committee thereof) then still in office who were directors of the Company at the beginning of any such period will be deemed to have been a director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Sections 1(c)(iii) or 1(c)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Charge in Control" shall not be deemed to have occurred for purposes of Section 1(c)(iii) or 1(c)(iv) solely because (A) the Company, (B) an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock (a "Subsidiary"), or (C) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 25% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. (d) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, 4 pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control. (e) "Incentive Pay" means an annual amount equal to not less than the greatest aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits payable thereunder prior to a Change in Control. (f) "Severance Period" means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earliest of (i) the second anniversary of the occurrence of the Change in Control or (ii) the Executive's death; PROVIDED, HOWEVER, that commencing on each anniversary of the occurrence of the Change in Control, the Severance Period will automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (g) "Target Annual Bonus" means the aggregate amount of all payments in the nature of annual cash bonus to which the Executive would be entitled in respect of any particular year if (i) the Executive were employed throughout the entirety of such year and (ii) with respect to any such 5 payment that is contingent in whole or in part upon the achievement of one or more specified performance targets, a performance level equal to the minimum performance target established to determine whether any bonus would be payable (in the event that only one performance target applicable thereto shall have been established) or a performance level equal to the midpoint of the minimum and maximum performance targets established to determine the amount of any bonus that would be payable (in the event that two or more performance targets applicable thereto shall have been established) were achieved in respect of that year. (h) "Term" means the period commencing as of the date hereof and expiring as of the later of: (i) the close of business on December 31, 1999, or (ii) the expiration of the Severance Period; PROVIDED, HOWEVER, that (A) commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(h), the Executive shall not be deemed to have ceased to be an employee of the Company and any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. 2. OPERATION OF AGREEMENT: This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement shall become immediately operative. 3. TERMINATION FOLLOWING A CHANGE IN CONTROL: (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall be entitled to the 6 benefits provided by Section 4(b) unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company or any Subsidiary otherwise than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4(h) hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4(b) upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a director of the Company (or any successor thereto) if the Executive shall have been a director of the Company immediately prior to the Change in Control; (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive's Base Pay 7 and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof, any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (iii) A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided it has been made in good faith and in all events will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following a Change in Control, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the Change in Control, which has caused Executive to suffer a substantial reduction in any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in Control, which situation is not remedied within 10 calendar days after written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a); (v) The Company relocates its principal executive offices, or requires the Executive to have his principal location of work changed, to any location which is in excess of 25 miles from the location thereof immediately prior to the Change of Control, or requires the Executive to travel away from his office 8 in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change of Control without, in either case, his prior written consent; or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. (c) A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) will not affect any rights which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof (subject in all events to the provisions of Section 6). 4. RETENTION BONUS AND SEVERANCE COMPENSATION: (a) If (i) the Executive remains employed by the Company or any Subsidiary for 30 days after the first occurrence of a Change in Control (the "Bonus Date") or (ii) the Executive's employment with the Company or any Subsidiary is terminated pursuant to Section 3(a)(i) or 3(a)(ii) following the first occurrence of a Change in Control but prior to the 31st day after the first occurrence of a Change in Control, the Company will pay to the Executive, within 10 business days after the Bonus Date, a lump sum payment (the "Retention Bonus Payment") in an amount equal to the multiple set forth under Item I on Annex A hereto times the sum of Base Pay and Target Annual Bonus (at the highest combined rate in effect for any period prior to the Bonus Date). (b) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or it the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive the following amounts within 10 business days after the date (the "Termination Date") that the Executive's employment is terminated (the effective date of which shall be the date of termination, or such other date that may be 9 specified by the Executive if, the termination is pursuant to section 3(b)) and continue to provide to the Executive the following benefits: (i) A lump sum payment (the "Severance Payment") in an amount equal to (A) the multiple set forth under Item II on Annex A hereto times the sum of Base Pay and Target Annual Bonus (at the highest combined rate in effect for any period prior to the Termination Date) minus (B) the amount of any Retention Bonus Payment actually paid to the Executive pursuant to Section 4(a). (ii) (A) for the number of months set forth under Item III on Annex A hereto (the "Continuation Period") following the Termination Date, the Company will arrange to provide the Executive with Employee Benefits that are health or welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) substantially similar to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, and (B) such Continuation Period will be considered service with the Company for the purpose of determining service credits and benefits due and payable to the Executive under any retirement income, supplemental executive retirement and other benefit plans of the Company applicable to the Executive, his dependents or his beneficiaries immediately prior to the Termination Date. If and to the extent that any benefit described in subsection (A) or (B) of this Section 4(b)(ii) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits. Notwithstanding the foregoing, Employee Benefits otherwise receivable by the Executive pursuant to subsection (A) of this Section 4(b)(ii) will be reduced to the extent comparable health or welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive's Termination Date, and any such benefits actually received by the Executive shall be reported by the Executive to the Company. 10 (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of THE WALL STREET JOURNAL. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Promptly following the date hereof, the Company will (if it has not already done so) establish a trust (the "Trust") for the purpose of assuring the payment of amounts that may become payable to the Executive under Sections 4(a) and (b) together, at the Company's election, with amounts that may become payable under other retention bonus or change-in-control severance agreements or plans to which the Company is a party or under which the Company is an obligor. A reputable commercial bank or trust company selected by the Company shall serve as trustee of the Trust (the "Trustee") pursuant to a written trust agreement between the Company and the Trustee. Prior to the occurrence of a Change in Control, the Company shall deposit with the Trustee cash and/or a letter of credit in an amount sufficient to fund all amounts which may become payable to the Executive under Sections 4(a) and (b), together with all amounts that may become payable under all other retention bonus or change-in-control severance agreements or plans that are intended to be secured by the Trust, and shall thereafter make such additional deposits, if any, as may be necessary to result in the Trust holding at all times a combination of cash and/or letters of credit sufficient for the payment of all such amounts. Any letter of credit deposited with the Trustee pursuant to this Section 4(d) shall be issued by a reputable commercial bank having combined capital and surplus of at least $500 million, shall be irrevocable and shall entitle the Trustee to draw all amounts payable thereunder immediately upon the occurrence of a Change in Control. Without limiting the Company's obligations under the preceding provisions of this Section 4(d), in the event that the Company shall have failed to fully fund the Trust as provided herein prior to the occurrence of a Change in Control, the Company shall do so as promptly as practicable 11 thereafter. All amounts required to be deposited with the Trustee pursuant to this Section 4(d) that are so deposited after the occurrence of a Change in Control shall be deposited solely in the form of cash. No failure by the Company to satisfy any of its obligations under this Section 4(d) shall limit the rights of the Executive hereunder. Notwithstanding the foregoing provisions of this Section 4(d), with respect to any and all amounts which may become payable to the Executive under this Agreement, the Executive shall have the status of a general unsecured creditor of the Company and shall have no right to, or security interest in, any assets of the Company. (e) Notwithstanding any other provision of this Agreement to the contrary, the parties' respective rights and obligations under this Section 4 and under Sections 5 and 8 will survive any termination or expiration of this Agreement or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. LIMITATION ON PAYMENTS AND BENEFITS: Notwithstanding any provision of this Agreement to the contrary, if any amount or benefit to be paid or provided under this Agreement (taking into account all other amounts and benefits to be paid or provided to or for the benefit of the Executive by the Company or any affiliate thereof under this Agreement or otherwise as though all such other amounts and benefits had already been so paid or provided) would be an "Excess Parachute Payment," within the meaning of Section 280G of the United States Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided under this Agreement shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of United States state law, and any applicable United States federal, state and local income taxes). The determination of whether any reduction in such payments or benefits to be provided under this Agreement is 12 required pursuant to the preceding sentence shall be made at the expense of the Company, if requested by the Executive or the Company, by the Company's independent accountants. The fact that the Executive's right to payments or benefits may be reduced by reason of the limitations contained in this Section 5 shall not of itself limit or otherwise affect any other rights of the Executive other than pursuant to this Agreement. In the event that any payment or benefit intended to be provided under this Agreement is required to be reduced pursuant to this Section 5, the Executive shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section 5. The Company shall provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 5 business days of the Bonus Date or the Termination Date, as applicable, the Company may effect such reduction in any manner it deems appropriate. 6. WAIVER BY EXECUTIVE OF CERTAIN RIGHTS: The Executive hereby irrevocably waives any and all rights that the Executive may have pursuant to any agreement (other than this Agreement), policy, plan, program or arrangement of the Company or any affiliate (as the term "affiliate" is defined under Rule 12b-2 promulgated under the Exchange Act) of the Company in effect as of the date hereof to receive payments and/or benefits in the nature of severance payments or benefits. 7. NO MITIGATION OBLIGATION: The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the last sentence of Section 4(a)(ii). 8. LEGAL FEES AND EXPENSES: It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, 13 enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with any of the foregoing. 9. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 10. WITHHOLDING OF TAXES: The Company may withhold from any amounts payable under this Agreement all federal, 14 provincial, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 11. SUCCESSORS AND BINDING AGREEMENT: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 12. NOTICES: For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given 15 hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 13. GOVERNING LAW: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of British Columbia, without giving affect to the principles of conflict of laws thereof. 14. VALIDITY: If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. MISCELLANEOUS: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 16. COUNTERPART: This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an 16 original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. THE LOEWEN GROUP INC. By: /s/ BRADLEY D. STAM --------------------------- Its: Senior Vice President, Law -------------------------- /s/ ROBERT B. LUNDGREN ------------------------------- Robert B. Lundgren 17 ANNEX A I. MULTIPLE OF BASE PAY AND TARGET ANNUAL BONUS. One times. II. MULTIPLE OF BASE PAY AND TARGET ANNUAL BONUS. Three times. III. MONTHS OF HEALTH AND WELFARE BENEFIT CONTINUATION AND ADDITIONAL RETIREMENT INCOME SERVICE CREDIT. 36 months. 18 EX-10.27-3 11 EXHIBIT 10.27.3 [LETTERHEAD OF THE LOEWEN GROUP INC.] February 3, 1999 Mr. Robert B. Lundgren Chief Executive Officer and President The Loewen Group Inc. 4126 Norland Avenue Burnaby, BC V5G 3S8 Dear Bob: Pursuant to Section 152 of the COMPANY ACT, R.S.B.C. 1979, c. 59, as amended, The Loewen Group Inc. (the "Company") may provide certain indemnities in favour of officers and former officers of the Company and in favour of officers or former officers of corporations of which the Company is or was a shareholder. Article 19.2 of the Articles of the Company provides for officers and former officers to be indemnified accordingly. In consideration of one dollar ($1.00) and other valuable consideration, the receipt and sufficiency where of is hereby acknowledged, the Company hereby undertakes to indemnify you and your heirs and personal representatives against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by you or any of such persons by reason of, arising from or in connection with your being a officer of the Company or corporation of which the Company is or was a shareholder, including a judgment in any civil, criminal or administrative action or proceeding to which you or any of such persons is made a party by reason of your being or having been an officer of the Company or corporation of which the Company is or was a shareholder, including an action brought by the Company or any corporation of which the Company is or was a shareholder. The Company (i) will, so long as you shall be an officer of the Company or corporation of which the Company is or was a shareholder, as the case may be, use its best efforts to ensure that none of the provisions in the articles of the Company relating to the indemnity of the officers is altered, (ii) will not prevent or seek to prevent you from obtaining the protection of any such provisions and (iii) will do all acts which may be required to secure such protection including without limitation make application to court for approval of the indemnity herein. -2- The foregoing indemnities are subject to the approval of the court, as provided in the COMPANY ACT and to the conditions that you have acted honestly and in good faith with a view to the best interests of the Company or corporation of which the Company is or was a shareholder, as the case may be, and, in case of a criminal or administrative action or proceeding, you had reasonable grounds for believing your conduct was lawful. You will be presumed to have acted honestly and in good faith with a view to the best interests of the Company or corporation of which the Company is or was a shareholder, as the case may be, in the absence of a determination by the court that you acted in bad faith or with criminal intent. This letter also confirms the terms on which the Company will assume conduct of the defense of any action to which the indemnity relates. Promptly upon you receiving notice of any claim for which you are entitled to indemnity under this letter, you will give notice thereof to the Company, together with all information in your possession related to the subject matter of the claim, and together with copies of any writs, petitions or other legal process served upon you. The Company will at its expense assume the defense of the claim, through counsel of its choice to whom you do not, on reasonable grounds, object. In addition, if you wish, you may retain legal counsel of your choice at the cost of the Company. Failure to give notice of a claim in a timely fashion will not disentitle you or your heirs or personal representatives to your rights hereunder unless the Company suffers material prejudice because of the delay. Thereafter the Company will have carriage of the defense of the claim, but you will make yourself available at the times and (at the expense of the Company) places from time to time requested by the Company or its counsel for the purpose of examinations for discovery, preparation of answer to any claim, and for any other purposes related to the claim. The Company may at its expense, settle or compromise any claim made against you, but not without the consent of you or your heirs or personal representatives, which will not be unreasonably withheld. The Company will pay all costs of investigating any claim and all costs associated with conducting the defense. All amounts advanced by the Company in respect of costs, charges and expenses of defending the claim will be treated as a non-interest bearing loan and will be repayable forthwith on demand in the event that the court fails to approve your entitlement to indemnity hereunder. The provisions of this letter shall survive your resignation or other cessation of holding office as officer and shall be in addition to and not in derogation of any rights at law or in equity that you or your heirs and personal representatives may have. The Company will be subrogated to all rights which you or your heirs and personal representatives may have under policies of insurance. -3- The Company and you and your heirs and personal representatives will execute all further documents and take all further actions as shall be necessary or desirable to give effect to provisions hereof. If any provision of this agreement is illegal, void, unenforceable or otherwise ineffective, such provision shall be severed and the remaining provisions shall remain in full force and effect. The provisions hereof shall be binding upon the Company and its successors and shall survive amalgamation, merger, combination or other reorganization of the Company. Yours very truly, THE LOEWEN GROUP INC. Per: /s/ BRADLEY D. STAM Agreed upon this 5th day of February, 1999. /s/ ROBERT B. LUNDGREN - ----------------------- Mr. Robert B. Lundgren EX-11 12 EXHIBIT 11 THE LOEWEN GROUP INC. Exhibit 11 Computation of Per Share Earnings EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS
Years ended December 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- -------- -------- --------- -------- Restated Restated Restated Restated BASIC Net earnings (loss) $ (598,969) $ 41,810 $ 65,999 $ (75,604) $ 39,872 Less: Preferred share dividends (8,900) (9,533) (8,874) --- --- ---------- -------- -------- --------- -------- Net earnings (loss) attributable to Common shareholders $ (607,869) $ 32,277 $ 57,125 $ (75,604) $ 39,872 ---------- -------- -------- --------- -------- ---------- -------- -------- --------- -------- Weighted average shares outstanding 73,989 67,313 56,743 45,291 39,701 Basic earnings (loss) per Common share $ (8.22) $ 0.48 $ 1.01 $ (1.67) $ 1.00 ---------- -------- -------- --------- -------- ---------- -------- -------- --------- -------- FULLY DILUTED Net earnings (loss) attributable to Common shareholders $ (607,869) $ 32,277 $ 57,125 $ (75,604) $ 39,872 Add: imputed earnings from dilutive options, net of tax effect --- --- 526 --- 1,775 ---------- -------- -------- --------- -------- Fully diluted net earnings (loss) $ (607,869) $ 32,277 $ 57,651 $ (75,604) $ 41,647 ---------- -------- -------- --------- -------- ---------- -------- -------- --------- -------- Weighted average shares outstanding 73,989 67,313 56,743 45,291 39,701 Shares issuable upon assumed conversion of dilutive options --- --- 671 --- 2,019 ---------- -------- -------- --------- -------- Fully diluted shares 73,989 67,313 57,414 45,291 41,720 ---------- -------- -------- --------- -------- ---------- -------- -------- --------- -------- Fully diluted earnings (loss) per Common share $ (8.22) $ 0.48 $ 1.00 $ (1.67) $ 1.00 ---------- -------- -------- --------- -------- ---------- -------- -------- --------- --------
EX-12.1 13 EXHIBIT 12.1 THE LOEWEN GROUP INC. Exhibit 12.1 Computation of Earnings to Fixed Charges Ratio (Under Canadian GAAP) EXPRESSED IN THOUSANDS OF U.S. DOLLARS
1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes $(763,440) $ 42,595 $ 89,470 $(125,216) $ 57,691 Fixed charges included in earnings before income taxes Interest on long-term debt 155,760 125,450 88,932 50,913 34,203 Amortization of deferred finance costs 26,859 7,014 4,171 1,512 1,139 Dividends on preferred securities of subsidiary 7,088 7,088 7,088 7,088 2,678 ---------- ---------- ---------- ---------- ---------- 189,707 139,552 100,191 59,513 38,020 ---------- ---------- ---------- ---------- ---------- Earnings (loss) $(573,733) $ 182,147 $ 189,661 $ (65,703) $ 95,711 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Fixed charges Fixed charges included in earnings before income taxes $ 189,707 $ 139,552 $ 100,191 $ 59,513 $ 38,020 Capitalized interest 2,510 2,093 2,092 2,722 1,128 ---------- ---------- ---------- ---------- ---------- Total fixed charges $ 192,217 $ 141,645 $ 102,283 $ 62,235 $ 39,148 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges ---- 1.3X 1.9X ---- 2.4X ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (1) The 1998 and 1995 losses are not sufficient to cover fixed charges by a total of approximately $765.9 million and $127.9 million, respectively, and as such the ratio of earnings to fixed charges has not been computed.
EX-12.2 14 EXHIBIT 12.2 THE LOEWEN GROUP INC. Exhibit 12.2 Computation of Earnings to Fixed Charges Ratio (Under US GAAP) EXPRESSED IN THOUSANDS OF U.S. DOLLARS
1998 1997 1996 1995 1994 ---------- --------- --------- ---------- --------- Earnings (loss) before income taxes $ (764,601) $ 43,290 $ 87,765 $ (125,539) $ 57,877 Fixed charges included in earnings (loss) before income taxes Interest on long-term debt 155,760 125,450 88,932 50,913 34,203 Amortization of debt issue costs 26,859 7,014 4,171 1,512 1,139 Dividends on preferred securities of subsidiary 7,088 7,088 7,088 7,088 2,678 ---------- --------- --------- ---------- --------- 189,707 139,552 100,191 59,513 38,020 ---------- --------- --------- ---------- --------- Earnings (loss) $ (574,894) $ 182,842 $ 187,956 $ (66,026) $ 95,897 ---------- --------- --------- ---------- --------- ---------- --------- --------- ---------- --------- Fixed charges Fixed charges included in earnings (loss) before income taxes $ 189,707 $ 139,552 $ 100,191 $ 59,513 $ 38,020 Capitalized interest 2,510 2,093 2,092 2,722 1,128 ---------- --------- --------- ---------- --------- Total fixed charges $ 192,217 $ 141,645 $ 102,283 $ 62,235 $ 39,148 ---------- --------- --------- ---------- --------- ---------- --------- --------- ---------- --------- Ratio of earnings to fixed charges ---X 1.3X 1.8X ---X 2.4X ---------- --------- --------- ---------- --------- ---------- --------- --------- ---------- ---------
(1) The 1998 and 1995 losses are not sufficient to cover fixed charges by a total of approximately $767.1 million and $128.3 million, respectively, and as such the ratio of earnings to fixed charges has not been computed. EX-21 15 EXHIBIT 21 APPENDIX "B" THE LOEWEN GROUP INC. THE FOLLOWING TABLE SHOWS THE RELATIONSHIP BETWEEN TLGI AND ITS HOLDING COMPANIES AND OPERATING SUBSIDIARIES AND ASSOCIATED COMPANIES. THE TABLE ALSO SHOWS THE RESPECTIVE JURISDICTION OF INCORPORATION OF SUCH COMPANIES. EXCEPT AS INDICATED, TLGI OWNS, DIRECTLY OR INDIRECTLY, ALL OF THE ISSUED AND OUTSTANDING SHARES OF EACH HOLDING COMPANY AND OPERATING SUBSIDIARY AND ASSOCIATED COMPANY. HOLDING COMPANIES AND OPERATING SUBSIDIARIES AND ASSOCIATED COMPANIES --------------- CANADA ------
JURISDICTION OF INCORPORATION --------------- ALBERTA 247663 Alberta Ltd. (90%) and subsidiary company: Memento Funeral Chapel (1975) Ltd. Courtney-Winter's Funeral Chapel Ltd. Lakeland Funeral Home Ltd. BRITISH COLUMBIA 4032 Investments Ltd. 4054 Investments Ltd.(15) and subsidiary companies: PUERTO RICO Camposanto-Aguadilla, Inc. and subsidiary company: Monte Cristo, Inc. Camposanto PR, Inc. (90%) Jibe Services Corporation(11) Los Jardines Memorial Park, Inc. (formerly: LJM Acquisitions, Inc.) Los Rosales Memorial Park, Inc. (formerly: Los Rosales Acquisitions, Inc.) 4103 Investments Ltd.(29)(31)(36) 476822 B.C. Ltd. Alberni Valley Memorial Gardens Ltd.(11) Aldon Enterprises Ltd. Armstrong-Enderby Funeral Home Ltd.(9) Graham Funeral Home Ltd. Gregory's Williams Lake Funeral Home Ltd.(11) Haywards Thomson & Irving Funeral Directors (1986) Inc. and subsidiary company: -2- Hayward's B.C. Funeral Company & Limousine Service Ltd.(8) Hollyburn Funeral Home Ltd. Hollyburn Funeral Services Ltd. Mt. Washington Memorial and Funeral Chapel Ltd. Neweol Investments Ltd.(37) and subsidiary companies: 4166 Investments Ltd.(11)(43) Pine Grove Crematorium (1996) Ltd. (50%)(27) TLGI Holdings Limited (formerly: Loewen Holdings Limited) and subsidiary companies: Glenhaven Memorial Chapel Ltd. Kamloops Funeral Home Ltd. Suburban Funeral Homes Ltd. Surrey Memorial Services and Crematorium Ltd.(3) TLGI Management Corp. (formerly: Loewen Management Corp.)(39) and subsidiary companies: ALBERTA Mountain View and Metcalf Funeral Chapels Ltd. BRITISH COLUMBIA Assman's Funeral Chapel Ltd. Chapel Hill Funeral Home Ltd. Chapel of Memories Funeral Directors Ltd. Hamilton-Harron Funeral Centre And Crematorium Ltd. Henderson's Fraser Valley Funeral Home Ltd. Henderson's Funeral Homes Ltd. Lakewood Funeral Home Ltd. Pabril Ventures Limited and subsidiary companies: Piercy's Funeral Home Limited and subsidiary companies: Mission Hill Crematorium Ltd. Sutton's Funeral Directors Ltd. Parksville Funeral Chapel Ltd. Vancouver Memorial Services and Crematorium Ltd. Vernon Funeral Home (1986) Ltd. CANADA (FEDERAL INCORPORATION UNDER CBCA) Troispap Inc.(20) and subsidiary company: QUEBEC Paperman & Sons Inc.(20) and subsidiary companies: CANADA (FEDERAL INCORPORATION UNDER CBCA) 170535 Canada Inc. 3144569 Canada Inc. MANITOBA Kerr's Funeral Chapel (1988) Ltd. Loewen Funeral Chapels (1973) Ltd. 60752 Manitoba Ltd. and subsidiary companies: The J. Thomson Company Limited and subsidiary company: Garry Memorial Crematorium Ltd. (61.00%) NOVA SCOTIA -3- Digby Funeral Home Limited Independent Funeral Services Incorporated J.A. Snow's Funeral Home (1985) Limited Jayne's Funeral Home (1984) Limited (90.00%) and associated company: Digby County Ambulance Service Limited (70.00%) Mattatall Funeral Home (1986) Limited Robert L. Hall Funeral Home Limited Wayne Hatt Enterprises Limited and subsidiary company: Ettinger-Kennedy Memorial Residence Limited(4) ONTARIO 1096952 Ontario Limited Addison Funeral Home, Inc. Canadian Funeral Services Inc. and subsidiary company: Cambridge Funeral Services Limited Comstock Funeral Home (1987) Ltd. Giffen-Mack Chapel Ltd. Green Funeral Home Limited H.S. Anderson and Sons (1986) Ltd. J.B. Marlatt Funeral Homes (1985) Limited R. Martino Funeral Homes (1987) Ltd. Sault Ste. Marie Funeral Homes Ltd. Schreiter-Sandrock Limited The Brown Funeral Home (Kenora 1983) Limited The Ratz-Bechtel Limited Trull Funeral Homes (1987) Limited PRINCE EDWARD ISLAND Cutcliffe Funeral Home (1986) Ltd. MacLean Funeral Home (1986) Limited SASKATCHEWAN Lee Funeral Home Ltd. Parkview Funeral Home Ltd. Weyburn Funeral Home (1987) Ltd. BRITISH COLUMBIA TLGM Holdings Inc. and subsidiary company: TLGM One Holdings Inc. and subsidiary companies(14): MEXICO Agencia de Inhumaciones Gonzalez, S.A. de C.V. (1%) Grupo Loewen De Mexico, S.A. de C.V. and subsidary companies: Prestadora De Servicios Funerarios, S.A. de C.V. Servicios Administrativos Funerarios, S.A. de C.V. MANITOBA 2239699 Manitoba Ltd. and subsidiary company: Klassen Funeral Chapel Ltd. -4- 2696216 Manitoba Ltd. P. Coutu Funeral Chapels Ltd. Green Acres Memorial Services (1969) Ltd. Green Acres Memorial Gardens (1969) Limited and subsidiary company: Holy Angel Mausoleum Inc. NOVA SCOTIA NovaStar Emergency Medical Service Limited (90%) ONTARIO 1026698 Ontario Inc. and subsidiary companies: Delmoro Funeral Home (Woodbridge) Ltd. (formerly: Delmoro Funeral Home Ltd.) Delmoro Funeral Home (North York) Ltd. (formerly: 983784 Ontario Limited) Dryden Funeral Service Limited Hawkins Funeral Home Ltd. O'Reilly-Lee Funeral Home Limited Oshawa Funeral Service (Thornton Chapel) Inc. (90%) Walter D. Kelly Funeral Home And Chapel Ltd. QUEBEC Guayco Investments Inc./Investissements Guayco Inc. (90%) and its subsidiary company: Les Salons Funeraires Guay Inc. SASKATCHEWAN 600838 Saskatchewan Ltd.(33)(34)(35) and its subsidary companies: ALBERTA Memories Funeral Directors & Crematory Inc.(33) SASKATCHEWAN Unser-Rist Funeral Home Services Inc.(35) Wilson & Zehner Funeral Chapel Ltd.(34) 601346 Saskatchewan Ltd.(34)(35) Centre-Sask Funeral Management Co. Ltd. Community Crematorium Services Limited(17) Coventry Funeral Services Ltd. Dionne-Moriarty Enterprises Ltd. E. Andrychuk Funeral Home Ltd. H D Funeral Home Ltd. Helmsing Funeral Chapels Ltd. Jerome-Martens Funeral Services Limited(11) Orsted Funeral Home Ltd.(11) Prairie Funeral Services Ltd.(1) and subsidiary companies: Clements' Rosetown Funeral Home Limited McKague's Funeral Chapels Ltd. Sallows and McDonald Funeral Home (1987) Limited Scharf's Funeral Home Ltd. Unity Funeral Chapel Ltd. Rist Enterprises Corporation(34)(35) Ross Funeral Service Ltd. Souris Valley Memorial Gardens Company Ltd.(11) -5- SOUTH CAROLINA Cauthen's, Inc. and its subsidiary companies: Cauthen's Inc., of York County Rock Hill Memorial Gardens, Inc. UNITED STATES ------------- DELAWARE Loewen Group International, Inc.(26) and subsidiary companies: ALABAMA Advanced Planning (Alabama), Inc. Eastwood Memorial Gardens, Inc.(11) Gethsemane Cemetery, Inc. (formerly: GC Acquisition, Inc.) North Alabama Memorial Gardens, Inc.(11) Searcy Funeral Home, Inc. Saint Clair Memorial Gardens, Incorporated Walker Cemetery Corporation ALASKA Evergreen Memorial Chapel, Inc. ARIZONA Cemetery Management Company, Inc. (formerly: Catholic Management Company, Inc.)(11) Dimond & Sons Silver Bell Chapel, Inc. Flagstaff-Greenlaw Mortuary, Inc. Lake Havasu Memorial Gardens, Inc. (formerly: Havasu Acquisition, Inc.)(11) Yuma Mortuary & Crematory, Inc. (formerly: RYM Acquisitions, Inc.) ARKANSAS Advance Planning of Arkansas, Inc. Loewen (Arkansas) Holdings, Inc. and its subsidiary company: Lough, Inc. and its subsidiary company: Benton County Memorial Park, Inc. CALIFORNIA Calico General Partner, Inc.(23) Coge Investment Corporation Conrad Lemon Grove Mortuary, Inc. Culjis, Miller, Skelton and Herberger, Inc. Directors Succession Planning, Inc. (85%)(22) and subsidiary company: TEXAS Directors Cemetery (Texas), Inc. and its subsidiary companies: Del Rio Memorial Park, Inc. Panola County Restland Memorial Park, Inc.(11) CALIFORNIA E. & M. Frandsen, Inc. Greenview Cemetery, Inc.(11) -6- Guerrero Mortuary, Inc. International Memorial Society, Inc. Jensen-Carpenter Mortuary, Inc. Keaton Mortuaries, Inc. Loewen (Alabama), Inc.(21) and subsidiary companies: ALABAMA Brooks-Cargile Funeral Home, Inc. Gethsemane Cemetery North, Inc. (formerly: Gracelawn Acquisition, Inc.) Montgomery Memorial Cemetery, Inc. Loewen (Indiana), Inc.(23) Loewen (Texas), Inc.(24) and subsidiary companies: TEXAS Loewen Cemetery (Texas), Inc. and subsidiary company: Cedar Hill Memorial Cemetery Association Northwest Services, Inc. Sharpstown Services, Inc. McLeod Mortuary, Inc. Memorial Consultants of California, Inc.(11) Merkley-Mitchell Mortuary Monument Hill Memorial Park Mount Hope Cemetery, Inc.(11) Palm Springs Mausoleum, Inc. Paris-Frederick Mortuary, Inc. Pierce Mortuary Chapels, Inc. Pinkham-Mitchell Mortuary, Inc. Security Plus Mini & RV Storage, Inc. Wallace-Martin Funeral Home, Inc. (99.91%)(2) Whitehurst California and subsidiary companies: Advance Funeral Insurance Services Brentwood Funeral Home, Inc. Chapel of Seaside, Inc. Chapel of the Valley of Castro Valley, Inc. Delano Mortuary Driscoll Mortuary, Inc. Hadley Funeral Chapels, Inc. Johnson Funeral Home, Inc. (formerly: E. P. Johnson, Jr., Enterprises, Inc.) Merced Funeral Chapel Miller's Tulare Funeral Home Mission Memorial Park Mission Mortuary, Inc. Nicoletti, Culjis & Herberger Funeral Home, Inc. (formerly: A. J. Nicoletti Funeral Home, Inc.) Norman's Family Chapel, Inc. Smith-Reardon Incorporated and its subsidary company: Conejo Mountain Memorial Park Stephens & Bean Valley Mortuary, Inc. Whitehurst, Sullivan, Burns & Blair Funeral Service Whitehurst-Grim Funeral Service Whitehurst-Lakewood Memorial Park and Funeral Service -7- Whitehurst-Loyd Funeral Service Whitehurst-McNamara Funeral Service Whitehurst-Muller Funeral Service Whitehurst-Norton Funeral Service Whitehurst-Terry Funeral Service Willow Glen Mortuary, Inc. (formerly: The Willow Glen Mortuary, Inc.) CONNECTICUT New England Holding Company, Inc. (90%) and subsidiary companies: Gilman Funeral Home, Inc. NEW HAMPSHIRE Robert Douglas Goundrey Funeral Home, Inc.(11) RHODE ISLAND Frank R. Gorton & Sons, Inc.(11) George M. Wilbur-Romano & Sons, Inc. John B. Romano & Sons, Inc. Pontarelli-Marino Funeral Home, Inc. (formerly: Corbett, Quirk & Pontarelli, Inc.) Rushlow-Iacoi Funeral Home, Inc. (formerly: Rushlow Acquisition, Inc.)(11) SOUTH DAKOTA Prata Funeral Homes, Inc. Willowbrook Management Corp. DELAWARE American Burial and Cremation Centers, Inc. Eagle Lending, Inc. Directors (Texas), L.P.(22) Henlopen Memorial Park, Inc. Lester L. Hayman Funeral Home, Inc. (formerly: Prime Holdings of Georgia, Inc.) Loewen (Alabama), L.P.(21) Loewen (Indiana), L.P.(23) Loewen (Texas), L.P.(24) Loewen Corporate Benefits of North Carolina, Inc. Loewen Group Acquisition Corp. and its subsidiary companies: ALABAMA Woodlawn Memory Gardens, Inc. (formerly: Woodlawn Acquisition, Inc.) ARKANSAS Eastern Arkansas Memorial Gardens, Inc. CALIFORNIA Chapel of the Pines Funeral Home, Inc.(11) Memory Chapel, Inc. Mission Chapel of San Jose, Inc. COLORADO Coal Creek Memorial Cemetery, Inc. (formerly: Coal Creek Acquisition Inc.) GEORGIA Harrell-Faircloth Funeral Home, Inc. (formerly: Harrell-Faircloth Acquisition, Inc.)(11) Mozley Memorial Gardens, Inc. (formerly: Mozley Memorial Gardens Acquisition, Inc.)(11) INDIANA Foster and Good Funeral Home, Incorporated(11) -8- KANSAS Murdock Funeral Home, Inc.(11) KENTUCKY Dowell-Martin Funeral Home, Inc. (formerly: Dowell & Martin Acquisition, Inc.)(99.01%)(40) LOUISIANA Evangeline Funeral Home, Inc. MONTANA Montana Memorial Services, Inc.(11) and its subsidiary company: Sunset Memorial Gardens of Billings, Inc.(11) NEW HAMPSHIRE St. Laurent Funeral Home, Inc.(11) NEW MEXICO Smith-Rogers Funeral Home, Incorporated NEW YORK DeVaney-Bennett Funeral Home, Inc. (formerly: DeVaney Acquisition, Inc.) James J. Stout Funeral Home, Inc. NORTH CAROLINA Devotional Gardens, Inc. Pamlico Memorial Gardens, Inc. Roselawn Memorial Gardens, Inc. Rutherford County Memorial Cemetery, Inc. OKLAHOMA Added Touch Flower Shop, Inc.(11) Baggerley Acquisition, Inc. Bill Eisenhour Funeral Homes, Inc.(11) SOUTH DAKOTA Behrens Mortuary, Inc. TENNESSEE Northridge/Woodhaven Chapel & Cemetery, Inc. (formerly Woodhaven Memory Gardens and Funeral Home, Inc.) TEXAS Campbell Funeral Home, Inc. Central Texas Funeral Services, Inc.(11) Darrell W. Rains, Inc. and its subsidiary company: Rains-Seale Funeral Home, Inc. Hale County Funeral Services, L.C.(11) Jerry T. Edwards, Inc.(11) Lemons Funeral Home, Inc.(11) Swisher County Funeral Services, L.C.(11) VIRGINIA Stitham, Incorporated WEST VIRGINIA Ceredo Mortuary Chapel, Inc. (formerly: Ceredo Acquisition, Inc.)(11) Ferrell Mortuary, Inc. (formerly: Ferrell Acquisition, Inc.)(11) Wilcoxen Associates, Inc.(11) DELAWARE Loewen Life Insurance Group, Inc. and subsidiary company: INDIANA Mayflower National Life Insurance Company and subsidiary companies: -9- LOUISIANA Administrative Resources Company, Inc. Planned Funeral Services, Inc. Security Industrial Insurance Company and subsidiary company: Security Industrial Fire Insurance Company TEXAS Funeral Service, Inc. and subsidiary company: National Capital Life Insurance Company (formerly: Earthman National Capital Life Insurance Company) Loewen Management Investment Corporation Neweol (Delaware), L.L.C.(11)(43) Neweol Investments (U.S.A.), Inc. Oehler Building Corporation Osiris Holding Corporation and subsidiary companies: ARIZONA Phoenix Memorial Mortuary, Inc. DELAWARE Osiris Holding of Maryland, Inc. Osiris Holding Finance Company Sunset Acquisition Corporation FLORIDA Osiris Holding of Florida, Inc. Royal Palm Acquisition Corporation ILLINOIS Osiris Holding of Illinois, Inc. and its subsidiary company: Woodlawn Memorial Park, Inc. Elmwood Acquisition Corporation The Oak Woods Cemetery Association PENNSYLVANIA Oak Woods Management Company Osiris Insurance Agency of Pennsylvania, Inc. Osiris Holding of Pennsylvania, Inc. RHODE ISLAND Osiris Holding of Rhode Island, Inc. WISCONSIN Osiris Holding of Wisconsin, Inc. and subsidiary company: Knollwood Memorial Park, Inc. Prime Succession Holdings, Inc.(29) Roses Delaware, Inc. (74.13%)(30) Rose Hills Holdings, Corp. (10.45%)(31) DISTRICT OF COLUMBIA Stein Hebrew Memorial Funeral Home, Inc. (formerly: Donald M. Stein Hebrew Memorial Funeral Home, Inc.) FLORIDA Bess-Kolski-Combs, Inc. Charlotte Memorial Gardens Acquisition, Inc. Garden Sanctuary Acquisition, Inc. Kraeer Holdings, Inc. (90.00%) and subsidiary companies: Cardwell Funeral Home, Inc. (formerly: CFH Acquisition, Inc. -10- Curry Raley Funeral Home, Inc. (formerly: Curry Acquisition, Inc.) Dale Maloney Funeral Home, Inc. (formerly: DMH Acquisition, Inc.) Harris Funeral Home, Inc. Joseph B. Cofer Funeral Home, Inc. (formerly: JBC Funeral Home, Inc.) Knauff Funeral Home, Inc.(11) Kraeer Funeral Homes, Inc. Moody Funeral Home, Inc. Naples Memorial Gardens, Inc. North American Cremation Society, Inc. Scott Funeral Home, Inc. Security Trust Plans, Inc. Sherrill-Guerry Funeral Home, Inc. Wylie-Baxley Funeral Home, Inc. MHI Group, Inc. and subsidiary companies: Funeral Services Acquisition Group, Inc. and subsidiary companies: Abreu Gonzalez Funeral Homes, Inc. (formerly: AGFH Acquisition, Inc.) Eternal Light Funeral Directors and Counselors, Inc. LM Park, Inc. MHI Financial, Inc. Martin Funeral Home Acquisition, Inc.(11) Memorial Services Acquisition, Inc. Memorial Services Corporation(11) Riverside Memorial Park, Inc. Sarasota Memorial Park Acquisition, Inc. Skyway Memorial Gardens Acquisition, Inc. Weinstein Family Services, Inc. (85%) and its subsidiary companies: ILLINOIS Devon Livery, Inc. Weinstein Family Services, Inc. and its subsidiary companies: FLORIDA Beth David Memorial Gardens, Inc. Blasberg Memorial Chapels, Inc. Jewish Memorial Society, Inc. Levitt-Weinstein Memorial Chapels, Inc. and its subsidiary companies: Levitt Memorial Chapel, Inc. Resmal, Inc. Mount Nebo Memorial Gardens, Inc. Mount Nebo of the Palm Beaches Memorial Gardens, Inc. Palm Beach County Community Chapel, Inc. ILLINOIS Horizon Funeral Direction, Inc. Weinstein Brothers, Inc. and its subsidiary companies: FLORIDA Mount Nebo Chapels, Inc. Sinai Funeral Home, Inc. Star of David Memorial Gardens, Inc. ILLINOIS Weinstein Chapels, Inc. -11- GEORGIA Advanced Planning of Georgia, Inc. Broadlawn, Inc. Cemetery Sales Holding Corp. and subsidiary company: Forest Lawn Memorial Gardens, Inc. Dixon-Bowen-Taylor Funeral Home, Inc. (formerly: DBT Acquisition, Inc.) Foster Family Funeral Home, Inc. (formerly: Roswell Store, Inc.) (90%)(7) and subisidary companies: Alpharetta Funeral Home, Inc. Sandy Springs Chapel, Inc. United Cemetery Management & Development Corp. and subsidiary company: Green Lawn Cemetery Corporation Woodstock Funeral Home, Inc. Frederica Cemeteries, Inc. (formerly: Oglethorpe Acquisition, Inc.) Horizon-Glynn Properties, Inc. James & Dean, Inc. Loewen (Georgia), Inc. (formerly: MMP, Inc.) and subsidiary companies: Southeastern Funeral Homes, Inc. SOUTH CAROLINA Graceland Cemetery Development Co. TEXAS Travis Land Company Waco Memorial Park NORTH CAROLINA Reeves, Inc. Macedonia Memorial Park, Inc. (formerly: Macedonia Acquisition, Inc.) Melwood Cemetery, Inc. Morrison Funeral Home, Inc. Poteet Holdings, Inc. (formerly: Horis A. Ward, Inc.) and subsidiary companies: A. C. Hemperley & Sons, Inc. (formerly: Hemperley Acquisition, Inc.) BN Incorporated Frazier & Son Funeral Home, Inc. Lowe's Funeral Home, Inc. Mann-Walden Funeral Home, Inc. Thomas L. King Funeral Home, Inc. (formerly: TLK, Inc.) Roundtree Funeral Home, Inc. (formerly: Roundtree Acquisition, Inc.) Shadowlawn Acquisition Corporation(11) Sims-Medford Enterprises, Inc. Sunset Memory Gardens, Inc. HAWAII Alternative Acquisition, Inc. Associated Memorial Group, Ltd. and its subsidiary companies: 50th State Funeral Plan, Ltd. Valley Of The Temples Mortuaries, Ltd. Hawaiian Memorial Park Mortuary Corporation and its subsidiary company: The Center For Pre-Arranged Funeral Planning, Inc. Ordenstein Holding Company, Inc. (90%) and its subsidiary companies: Maui Memorial Park, Inc.(11)(42)and its subsidiary company: -12- Maui Funeral Plan, Inc. (50%)(11)(42) Nakamura Mortuary, Inc.(11)(42) Windward Crematory, Inc. IDAHO Parks Development Company, Inc. Restlawn Cemetery, Inc. (formerly: Restlawn Acquisition, Inc.)(11) ILLINOIS Allen-Melvin Funeral Home, Ltd. (formerly: Allen Funeral Homes, Ltd.) Grennan Funeral Home, Ltd. McCracken Funeral Home, Inc. Memorial Consultants, Inc. and its subsidiary companies: Evergreen Memorial Gardens, Inc. Glendale Memorial Gardens, Inc. Memorial Gardens Association, Inc. National Home Service Institute, Inc. Pre-Arrangement Consultants, Inc. Mount Hope Woodlawn Corporation (formerly: Mount Hope Woodlawn Acquisition Corporation) OBC Acquisitions, Ltd. Pineview Memorial Park, Inc. Ridgewood Cemetery Company, Inc. Robert A. Weinstein, Ltd. (90%) and subsidiary companies Genesis Associates, Ltd. and subsidiary companies: Brown Funeral Home, Ltd. (formerly: BFH Acquisition, Inc.) Chapel Hill Memorial Gardens & Funeral Home Ltd. (formerly: Chapel Hill Acquisition,Inc.) Chicago Cemetery Corporation Chrastka Funeral Home, Ltd. Community-Opyt Funeral Home, Ltd. Fitzpatrick Funeral Services, Ltd.(11) Furman Funeral Home, Inc. Mittendorf Calvert Funeral Home, Ltd. (Formerly: MCFH Acquisition, Ltd.)(11) Mount Auburn Funeral Home, Inc. Mount Auburn Memorial Park, Inc. Oakland Memory Lanes, Inc. and its subsidiary company: INDIANA Chapel Lawn Memorial Gardens, Inc. ILLINOIS Westwood Memorial Chapel, Inc.(11) Windridge Funeral Home, Ltd. (formerly: Windridge Acquisition, Inc.) Robert A. Weinstein Funeral Directors Ltd. Zefran Funeral Home, Ltd. Ruzich Funeral Home, Inc. Tazewell County Memorial Gardens, Inc. Woodlawn Cemetery Of Chicago, Inc. INDIANA AFH, Inc. -13- Advance Planning of Indiana, Inc.(11) Alexandria Cemetery Association, Inc.(11) B & H Contractors Inc. Bicknell Memorial Cemetery, Inc. (formerly: Bicknell Acquisition, Inc.)(11) Bond-Mitchell Funeral Home, Inc. (formerly: Bond-Mitchell Acquisitions, Inc.) Brosmer-Drabing Funeral Home, Inc. (formerly: FH Acquisition, Inc.) Berhalter-Hutchins Funeral Home, Inc. (99.80%)(2) Denbo Funeral Home, Inc. (formerly: Denbo Acquisitions, Inc.) Daviess Co. Cemetery Assoc., Inc. Deremiah-Frye Mortuary, Inc. Ever Rest Memorial Park, Inc.(16) Gardens of Memory, Inc. (formerly: GOM Acquisition, Inc.)(11) Gordon E. Utt Funeral Home, Inc. (formerly: GEUFH, Inc.) Green Lawn Cemetery, Inc.(16) Kemple Funeral Homes, Inc. McClure Funeral Service, Inc. (formerly: BDFH, Inc.) New Crown Cemetery Company, Inc. (formerly: New Crown Acquisition, Inc.) Oak Enterprises, Inc. Rest-Haven Cemetery Association, Inc. Ruzich Funeral Home, Inc. St. Joseph Valley Memorial Park, Inc. South Bend Highland Cemetery Association, Inc. (formerly: South Bend Acquisition, Inc.) Titzer Funeral Home, Inc. (formerly: TFHI Acquisition, Inc.) IOWA Mass-Hinitt-Alexander Funeral Home, Inc. (formerly: Alexander Acquisition, Inc.) Blackhawk Garden Of Memories, Inc. (formerly: Blackhawk Acquisition, Inc.) Burlington Cemetery Management, Inc. Loewen (Iowa), Inc. North Lawn Cemetery, Inc.(11) Shrine of Memories, Inc. KANSAS Byrd-Snodgrass Funeral Home, Inc. Colonial Services, Ltd. Hawks Funeral Home, Inc. Potts Funeral Home, Inc. Quiring Monument Company (formerly: Quiring Acquisition, Inc.) Restlawn Gardens of Memory, Inc. Sperry-McConnell-Bath Funeral Homes, Inc. Sunset Funeral Home, Inc. KENTUCKY Advanced Planning of Kentucky, Inc. Campbellsville Memorial Gardens, Incorporated Danville Memorial Gardens, Incorporated East Ashland Memorial Gardens, Inc. Forest Lawn Memorial Gardens, Inc. Golden Oaks Memorial Gardens, Incorporated -14- Green Hills Memorial Gardens, Inc. (formerly: GHMG Acquisitions, Inc.) Hillcrest Garden of Memories, Inc. Jenkins Funeral Home, Inc. (99.01%)(6) Loewen Group Inc.(21)(24) Loewen (Kentucky), Inc. (99.01%)(6) (formerly: Engle Funeral Home, Inc.) Louisville Memorial Gardens, Inc. and its subsidiary company: Memory Gardens, Inc. Madison County Memorial Gardens, Inc. New Rose Hill, Inc. (formerly: NR Acquisition, Inc.) Rogers Funeral Home of Clarkson, Kentucky, Inc. (formerly: PFH Acquisition, Inc.) (99.01%)(6) Sunset Memorial Gardens of Irvine Kentucky, Inc. Sunset Memorial Park, Inc. The Pulaski Funeral Home, Inc. (99.9%)(6) LOUISIANA Cemetery Management Corp. Loewen Louisiana Holdings, Inc. and subsidiary companies: New Orleans Limousine Service, Inc.(86.10%)(25) Woodlawn Memorial Park, Inc. (86.5%) MARYLAND Lorraine Park Cemetery Company(11) Modern Park Development Company Springhill Memory Gardens, Inc. Sunset Memorial Park, Inc. and its subsidiary company: Cedar Hill Funeral Home, Inc. (formerly: Leasure-Stein Funeral Home, Inc.) W N C, Inc. Wicomico Memorial Parks, Incorporated(11) MASSACHUSETTS Byron's Funeral Homes, Inc. (49.51%) Cuffe-McGinn Funeral Home, Inc. (49%) Doane Beal & Ames, Inc. (49.00%) Doba-Haby Insurance Agency, Inc. Edward J. Gaffey & Sons, Inc. (49.00%) Ernest A. Richardson Funeral Home, Inc. (49.00%) Hafey Funeral Service, Inc. (49.00%) John C. Mulry Funeral Homes, Inc. (formerly: Mulry Acquisition, Inc.) (49%) Loewen Cape Cod Holdings (1991), Inc. (90.00%) and subsidiary company: NEW HAMPSHIRE ZS Acquisition, Inc. Loewen Eastern Massachusetts Holdings (1992), Inc. Loewen Massachusetts Holdings (1991), Inc. Ratell Funeral Home, Inc.(40.00%) MICHIGAN Care Memorial Society, Inc. -15- Covell Funeral Home Inc. Covell-Smith Funeral Home, Inc. Edward Swanson & Son Funeral Home, Inc. (formerly: ESFH Acquisition, Inc.) Gethsemane Mausoleum And Sales Company Halverson Chapel, Inc. Hibbard-Ruggles Funeral Home, Inc. Hill Funeral Home, Inc. (formerly: HFH Acquisitions, Inc.) Loewen HDG Acquisition, Inc. (90%) Loewen (Michigan), Inc. Maple Valley Chapel, Inc. (formerly: Genther Acquisition, Inc.)(11) Memorial Guardian Company Peace Rose, Inc. Peter Feldpaush & Co., Inc. RKL Supply, Inc. Resurrection Funeral Home, Inc. Roseland Park Sales Company Star Cement And Vault Company Wachterhauser-Brietzke Funeral Homes, Inc. (formerly: Brietzke Acquisition, Inc.) Wren Funeral Home, Inc. MINNESOTA Bell Bros., Incorporated(11) Enga Memorial Chapels, Inc. Kapala-Glodek Funeral Service, Ltd. and subsidiary companies: Gleason Mortuary, Inc. Kapala-Glodek Gearhart Funeral Home, Inc. Malone Funeral Home, Inc. FLORIDA Coral Ridge Funeral Home And Cemetery, Inc. Kadek Enterprises of Florida, Inc. Phil Kiser Funeral Home, Inc. MINNESOTA Morningside Memorial Gardens, Inc. (formerly: MMG Acquisition, Inc.) North American Cremation Society, Inc. Wulff Family Mortuary, Inc. and its subsidary company: WHC, Inc. and its subsidiary company: East Metro Agency, Inc. MISSISSIPPI Riemann Holdings, Inc. (90.00%) and subsidiary companies: ARKANSAS Maxwell Holding Company, Inc. and its subsidiary companies: Batesville Funeral Services, Inc. Nashville Funeral Home, Inc. LOUISIANA Beau Pre Memorial Park, Inc.(11) Forest Park Cemetery of Shreveport, Inc. Forest Park Cemetery West of Shreveport, Inc. -16- H. C. Alexander Funeral Home, Inc. Leitz-Eagan Funeral Home, Inc.(25) Ourso Funeral Home, Inc.(11) Ourso Funeral Home, Airline Gonzales, Inc.(11) MISSISSIPPI Advance Planning of Mississippi, Inc. Baldwin-Lee Funeral Homes, Inc. Barham Funeral Home, Inc. Browning Funeral Homes, Inc. Browning Funeral Home, Inc. Water Valley, Mississippi Cardinal Flowers and Fine Gifts, Inc. Cockrell Funeral Home, Inc. Coleman Funeral Home, Inc. F.J.W. Incorporated Family Care, Inc. Floral Hills Memorial Gardens, Inc. Frank J. Fisher Funeral Directors, Inc. and subsidiary company: Fisher-Riles Funeral Insurance Company Gulf Coast Funeral Services, Inc. Holder-Wells Funeral Home, Inc. McPeters, Incorporated - Funeral Directors Magnolia Memorial Gardens of Meridian, Inc. (formerly: Magnolia Memory Gardens, Inc.)(11) Newton County Memorial Gardens, Inc. Riemann Enterprises, Inc. Riemann Funeral Homes, Inc. Riemann Funeral Insurance Company, Inc. Riemann Insurance Company, Inc. Roseland Park Cemetery, Inc. Southern Memorial Park, Inc. Stephens Funeral Homes, Inc. and subsidiary companies: Stephens Burial Association, Inc. Stephens Funeral Benefit Association, Inc. Stephens Funeral Fund, Inc. Stringer's Hartman-Baldwin Funeral Home, Inc. Thweatt-King Funeral Home, Inc. and subsidiary company: Thweatt Funeral Insurance Company, Inc. Wright & Ferguson Funeral Home and subsidiary company: Parkway Memorial Cemetery Corporation MISSOURI Loewen Missouri, Inc. Mount Auburn Cemetery Company NEBRASKA Boyd E. Braman Mortuary, Inc. Moon Acquisition, Inc. Moon Cemetery Association(16) NEVADA -17- American Burial & Crematory Service Davis Funeral Home, Inc. Davis Funeral Home Memorial Plan Paradise Memorial Gardens, Inc. NEW HAMPSHIRE Loewen New Hampshire Holdings 1990, Inc. McHugh Funeral Home, Inc. (49.00%) NEW JERSEY Arlington Development Company Osiris Management, Inc. (formerly: Shipper Management Group, Inc.) NEW MEXICO Advance Planning - Southwest, Inc. (formerly: Advance Planning of New Mexico, Inc.) Fitzgerald & Son Funeral Directors, Inc. Grants Mortuary, Inc. Griffin Funeral Home, Inc. Hillcrest Memorial Gardens Cemetery, Inc. (formerly: HMGC Acquisition, Inc.) Larry A. McGee, Inc. Strong-Thorne Mortuary, Inc. Valley Memory Gardens, Inc. (formerly: MC Acquisition, Inc.) West Funeral Home, Inc. NEW YORK Cusimano & Russo, Inc. (formerly: Cusimano Acquisition, Inc.)(11) Delaware Park Memorial Chapel, Inc. Joseph G. Duffy, Inc. John Dormi & Sons, Inc.(11) John J. Healey Funeral Home, Inc. La Familia Funeral Home, Inc. Louis Hirsch & Sons, Inc. M. J. Smith Sons, Inc. Northeast Monument Company, Inc. Osiris Telemarketing Corp. Ridge Chapels, Inc. T.J. McGowan Sons Funeral Home, Inc. Vay-Meeson Holding Company, Inc. (90%) and subsidary company: Vay-Schleich & Meeson Funeral Home Inc. Wagner Acquisition Corporation (90.00%) and subsidiary companies: CONNECTICUT S. Spadaccino & Sons Funeral Home, Inc. NEW YORK Carpenter's Funeral Homes, Inc. Coloni Funeral Homes, Inc. Drownwood Forest National Pet Cemetery, Inc. (formerly: Chicorelli Acquisitions, Inc.) Edward F. Carter, Inc. James Funeral Home, Inc. (formerly: Morton Acquisition, Inc.) Kennedy-Roth Funeral Home, Inc. -18- Lang-Tobia-DiPalma Funeral Home, Inc. (formerly: LTDP Acquisition, Inc.) O'Neill-Redden-Drown Funeral Home, Inc. R. Stutzmann & Son, Inc. Sears-Middleton-Jones Funeral Home, Inc. Sensible Alternatives, Inc.(11) Vernon C. Wagner Funeral Homes, Inc. David T. Ferguson Funeral Home, Inc. (formerly: WLFH Acquisition, Inc.)(11) Wattengel Funeral Home, Inc. (formerly: Wattengel Acquisitions, Inc.) William Leahy Funeral Home, Inc. Wanamaker & Carlough, Inc. Weeks Funeral Home, Inc. Yablokoff Kinsgway Memorial Chapel, Inc. (formerly: Yablokoff Acquisition, Inc.) Yablokoff-Wandy Funeral Home, Inc. NORTH CAROLINA Carothers Holding Company, Inc. (90%) and subsidiary companies(7): Advanced Funeral Planning of North Carolina, Inc. Bob Miller Funeral Home, Inc. Gardens of Faith Cemetery, Inc. (formerly: RMC Acquisitions, Inc.) Highland Memorial Gardens, Inc. Charlotte Memorial Gardens, Inc.(11) Raleigh Memorial Park, Inc. (formerly: RYM Acquisition, Inc.) Reeves Funeral Home, Inc. Sandling Funeral Home, Inc. Williams Funeral Service, (Incorporated) GEORGIA Carothers Holding Company (Georgia), Inc. (formerly: Peebles Curry Durden Mortuary, Inc.) Dekle-Wainwright Funeral Home, Inc. E.K. May Funeral Home, Inc. Edo Miller & Sons, Inc. Harvey Funeral Home, Inc. Kennedy Monument Co., Inc. Kennedy-Morgan Funeral Home, Inc. Parkway Garden Chapel, Inc.(5) Smith-Tillman Mortuary, Inc. KENTUCKY Schoppenhorst Brothers - Funeral Home (97%)(32) SOUTH CAROLINA Carothers Holding Company (South Carolina), Inc. (formerly: Bass Funeral Home) and its subsidiary companies: Elmwood Cemetery and Gardens, Inc. (formerly: Elmwood Acquisition, Inc.) Frederick Memorial Gardens, Inc. (formerly: Frederick Memorial Gardens) Poteet Funeral Home, Inc. Shuford-Hatcher Company VIRGINIA Barnett's Marion Funeral Home, Inc. Cumberland Memorial Gardens, Inc. Edgecombe Forest, Inc. (formerly: Edgecombe Acquisition, Inc.)(11) Evergreen Memorial Cemetery, Inc. -19- Fairview Memorial Park of Albemarle, Inc. Harnett Devotional Gardens, Inc. Lineberry Cemetery Corporation (90.00%) and subsidiary company: Westminster Gardens, Inc. Lineberry Group, Inc. and subsidiary companies: Chatham Memorial Park, Inc. (formerly: Chatham Acquisition, Inc.) Crestview Memorial Park, Inc. Evergreen Acquisition, Inc. Hanes-Lineberry Advanced Funeral Planning, Inc. Lumbee Memorial Gardens, Inc. (formerly: Lumbee Memorial Acquisition, Inc.) Oak Ridge Memorial Park, Inc. (formerly: ORMP Acquisition, Inc.) Padgett Funeral Home, Inc. Rockfish Memorial Cemetery, Inc. Rose Hill Memorial Park, Inc. Scotland County Cemetery, Inc. (formerly: Scotland Acquisition, Inc.) VIRGINIA Lineberry Group (Virginia), Inc. (formerly: Lynch Funeral Home, Inc.) and its subsidiary companies: DISTRICT OF COLUMBIA Takoma Funeral Home, Inc. MARYLAND Advanced Planning Services of Maryland, Inc.(11) The Huntt Funeral Home, Inc.(11) Robert E. Evans Funeral Home, Inc. (formerly: Lincoln Memorial Chapel, Inc.) VIRGINIA Henry Memorial Park, Inc. (formerly: HMP Acquisition, Inc.) Ives-Pearson Funeral Homes, Inc. Kyger Funeral Home, Inc. (formerly: Kyger Acquisition, Inc.) Lee Funeral Home of Manassas, Inc. Roselawn Development Corporation Tomlinson Funeral Home, Inc. (formerly: TFH Acquisition, Inc.) NORTH CAROLINA Loewen (North Carolina), Inc. (formerly: Capps Funeral Home, Incorporated) Stanly Gardens of Memory, Inc. West Lawn Cemetery, Inc. NORTH DAKOTA Advanced Funeral Planning of the Dakotas, Inc. (formerly: Advanced Funeral Planning of North Dakota, Inc.) Dakota Memorial Chapel, Inc. Eastgate Holdings, Inc. and subsidiary companies: Boelter Funeral Home, Inc. (formerly: Gerhardt-Schreiner-Ladbury Funeral Home, Inc.) Eastgate Funeral Service, Inc. Thompson Funeral Home, Incorporated W. B. M., Inc.(11) Weigel Funeral Home, Inc. (formerly: WFH Acquisition, Inc.) OHIO Bennett-Emmert Funeral Home, Inc. (90.00%)(2) Berry Funeral Home, Inc. (90.00%)(6) -20- Blessing Funeral Home, Inc. (formerly: Blessing Acquisition, Inc.) (90.00%)(6) Chestnut Hill/Mount Peace Cemeteries, Inc.(11)(16) Corrigan Funeral Home, Inc. (90.00%)(2) Craciun Funeral Home, Inc. (90.00%)(6) Crawford County Memory Gardens, Inc.(16) DiCicco and Son, Inc. (90.00%)(6) East Lawn Memorial Park Association (formerly: FHCA Acquisition Company, Inc.)(16) Evergreen Cemetery Belpre, Inc. (formerly: Evergreen Acquisition II, Inc.)(16) Forest Hills Memorial Gardens, Inc.(16)(11) Fort Steuben Management, Inc. (formerly: FSBE Acquisition, Inc.) Gemini Memorial, Inc. and its subsidiary company: Danlan Corporation Green Haven Memorial Gardens, Inc.(16) H. & D. Management Company, Inc. and subsdiary companies: Pet Haven Memorial Gardens, Inc. PENNSYLVANIA Memorial Cemetery Advisors, Inc. H.H. Birkenkamp Funeral Home, Inc. (90.00%)(2) Heritage Cemetery Management Corporation (formerly: HCMC Acquisition, Inc.) Hogenkamp-Bonham Funeral Home, Inc. (90.00%) J.H. Finefrock & Sons, Inc. (90.00%)(2) Loewen Cemetery (Ohio), Inc. (formerly: ELMP Acquisitions, Inc.) Long and Folk Funeral Home, Inc. (90.00%) Memory Gardens Company (formerly: MGC Acquisition, Inc.)(16) Meigs Acquisition, Inc.(16) Midwest Cemetery Service Company and its subsidiary company: Restlawn Memorial Gardens, Inc. Northeast Ohio Crematory, Inc. Oak Grove Memorial Park, Inc. (formerly: OGMP Acquisitions, Inc.)(16) Reed-Nichols Funeral Home, Inc. (90.00%)(2) Resthaven Memory Garden Cemetery, Inc. (formerly: RMGC Acquisition, Inc.)(16) Restlawn Memorial Park Association(16) Ridgecrest Memory Gardens, Inc. (formerly: Ridgecrest Acquisition, Inc.)(16)(11) Riverview Memory Gardens, Inc. (formerly: RMG Acquisition, Inc.)(16) Rose Hill Management Co., Inc. Rose Hill Memorial Gardens(16) Seneca Memory Gardens(16) Siferd Professional Associates, Inc. (80.00%)(6) Sinfran, Inc. Spiker-Foster-Shriver Funeral Homes, Inc. (formerly: Stoecklein Acquisition Corporation) (90.00%)(6) Terebinski Funeral Home Forest Hills Chapel, Inc. (90.00%)(6)(11) The Forest Hill Cemetery Association(16) The Fort Steuben Burial Estates Association(16) The Schmidt-Dhonau Company (90.00%) West Memory Gardens Association(16)(11) Western Reserve Memorial Garden(16) OKLAHOMA Ada Cemetery Holding Company, Inc.(11) and its subsidiary company: -21- Memorial Park of Ada, Inc.(11) Arlington Memory Gardens, Inc. (formerly: Arlington Acquisition, Inc.)(11) Loewen (Oklahoma), Inc. (formerly: Heath-Griffith Funeral Service, Inc.) and its subsidiary company: Hunsaker-Wooten Funeral Home, Inc. Lowell Holdings, Inc. (90%) and its subsidiary companies: KANSAS Fryberger Acquisition, Inc. Janousek Funeral Home, Inc. Pittsburg Cemetery Company(11) Southeastern Cemeteries Association(11) MISSOURI Park Cemetery of Carthage, Inc.(11) OKLAHOMA Area Funeral Services, Inc.(11) Gray Funeral Service, Inc. Gray Gish, Inc. Greer Funeral Home, Inc. HM Acquisition, Inc. Kiesau Funeral Home, Inc. Ludlum Management Services, Inc. Patterson Greer Funeral Home, Inc. Seeger Funeral Home, Inc. Resthaven Memorial Company Sunset Memorial Gardens, Inc. OREGON Advanced Planning, Inc. Bateman Funeral Chapel, Inc. Beaverton Funeral Home, Inc. Belcrest Memorial Park, Inc. (formerly: Belcrest Acquisition, Inc.) Bishop Funeral Chapel Inc. Buell Chapel, Inc. Cemetery Services, Inc. Fir Lawn Chapel, Inc. Gable and Parkrose Funeral Chapels, Inc. Haakinson-Groulx Mortuary, Inc. Howell-Edwards-Doerksen Chapel of the Gardens, Inc. O'Hair's Funeral Chapel, Inc. (formerly: O'Hair's Memorial Chapel, Inc.) Litwiller Funeral Home, Inc.(11) Pacific Mausoleum Co., Inc. Payne Family Mortuary, Inc. (formerly: Payne Acquisition, Inc.) Peake Memorial Chapel, Inc. Portland Funeral Alternatives, Inc. (formerly: PFA Acquisition, Inc.) The Portland Memorial, Inc. Young's Funeral Home, Inc. -22- PENNSYLVANIA Alleva Leasing Corporation BLH Management, Inc. (formerly: Burton L. Hirsch Funeral Home, Inc.) Bethlehem Cemetery Association(16) Blue Ridge Memorial Gardens CMS West, Inc. and its subsidiary companies: DELAWARE H.P. Brandt Funeral Home, Inc. The Mausoleum Construction Company Wm. F. Cushing, Inc. PENNSYLVANIA American Monument Corporation and its subsidiary company: Greene County Monument & Vault Company, Inc. Bedford County Memorial Park, Inc. and its subsidiary companies: Blair Memorial Park, Inc. Crestview Memorial Park, Inc. BFMI Co. (formerly: Brandt Family Memorial Investment Company) Bright Undertaking Company Castle View Memorial Gardens, Inc. Central Penn Funeral Associates, Inc. and its subsidiary company: Grand View Cemetery Company Coraopolis Cemetery Company Eloise B. Kyper Funeral Home, Inc. H. Samson, Inc. Heffner Funeral Home, Inc. Knee Funeral Home of Wilkinsburg, Inc. Mount Lebanon Cemetery Company Tri-State Funeral Associates, Inc. Chartiers Cemetery Company(11) Green Lawn Memorial Park, Inc. J. V. Walker Inc. Juniata Memorial Park, Inc. Laurelwood Holding Company(11) and its subsidiary companies: Laurelwood Cemetery Company(11) Laurelwood Management Company(11) Melrose Land Company NFH Leasing Corporation Prospect Hill Cemetery Company Reese Leasing Corporation Reese Management Corporation Riverside Cemetery Company Riverview Memorial Gardens, Inc. Stone and Metal, Incorporated The Prospect Cemetery Tioga County Memorial Gardens, Inc. Tri-County Memorial Gardens, Inc. Twin Hills Memorial Park and Mausoleum Corporation Westminster Cemetery, Inc. -23- SOUTH CAROLINA Crescent Hill Memorial Gardens Forest Lawn Cemetery, Inc.(11) Good Shepherd Memorial Park, Inc. Memorial Gardens of Charleston, Inc. (formerly: MGC Acquisitions, Inc.) Springhill Memorial Gardens, Inc. SOUTH DAKOTA HRMP Management, Inc. (formerly: HRMP Acquisitions, Inc.) Hofmeister Funeral Chapels, Inc. Osthus Funeral Home, Inc. (formerly: OFH Acquisitions, Inc.) Restlawn Memory Gardens, Inc. (formerly: Restlawn Acquisition, Inc.) Sunset Management, Inc. (formerly: Sunset Acquisition, Inc.) TENNESSEE Weaver Funeral Home, Inc. (formerly: Booth Funeral Home, Inc.) Coffey Mortuary, Inc. Crestview Memorial Park, Inc. (formerly: CMP Acquisition, Inc.) DMA Corporation Eastview Memorial Gardens, Inc. (formerly: EMG Acquisition, Inc.) Family Funeral Service Group, Inc. (90%)(10) and subsidiary companies: INDIANA Elzey & Haggard Funeral Homes, Inc. KENTUCKY Blalock-Coleman Funeral Home, Inc. (99.6%)(10) Bowling Green-Warren County Memorial Gardens, Inc. Cook-Webb Funeral Home, Inc. (99.9%)(10) Greenwell-Jenkins Funeral Home, Inc. (formerly: Greenwell Acquisition, Inc.) (99.01%)(10) Keith Monument Co. of Bowling Green, Inc. Laurel Funeral Home, Inc. (97.9%)(10) Lindsey Funeral Home, Inc. (99.9%)(10) Maplelawn Park Cemetery, Inc. Murray Memorial Gardens, Inc. Roth Funeral Chapel, Incorporated (94%)(10) Wilder Funeral Home, Inc. (99%)(10) OHIO Beam Funeral Home, Inc. (90%)(10) Burcham Funeral Home, Inc. (90%)(10) TENNESSEE Burris Funeral Home, Inc. Dickson Funeral Home, Incorporated Hilcrest Cemetery Corporation J. W. Curry & Son, Inc. Johnson Funeral Home Of Church Hill, Inc. Kingston Memorial Gardens, Inc. (formerly: Kingston Memorial Gardens Acquisition, Inc.)(11) Luff Bowen Funeral Home, Inc. Nave Funeral Home, Inc.(11) Roselawn Memorial Gardens Corporation -24- Spring Hill Cemetery Company Sweetwater Valley Memorial Park, Inc. (formerly: Sweetwater Valley Memorial Park And Chapel, Inc.) Tennessee Valley Memory Gardens And Funeral Home, Inc. (formerly: Tennessee Valley Acquisition, Inc.) Wilson County Memorial Park, Inc. Franklin Memorial Chapel, Inc. (formerly: Daves-Culbertson Funeral Home, Inc.) Funeral Concepts of Knoxville, Inc. Kiser Funeral Home, of Greeneville, Incorporated(11) Mayes Mortuary, Inc. and subsidiary company: Advance Planning of Tennessee, Inc. Memorial Concepts Of Tennessee, Inc. Memorial Park, Inc. Newby Funeral Home, Inc. Pettus-Owen & Wood Funeral Home, Inc. (formerly: Gamble-Watson Funeral Home, Inc.) Rawlings Funeral Home, Inc. and subsidiary company Smith Funeral Home, Inc. Roane Memorial Gardens, Inc. (formerly: Roane Memorial Gardens Acquisition, Inc.)(11) White's Vault Co. TEXAS Affordable Caskets, Inc. Allen-Korzenewski Funeral Home, Inc. American Mausoleum Co. Cavazos Memorial Chapel, Inc. Chism-Smith Funeral Home, Inc. DSP General Partner, Inc.(85%)(22) and subsidiary companies: Branon Funeral Home, Inc.(11) Del Rio Funeral Home, Inc. Jimerson Funeral Home, Inc.(11) Roger Pool Funeral Home, Inc. Tembico-Harkey, Inc. Darling-Mouser Funeral Home, Inc. Earthman Holdings, Inc. (90%) and subsidiary companies: Bernard Probst Funeral Home, Inc. Crown Hill Memorial Park, Inc. Dudley M. Hughes Funeral Home, Inc. Dudley M. Hughes Funeral Home North Chapel, Inc. Ed C. Smith & Brothers Funeral Directors, Inc. HLLB, Inc. Hughes Funeral Homes, Inc. Hughes Funerals, Inc. Hughes Southland Funeral Home, Inc. Max Martinez Funeral Home, Incorporated Oak Bluff Memorial Park, Inc., Of Port Neches Pace-Stancil Funeral Home, Inc. Pace-Stancil Memorial Rest Gardens, Inc. Trevino Funeral Home, Inc. Trevino Funeral Home - Palo Alto, Inc. George C. Price Funeral Directors, Inc. Grace Memorial Park, Inc. -25- Harper-Talasek Funeral Homes, Inc. Huff Funeral Home, Inc. (formerly: Charda Corporation) James Funeral Home, Incorporated and subsidiary company: Dunwood Cemetery Service Company (80%) Memorial Park Cemetery, of Tyler, Texas Paradise Chapel of Roses Mortuary, Inc. Paragon Trevino Funeral Home, Inc. Pitts Kreidler-Ashcraft Funeral Directors, Inc. Tyler Memorial Funeral Home And Chapel, Inc. VIRGINIA Advanced Planning of Virginia, Inc. Altavista Memorial Park, Inc. Birchlawn Burial Park, Inc. Cemetery Investments, Inc. Covenant Acquisition, Inc.(11) HFH, Inc. (99.01%)(2) Huff-Cook Funeral Home, Inc. (99.01%)(2) Loewen (Virginia), Inc. (formerly: Powell Valley Memorial Gardens, Incorporated) Mullins Holding Company and subsidiary companies: Alleghany Memorial Park, Inc. Arlington Funeral Home, Incorporated Bucktrout Funeral Home of Williamsburg, Inc. (formerly: BFH Acquisitions, Inc.) Hill Funeral Home, Inc. Jones-Ash Funeral Home, Inc. L & D Enterprises, Incorporated Lacy Funeral Home, Inc. PMSI, Inc. and its subsidiary companies: Kiris, Inc. Southern Memorial Sales, Inc. Sidney F. Harrell Funeral Home, Inc. (formerly: SFH Acquistions, Inc.) Umphlett Funeral Home, Inc. (formerly: UFH Acquisition, Inc.) Virginia Memorial Service Corporation Williamsburg Funeral Home, Inc. (formerly: WFH Acquisitions, Inc.) Woodward Funeral Home, Incorporated PVD Acquisitions, Inc. Rockbridge Memorial Gardens Company (formerly: RMG Acquisition, Inc.) Rose Lawn Cemeteries, Incorporated Russell Memorial Cemetery, Inc. Star City Memorial Sales, Inc. Sunset Memorial, Inc. (55.8%)(28) Temple Hill Corporation WASHINGTON Acacia Memorial Park(11) Advanced Planning of Washington, Inc. American Burial & Cremation Services, Inc. Bauer Funeral Chapel, Inc. Brown Mortuary Service, Inc. -26- Dahl/McVicker Funeral Homes, Inc. Davies Cremation & Burial Services, Inc. (formerly: Davies Acquisition, Inc.) Green Service Corporation and subsidiary company: Sunset Marketing, Inc. (75%) J & K Management Company Jerns Funeral Chapel, Inc. Longview Memorial Park, Inc. Lower Valley Memorial Gardens, Inc. Malletta-Vertin Holdings Inc. and subsidiary companies: ARIZONA Carr Mortuary, Inc. Desert DR Acquisition, Inc. Greer - Mountain View Mortuary, Inc. Hatfield Funeral Home, Inc. Page Mortuary, Inc. COLORADO Almont, Inc. Imperial Memorial Gardens, Inc. Mountain Vale Memorial Park, Inc. (formerly: MVMP Acquisitions, Inc.) DELAWARE Chapel of Chimes Funeral Home, Inc. Gorder Funeral Home, Inc. Lienkaemper Chapels, Inc. Livingston-Malletta & Geraghty Funeral Home, Inc. O'Connor Funeral Home & Crematory, Inc. Retz Funeral Home, Inc. Short's Funeral Chapel, Inc. Squire-Simmons & Carr Funeral Home, Inc. Sunset Memorial Cemetery & Funeral Home, Inc. IDAHO Reynolds Funeral Chapel, Inc. (formerly: Reynolds Acquisition, Inc.) White Mortuary, Inc. MONTANA Glacier Memorial Gardens, Inc. (formerly: Glacier Memorial Acquisition, Inc.) WASHINGTON Evergreen Funeral Home And Cemetery, Inc. Kimball Funeral Home, Inc. Marysville Acquisition, Inc. Powers Funeral Home, Inc. Price-Helton Funeral Chapel, Inc. S & H Properties and Enterprises, Inc. and subsidiary companies: OREGON Universal Memorial Centers I, Inc. Universal Memorial Centers II, Inc. Universal Memorial Centers III, Inc. CALIFORNIA Universal Memorial Centers V, Inc. Universal Memorial Centers VI, Inc. -27- WASHINGTON Vancouver Funeral Chapel, Inc. and subsidiary company: Northwood Park Cemetery, Inc. Schaefer-Shipman Funeral Home, Inc. Shaw & Sons Funeral Directors, Inc. Sticklin Funeral Chapel, Inc. WEST VIRGINIA Advance Planning of West Virginia, Inc. Beverly Hills Memorial Gardens, Inc. Davis Funeral Home, Inc. Delta Marketing, Inc. Dorsey Funeral Home, Inc. Evergreen Acquisition, Inc. Floral Hills Memorial Gardens, Inc. Greenbrier Burial Park, Inc. (formerly: GBP Acquisition, Inc.) Highland Memory Gardens, Inc. and subsidiary company: Guyan Memorial Gardens, Inc. Sunset Memorial Park of Beckley, Inc.(11) Montgomery Memorial Park Corporation Mountaineer Vaults, Inc. Mountain State Wilbert Vault, Inc. Park View Memorial Gardens, Inc. (formerly: Cemetery Acquisition Company, Inc.) Pineview Cemetery, Inc. Resthaven Memorial Park, Inc. Restwood Memorial Gardens, Inc. R.J.P. Enterprises, Inc. Sunset Memorial Park Company (formerly: SMP Acquisition, Inc.) Stanley N. Vaughan Funeral Home, Inc. Spurgeon Funeral Home, Inc. Spring Valley Memory Gardens, Inc. (formerly: SVM Acquisition, Inc.) Tankersley Funeral Home, Inc. Valley View Memorial Park, Inc. White Chapel Memorial Gardens, Inc. Woodlawn Memorial Park Corporation and subsidiary companies: Cemetery Estates, Inc. Restlawn Company WISCONSIN Arlington Park Cemetery, Inc.(11) Community Funeral Homes of Wisconsin, Inc. (90%) Great Lakes Cemeteries I, Inc. Highland Management Corp.(11) Milton Lawns Memorial Park of Janesville, Inc.(19) Northern Land Company, Inc. Perfection Management Corporation(11) Roselawn Memorial Park Company Roselawn Operations, Inc.(11) Sunset Ridge, Inc. (formerly: SR Acquisition, Inc.)(11) -28- WYOMING Buck-Heggie Funeral Home, Inc. Champion Funeral Home, Inc. (formerly: Champion Acquisitions, Inc.) HFH Acquisition, Inc. HPS Acquisition, Inc. Memorial Services, Inc. and its subsidiary company: Wyoming Memorial Gardens, Inc. INTERNATIONAL COMPANIES ----------------------- BARBADOS Loewen International Holdings Ltd.(15) and subsidiary companies: Loewen Financial Corporation(12) and subsidiary company: TENNESSEE Eagle Financial Associates, Inc. (formerly: Mountain Laurel Financial Services,Inc.) BARBADOS Loewen Insurance Holdings Inc. Loewen Mexico Holdings Ltd. Loewen Trading Corporation(18) LUXEMBOURG Loewen Luxembourg (No. 1) S.A.(13) and its subsidiary company: Loewen Luxembourg (No. 2) S.A.(13) and its subsidiary company: GIBRALTAR Loewen Investments (Gibraltar) and its subsidiary company: Loewen Investments Two (Gibraltar) and its subsidiary company: NETHERLANDS Neweol Finance B.V. and its subsidiary company: LUXEMBOURG Loewen Luxembourg (No. 3) S.A.(11)(38) and its subsidiary company: GIBRALTAR Loewen One (Gibraltar) Limited(11) BRITISH COLUMBIA 28886 Investments Ltd.(41)(11) and its subsidiary companies: AMSTERDAM Neweol Holdings B.V.(11) LUXEMBOURG Loewen Luxembourg (No. 4) S.A.(11) ENGLAND AND WALES Loewen UK Holdings Limited(11) and its subsidiary company: The Loewen Partnership Limited(11) and its subsidiary companies: Loewen Funerals Limited(11) and its subsidiary companies: Andrew Holmes & Son Limited(11) Anglia Funeral Services Limited(11) JNO Steel Holdings Limited(11) and its subsidiary companies: -29- JNO Steel & Son Limited(11) W. Cornish Ltd. (50%)(11) Maple Leaf Funerals Limited(11) Woking Funeral Service Limited(11)
NOTES: (1) The issued and outstanding shares of Prairie Funeral Services Ltd. consists of Class "A" common shares of which TLGI owns 50.00% and Centre-Sask Funeral Management Co. Ltd. ("Centre-Sask") owns 50.00%, Class "B" preferred shares of which 307744 Saskatchewan Ltd. ("Saskatchewan Ltd.") owns 100% and Class "C" preferred shares of which Centre-Sask owns 100%. TLGI Management Corp. (formerly: Loewen Management Corp.) owns 100% of the issued and outstanding shares of Saskatchewan Ltd. (2) The minority shareholders of these companies have each executed either a Voting Proxy and Option Agreement or a Voting Trust and Option Agreement, the purpose and intent of which is to transfer the minority shareholder's shares into a voting trust or to designate a voting representative for the minority shareholder's shares, as the case may be, and to grant an option in favour of Loewen Group International, Inc. (as successor to Paragon Family Services, Inc.) to acquire such shares. (3) The issued and outstanding shares of Surrey Memorial Services and Crematorium Ltd. consists of common shares of which TLGI Holdings Limited owns 66.68%, Suburban Funeral Homes Ltd. owns 16.66% and Chapel Hill Funeral Home Ltd. owns 16.66%. (4) The issued and outstanding shares of Ettinger-Kennedy Memorial Residence Limited consists of common shares of which Wayne Hatt Enterprises Limited owns 97% and TLGI Management Corp. owns 3%. (5) The issued and outstanding shares of Parkway Garden Chapel Inc. are owned 100% by Carothers Holding Company, Inc. with the exception of 300 issued and outstanding shares of preferred stock with a par value of U.S. $10.00 each. (6) The minority shareholders of these companies have each executed either a Voting Proxy and Option Agreement or a Voting Trust and Option Agreement, the purpose and intent of which is to transfer the minority shareholder's shares into a voting trust or to designate a voting representative for the minority shareholder's shares, as the case may be, and to grant an option in favour of Loewen Group International, Inc. to acquire such shares. (7) Foster Family Funeral Home, Inc. is 5% owned by Carothers Holding Company, Inc. and 5% owned by Poteet Holdings, Inc. (8) The issued and outstanding shares of Hayward's B.C. Funeral Company & Limousine Service Ltd. consists of 100 Common shares of which TLGI owns 60.00% and Haywards Thomson & Irving Funeral Directors (1986) Inc. owns 40%. (9) The issued and outstanding shares of Armstrong-Enderby Funeral Home Ltd. are owned 100% by The Loewen Group Inc. with the exception of 1 issued and outstanding share of Class D -30- preferred stock with a par value of $1.00 each. (10) The minority shareholders of these companies have each executed either a Voting Proxy and Option Agreement or a Voting Trust and Option Agreement, the purpose and intent of which is to transfer the minority shareholder's shares into a voting trust or to designate a voting representative for the minority shareholder's shares, as the case may be, and to grant an option in favour of Family Funeral Service Group, Inc. to acquire such shares. (11) Addition to list after December 31, 1997. (12) 100% of Loewen Financial Corporation (represented by 1,050 common shares and 350 first preferrence shares) is owned by Loewen International Holdings Ltd. (13) Loewen Luxembourg (No. 1) S.A. is 100% beneficially owned by Neweol Investments Ltd. Quenon Investments Ltd. is the registered owner of 1 share in the authorized capital of each of Loewen Luxembourg (No. 1) S.A. and Loewen Luxembourg (No. 2) S.A. (14) Agencia de Inhumaciones Gonzalez, S.A. de C.V. is owned by The Loewen Group Inc. (1%) and TLGM One Holdings Inc. (99%) Grupo Loewen De Mexico, S.A. de C.V. is owned by TLGM One Holdings Inc. (99%) and TLGM Holdings Inc. (1%) Prestadora De Servicios Funerarios, S.A. de C.V. is owned by Grupo Loewen de Mexico, S.A. de C.V. (99%) and TLGM One Holdings Inc. (1%) Servicios Administrativos Funerarios, S.A. de C.V. is owned by Grupo Loewen De Mexico, S.A. de C.V. (99%) and TLGM One Holdings Inc. (1%) (15) 100% of the voting stock of Loewen International Holdings Ltd. (represented by 210 common shares) is owned by 4054 Investments Ltd. (16) This is a Non Profit Corporation and therefore has no shareholders. (17) The issued and outstanding shares of Community Crematorium Services Limited consists of 100 Class "A" common shares of which Helmsing Funeral Chapels Ltd. ("Helmsing") owns 25.00%, Lee Funeral Home Ltd. ("Lee") owns 25.00% and Speers Funeral Services Ltd. owns 50.00%. TLGI owns 100% of the issued and outstanding shares of Helmsing and TLGI Management Corp. (formerly: Loewen Management Corp.) owns 100% of the issued and outstanding shares of Lee. (18) Neweol Investments Ltd. owns 85% and TLGI owns 15% of the issued and outstanding shares of Loewen Trading Corporation. (19) The issued and outstanding shares of Milton Lawns Memorial Park of Janesville, Inc. consists of 1 share of common stock with a par value of $100.00 and 1,000 shares of preferred stock without par value. LGII owns all of the authorized shares of preferred stock and Rock County Savings & Trust as Trustee is the registered holder of the 1 common share. (20) TLGI Management Corp. owns 55% of the issued and outstanding shares of Paperman & Sons Inc. and 100% of the issued and outstanding shares of Troispap Inc. which owns 45% of Paperman & Sons Inc. -31- (21) Loewen (Alabama), L.P. is a Delaware limited partnership in which Loewen Group Inc. is the general partner (1%) and Loewen (Alabama), Inc. is the limited partner (99%). (22) Directors (Texas), L.P. is a Delaware limited partnership in which DSP General Partner, Inc. is the general partner (1%) and Directors Succession Planning, Inc. is the limited partner (99%). (23) Loewen (Indiana), L.P. is a Delaware limited partnership in which Calico General Partner, Inc. is the general partner (1%) and Loewen (Indiana), Inc. is the limited partner (99%). (24) Loewen (Texas), L.P. is a Delaware limited partnership in which Loewen Group Inc. is the general partner (1%) and Loewen (Texas), Inc. is the limited partner (99%). (25) The issued and outstanding shares of New Orleans Limousine Service, Inc. consists of 10,000 shares of common stock of which Loewen Louisiana Holdings, Inc. owns 8,610 common shares (86.10%), Leitz-Eagan Funeral Home, Inc. owns 695 Common shares (6.95.00%) and Mothe Funeral Homes, Inc. owns 695 Common shares (6.95%). (26) TLGI owns 84.95% and Neweol Investments Ltd. owns 15.05% of the issued and outstanding shares of Loewen Group International, Inc. (27) The issued and outstanding shares of Pine Grove Crematorium (1996) Ltd. consists of 120 Class "A" common shares of which TLGI owns 60 Class "A" common shares (50%). (28) 55.8% of the issued and outstanding voting shares of Sunset Memorial, Inc. are owned by Loewen Group International, Inc. and 44.2% of the issued and outstanding voting stock is owned by Mullins Holding Company. (29) Loewen Group International, Inc. owns 11.8045% (represented by 113.23529 Common Shares) and 4103 Investments Ltd. owns 10% (represented by 100 Common Shares) of all of the issued and outstanding Common Shares, par value $0.01 of Prime Succession Holdings, Inc. ("Prime"). 4103 Investments Ltd. owns 100% of the issued and outstanding 10% Pay-In-Kind Cumulative Preferred Stock Par Value $.01 each of Prime (represented by 6,350 Preferred shares). (30) Loewen Group International, Inc. owns 74.13% of the issued and outstanding common stock and Whitehurst California owns 25.87% of the issued and outstanding common stock of Roses Delaware, Inc. (31) Loewen Group International, Inc. owns 10.45% of all of the issued and outstanding common shares and 4103 Investments Ltd. owns 10% of all of the issued and outstanding common shares of Rose Hills Holdings, Corp. ("Rose Hills"). 4103 Investments Ltd. owns 73.256% of the issued and outstanding 10% Pay-In-Kind Cumulative Preferred Stock Par Value $.01 each and Roses Delaware, Inc. owns 26.744% of the issued and outstanding 10% Pay-In-Kind Cumulative Preferred Stock Par Value $.01 each of Rose Hills. (32) The minority shareholders of these companies have each executed either a Voting Proxy and Option Agreement or a Voting Trust and Option Agreement, the purpose and intent of which is to transfer the minority shareholder's shares into a voting trust or to designate a voting representative for the minority shareholder's shares, as the case may be, and to grant an option in -32- favour of Carothers Holding Company to acquire such shares. (33) TLGI owns 58% and 600838 Saskatchewan Ltd. owns 42% of the issued and outstanding shares of Memories Funeral Directors & Crematory Inc. TLGI owns 100% of the issued and outstanding shares of 600838 Saskatchewan Ltd. (34) 600838 Saskatchewan Ltd. owns 90%, Rist Enterprises Corporation owns 5% and 601346 Saskatchewan Ltd. owns 5% of the issued and outstanding shares of Wilson & Zehner Funeral Chapel Ltd. TLGI owns 100% of the issued and outstanding shares of 600838 Saskatchewan Ltd., Rist Enterprises Corporation and 601346 Enterprises Corporation. (35) 600838 Saskatchewan Ltd. owns 60%, Rist Enterprises Corporation owns 20% and 601346 Saskatchewan Ltd. owns 20% of the issued and outstanding shares of Unser-Rist Funeral Home Services Inc. TLGI owns 100% of the issued and outstanding shares of 600838 Saskatchewan Ltd., Rist Enterprises Corporation and 601346 Saskatchewan Ltd.. (36) TLGI owns 51.32% (represented by 199,737,501 Class A Voting Common Shares) and LGII owns 48.68% (represented by 189,475,132 Class B Common (Non-Voting) Shares) of all of the issued and outstanding common shares of 4103 Investments Ltd. (37) TLGI owns 95.6% (represented by 332,430 Common shares) and TLGI Management Corp. owns 4.4% (represented by 15,276 Common shares) of all of the issued and outstanding common shares of Neweol Investments Ltd. (38) Loewen Luxembourg (No. 3) S.A. is 100% beneficially owned by Neweol Finance B.V. Quenon Investments Ltd. is the registered owner of 1 share in the authorized capital of Loewen Luxembourg (No. 3) S.A. (39) TLGI owns 100% of the issued and outstanding Common shares (represented by 1,683,739 Common shares) of TLGI Management Corp. TLGI owns 17% and 4103 Investments Ltd. owns 83% of the issued and outstanding Class A Preferred shares of TLGI Management Corp. (40) The minority shareholders of these companies have each executed either a Voting Proxy and Option Agreement or a Voting Trust and Option Agreement, the purpose and intent of which is to transfer the minority shareholder's shares into a voting trust or to designate a voting representative for the minority shareholder's shares, as the case may be, and to grant an option in favour of Loewen Group Acquisition Corp. to acquire such shares. (41) TLGI owns 100% of the issued and outstanding shares of 28886 Investments Ltd.. (42) Nakamura Mortuary, Inc. owns 50% and Maui Memorial Park, Inc. owns 50% of the issued and outstanding shares of Maui Funeral Plan, Inc.. (43) 4166 Investments Ltd. is the sole member of Neweol (Delaware), L.L.C. (44) Loewen Luxembourg (No. 4) S.A. is 100% beneficially owned by 28886 Investments Ltd. Viotta Trust Services B.V. is the registered owner of 1 share in the authorized capital of Loewen Luxembourg (No. 4) S.A. EX-23.1 16 EXHIBIT 23.1 [LETTERHEAD OF KPMG LLP] CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Loewen Group Inc. and Loewen Group International, Inc. We consent to incorporation by reference in the registration statements on Forms S-8 (Nos. 333-07033, 333-22551, 333-38551, 333-38553, 33-42892, 33-79604, 33-954953, 33-79602, 333-52811), S-3 (Nos. 333-23747, 333-43519, 333-43463), and S-4 (No. 333-09523) of The Loewen Group Inc. and the registration statement on Form S-3 (No. 333-23747) of Loewen Group International, Inc. of our reports: (i) dated April 12, 1999 relating to the consolidated balance sheets of The Loewen Group Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations, retained earnings (deficit) and cash flows of The Loewen Group Inc. for each of the years in the three year period ended December 31, 1998 and related schedule, (ii) dated April 12, 1999 relating to the consolidated balance sheets of Loewen Group International, Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations and deficit and cash flows of Loewen Group International, Inc. for each of the years in the three year period ended December 31, 1998, (iii) dated April 12, 1999 relating to the consolidated balance sheets of Neweol Investments Ltd. (as defined in Note 2 thereto) as at December 31, 1998 and 1997 and the consolidated statements of operations, comprehensive income and retained earnings (deficit) and cash flows of Neweol Investments Ltd. for each of the years in the three year period ended December 31, 1998, all of which reports appear in the December 31, 1998 annual report on Form 10-K of The Loewen Group Inc. Our reports include Comments by auditor for U.S. readers on Canada-U.S. reporting differences which contains additional comments regarding conditions which raise substantial doubt about each of the entities' ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP Chartered Accountants Vancouver, Canada April 12, 1999 EX-27.1 17 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE LOEWEN GROUP INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 18,059 20,198 32,931 18,588 0 0 0 0 215,334 231,866 254,699 273,106 27,717 21,034 21,122 27,448 32,008 32,877 32,900 34,247 249,229 275,074 312,487 310,400 794,378 815,799 854,313 898,615 108,093 116,231 123,861 132,049 3,718,734 3,968,447 4,316,142 4,590,944 193,652 193,556 172,410 236,718 1,416,345 1,608,610 1,398,699 1,600,991 75,000 75,000 75,000 75,000 157,146 157,146 157,146 157,146 796,431 798,329 1,248,102 1,257,573 73,040 94,123 110,352 68,217 3,718,734 3,968,447 4,316,142 4,590,944 908,385 274,697 550,345 824,481 908,385 274,697 550,345 824,481 579,377 175,687 353,735 555,382 579,377 175,687 353,735 555,382 139,422 34,957 62,849 158,454 0 0 0 0 93,028 32,283 66,873 107,961 89,470 29,998 63,344 (2,632) 23,471 5,831 12,011 (13,636) 65,999 24,167 51,333 11,004 0 0 0 0 0 0 0 0 0 0 0 0 65,999 24,167 51,333 11,004 1.01 0.37 0.76 0.06 1.00 0.36 0.76 0.06
EX-27.2 18 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE LOEWEN GROUP INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 3-MOS 6-MOS DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1997 MAR-31-1998 JUN-30-1998 36,767 34,573 33,316 0 0 0 283,875 289,050 303,470 32,869 34,756 36,151 34,885 35,572 36,956 333,799 337,668 350,815 939,135 966,275 993,456 141,957 153,327 162,938 4,790,687 4,940,087 5,124,337 203,715 194,958 179,968 1,750,427 1,885,055 2,065,742 75,000 75,000 75,000 157,146 157,146 157,146 1,271,177 1,271,869 1,272,660 89,448 117,813 118,139 4,790,687 4,940,087 5,124,337 1,114,099 309,736 611,659 1,114,099 309,736 611,659 750,460 196,356 404,674 750,460 196,356 404,674 174,029 39,082 78,482 0 0 0 139,927 35,014 75,450 42,595 37,512 49,509 785 7,473 9,228 41,810 30,039 40,281 0 0 0 0 0 0 0 0 0 41,810 30,039 40,281 0.48 0.38 0.48 0.48 0.37 0.48
EX-27.3 19 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE LOEWEN GROUP INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS 12-MOS DEC-31-1998 DEC-31-1998 SEP-30-1998 DEC-31-1998 49,182 94,141 0 0 290,870 288,293 48,665 66,614 35,390 34,482 338,958 359,218 1,010,749 1,014,688 172,390 188,703 5,195,300 4,673,908 285,691 1,110,479 2,066,127 1,393,891 75,000 75,000 157,146 157,146 1,274,063 1,274,096 81,990 (525,801) 5,195,300 4,673,908 875,546 1,136,234 875,546 1,136,234 604,968 844,498 604,968 844,498 146,111 550,576 0 315,207 121,953 182,305 (2,802) (763,440) (10,645) (164,471) 7,843 (598,969) 0 0 0 0 0 0 7,843 (598,969) 0.01 (8.22) 0.01 (8.22)
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