ALDERWOODS GROUP INC - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------------

FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 000-33277

--------------------------

ALDERWOODS GROUP, INC.
(Exact name of registrant as specified in its charter)

------------------------------

DELAWARE 52-1522627
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)

311 ELM STREET, SUITE 1000, CINCINNATI, OHIO 45202
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 513-768-7400

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

NONE NONE
(Title of each class) (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)

WARRANTS TO PURCHASE COMMON STOCK
(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. /X/

The aggregate market value of the Common Stock and Warrants to purchase
Common Stock held by non-affiliates of the registrant (assuming that the
registrant's only affiliates are its officers and directors), based on their
closing prices on the Nasdaq Stock Market on February 28, 2002 was $521,153,000
and $7,031,000, respectively.

--------------------------

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /

--------------------------

At February 28, 2002, there were 39,899,089 shares of Common Stock
outstanding and Warrants to purchase 2,992,000 shares of Common Stock
outstanding.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

i

GENERAL INFORMATION

Unless the context otherwise requires (a) "Alderwoods Group" refers to
Alderwoods Group, Inc., a Delaware corporation, (b) "Loewen Group" or the
"Predecessor" refers to The Loewen Group Inc., a British Columbia corporation,
(c) "Loewen International" refers to Loewen Group International, Inc., (a
Delaware corporation and a wholly-owned subsidiary of Loewen Group which, on
January 2, 2002, was reorganized and renamed Alderwoods Group, Inc. and
thereupon ceased to be affiliated with Loewen Group), (d) the "Company" refers
to Alderwoods Group together with its subsidiaries and associated companies,
(e) "Debtors" refers to, collectively, Loewen Group, Loewen International and
their debtor subsidiaries, and (f) "Loewen Companies" refers to Loewen Group,
Loewen International and their subsidiaries.

All dollar amounts are in United States dollars ("U.S.$" or "$") unless
otherwise indicated. References to "Cdn.$" are to Canadian dollars.

1

PART I

ITEM 1. BUSINESS

OVERVIEW

Alderwoods Group, Inc. is the second largest operator of funeral homes and
cemeteries in North America. As of February 23, 2002, the Company operated 818
funeral homes, 204 cemeteries and 65 combination funeral homes and cemeteries
throughout North America and 31 funeral homes in the United Kingdom. The Company
provides funeral and cemetery services and products on both an at-need basis
(time of death) and pre-need basis. In support of its pre-need business, the
Company operates insurance subsidiaries that provide customers with a funding
mechanism for the pre-arrangement of funerals.

Loewen International (incorporated in Delaware on February 25, 1987), as
reorganized and renamed Alderwoods Group, Inc., succeeded to the business
previously conducted by Loewen Group on January 2, 2002 (the "Effective Date").
Alderwoods Group is a holding company owning, directly or indirectly, the
capital stock of approximately 300 subsidiaries through which the funeral and
cemetery businesses are operated. The principal executive office of the Company
is located at 311 Elm Street, Suite 1000, Cincinnati, Ohio 45202.

BASIS OF ACCOUNTING

Alderwoods Group succeeded to substantially all of the assets and operations
of Loewen Group on the Effective Date, and continues to operate the businesses
previously conducted by the Loewen Companies. For financial reporting purposes,
the effective date of the reorganization was December 31, 2001, because United
States generally accepted accounting principles ("GAAP") require that the
financial statements reflect fresh start reporting as of the confirmation date
or as of a later date when all material conditions precedent to the Plan
becoming binding are resolved.

Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Form 10-K. However, due to the significant changes in the
financial structure of the Company, the application of "fresh start" reporting
as explained in Note 2 to the Company's consolidated balance sheet as at
December 31, 2001 (the "Consolidated Balance Sheet") as a result of the
confirmation and implementation of the plan of reorganization described below
and changes in accounting policies adopted by the Company, the consolidated
financial and other information of the Company issued subsequent to
implementation of the plan of reorganization are not comparable with the
consolidated financial information and other information issued by the
Predecessor prior to implementation of the plan of reorganization. Furthermore,
Loewen Group had implemented an asset disposition program to dispose of
properties that did not fit into Loewen's strategic plans. As a result of these
sales, a significant reduction in future funeral and cemetery revenues is
anticipated. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management's Discussion and Analysis of
Alderwoods Group -- Anticipated Effects of Dispositions and Consummation of
the Plan."

The Company's accounting information contained in this Form 10-K is
presented on the basis of U.S. GAAP. Historically, the Predecessor's
consolidated financial statements were presented in accordance with Canadian
GAAP, and material differences between Canadian GAAP and U.S. GAAP were
explained in a note to the Predecessor's consolidated financial statements. In
addition, the Predecessor had not previously fully implemented the United States
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), as a result of the
Predecessor's ongoing reorganization proceedings. The Predecessor's historical
financial information and the consolidated financial statements included in this
Form 10-K have been restated to the full extent necessary to comply with
U.S. GAAP and the implementation of SAB 101, effective January 1, 2000.

2

BUSINESS OPERATIONS

The Company's core operations consist of the funeral and cemetery activities
of its operating subsidiaries. The Company's operations also include an
insurance business in support of the core operations. The Company maintains a
regional operations management structure for the funeral and cemetery business
that is organized into multiple geographic regions in the United States, Canada
and the United Kingdom. For certain financial information by segment and
geographic area, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management's Discussion and Analysis of
Predecessor," Note 14 to the Company's Consolidated Balance Sheet and Note 15 to
the Predecessor's Consolidated Financial Statements.

The Company is aggressively pursuing a business plan designed to provide a
stable platform for future growth. The key components of the business plan are
to increase revenues, reduce operating costs, upgrade information systems, build
marketing and research capabilities and generate positive cash flow. Revenue
increasing initiatives include increased funeral home volume and direct
cremations, upgraded cremation services and merchandise options, and increased
at-need cemetery business through cross-referrals. Operating cost reduction
initiatives include restructured location management, increased efficiency
through allocation of local resources and centralized purchasing plans.

FUNERAL OPERATIONS

The Company's funeral operations encompass making funeral, cemetery and
cremation arrangements on an at-need or pre-need basis. The Company's funeral
operations 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.

Substantially all of the Company's funeral homes provide basic cremation
services through Company owned or third party crematories, and the Company has
proprietary programs designed to provide a full range of merchandise and
services to families choosing cremation. In 2001, cremations accounted for
approximately 34% of all funeral services performed by the Loewen Companies
compared to approximately 33% in 2000. As a percentage of all funeral services
in the United States, cremations have been increasing by approximately 1%
annually over the past five years and, in 2000, accounted for approximately 26%
of all funeral services performed in the United States.

Funeral operations constituted approximately 62% of consolidated revenue of
the Loewen Companies for 2001 consistent with 2000. Amounts paid for funeral
services are recorded as revenue at the time the service is performed. Payments
made for pre-need funeral contracts are either placed in trust 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-need funeral service, the original contract amount,
together with related accrued earnings from trust and increased insurance
benefits, is recorded as funeral revenue.

CEMETERY OPERATIONS

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.

Cemetery operations constituted approximately 25% of consolidated revenue of
the Loewen Companies for 2001 and approximately 28% for 2000. Provided certain
collectibility criteria are met, pre-need cemetery interment right sales of
developed cemetery property are deferred until a minimum percentage of the sales
price has been collected, while pre-need cemetery interment right sales of

3

undeveloped cemetery property are deferred until the cemetery property is
developed and a minimum percentage of the sales price has been collected.
Pre-need sales of cemetery merchandise or services are deferred until the
delivery or performance of such merchandise or services occurs.

Pursuant to various state and provincial laws, a portion of the proceeds
from the sale of pre-need merchandise and services may also be required to be
paid into trusts, which are included in pre-need cemetery contracts in the
Company's consolidated balance sheet. Earnings on merchandise and services trust
funds are recognized when the revenue of the associated merchandise or service
is recognized. Selling costs related to the sale of pre-need merchandise and
services are expensed in the period incurred.

The Company provides for the long-term maintenance of its cemetery
properties by placing a portion, typically 10% to 15%, 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, 2001, the cemeteries had approximately $259 million in perpetual
care trust funds, compared to $258 million at December 31, 2000, which are not
reflected on the consolidated balance sheet because the principal is required to
stay in trust in perpetuity.

INSURANCE OPERATIONS

The Company operates several insurance subsidiaries licensed in a total of
29 jurisdictions. These insurance subsidiaries sell a variety of life insurance
products, primarily for the funding of pre-need funerals. Insurance operations
constituted approximately 13% of consolidated revenue of the Loewen Companies
for 2001, as compared to approximately 10% for 2000.

COMPETITION

The funeral service industry in North America is highly fragmented,
consisting primarily of small, family-owned businesses. Competition generally
arises 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 or losses in market share within a community are usually
realized over a period of time.

The Company also faces similar competitive elements from large,
publicly-traded funeral service companies, as well as non-public regional
consolidators in certain markets.

REGULATION

The funeral service and cemetery 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. Most
jurisdictions also regulate the sale of pre-need services and the administration
of any resulting trusts or insurance contracts. The laws and regulations are
complex, subject to 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 operations in the United States 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 subsidiaries are subject to regulation by the states
in which they are domiciled and the states in which their products are sold.

4

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. On a continuing basis, the
Company's business practices are designed to assess and evaluate environmental
risk and, when necessary, conduct appropriate corrective measures. Liabilities
are recorded when known or considered probable and reasonably estimable.

The Company provides for environmental liabilities using its best estimates.
Actual environmental liabilities could differ significantly from these
estimates.

EMPLOYEES

At February 28, 2002, the Company employed approximately 10,000 people, with
approximately 560 people employed at the executive and administrative offices in
Cincinnati, Ohio, Toronto, Ontario and Burnaby, British Columbia. The Company
believes that relationships with these employees are good, but recognizes
employees have concerns over the challenges facing the Company, as it operates
as a successor to the Loewen Companies. At February 28, 2002, approximately 120
of the Company's employees were members of collective bargaining units.

PREDECESSOR OVERVIEW

From the inception of Loewen Group in 1985 until the last half of 1998,
Loewen Group's business philosophy centered on a growth strategy in the funeral
home and cemetery businesses. Loewen Group's primary growth philosophy was to
act as a consolidator and, as such, to respond to opportunities offered by
independent operators seeking to complete their own ownership "succession
planning" by selling their businesses to a larger organization. The greatest
number of acquisitions made by Loewen Group involved small- and medium-sized
businesses; these businesses, many with annual revenues of less than
$1 million, comprised the vast majority of the Loewen Group's operating
locations. Most acquisitions made by Loewen Group were funded by debt either
(a) issued to the seller, (b) borrowed from large financial institutions or
(c) raised in the public debt markets. Beginning in 1996, Loewen Group's
strategic growth plan began to increase its focus on acquisitions of cemeteries,
as distinguished from the earlier emphasis on acquisitions of funeral homes.

Beginning in the second half of 1998, in light of negative cash flow from
its businesses and increasing difficulties in meeting its debt service
obligations, Loewen Group virtually ceased its acquisition program. During the
last quarter of 1998, Loewen Group began attempting to sell various operations.

In November 1995, an extraordinary jury award of $500 million (consisting of
$100 million in compensatory damages and $400 million in punitive damages) was
entered against Loewen Group and certain of its subsidiaries in a state court
lawsuit in Hinds County, Mississippi, captioned O'KEEFE V. THE LOEWEN
GROUP INC. This judgment arose from a dispute involving the purchase and sale of
businesses having a total value of approximately $6 million. In the lawsuit, the
plaintiffs asserted claims based on breach of contract and tort claims,
including tortious breach of contract, tortious interference with a contract,
breach of covenants of good faith and willful or malicious breach of contract,
among others, arising out of the alleged failure of Loewen Group and certain of
its subsidiaries to consummate the purchase and sale transaction. Loewen Group
and the involved subsidiaries were unable to secure the necessary bond under
Mississippi law to stay the enforcement of the judgment pending appeal to the
Supreme Court of Mississippi and, facing extreme financial pressure to resolve
the lawsuit consensually, entered into a settlement of the lawsuit. The
settlement, which provided for consideration valued in the aggregate at
approximately $175 million, involved an immediate payment of cash and the
issuance of shares of the common stock of Loewen Group and two promissory notes.
Alderwoods Group believes that the O'KEEFE litigation had a lasting, damaging
effect on the Loewen Companies' acquisition program and their overall financial
health by reducing the Loewen Companies' reputation as "friendly" acquirers of

5

businesses, reducing the Loewen Companies' cash resources, diverting management
attention from day-to-day operations and causing a reduction in Loewen Group's
stock price, thereby adversely affecting its use as an acquisition currency.
Alderwoods Group believes that these events and consequences were a significant
cause of the voluntary filing of petitions for creditor protection under
Chapter 11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy
Code") as described below.

Loewen Group's financial difficulties primarily stemmed from a highly
burdensome debt load, much of which was incurred in connection with its
historical acquisition program, and the poor cash flow characteristics
associated with its then-existing cemetery pre-need sales strategy. As of
March 31, 1999, Loewen Group's consolidated balance sheet reflected
approximately $2.1 billion of long-term debt (of which approximately
$742.2 million was due currently) and approximately $48.8 million of other
current debt.

On June 1, 1999 (the "Petition Date"), Loewen Group, approximately 850
United States subsidiaries of Loewen Group (including Loewen International) and
one foreign subsidiary of Loewen Group each voluntarily filed a petition for
creditor protection under Chapter 11 in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). Concurrent with the
Chapter 11 filing, Loewen Group and 117 of its Canadian subsidiaries filed for
creditor protection under the Companies' Creditors Arrangement Act ("Creditors
Arrangement Act") with the Ontario Superior Court of Justice (the "Canadian
Court"). Subsequent to the Petition Date, five additional subsidiaries of Loewen
Group voluntarily filed petitions for creditor protection and 41 subsidiaries
were voluntarily deleted. The Loewen Companies' insurance, United Kingdom and
certain funeral and cemetery subsidiaries were excluded from the Chapter 11 and
Creditors Arrangement Act filings.

The Bankruptcy Court confirmed the Fourth Amended Joint Plan of
Reorganization of Loewen Group International, Inc., its Parent Corporation and
certain of their Debtor Subsidiaries, as modified (the "Plan"), on December 5,
2001, the Canadian Court recognized the Plan on December 7, 2001, and the Plan
became effective on January 2, 2002.

Pursuant to the Plan, the following transactions, among other things, were
completed on the Effective Date:

- Loewen Group, through a series of transactions, transferred to Loewen
International all of its assets, excluding only bare legal title to its
claims against the United States in the pending arbitration matter ICSID
Case No. ARB(AF)/98/3 (the "NAFTA Claims") under the North American Free
Trade Agreement ("NAFTA"), and transferred to Loewen International the
right to any and all proceeds from the NAFTA Claims; these transactions
were structured in light of the jurisdictional and substantive
requirements for the maintenance of, and are intended to preserve, the
NAFTA Claims; and, following these transactions, Loewen Group ceased to
have any employees, meaningful assets or operations;

- Through a series of subsidiary restructuring transactions, including
mergers, consolidations and similar transactions, the number of
subsidiaries in the corporate structure was reduced from more than 1,000
to approximately 300;

- Loewen Group's ownership of Loewen International was cancelled, and Loewen
International thereupon ceased to be affiliated with Loewen Group;

- The 9.45% Cumulative Monthly Income Preferred Securities, Series A issued
by Loewen Group Capital, L.P. ("Monthly Income Preferred Securities") and
the related obligations were cancelled in exchange for warrants
("Warrants") to purchase 496,800 shares of common stock, par value $0.01
per share, of Alderwoods Group ("Common Stock") at an initial price of
$25.76, which Warrants will expire on January 2, 2007;

6

- The debt claiming the benefit of the collateral trust agreement dated as
of May 15, 1996, among Bankers Trust Company, as trustee, Loewen Group,
Loewen International and certain pledgors (the "Collateral Trust
Agreement") was cancelled in exchange for a combination of an aggregate
cash payment of $131.5 million, 36,728,503 shares of Common Stock and
Alderwoods Group's 12 1/4% Senior Notes Due 2009 in the aggregate
principal amount of $330 million ("Seven-Year Unsecured Notes"),
Alderwoods Group's 12 1/4% Senior Notes Due 2004 in the aggregate
principal amount of $49.5 million ("Two-Year Unsecured Notes") and
Alderwoods Group's 11% Senior Secured Notes Due 2007 in the aggregate
principal amount of $250 million ("Five-Year Secured Notes");

- Certain claims were settled in exchange for an aggregate cash payment of
$2 million and 11,648 shares of Common Stock;

- Certain unsecured obligations were cancelled in exchange for an aggregate
of 2,759,270 shares of Common Stock, Warrants to purchase 2,495,200 shares
of Common Stock and all of the interests in a liquidating trust that holds
(a) five-year warrants of reorganized Prime Successions Holdings, Inc.
("Prime") issued to Loewen Group in Prime's reorganization proceeding and
(b) an undivided 25% interest in the net proceeds, if any, of the NAFTA
Claims;

- Certain administrative claims were satisfied through the issuance of
Alderwoods Group's 12 1/4% Convertible Subordinated Notes Due 2012 in the
aggregate principal amount of $24.7 million (the "Convertible Subordinated
Notes"), which are convertible, at the holder's option, into Common Stock
at an initial conversion rate equal to $17.17 per share and 379,449 shares
of Common Stock, which resulted in Alderwoods Group becoming the owner of
all of the outstanding common stock of Rose Hills Holdings Corp. ("Rose
Hills") which in turn owns 100% of the outstanding common stock of Rose
Hills Company, also an SEC registrant;

- Certain executory contracts and unexpired leases of the Debtor
subsidiaries were reinstated and, such indebtedness, together with
long-term indebtedness of subsidiaries of the Company that were not
Debtors, totaled approximately $45 million;

- Cash payments in the aggregate amount of $31.6 million were made in
respect of certain convenience, priority and other claims;

- A new board of directors was selected for the Company; and

- The Company entered into an exit financing facility (the "Exit Financing
Revolving Credit Facility") with a maximum availability of $75 million.

ITEM 2. PROPERTIES

The Company's properties consist primarily of funeral homes and cemeteries.
Of the Company's 849 funeral homes at February 23, 2002, 120 were leased
facilities and the balance were owned by the Company. In some cases, the Company
has a right of first refusal and an option to purchase its leased premises. Of
the funeral homes owned by the Company, 364 funeral homes in the United States
were pledged as security for the Exit Financing Revolving Credit Facility and
55 funeral homes were pledged as security for other debt. As of February 23,
2002, there were 689 funeral homes located in the United States, 129 in Canada
and 31 in the United Kingdom.

The Company operated or provided management and sales services pursuant to
various management and sales agreements to 204 cemeteries at February 23, 2002,
of which the assets of six were pledged as security for debt. The cemeteries
operated by the Company at February 23, 2002 contained an aggregate of
approximately 14,000 acres of which approximately 61% were developed. As at
February 23, 2002, there were 200 cemeteries located in the United States and
four in Canada.

7

At February 23, 2002, the Company operated 65 combination funeral homes and
cemeteries, of which 62 were located in the United States and three in Canada.

The Company's office in Cincinnati, Ohio occupies approximately 21,000
square feet of leased office space. The Company's office in Toronto, Ontario
occupies approximately 19,000 square feet of leased office space. The Company's
office in Burnaby, British Columbia occupies approximately 90,000 square feet of
leased office space.

The Company's facilities are well-maintained and kept in good condition,
which, management believes, meets the standards required for the Company's
nature of business.

ITEM 3. LEGAL PROCEEDINGS

PROPOSED CIVIL RIGHTS CLASS ACTIONS

Since July 2000, ten lawsuits have been filed against Security Industrial
Insurance Company, subsequently renamed Security Plan Life Insurance Company
("Security Industrial"), a subsidiary of the Company, and various other
unrelated insurance companies asserting similar claims and seeking class action
certification. The ALEXANDER, BEVERLY, COTHRAN, SMITH and SUTHERLAND cases were
filed in July 2000, the FLETCHER, FRANK and PRINCE cases were filed in October
2000, the JACKSON case was filed in November 2000, and the HALL case was filed
in February 2001.

Except as described in this paragraph, the complaints in each of the
lawsuits are almost identical. Plaintiffs allege that the defendants sold life
insurance products to plaintiffs and other African Americans without disclosing
that premiums paid would likely exceed the face value of the policies, and that
plaintiffs paid higher premiums than Caucasian policyholders and received
proportionately lower death benefits. The plaintiffs sought, among other things,
injunctive relief, equitable relief, restitution, disgorgement, increased death
benefits, premium refunds (in one case, with interest), costs and attorney fees.
In several of the cases, Security Industrial filed a motion to dismiss all
claims for failure to state a cause of action and/or for summary judgment.

In December 2000, nine of the cases were transferred to the Judicial Panel
on Multidistrict Litigation (the "MDL Panel") for consolidation for
administrative purposes, where they were assigned to Judge Martin L.C. Feldman
as IN RE INDUSTRIAL LIFE INSURANCE LITIGATION, MDL No. 1382.

On January 9, 2002, the Louisiana State Court gave final approval to a
class-action settlement with respect to the claims in the ten lawsuits. The
Louisiana State Court's final approval determined such settlement to be fair,
reasonable and adequate for the class, which was certified by such court for
settlement purposes only. The settlement provides agreed-upon amounts of
compensation to class members in exchange for a release of all pending and
future claims they may have against the Company and certain of its affiliates.

The Company has recorded a provision for the agreed-upon amounts of
compensation and related costs with respect to these lawsuits within the
Company's Consolidated Balance Sheet. Although the Company believes such
provision is adequate, there can be no assurance that actual payments with
respect to these claims will not exceed such provision.

Following are certain procedural and other information relating to each of
the ten lawsuits:

- ALEXANDER, ET AL. V. SECURITY INDUSTRIAL, filed in the United States
District Court, Western District of Louisiana, Lafayette-Opelousas
Division (No. 6:00CV1810). In October 2000, the plaintiffs filed a motion
for class certification.

- BEVERLY, ET AL. V. UNION NATIONAL LIFE INSURANCE CO., ET AL., filed in the
United States District Court, Western District of Louisiana,
Lafayette-Opelousas Division (No. CV00-1633L-0).

- COTHRAN, ET AL. V. SECURITY INDUSTRIAL, ET AL., filed in the United States
District Court, Western District of Louisiana, Shreveport Division
(No. 5:00CV1811).

8

- FLETCHER, ET AL. V. UNITED INSURANCE CO. OF AMERICA, ET AL., filed in the
United States District Court, Eastern District of Louisiana
(No. 00-2932 "S" (1)).

- FRANK ET AL. V. UNION NATIONAL LIFE INSURANCE CO. AND SECURITY INDUSTRIAL,
originally filed in the 13th Judicial District Court for the Parish of
Evangeline, State of Louisiana (No. 62369 Div. A).

- HALL, ET AL. V. SECURITY INDUSTRIAL, filed in the 23rd Judicial Court for
the Parish of Baton Rouge, State of Louisiana (No. 68938).

- JACKSON, ET AL. V. SECURITY INDUSTRIAL AND SECURITY INDUSTRIAL LIFE
INSURANCE CO., filed in the United States District Court, Northern
District of Georgia (No. 4-00CV-339-RLV).

- PRINCE V. UNITED INSURANCE CO. OF AMERICA, UNION NATIONAL LIFE INSURANCE
COMPANY AND SECURITY INDUSTRIAL, filed in the United States District
Court, Western District of Louisiana, Lafayette-Opelousas Division
(No. CV-00-2255,LO).

- SMITH V. SECURITY INDUSTRIAL, filed in the United States District Court,
Eastern District of Louisiana.

- SUTHERLAND, ET AL. V. UNITED INSURANCE CO. OF AMERICA, ET AL., filed in
the United States District Court, Eastern District of Louisiana
(No. 00-2076 "F" (2)).

THE LOEWEN GROUP INC. ET AL. V. THE UNITED STATES OF AMERICA

In October 1998, the Predecessor and Raymond L. Loewen, the then-Chairman
and Chief Executive Officer of the Predecessor, filed a claim against the United
States government for damages under the arbitration provisions of NAFTA. The
claimants 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 VS. THE LOEWEN GROUP INC.
Specifically, the plaintiffs allege that they were subjected to discrimination,
a denial of justice, a denial of the fair and equitable treatment and full
protection and security guaranteed by NAFTA and uncompensated expropriation, all
in violation of NAFTA. The NAFTA claims are currently the subject of a pending
proceeding before an arbitration panel (the "Arbitration Tribunal") appointed
pursuant to the rules of the International Centre for Settlement of Investment
Disputes. In January 2001, the Arbitration Tribunal issued a ruling rejecting
certain of the U.S. government's jurisdictional challenges and scheduled a
hearing on the merits of the NAFTA claims, held on October 15-19, 2001.

In connection with the Company's emergence from reorganization proceedings
on January 2, 2002, the Predecessor effectively transferred to a Canadian
subsidiary of the Company the right to receive any and all proceeds from the
Predecessor's claims described below against the United States. The Company, as
provided for in the Plan, irrevocably assigned an undivided 25% interest in the
net proceeds, if any, of these claims to a liquidating trust for the benefit of
creditors of certain of the Debtors under the Plan.

Although the Company believes that these actions should not affect the NAFTA
Claims, in January 2002, the United States claimed that the reorganization
constitutes a change of nationality of the NAFTA claims that deprives the
Arbitration Tribunal of jurisdiction over the NAFTA claims. The Arbitration
Tribunal has set a briefing schedule on the jurisdictional issues raised by the
United States. 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 realized by the Company.

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 operations or liquidity.

As of the Effective Date, Loewen Group was party to various other legal
proccedings, all of which were subject to settlement and discharge through the
bankruptcy process. Therefore, the Company is not subject to such proceedings.
See "Business -- Overview" for a discussion of these proceedings.

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

None.

9

PART II

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

MARKET INFORMATION

Pursuant to the Plan, the Company's Common Stock and Warrants were issued on
the Effective Date and commenced trading on The Nasdaq Stock Market ("Nasdaq")
on January 3, 2002. The Common Stock and Warrants trade as National Market
securities on Nasdaq under the symbols "AWGI" and "AWGIW," respectively.

As at February 28, 2002, there were 385 and two record holders of the Common
Stock and Warrants, respectively.

DIVIDEND POLICY

It is not anticipated that Alderwoods Group will pay any dividends on the
Common Stock in the foreseeable future. In addition, covenants in the respective
indentures governing the Five-Year Secured Notes, the Two-Year Unsecured Notes,
the Seven-Year Unsecured Notes, the Convertible Subordinated Notes and in the
Exit Financing Facility restrict the ability of Alderwoods Group to pay
dividends and may prohibit the payment of dividends and certain other payments.

RECENT SALES OF UNREGISTERED SECURITIES

As of the Effective Date and in accordance with the Plan, the Company issued
in respect of holders of certain claims:

- 39,878,870 shares of Common Stock;

- Warrants to purchase 2,992,000 shares of Common Stock (exercisable at an
initial exercise price of $25.76 per share at anytime on or before
January 2, 2007);

- $250 million aggregate principal amount of the Company's 11% Senior
Secured Notes Due 2007;

- $49.5 million aggregate principal amount of the Company's 12 1/4% Senior
Notes Due 2004;

- $330 million aggregate principal amount of the Company's 12 1/4% Senior
Notes Due 2009; and

- $24.7 million aggregate principal amount of the Company's 12 1/4%
Convertible Subordinated Notes Due 2012 (convertible at any time at the
option of the holder, at an initial conversion rate equal to $17.17 per
share).

Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act of 1933 (the "Securities Act") and state securities laws if three principal
requirements are satisfied: (a) the securities must be offered and sold under a
plan of reorganization and must be securities of the debtor, an affiliate
participating in a joint plan with the debtor or a successor to the debtor under
the plan; (b) the recipients of the securities must hold a prepetition or
administrative expense claim against the debtor or an interest in the debtor;
and (c) the securities must be issued entirely in exchange for the recipient's
claim against or interest in the debtor, or principally in such exchange and
partly for cash or property. Section 1145(a)(2) of the Bankruptcy Code exempts
the offer of a security through any warrant, option, right to purchase or
conversion privilege that is sold in the manner specified in section 1145(a)(1)
and the sale of a security upon the exercise of such a warrant, option, right or
privilege. Alderwoods Group believes that the offer and sale of the Common
Stock, the Warrants, the Five-Year Secured Notes, the Two-Year Unsecured Notes,
the Seven-Year Unsecured Notes, and the Convertible Subordinated Notes under the
Plan satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and,
therefore, are exempt from registration under the Securities Act and state
securities laws. Similarly, the offer of Common Stock through the Warrants and
the Convertible Subordinated Notes and the sale of Common Stock upon the
exercise of the Warrants or

10

conversion of the Convertible Subordinated Notes satisfy the requirements of
section 1145(a)(2) of the Bankruptcy Code and, therefore, are exempt from
registration under the Securities Act and state securities laws.

ITEM 6. SELECTED FINANCIAL DATA

Alderwoods Group succeeded to substantially all of the assets and operations
of Loewen Group on the Effective Date, and continues to operate the businesses
previously conducted by the Loewen Companies. For financial reporting purposes,
the effective date of the reorganization was December 31, 2001, because
U.S. GAAP requires that the financial statements reflect fresh start reporting
as of the confirmation date or as of a later date when all material conditions
precedent to the Plan becoming binding are resolved.

Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Form 10-K. However, due to the significant changes in the
financial structure of the Company, the application of "fresh start" reporting
as explained in Note 2 to the Company's Consolidated Balance Sheet as at
December 31, 2001, and as a result of the confirmation and implementation of the
Plan and changes in accounting policies adopted by the Company, the consolidated
financial and other information of the Company issued subsequent to the Plan
implementation are not comparable with the consolidated financial information
and other information issued by the Predecessor prior to the Plan
implementation. Furthermore, Loewen Group had implemented an asset disposition
program to dispose of properties that did not fit into Loewen Group's strategic
plans. As a result of these sales, a significant reduction in future funeral and
cemetery revenues is anticipated. Accordingly, the accompanying selected
consolidated financial information should be reviewed with caution, and the
Predecessor's selected consolidated financial information should not be relied
upon as being indicative of future results of the Company or providing an
accurate comparison of financial performance. A black line has been drawn for
certain items of the selected consolidated financial information to separate and
distinguish between the consolidated financial information that relates to the
Company and the consolidated financial information that relates to the
Predecessor.

The Company's accounting information contained in this Form 10-K is
presented on the basis of U.S. GAAP. Historically, the Predecessor's
consolidated financial statements were presented in accordance with Canadian
GAAP and material differences between Canadian GAAP and U.S. GAAP were explained
in a note to the Predecessor's consolidated financial statements. In addition,
the Predecessor had not previously fully implemented SAB 101, as a result of the
Predecessor's ongoing reorganization proceedings. The Predecessor's historical
financial information and the consolidated financial statements included in this
Form 10-K have been restated to the full extent necessary to comply with
U.S. GAAP and the implementation of SAB 101, effective January 1, 2000.

Set forth below is certain selected consolidated financial information for
the Company as of December 31, 2001, and, for the Predecessor, consolidated
financial and operating information as of and for the fiscal years ended
December 31, 2001, 2000, 1999, 1998, and 1997. The selected consolidated
financial information set forth below is derived from the Company's and the
Predecessor's respective audited consolidated financial statements for such
periods, and should be read in conjunction with the Company's Consolidated
Balance Sheet and the Predecessor's consolidated financial statements (the
"Consolidated Financial Statements") included in Item 8 of this Form 10-K
(including the notes thereto), as well as the discussion contained under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

The financial results of the Predecessor for the year ended December 31,
2001 include $181 million of pre-tax charges representing impairment of assets
and $87 million of reorganization costs. The results for the year exclude $133
million of contractual interest expense applicable to certain pre-Petition Date
debt obligations, which were subject to compromise as a result of the
Chapter 11 and Creditors Arrangement Act filings.

11

The financial results of the Predecessor for the year ended December 31,
2000 include $117 million of pre-tax charges representing impairment of assets
and $46 million of reorganization costs. The 2000 results exclude $154 million
of contractual interest expense applicable to certain pre-Petition Date debt
obligations, which were subject to compromise as a result of the Chapter 11 and
Creditors Arrangement Act filings. As of December 31, 2000, $2.3 billion of
liabilities were subject to compromise.

The financial results of the Predecessor for the year ended December 31,
1999 include $487 million of pre-tax charges representing impairment of capital
assets and investments and accrual of contingent losses on investments and
$93 million of reorganization costs. The 1999 results exclude $95 million of
contractual interest expense applicable to certain pre-Petition Date debt
obligations which were subject to compromise as a result of the Chapter 11 and
Creditors Arrangement Act filings. As of December 31, 1999, $2.3 billion of
liabilities were subject to compromise.

The financial results of the Predecessor for the year ended December 31,
1998 include $649 million of pre-tax charges representing impairment of capital
assets and investments and accrual of contingent losses on investments.

The financial results of the Predecessor for the year ended December 31,
1997 include $89 million of pre-tax charges, representing certain restructuring,
strategic initiative and other charges.

ALDERWOODS PREDECESSOR
GROUP
-------------- -------------------------------------------------
AS OF AS OF DECEMBER 31
DECEMBER 31
-------------- -------------------------------------------------
2001 2000 (E) 1999 1998 1997
-------------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
(IN THOUSANDS)

BALANCE SHEET INFORMATION:
Total assets....................... $3,503,103 $3,878,044 $4,059,751 $4,709,654 $4,776,535
Liabilities subject to
compromise (b)................... -- 2,289,497 2,282,601 -- --
Total long-term debt (b)(c)........ 835,648 73,542 91,204 2,268,014 1,793,934
Preferred securities of
subsidiary (b)................... -- -- -- 75,000 75,000
Stockholders' equity............... 739,352 (662,768) 383,075 913,365 1,524,195

- ------------------------

(a) There are no material differences between basic and diluted earnings (loss)
per share. Historical earnings (loss) per share amounts are included herein,
as required by U.S. GAAP. However, the common stockholders of the
Predecessor received no equity in the Company upon reorganization.

(b) For the Predecessor, under-secured and unsecured debt obligations (including
the Monthly Income Preferred Securities, which are identified as "Preferred
securities of subsidiary") were reclassified to

12

liabilities subject to compromise as a result of the Chapter 11 and the
Creditors Arrangement Act filings.

(c) For the Predecessor, total long-term debt comprises long-term debt which is
not subject to compromise, including the current maturities of
long-term debt.

(d) The 2001, 2000, 1999 and 1998 losses are not sufficient to cover fixed
charges by a total of approximately $59.2 million, $34.9 million,
$576.7 million and $774.2 million, respectively, and as such the ratio of
earnings to fixed charges has not been computed. The 2001, 2000 and 1999
fixed charges exclude certain contractual interest charges on liabilities
subject to compromise. On a pro forma basis, after giving effect to interest
that would have been incurred on the Company's debt established upon
emergence on the Effective Date, 2001 losses would be insufficient to cover
fixed charges by $134.2 million.

(e) As explained in Note 3 to the Predecessor's Consolidated Financial
Statements, certain financial information has been restated.

13

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF ALDERWOODS GROUP

LIQUIDITY AND CAPITAL RESOURCES AND EFFECT OF EMERGENCE ON FUTURE OPERATIONS

Pursuant to the Plan, the Company issued, among other things, debt
securities for the discharge of a substantial portion of the Debtors'
liabilities subject to compromise, and approximately $45 million of the Debtors'
indebtedness was reinstated. Pursuant to the Plan, the Company issued the
following debt securities:

(a) Five-Year Secured Notes in an aggregate principal amount of
$250 million bearing interest at 11% per annum and due in 2007;

(b) Two-Year Unsecured Notes in an aggregate principal amount of
$49.5 million bearing interest at 12 1/4% per annum and due in 2004;

(c) Seven-Year Unsecured Notes in an aggregate principal amount of
$330 million bearing interest at 12 1/4% per annum and due in 2009; and

(d) Convertible Subordinated Notes in an aggregate principal amount of
$24.7 million bearing interest at 12 1/4% per annum and due in 2012. The
carrying amount of $33.7 million includes a fair value premium of
$9.0 million. The Convertible Subordinated Notes are convertible at any
time into the Company's Common Stock at an initial conversion rate of
$17.17 per share.

As a result of the implementation of the Plan, the Company owns all of the
outstanding capital stock of Rose Hills. As of December 31, 2001, Rose Hills
Company had outstanding $61.6 million under a bank term facility, which matures
on November 1, 2003, and $76.8 million (net of $3.2 million fair value discount)
of outstanding 9 1/2% Senior Subordinated Notes due 2004.

The Company's carrying and principal amounts of long-term indebtedness as of
December 31, 2001, are as follows:

LONG-TERM INDEBTEDNESS

As a condition to the effectiveness of the Plan, the Company entered into
the Exit Financing Revolving Credit Facility. The Exit Financing Revolving
Credit Facility has a maximum availability of the lesser of $75 million or an
amount (determined pursuant to a borrowing base calculation) equal to the sum of
(a) 80% of eligible accounts receivable plus (b) the lesser of (i) 50% of the
value of eligible inventory and (ii) $15 million plus (c) the lesser of (i) 25%
of the book value of real property on which the collateral agent for the exit
lenders has a first priority mortgage and (ii) $40 million less (d) a reserve
against borrowing availability set by the agent for the exit lenders. Up to
$35 million of the Exit Financing Revolving Credit Facility is available in the
form of letters of credit. Borrowings under the Exit Financing Revolving Credit
Facility initially bear interest at a rate per annum equal to the Chase Bank
Rate plus 1%

14

or, at the Company's option, LIBOR plus 2.5%. The Exit Financing Revolving
Credit Facility expires on January 2, 2003. There were no borrowings under the
Exit Financing Revolving Credit Facility as at the Effective Date, other than
letters of credit in the aggregate amount of $15.1 million. At the Effective
Date, the Company could not borrow under the Exit Financing Revolving Credit
Facility until security was put in place on certain real property, an initial
borrowing base was calculated, and certain existing liens were removed. As of
March 25, 2002, the remaining conditions had been removed and the Company could
borrow approximately $72.9 million under the Exit Financing Revolving Credit
Facility, less $15.1 million in outstanding letters of credit.

The Exit Financing Revolving Credit Facility, 11% Senior secured notes,
12.25% Senior unsecured notes due in 2004, and 12.25% Senior unsecured notes due
in 2009, are guaranteed by substantially all of Alderwoods Group's wholly-owned
U.S. subsidiaries, other than Rose Hills, Alderwoods Group's insurance
subsidiaries and certain other excluded subsidiaries. Alderwoods Group, the
parent company, has no independent assets or operations, and the guarantees of
its guarantor subsidiaries are full and unconditional, and joint and several.
There are no cross-guarantees of debt between the Company and Rose Hills.

As a result of the implementation of the Plan, a $163.6 million cash
distribution was made to certain of the Predecessor's creditors, resulting in
$101.6 million of cash in the Company at emergence. Included in accrued
liabilities of the Company are approximately $77.6 million to be paid out in
2002 associated with claims not subject to compromise and accrued
reorganization costs.

The Company expects to extinguish the $49.5 million 12.25% Senior unsecured
notes due in 2004 by June 30, 2002, from available cash resources.

Although the Company will continue to be substantially leveraged, the
Company believes that the Exit Financing Revolving Credit Facility, together
with existing cash and cash flow from operations, will be sufficient to meet the
Company's anticipated capital expenditures and working capital requirements
through at least December 31, 2002, including payment obligations under the
indebtedness described above.

DISPOSITIONS

At December 31, 2001, the Company had 25 funeral homes and 53 cemeteries
under signed agreements for sale, with expected proceeds of approximately
$12.1 million.

RESTRICTIONS

The Company will be required to apply net proceeds from the sale of
specified properties to the redemption of the Two-Year Unsecured Notes, pursuant
to procedures set forth in the indenture governing the Two-Year Unsecured Notes.
Furthermore, the indentures governing the Five-Year Secured Notes, the
Seven-Year Unsecured Notes and the Convertible Subordinated Notes will prohibit
the Company from consummating certain asset sales unless (a) consideration at
least equal to fair market value is received and (b) except with respect to
specified assets, not less than 75% of the consideration for the asset sale is
paid in cash. Within 270 days of the receipt of net proceeds from any such asset
sale, the Company will be obligated to apply such net proceeds at its option (or
as otherwise required) as follows: (a) with respect to asset sales of specified
properties, to pay the Two-Year Unsecured Notes; and (b) with respect to all
other such asset sales, (i) to pay the Exit Financing Revolving Credit Facility
and permanently reduce commitments with respect thereto, or the Two-Year
Unsecured Notes, or (ii) to make capital expenditures or acquisitions of other
assets in the same line of business as the Company or certain of its
subsidiaries or businesses related thereto. To the extent the Company receives
net proceeds from any such asset sale not applied in accordance with the
immediately preceding sentence in excess of certain thresholds, the Company must
offer to purchase Five-Year Secured Notes, Seven-Year Unsecured Notes or
Convertible Subordinated Notes (in that order) with such excess proceeds.

The Company's insurance subsidiaries are subject to certain state
regulations that restrict distributions, loans and advances from such
subsidiaries to the Company and its other subsidiaries.

15

ANTICIPATED EFFECTS OF DISPOSITIONS AND CONSUMMATION OF THE PLAN

The Predecessor's recent disposition program, and certain transactions
consummated pursuant to the Plan, are anticipated to have significant impacts on
the Company's operating results and liquidity, compared to the Predecessor's
historical operating performance and liquidity. The following highlights the
anticipated effects that such transactions might have:

- The disposition program during 2000 resulted in the sale of 101 funeral
homes and 33 cemeteries. The operations at these locations had revenue and
gross margin of approximately $24.8 million and $3.0 million respectively,
during 2000. The disposition program during 2001 resulted in the sale of
124 funeral homes and 119 cemeteries. The operations of these locations
had revenue and gross margin for the year ended December 31, 2001 of
approximately $43.9 million and $(4.1) million, respectively. Operations
at locations disposed of in the first two months of 2002 had revenue and
gross margin for the year ended December 31, 2001 of approximately $2.4
and $(0.7), respectively.

- Annual interest expense in 2002 for the Company's long-term indebtedness
is estimated to be approximately $88.0 million based on existing terms and
balances as of December 31, 2001 (see "-- Liquidity and Capital Resources
and Effect of Emergence on Future Operations").

- The acquisition of Rose Hills is expected to increase annual revenues and
gross margin. Rose Hills had revenue and gross margin for the year ended
December 31, 2001, of approximately $77.2 million and $18.5 million,
respectively.

- Cash flow and liquidity will be further impacted by the scheduled
principal payments on long-term indebtedness, as well as certain
restrictions pursuant to such debt, as further described under
"-- Restrictions." As of December 31, 2001, the Company's total carrying
amount of long-term indebtedness (including the current portion thereof)
is $835.6 million, and the total principal amount of the Company's
indebtedness is $829.8 (including the current portion thereof). The annual
maturities of such indebtedness over the next five years, are as follows:

- As a result of the application of fresh start reporting on the Effective
Date, the Company's gross margins on pre-need contracts entered into after
the Effective Date, will be significantly higher than gross margins on
similar contracts entered into prior to the emergence.

CRITICAL ACCOUNTING POLICIES

FRESH START REPORTING

The following methods and assumptions were used to estimate the fair value
of significant assets and liabilities at December 31, 2001:

Cash and cash equivalents, receivables, inventories, other current assets,
and accounts payable and accrued liabilities: The carrying amounts, which
reflect provisions for uncollectible amounts and for inventory obsolescence,
approximate fair value because of the short term to maturity of these
current assets and liabilities.

Pre-need funeral and cemetery contracts: For funeral and cemetery customer
receivables, the fair value was determined as the present value of expected
future cash flows discounted at the interest rate currently offered by the
Company, which approximates market rates for loans of similar terms to
customers with comparable credit risk. For amounts receivable from funeral
and cemetery trusts, the fair value is based on quoted market prices of the
underlying investments. Amounts receivable from third-party insurance
companies are based on the face value of the policy plus accumulated annual

16

insurance benefits. Pre-need funeral and cemetery contracts are recorded net
of allowances for expected cancellations and refunds.

Cemetery property: For developed land and undeveloped land, the fair value
was estimated by discounting cash flows from the expected future sales of
cemetery land, reduced by a reasonable profit margin. A maximum term of
30 years was assumed in determining projected sales revenue. Portions of the
Company's cemetery land are situated in areas that cannot be developed due
to geographic or regulatory restrictions. Such cemetery land, together with
portions of land that are not required for sales during the next 30 years
and for which the Company has no current plan to sell, were assigned a fair
value of zero. For mausoleums and lawn crypts, the fair value was based on
the replacement cost for similar inventory. It is possible that the
Company's future operations in the near term may result in recoveries on
excess land sales that are different than those assumed in the estimates.

Insurance invested assets and insurance policy liabilities: The fair value
of insurance invested assets was based on quoted market prices. The fair
value of insurance policy liabilities was based on 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. Insurance policy liabilities were computed using the net
level premium method, which involves interest assumptions, and withdrawal,
mortality and morbidity assumptions as of the Effective Date.

Long-term debt: The fair value of the Company's long-term debt was estimated
by discounting the future cash flows of each instrument at rates for similar
debt instruments of comparable maturities.

Deferred pre-need funeral and cemetery contract revenue: The fair value of
deferred funeral and cemetery contract revenue was based on the larger of,
as applicable, (i) the amount refundable to the customer, if the contract
was written in a jurisdiction requiring refunds upon request by the customer
or upon cancellation for non-payment; (ii) the current amount of an
insurance policy representing the face value and accumulated annual
insurance benefits; or (iii) the present value of the projected future cost
to outsource the fulfillment of the pre-need obligation, based on the
estimated current outsourcing cost and mortality, inflation and interest
rate assumptions. It is possible deferred pre-need funeral and cemetery
contract revenue could change materially in the near term as a result of
actual servicing and cancellation experience.

SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies have been adopted by the
Company and will be applied prospectively upon its emergence as of
December 31, 2001:

FUNERAL OPERATIONS

Sales of at-need funeral services are recorded as revenue when the service
is performed.

Pre-need 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 is designated as
beneficiary. Pre-need funeral services contract amounts, together with related
trust fund investment earnings 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.

Selling costs related to the sale of pre-need funeral services are expensed
in the period incurred.

CEMETERY OPERATIONS

Sales of cemetery merchandise and services and at-need cemetery interment
rights are recorded as revenue when the merchandise is delivered or service is
performed.

Sales of pre-need cemetery interment rights are recognized in accordance
with the retail land sales provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, provided
certain collectibility criteria are met, pre-need cemetery interment right sales
of

17

developed cemetery property are deferred until a minimum percentage of the sales
price has been collected, while pre-need cemetery interment right sales of
undeveloped cemetery property are deferred until the cemetery property is
developed and a minimum percentage of the sales price has been collected. A
portion of the proceeds from cemetery sales for interment rights is generally
required by law to be paid into perpetual or endowment care trusts. Earnings of
perpetual or endowment care trusts are recognized in current cemetery revenue
and are used to defray the maintenance costs of cemeteries, which are expensed
as incurred. The principal of these perpetual or endowment care trusts cannot be
withdrawn by the Company, and therefore is not included in the Company's
consolidated balance sheet.

Pursuant to various state and provincial laws, a portion of the proceeds
from the sale of pre-need merchandise and services may also be required to be
paid into trusts, which are included in pre-need cemetery contracts in the
Company's consolidated balance sheet. Earnings on merchandise and services trust
funds are recognized when the revenue of the associated merchandise or service
is recognized.

Selling costs related to the sale of pre-need cemetery contract revenues are
expensed in the period incurred.

Interest is imputed at a market rate for pre-need cemetery contracts that do
not bear a market rate of interest.

INSURANCE OPERATIONS

For traditional life and participating life products, premiums are
recognized as revenue when due from policyholders. Benefits and expenses are
associated with earned premiums to result in recognition of profits over the
life of the policy contracts. This association is accomplished by means of the
provision for liabilities for future policy benefits and the amortization of
deferred policy acquisition costs.

Revenues from annuity contracts represent amounts assessed against contract
holders. Such assessments are principally surrender charges. Policy account
balances for annuities represent the deposits received plus accumulated interest
less applicable accumulated administrative fees.

Investment income, net of investment expenses, and realized gains and losses
related to insurance invested assets are included within revenues.

To the extent recoverable, certain costs of acquiring new insurance business
have been deferred. Such costs consist of first-year commissions in excess of
renewal rates, related fringe benefit costs, and direct underwriting and
issuance costs.

The deferred policy acquisition costs on traditional life products are
amortized with interest over the anticipated premium-paying period of the
related policies, in proportion to the ratio of annual premium revenue to be
received over the life of the policies. Expected premium revenue is estimated by
using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy
acquisition costs is reduced by a provision for possible inflation on
maintenance and settlement expenses.

Also, the present value of future profits of acquired insurance business in
force is amortized over the expected premium-paying period of the policies
acquired.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided against deferred tax assets to
the extent recoverability of the asset cannot be considered to be more likely
than not.

18

In accordance with the principles of fresh start reporting, any future
reduction of valuation allowances established at the Effective Date will reduce
goodwill or, if goodwill has been reduced to zero, increase capital in excess of
par value.

FRESH START REPORTING

The Company has adopted fresh start reporting in accordance with AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." The Predecessor's balance sheet, the effects of the
debt discharge, the effects of fresh start reporting and other adjustments, the
acquisition of Rose Hills and resulting fresh start balance sheet of the Company
at December 31, 2001, are presented below.

- ------------------------------

(a) Reflects the payment at emergence of (i) payments pursuant to the Plan; and
(ii) payments of administrative and convenience claims. Such amounts include
amounts placed on deposit with a disbursement agent for distribution
to creditors.

19

(b) Reflects the distribution of a combination of cash, new debt, Warrants and
Common Stock pursuant to the Plan in respect of certain claims.

(c) Reflects the write off of the excess of cost over the net assets acquired in
previous acquisitions and adjustments of the Predecessor's identifiable
assets to fair value in accordance with fresh start reporting.

(d) Reflects the consolidation of Rose Hills as a result of its acquisition by
the Company in satisfaction of certain administrative claims pursuant to
the Plan.

(e) Reflects the reorganization value in excess of amounts allocable to
identifiable assets in accordance with fresh start reporting.

(f) Reflects in the fresh start and other adjustments, the adoption of
accounting policies and presentation adopted by the Company, which affected
certain assets and liabilities approximately as follows: pre-need funeral
contracts $490 million and deferred pre-need funeral contract revenue
$500 million; cemetery property $23 million and deferred pre-need cemetery
contract revenue $108 million.

(g) Reflects the establishment of Alderwoods Group's stockholders' equity based
on the value of Common Stock and Warrants issued pursuant to the Plan.

20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PREDECESSOR

FINANCIAL CONDITION

PREPETITION FINANCIAL RESULTS AND OVERLEVERAGE

Between January 1, 1998 and the Petition Date, Loewen Group experienced
disappointing financial results. Loewen Group reported a loss from operations in
1998 of $260 million after recording a charge for asset impairment of $334
million. Loewen Group's acquisition, integration and operation of cemeteries
over the three years preceding the Petition Date required significant cash
resources on account of pre-need sales of cemetery interment rights, products
and services and related interest costs on debt incurred. Cemetery pre-need
sales typically were structured with low initial cash payments by the customers
that did not offset the cash costs of establishing and supporting a growing
pre-need sales program, including the payment of sales commissions.

Loewen Group's financial difficulties primarily stemmed from a highly
burdensome debt load, much of which was incurred in connection with its
historical acquisition program, and the poor cash flow characteristics
associated with its then-existing cemetery pre-need sales strategy. As of
March 31, 1999, Loewen Group's consolidated balance sheet reflected
approximately $2.1 billion of long-term debt (of which approximately
$742.2 million was due currently) and approximately $48.8 million of other
current debt. The deterioration of Loewen Group's financial health was also
caused by the $175 million settlement of the O'KEEFE litigation in 1996, which
affected its immediate and future liquidity, and resulted in unfavorable
publicity that negatively affected its operating results and ability to maintain
its long-term acquisition strategy (see "Item 1. Business").

BASIS OF PRESENTATION

Alderwoods Group succeeded to substantially all of the assets and operations
of Loewen Group on the Effective Date, and continues to operate the businesses
previously conducted by the Loewen Companies. For financial reporting purposes,
the effective date of the reorganization was December 31, 2001, because
U.S. GAAP requires that the financial statements reflect fresh start reporting
as of the confirmation date or as of a later date when all material conditions
precedent to the Plan becoming binding are resolved.

Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this annual Form 10-K. However, due to the significant changes
in the financial structure of the Company, the application of "fresh start"
reporting as explained in Note 2 to the Company's Consolidated Balance Sheet as
at December 31, 2001, and as a result of the confirmation and implementation of
the Plan and changes in accounting policies adopted by the Company, the
consolidated financial and other information of the Company issued subsequent to
the Plan implementation are not comparable with the consolidated financial
information and other information issued by the Predecessor prior to the Plan
implementation. Accordingly, management's discussion and analysis of financial
condition and results of operations of the Predecessor should be reviewed with
caution, and should not be relied upon as being indicative of future results of
the Company or providing an accurate comparison of financial performance.

The Company's accounting information contained in this Form 10-K is
presented on the basis of U.S. GAAP. Historically, the Predecessor's
consolidated financial statements were presented in accordance with Canadian
GAAP, and material differences between Canadian GAAP and U.S. GAAP were
explained in a note to the Predecessor's consolidated financial statements. In
addition, the Predecessor had not previously fully implemented SAB 101, as a
result of the Predecessor's ongoing reorganization proceedings. The
Predecessor's historical financial information and the consolidated financial
statements included in this Form 10-K have been restated to the full extent
necessary to comply with U.S. GAAP and the implementation of SAB 101, effective
January 1, 2000.

21

This discussion and analysis of financial condition and results of
operations of the Company and the Predecessor are based upon and should be read
in conjunction with the Company's Consolidated Balance Sheet and the
Predecessor's Consolidated Financial Statements included in Item 8 of this
Form 10-K (including the notes thereto).

RESULTS OF OPERATIONS

Detailed below are the operating results of the Predecessor for the years
ended December 31, 2001, 2000 and 1999, expressed in dollar amounts as well as
relevant percentages. The operating results are presented as a percentage of
revenue.

The operations of the Predecessor comprised three businesses: funeral homes,
cemeteries and insurance. Additional segment information is provided in Note 15
to the Predecessor's Consolidated Financial Statements.

22

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

Consolidated revenue decreased 9.8% to $836.4 million for the year ended
December 31, 2001, from $927.7 million in 2000. This was primarily due to
decreases in cemetery and funeral revenue as described below. Consolidated gross
margin decreased by 30.8%, to $181.2 million for the year ended December 31,
2001, from $262.0 million in 2000, primarily due to the decline in cemetery and
funeral revenue, though costs, as a percentage of revenue, increased for the
funeral and cemetery operations. As a percentage of revenue, consolidated gross
margin decreased to 21.7% for the year ended December 31, 2001, from 28.2% in
2000.

Funeral revenue decreased $54.8 million, or 9.5%, to $522.1 million for the
year ended December 31, 2001, from $576.9 million in 2000, primarily due to
location dispositions, fewer funeral services, and partly, the Predecessor's
management ("Predecessor Management") believed, attributable to consumer
concerns caused by the reorganization proceedings. Of the $54.8 million revenue
decline, approximately $48 million was due to the locations sold during 2000 and
2001. At locations in operation throughout the years ended December 31, 2001 and
2000, funeral revenue declined approximately $7 million, or 1.3%, to
approximately $505 million, compared to approximately $512 million in 2000, due
primarily to a 1.1% decline in the number of funeral services performed.

The Predecessor's pre-need funeral contracts written decreased to
approximately $108 million in 2001 from approximately $119 million in 2000.
Locations sold in 2001 had written $5 million of pre-need funeral contracts. The
Predecessor estimated that it had a backlog of approximately $1.1 billion in
pre-need funeral contracts as of December 31, 2001. At January 1, 2000, when the
Predecessor implemented SAB 101, approximately $92 million was recorded on the
balance sheet as deferred revenue, representing amounts received but not
required to be placed in trust, and interest earnings on amounts in trust, which
had previously been recognized in revenue. During 2001, the Predecessor
recognized approximately $4.4 million of this amount in funeral revenue.
Pre-need funeral services comprised approximately 22% of the annual funeral
services performed by the Predecessor in 2001 and 2000.

Overall funeral gross margin, as a percentage of funeral revenue, decreased
to 26.5% for the year ended December 31, 2001, from 29.9% in 2000, principally
as a result of lower revenues and higher fixed costs at locations not sold.

Cemetery revenue decreased $53.1 million, or 20.2%, to $210.1 million for
the year ended December 31, 2001, from $263.2 million in 2000, as at-need
revenue, pre-need revenue and finance income declined, primarily due to location
dispositions, as well as, Predecessor Management believed, consumer concerns
caused by the reorganization proceedings. Of the $53.1 million revenue decline,
approximately $44 million was due to locations sold during 2000 and 2001, of
which the main components were approximately $11 million at-need revenue and
$28 million pre-need revenue. At locations in operation throughout the years
ended December 31, 2001 and 2000, revenue declined approximately $9 million,
primarily due to lower at-need revenue of approximately $4 million from plot
sales and a decline in finance income of approximately $5 million due to fewer
customer receivables and recent pre-need contracts being written with shorter
contract terms and higher down payments. Though improving cash flow, the shorter
contract terms and larger down payments, as well as the impacts of a lower
number of pre-need cemetery contracts written, negatively impacted finance
income, down approximately $8 million in the year ended December 31, 2001,
compared to 2000.

Pre-need cemetery contracts written during the year ended December 31, 2001
were approximately $69 million, a decrease of approximately $25 million, or
26.6%, compared to 2000, of which approximately $12 million was attributable to
locations sold. The remaining decline in new pre-need contracts written of
approximately $13 million was primarily due to the Predecessor's changes in
pre-need sales practices, including continued refinements of contract terms,
which were less attractive to the customer, but generated significantly better
cash flow to the Predecessor.

Overall cemetery gross margin, as a percentage of cemetery revenue,
decreased to 14.8% for the year ended December 31, 2001, from 31.9% in 2000,
primarily due to the large declines in at-need and pre-need

23

revenue and finance income. As well, higher wage and other fixed costs at
locations not sold and the fixed nature of other cemetery expenses, contributed
to expense reductions that were not commensurate with the revenue declines
experienced.

Insurance revenue increased 19.0% to $104.2 million for the year ended
December 31, 2001, from $87.6 million in 2000. Overall insurance gross margin as
a percentage of insurance revenue increased to 11.2% for the year ended
December 31, 2001, from 6.5% in 2000, primarily due to higher premium revenue,
lower realized investment losses and litigation costs, partially offset by
increased benefits and claims costs.

General and administrative expenses increased to $75.7 million for the year
ended December 31, 2001, from $70.6 million in 2000. The increase in general and
administrative expenses for the year ended December 31, 2001, was primarily due
to costs associated with the continued implementation of a new cemetery contract
management system. General and administrative expenses, as a percentage of
revenue, increased to 9.1% for the year ended December 31, 2001, from 7.6% in
2000, primarily due to the effects of the revenue decline.

Depreciation and amortization expenses remained constant at $57.0 million
for the year ended December 31, 2001 and 2000. As a percentage of revenue,
depreciation and amortization expense increased slightly to 6.8% for the year
ended December 31, 2001, from 6.1% in 2000, primarily due to the effects of the
revenue decline.

For the year ended December 31, 2001, the Predecessor recorded a pre-tax
asset impairment of long-lived assets of $180.7 million, primarily due to
additional locations sold, as well as from revised estimates of expected cash
flows for the long-lived assets of locations expected to be sold. For the year
ended December 31, 2000, the $116.9 million pre-tax asset impairment of
long-lived assets resulted from the Predecessor revising its estimates of
expected cash flows for the long-lived assets of locations expected to be sold.
Gains on sales of locations were $173.3 million in 2001 and $5.6 million in
2000, representing primarily the gain realized at the time of disposition on
deferred pre-need funeral and cemetery contracts.

Interest expense on long-term debt decreased by $1.4 million to $11.0
million for the year ended December 31, 2001, from $12.4 million in 2000. The
decrease was primarily due to the reduction in interest and related fees
associated with the debtors-in-possession revolving credit agreement that
expired on June 30, 2001, as well as the continuing reduction in long-term debt
not subject to compromise. Contractual interest expense not recorded on certain
pre-Petition Date debt obligations amounted to $132.5 million and $153.9 million
for the years ended December 31, 2001 and 2000, respectively.

Reorganization costs increased to $87.2 million for the year ended
December 31, 2001, from $45.9 million in 2000. These costs, before offsetting
interest income of $8.3 million (2000 -- $4.7 million), primarily consisted of
$75.5 million for professional fees for legal, accounting and consulting
services provided to the Debtors and the statutory committee of unsecured
creditors appointed by the U.S. Trustee for the District of Delaware, in
connection with the Debtors' reorganization under Chapter 11 and the Creditors
Arrangement Act, $15.0 million for the Predecessor's Key Employee Retention Plan
and $5.0 million for executory contracts submitted for rejection. The increase
of approximately $41.3 million is primarily due to costs incurred in connection
with the Predecessor's actual emergence from Chapter 11 and the Creditors
Arrangement Act, and various activities related thereto. Total reorganization
costs since the Petition Date applicable to the Debtors' reorganization amounted
to $225.9 million as at December 31, 2001. The Company expects to pay during
2002, approximately $57.1 million of reorganization costs, which were accrued at
December 31, 2001.

Income taxes for the year ended December 31, 2001 were $28.0 million,
compared to income tax of $22.5 million in 2000. The Predecessor's tax rate for
the years ended December 31, 2001 and 2000 varied from the statutory tax rate
because tax benefits generated by the Predecessor's losses were largely offset
by a resultant increase in the valuation allowance against the Predecessor's
deferred tax assets. In addition, a substantial portion of goodwill amortization
and reorganization costs are not deductible for tax purposes and losses incurred
in certain jurisdictions may not offset the tax expense in profitable
jurisdictions. Future

24

income and losses, and the disposition of certain locations, may require the
Company to record a change in the valuation allowance of tax assets that were
taken into account in determining the net amount of liability for deferred
income taxes recorded on its balance sheet at December 31, 2001. If this occurs,
any resulting increase in the valuation allowance would generally be treated as
an additional income tax expense in the period in which it arises, while any
resulting decrease in the valuation allowance established on the Effective Date
would be treated as a reduction of goodwill with any excess over the value
assigned to goodwill recognized as a capital transaction.

The Predecessor recorded an extraordinary gain on debt discharge of
$959.0 million and fresh start valuation adjustments of $228.1 million for the
year ended December 31, 2001, as a result of its emergence from reorganization
proceedings and the application of fresh start reporting. Additionally, for the
year ended December 31, 2000, the Predecessor recorded a charge for the
cumulative effect of accounting change of $986.8 million (net of income taxes of
$108.7 million) as a result of the implementation of SAB 101 effective
January 1, 2000. The cumulative effect of accounting change resulted primarily
from the deferral of $894.1 million of merchandise and services revenue,
including related trust income, $258.5 million of cemetery interment rights
revenue and other miscellaneous cemetery deferrals of $17.7 million, reduced by
$54.8 million reserve for cancellations. The amounts were offset by the reversal
of related merchandise and service costs of sales of $180.0 million and
interment rights costs of sales of $40.1 million. In addition, pre-need funeral
revenue of $92.0 million was deferred and previously deferred direct obtaining
costs of $108.1 million were written off.

The Predecessor's statement of cash flows for the year ended December 31,
2001, reflects cash provided from operations of $68.7 million, compared to
$147.8 million in 2000. The decrease in cash of $159.1 million for the year
ended December 31, 2001, was primarily due to the distribution of
$163.6 million in respect of claims against the Debtors, as well as the
distribution of $93.9 million to Alderwoods Group, as a result of the
implementation of the Plan on the Effective Date.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Effective January 1, 2000, the Predecessor changed its accounting policy for
pre-need sales to conform to the guidance promulgated by SAB 101. However,
pro forma 1999 pre-need revenue could not be determined, as it was impractical
to calculate such amounts because, among other things, the Predecessor no longer
had access to the information necessary to determine the effect of such
adjustments on disposed locations. This change did not materially affect
reported funeral revenue, however, cemetery pre-need revenue was significantly
affected.

Consolidated revenue decreased 9.2% to $927.7 million for the year ended
December 31, 2000 from $1.0 billion in 1999. This was primarily due to decreases
in cemetery and funeral revenue as described below. Consolidated gross margin
increased by 1.4% to $262.0 million in 2000 from $258.5 million in 1999,
primarily due to the decline in cemetery costs, which more than offset revenue
declines in all operations. As a percentage of revenue, consolidated gross
margin increased to 28.2% in 2000 compared to 25.3% in 1999.

Funeral revenue decreased $28.1 million, or 4.6%, to $576.9 million for the
year ended December 31, 2000, from $605.0 million in 1999, primarily due to
location dispositions, fewer funeral services, and partly, Predecessor
Management believed, attributable to consumer concerns caused by the
reorganization proceedings. Of the $28.1 million revenue decline, approximately
$8 million was due to the locations sold during 2000. At locations in operation
throughout the years ended December 31, 2000 and 1999, funeral revenue declined
approximately $20 million, or 3.6%, to approximately $549 million, compared to
approximately $569 million in 1999, due primarily to a 3.0% decline in the
number of funeral services performed.

The Predecessor's pre-need funeral contracts written decreased to
approximately $119 million in 2000 from approximately $168 million in 1999.
Dispositions of funeral homes in 2000 and 1999 as well as changes to the sales
commission structure intended to enhance the Predecessor's cash flow contributed
to

25

the decline in the generation of pre-need funeral contracts. The Predecessor
estimated that it had a backlog of approximately $1.2 billion in pre-need
funeral contracts as of December 31, 2000. At January 1, 2000, when the
Predecessor implemented SAB 101, approximately $92 million was recorded
representing amounts received but not required to be placed in trust, and
interest earnings on amounts in trust, which had previously been recognized in
revenue. During 2000, the Predecessor recognized approximately $6.1 million of
this amount in funeral revenue. Pre-need funeral services comprised
approximately 22% of the annual funeral services performed by the Predecessor in
2000 and 23% in 1999.

Overall funeral gross margin, as a percentage of funeral revenue, decreased
to 29.9% for the year ended December 31, 2000, from 31.6% in 1999, principally
as a result of lower revenues and higher fixed costs at locations not sold, and
a less than commensurate reduction in location operating costs.

Cemetery revenue decreased $60.8 million, or 18.8%, to $263.2 million for
the year ended December 31, 2000, from $324.0 million in 1999. The at-need
cemetery revenue for 2000 decreased approximately $16 million, or 16%, to
approximately $85 million for the year ended December 31, 2000, from
approximately $101 million in 1999. Of the decline of $16 million, approximately
$7 million was due to locations sold during 2000. Pre-need cemetery revenue
declined $38 million in 2000, however as noted, due to the change in accounting
policy for pre-need revenue, the pre-need revenue is not comparable between 2000
and 1999.

Pre-need cemetery contracts written during the year ended December 31, 2000,
were approximately $94 million, a decrease of approximately $107 million,
compared to 1999, of which approximately $30 million was attributable to
locations sold. The remaining decline in pre-need cemetery contracts written of
approximately $77 million was primarily due to the Predecessor's implemented
changes to contract terms and commission structures related to its pre-need
cemetery contracts. These changes resulted in a reduced sales force and number
of contracts written, as the contract terms were less attractive to the
customer, but generated significantly better cash flow to the Predecessor.
Though improving cash flow, the shorter contract terms and larger down payments,
as well as the impacts of a lower number of pre-need cemetery contracts written,
negatively impacted finance income, down approximately $9 million in the year
ended December 31, 2000, compared to 1999.

Overall cemetery gross margin, as a percentage of cemetery revenue,
increased to 31.9% for the year ended December 31, 2000, from 16.3% in 1999. As
noted above, as a result of implementing SAB 101 as of January 1, 2000, the
cemetery operating results for 2000 and 1999 are not comparable. However,
excluding the net SAB 101 adjustment of approximately $35 million in 2000, the
2000 cemetery gross margin would have been approximately 22%. On this basis, the
increase over the 1999 cemetery gross margin was primarily due to cost
reductions achieved and lower provision for accounts receivable cancellations,
due to improved pre-need contract terms, better collections, and fewer
delinquencies.

Insurance revenue decreased 5.0% to $87.6 million for 2000 from
$92.2 million in 1999. Overall insurance gross margin as a percentage of
insurance revenue decreased to 6.5% for 2000 from 15.6% in 1999, primarily due
to realized investment losses and a provision for litigation costs.

General and administrative expenses were reduced 22.4%, or $20.3 million, to
$70.6 million for the year ended December 31, 2000 from $90.9 million in 1999.
The decrease in general and administrative expenses for the year ended
December 31, 2000 was primarily due to the closure of the Trevose corporate
office in the second quarter of 1999, the termination of various strategic
initiatives subsequent to the Chapter 11 and the Creditors Arrangement Act
filings and the Predecessor's continuing program to operate more efficiently and
implement system improvements during 2000. General and administrative expenses,
as a percentage of revenue, decreased to 7.6% for the year ended December 31,
2000 from 8.9% in 1999, due to the reduction in costs, partially offset by the
effect of reduced revenues.

Depreciation and amortization expenses decreased to $57.0 million for the
year ended December 31, 2000 from $64.0 million in 1999, primarily due to
dispositions made in 2000 and 1999, and asset impairment provisions recorded in
2000 and 1999. As a percentage of revenue, depreciation was 6.1% for

26

the year ended December 31, 2000, a slight decrease from 6.3% in 1999, as the
decline in depreciation expense was partially offset by the effects of the
revenue decline.

The Predecessor recorded a pre-tax asset impairment of long-lived assets of
$116.9 million in 2000, as compared to $428.2 million in 1999, due to revised
estimates of expected cash flows for the long-lived assets of locations expected
to be sold. A gain on sale of locations of $5.6 million in 2000, represented
primarily the gain realized at the time of disposition on deferred pre-need
funeral and cemetery contracts. A loss of $1.1 million was recorded in 1999.

Interest expense on long-term debt decreased by $75.4 million to
$12.4 million for the year ended December 31, 2000, from $87.8 million in 1999.
The decrease was primarily a result of the suspension of post-Petition Date
interest expense and payments for under-secured and unsecured debt obligations
resulting from the Chapter 11 and Creditors Arrangement Act filings. Contractual
interest expense not recorded on certain pre-Petition Date debt obligations
amounted to $153.9 million and $94.9 million for the years ended December 31,
2000 and 1999, respectively.

Reorganization costs decreased to $45.9 million for the year ended
December 31, 2000, from $92.8 million in 1999. These costs, before offsetting
interest income of $4.7 million (1999 -- $0.6 million), primarily consisted of
$36.7 million for professional fees for legal, accounting and consulting
services provided to the Debtors and the Creditors' Committee in connection with
the Debtors' reorganization under Chapter 11 and the Creditors Arrangement Act,
$7.3 million for the Predecessor's Key Employee Retention Plan, and
$6.6 million for the write-off of costs associated with executory contracts
submitted for rejection by the Debtors. Total reorganization costs since the
Petition Date applicable to the Debtors' reorganization amounted to
$138.7 million as at December 31, 2000.

Income tax expense for the year ended December 31, 2000 was $22.5 million,
compared to an income tax benefit of $49.7 million in 1999. The Predecessor was
not able to realize a significant income tax benefit associated with the
provision for asset impairment and the reorganization costs recorded in the
years ended December 31, 2000 and 1999, because these items were generally not
deductible for tax purposes or realization of the associated deferred tax
benefits was not considered more likely than not. Future income and losses, and
the disposition of certain locations, may require the Predecessor or the Company
to record a change in the valuation allowance of tax assets that were taken into
account in determining the net amount of the liability for deferred income taxes
recorded on the balance sheet at December 31, 2000.

As a result of the implementation of SAB 101 effective January 1, 2000, the
Predecessor recorded a charge for the cumulative effect of accounting change of
$986.8 million (net of income taxes of $108.7 million) for the year ended
December 31, 2000.

The statement of cash flows for the year ended December 31, 2000 reflected
cash provided from operations of $147.8 million, compared to $33.1 million in
1999, primarily due to the suspension of interest on under-secured and unsecured
debt obligations for a full year, as a result of the Chapter 11 and the
Creditors Arrangement Act filings and the improved cash flow from cemetery
operations.

DISPOSITIONS

In December 1999, the Predecessor announced its intention to dispose of 201
funeral homes and 170 cemeteries in the United States that did not meet its
strategic objectives, based on geographic location or financial performance. In
January 2000, the Bankruptcy Court approved the Predecessor's disposition
process for the locations identified. In addition, other properties not in the
initial group were periodically disposed of after obtaining Bankruptcy Court
approval. During 2000, the Predecessor sold 101 funeral homes and 33 cemeteries
for net proceeds of $36.1 million. During the year ended December 31, 2001, the
Predecessor sold 124 funeral homes and 119 cemeteries for net proceeds of
$105.8 million.

27

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain 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 SEC, 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. The words "believe,"
"may," "will," "estimate," "continues," "anticipate," "intend," "expect" and
similar expressions identify these forward-looking statements. Certain events or
circumstances, including those described below under the caption "Risk Factors,"
could cause actual results to differ materially from those estimated, projected
or predicted. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

RISK FACTORS

In addition to other information in this Form 10-K, the following important
factors, among others, could cause future results to differ materially from
estimates, predictions or projections.

FUTURE REVENUES ARE UNCERTAIN

1. VOLUME, MIX AND MARGINS. Revenue is significantly affected by the
volume of services rendered and the mix and pricing of services and products
sold. Cemetery revenues are also significantly affected by the fulfillment of
previously sold pre-need cemetery contracts and the writing of pre-need cemetery
contracts for interment rights. Margins are affected by changes in revenue,
their related costs and the level of fixed costs in operating our funeral homes
and cemeteries. Further, revenue and margins may be affected by competitive
pricing strategies.

2. NUMBER OF PRE-NEED CONTRACTS WRITTEN IS DEPENDENT UPON AN ADEQUATE
SALESFORCE. The level of pre-need contracts written is dependent upon
maintaining an adequate salesforce. Accordingly, the future success of the
Company is dependent upon the Company's ability to attract, train and retain an
adequate number of salespeople.

3. TRUST INCOME IS SUBJECT TO MARKET CONDITIONS. Cemetery revenue is
impacted by the trust income on perpetual care trust funds which is recognized
when the trust income is earned. Trust income on funeral and cemetery
merchandise and service trust funds is deferred and revenue is recognized when
the underlying merchandise and service obligations are fulfilled. The level of
trust income is largely dependent on yields available in connection with the
investment of the balances held in such trust funds. Available yields may be
subject to significant fluctuations in response to conditions in the economy in
general.

4. THE DEATH RATE MAY DECREASE. The death rate in the United States
declined approximately 1% in 1997 and approximately 2% in 1998, reversing a
trend of an approximate 1% increase per year since 1980. However, for the
combined two-year period from 1998 to 2000, the death rate has declined by less
than 1%. Industry studies indicate that the average age of the population is
increasing. The financial results of the Company may be affected by any decline
in the death rate.

5. THE RATE OF CREMATION IS INCREASING. There is an increasing trend in
the United States toward cremation. According to industry studies, cremations
represented approximately 26% of the burials performed in the United States in
2000, as compared with approximately 10% in 1980, and this percentage has been
increasing by approximately 1% annually over the past five years. Compared to
traditional funeral services, cremations have historically generated similar
gross profit percentages but lower revenues. A substantial increase in the rate
of cremations performed by the Company could have a material adverse effect on
the results of operations of the Company.

28

6. DISPOSITIONS. Revenue is also affected by dispositions. The
Predecessor's recent dispositions of funeral and cemetery properties had a
significant and adverse impact on the Predecessor's revenue. The Company's
future revenue may be similarly affected.

THE COMPANY HAS SUBSTANTIAL DEBT

1. SUBSTANTIAL LEVERAGE WILL CONTINUE. The Company's total carrying value
of long-term indebtedness (including the current portion thereof) is
$835.6 million. While the Company believes that future operating cash flow,
together with financing arrangements, will be sufficient to finance operating
requirements under the Company's business plan, the Company's leverage and debt
service requirements could make it more vulnerable to economic downturns in the
markets the Company intends to serve or in the economy generally. The Company's
indebtedness could restrict its ability to obtain additional financing in the
future and, because the Company may be more leveraged than certain of its
competitors, could place the Company at a competitive disadvantage.

2. DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT LIQUIDITY
AND CORPORATE ACTIVITIES. The Exit Financing Facility and the indentures
governing the Five-Year Secured Notes, the Two-Year Unsecured Notes, the
Seven-Year Unsecured Notes, the Convertible Subordinated Notes and the Rose
Hills debt contain covenants that impose operating and financial restrictions on
the Company. For example, these covenants restrict the ability of Alderwoods
Group, and most of its subsidiaries, to incur additional indebtedness, prepay
indebtedness, allow liens on assets, sell stock or other assets without using
proceeds thereof to reduce the indebtedness of the Company, engage in mergers or
acquisitions, make investments or pay dividends or distributions (other than to
Alderwoods Group or certain of its subsidiaries). These covenants could prohibit
the Company from making acquisitions and adversely affect the Company's ability
to finance future operations by limiting the incurrence of additional
indebtedness or requiring equity issuance proceeds to be applied to reduce
indebtedness. In addition, the Company is required to achieve specified earnings
to fixed charges ratios and specified levels of tangible net worth. Adverse
operating results could cause the Company to be unable to achieve these
financial ratios and tests, in which event, unless the Company were able to
obtain appropriate waivers with respect to non-compliance, certain of the
Company's long-term debt would be in default and the holders thereof could
accelerate the maturities of such debt.

3. SUBSIDIARY STOCK IS SUBJECT TO SECURITY INTERESTS. The capital stock of
subsidiaries directly owned by Alderwoods Group or a subsidiary guarantor of the
Exit Financing Facility is subject to various liens and security interests,
subject to percentage limitations in the case of foreign subsidiaries. If a
holder of a security interest becomes entitled to exercise its rights as a
secured party, it would have the right to foreclose upon and sell or otherwise
transfer the collateral subject to its security interest, and the collateral
accordingly would be unavailable to Alderwoods Group or the subsidiary owning
the collateral, except to the extent, if any, that the value of the affected
collateral exceeds the amount of indebtedness in respect of which such
foreclosure rights are exercised.

4. THE SECURITY FOR THE FIVE-YEAR SECURED NOTES MAY NOT BE SUFFICIENT TO
SECURE PAYMENTS. The Company's obligations under the Five-Year Secured Notes
Indenture is secured by collateral which consists of (i) all personal property
(other than capital stock) and (ii) the material funeral home real property
assets pledged under the Exit Financing Revolving Credit Facility of the Company
and certain of its wholly owned subsidiaries. The rights of the holders of the
Five-Year Notes to this collateral will be subordinate to those of the lenders
under the Exit Financing Revolving Credit Facility. The proceeds from the sale
of this collateral may not be sufficient to satisfy amounts due on the Five-Year
Secured Notes.

If, upon a foreclosure on the collateral, the proceeds from the sale of such
collateral is insufficient to satisfy the entire amount due on the Five-Year
Secured Notes, the claim by the holders of the Five-Year Secured Notes against
the Company for this deficiency would rank equally with the claims of the other

29

general, unsubordinated creditors of the Company. The remaining assets of the
Company may not be sufficient to satisfy this deficiency.

5. CERTAIN DEBT IS EFFECTIVELY SUBORDINATED TO OBLIGATIONS OF
SUBSIDIARIES. The Company principally is a holding company, and therefore its
right to participate in any distribution of assets of any subsidiary upon that
subsidiary's dissolution, winding-up, liquidation or reorganization or otherwise
is subject to the prior claims of creditors of that subsidiary, except to the
extent that the Company may be a creditor of that subsidiary and its claims are
recognized. There are various legal limitations on the extent to which some of
the subsidiaries of the Company may extend credit, pay dividends or otherwise
supply funds to, or engage in transactions with, the Company or its other
subsidiaries. The Five-Year Secured Notes, the Two-Year Unsecured Notes, the
Seven-Year Unsecured Notes and the Convertible Subordinated Notes are
effectively subordinated to all indebtedness and other obligations of the
subsidiaries except to the extent that those subsidiaries have guaranteed that
obligations of the Company to pay amounts due on the Five-Year Secured Notes,
the Two-Year Unsecured Notes, the Seven-Year Unsecured Notes or the Convertible
Subordinated Notes, as applicable.

6. THERE IS NO ESTABLISHED MARKET FOR CERTAIN DEBT; VOLATILITY IS
POSSIBLE. No established market exists for the Five-Year Secured Notes, the
Two-Year Unsecured Notes, the Seven-Year Unsecured Notes and the Convertible
Subordinated Notes.

There can be no assurance that an active market therefor will develop or as
to the degree of price volatility in any such particular market. Accordingly, no
assurance can be given that a holder of the Five-Year Secured Notes, the
Two-Year Unsecured Notes, the Seven-Year Unsecured Notes or the Convertible
Subordinated Notes will be able to sell such securities in the future or as to
the price at which any such sale may occur. If such markets were to exist, the
Five-Year Secured Notes, the Two-Year Unsecured Notes, the Seven-Year Unsecured
Notes or the Convertible Subordinated Notes could trade at prices higher or
lower than the face amount thereof, depending on many factors, including
prevailing interest rates, markets for similar securities, industry conditions
and the performance of, and investor expectations for the Company.

THE TAX RATE IS UNCERTAIN

1. EFFECTIVE INCOME TAX RATE. The Company expects that its effective
income tax rate for 2002 and beyond may vary significantly from the statutory
tax rate because (i) the losses incurred in particular jurisdictions may not
reduce cash taxes in other jurisdictions, and (ii) there are differences between
foreign and U.S. income tax rates.

2. ONGOING TAX AUDIT COULD IMPACT PRIORITY TAX CLAIMS AND TAX
RATE. Although the Company does not presently anticipate that any material
payment will be made to the Internal Revenue Service on account of certain tax
claims given a priority status under the Bankruptcy Code, the Debtors' 1993
through 1998 tax years remain under audit by the Internal Revenue Service, and,
as a result, the Internal Revenue Service could assert additional claims against
the Debtors that could, if sustained, result in material adjustments to recorded
tax assets and liabilities.

CAPITAL STOCK: LACK OF ESTABLISHED MARKET AND DIVIDENDS NOT ANTICIPATED

1. THERE IS LIMITED TRADING HISTORY FOR THE COMMON STOCK AND THE WARRANTS;
VOLATILITY IS POSSIBLE. In January 2002 the Company's Common Stock and Warrants
commenced trading on Nasdaq. Due to the limited trading history of the Company's
Common Stock and Warrants, there can be no assurance that an active market for
the Common Stock and Warrants will develop or, if any such market does develop,
that it will continue to exist or as to the degree of price volatility in any
such market that does develop. Moreover, the Common Stock and Warrants were
issued pursuant to the Plan to holders of claims in several classes of
creditors, some of which may prefer to liquidate their investment rather than
hold it on a long-term basis. Accordingly, it is anticipated that the market for
the Common Stock and Warrants will be volatile, at least for an initial period
after the Effective Date. In addition, the market price of the Common Stock and

30

Warrants may be subject to significant fluctuations in response to numerous
factors, including variations in the Company's annual or quarterly financial
results or those of its competitors, changes by financial analysts in their
estimates of the future earnings of the Company, conditions in the economy in
general or in the funeral industry in particular or unfavorable publicity.
Additionally, there can be no assurance that the market value of the Common
Stock will exceed the exercise price of the Warrants at any time prior to their
expiration.

2. DIVIDENDS ARE NOT ANTICIPATED; PAYMENT OF DIVIDENDS IS SUBJECT TO
RESTRICTION. Alderwoods Group is not expected to pay any dividends on the
Common Stock in the foreseeable future. In addition, covenants in the respective
indentures governing the Five-Year Secured Notes, the Two-Year Unsecured Notes,
the Seven-Year Unsecured Notes and the Convertible Subordinated Notes and in the
Exit Financing Facility restrict the ability of Alderwoods Group to pay
dividends and may prohibit the payment of dividends and certain other payments.
Certain institutional investors may only invest in dividend-paying equity
securities or may operate under other restrictions that may prohibit or limit
their ability to invest in the Common Stock.

3. CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS AND RIGHTS PLAN HAVE
ANTI-TAKEOVER EFFECTS. Certain provisions of the certificate of incorporation
and bylaws, of Alderwoods Group, as well as the General Corporation Law of the
State of Delaware, may have the effect of delaying, deferring or preventing a
change in control of Alderwoods Group. Such provisions, including those
providing for the possible issuance of preferred stock of Alderwoods Group
without stockholder approval, regulating the nomination of directors and
eliminating stockholder action by written consent may make it more difficult for
other persons, without the approval of the Board of Directors (the "Board of
Alderwoods Group"), to make a tender offer or otherwise acquire substantial
amounts of the Common Stock or to launch other takeover attempts that a
stockholder might consider to be in such stockholder's best interest.
Additionally, the Company's short-term stockholder rights plan, which was
adopted by the Board of Alderwoods Group on March 6, 2002, and became effective
on March 26, 2002, may also delay, defer or prevent a change of control of
Alderwoods Group. Under the rights plan, each outstanding share of Common Stock
has one right attached that trades with the Common Stock. Absent prior action by
the Board of Alderwoods Group to redeem the rights or amend the rights plan,
upon the consummation of certain acquisition transactions, the rights would
entitle the holder thereof (other than the acquiror) to purchase shares of
Common Stock at a discounted price in a manner designed to result in substantial
dilution to the acquiror.

LIMITED COMPARABILITY TO PREDECESSOR

1. HISTORICAL FINANCIAL INFORMATION WILL NOT BE COMPARABLE. As a result of
the consummation of the Plan, Alderwoods Group operates the businesses
previously operated by the Loewen Companies under a new capital structure and
has adopted fresh start reporting. In addition, historically the financial
statements of the Predecessor have not consolidated the assets, liabilities and
results of operations of Rose Hills as will the financial statements of
Alderwoods Group, and in the future the consolidated financial statements of
Alderwoods Group will not reflect the assets, liabilities or results of
operations of properties that, as part of the program to dispose of
non-strategic assets, have been or will be sold or otherwise disposed of.
Furthermore, as a result of the application of fresh start reporting on the
Effective Date, the Company's gross margins on pre-need contracts entered into
after the Effective Date, will be significantly higher than gross margins on
similar contracts entered into prior to the Effective Date. Accordingly, the
financial condition and results of operations of Alderwoods Group from and after
the Effective Date will not be comparable to the financial condition or results
of operations reflected in the historical financial statements of the
Predecessor, including the consolidated financial statements of the Predecessor
included elsewhere in this Form 10-K.

31

OTHER RISK FACTORS

1. FEDERAL, STATE AND LOCAL REGULATIONS MAY CHANGE TO THE DETRIMENT OF
ALDERWOODS GROUP. The Company's operations are subject to regulation,
supervision and licensing under numerous federal, state and local laws,
ordinances and regulations, including extensive regulations concerning trust
funds, pre-need sales of funeral and cemetery products and services,
environmental matters and various other aspects of the business. The impact of
such regulations varies depending on the location of funeral homes and
cemeteries. From time to time, states and regulatory agencies have considered
and may enact additional legislation or regulations that could affect the
Company. For example, additional legislation or regulations requiring more
liberal refund and cancellation policies for pre-need sales of products and
services or prohibiting door-to-door or telephone solicitation of potential
customers could adversely impact sales, resulting in lower gross revenues.
Similarly, additional legislation or regulations increasing trust requirements
could reduce the amount of cash available to the Company for other purposes.
Additional legislation or regulations prohibiting the common ownership of
funeral homes and cemeteries in the same market could adversely impact both
sales and costs and expenses in the affected markets. If adopted in the states
in which the Company operates, additional legislation or regulations such as
these could have a material adverse effect on the results of operations of the
Company.

2. ALDERWOODS GROUP PRINCIPALLY IS A HOLDING COMPANY. Alderwoods Group
principally is a holding company, and therefore its right to participate in any
distribution of assets of any subsidiary upon that subsidiary's dissolution,
winding-up, liquidation or reorganization or otherwise is subject to the prior
claims of creditors of that subsidiary, except to the extent that Alderwoods
Group may be a creditor of that subsidiary and its claims are recognized. There
are various legal limitations on the extent to which some of the subsidiaries of
Alderwoods Group may extend credit, pay dividends or otherwise supply funds to,
or engage in transactions with, Alderwoods Group or its other subsidiaries.

3. OUTCOME OF NAFTA CLAIMS IS IMPOSSIBLE TO PREDICT. In October 1998,
Loewen Group filed the NAFTA Claims against the government of the United States
seeking damages under the arbitration provisions of NAFTA. Pursuant to the Plan,
Loewen Group, through a series of transactions, transferred to Loewen
International all of its assets, excluding only bare legal title to the NAFTA
Claims, and transferred to Loewen International the right to any and all
proceeds from the NAFTA Claims. In addition, pursuant to the Plan, an undivided
25% interest in the proceeds, if any, of the NAFTA Claims as such proceeds may
be adjusted as a result of the arbitration contemplated by the letter agreement
between Loewen Group and Raymond L. Loewen, dated May 27, 1999 (the "NAFTA
Arbitration Agreement"), less (a) any amounts payable under paragraph 3 of the
NAFTA Arbitration Agreement and (b) any amounts payable pursuant to the
contingency fee letter agreement between Jones, Day, Reavis & Pogue and Loewen
Group, dated July 25, 2000, was transferred to the Liquidating Trust. Although
the Company believes that these actions should not affect the NAFTA Claims, the
government of the United States, respondent in the NAFTA proceeding, has
asserted that these actions have divested the Arbitration Tribunal of
jurisdiction over some or all of the claims. The Company does not believe that
it is 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,
or the proceeds, if any, that may be received in respect of the NAFTA Claims.

4. IMPLEMENTATION OF NEW CEMETERY CONTRACT MANAGEMENT SYSTEM. Although
completed during 2001 for most locations, the Company will continue to finish
its implementation of the new cemetery contract management system for a few
remaining locations during 2002. The new cemetery contract management system
provides for the recording and tracking of individual items and their respective
deferred revenue fair values on cemetery contracts. In the December 31, 2001
Alderwoods Group balance sheet, due to certain locations not yet being
established on the new system, deferred revenue was partially estimated based on
a sample from the uncompleted locations. Management believes this process
provided a reasonable basis for such estimate. However, as the implementation is
completed during 2002, adjustments may be required to be made to the estimated
deferred revenue.

32

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's major market risk exposures are to changing interest rates and
currency exchange rates and to equity prices. The market risk exposure
discussion below provides information about market-sensitive financial
instruments and constitutes "forward-looking statements," which involve risks
and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.

The Company's exposure to interest rate fluctuations resides primarily in
the United States, and the Company's exposure to currency exchange rate
fluctuations resides primarily in investments in Canada and, to a lesser extent,
the United Kingdom, each of which is generally stable politically and
economically and is not highly inflationary. None of the Company's foreign net
assets are subject to significant translation risk. The Company has not entered
into any derivative instruments at December 31, 2001, that are intended to
manage foreign currency risk.

The Company intends to implement strategies to manage its mix of floating
and fixed rate debt through the use of derivatives, primarily in the form of
interest rate and currency swap transactions. No such instruments were in place
at December 31, 2001.

The Company's debt instrument sensitivity to floating interest rates is
based on the Company's floating rate debt being based in the United States.
Accordingly, changes in U.S. interest rates can affect the interest paid on the
Company's floating rate debt. To reduce the impact of fluctuations in
U.S. interest rates, the Company manages the proportion of fixed to floating
rates in the debt structure. Currently, the Company's total fixed rate debt is
$768.2 million, representing approximately 93% of total debt, and has a weighted
average rate of 11.43%. The Company's floating rate exposure of $61.6 million,
represents 7% of total debt and has a weighted average rate of approximately
4.9%. A one percent change in the applicable floating rate indices would cause
an approximately $0.6 million change in the Company's annual interest expense.

The Company's exposure to equity prices resides primarily in the United
States. The sale of pre-need funeral contracts, pre-need cemetery merchandise
and insurance products results 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 pre-need funeral trusts
and pre-need cemetery merchandise trusts do not result in significant current
income fluctuation, as the income is not realized until services are performed.
Investments of pre-need cemetery merchandise trusts and insurance invested
assets are currently predominately in fixed income securities. The Company
manages the mix of equities and fixed income securities in accordance with
policies set by an investment committee 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.

The principal cash flows and the related weighted average interest rates as
of December 31, 2001, are presented below. The carrying values of the Company's
debt instruments equal their fair values at December 31, 2001, as a result of
the adoption of fresh start reporting, and are included in Note 6 to the
Company's Consolidated Balance Sheet.

QUANTITATIVE DISCLOSURE OF MARKET RISKS

33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

- ------------------------

(1) ALTHOUGH NOT COMPARABLE, CERTAIN CONSOLIDATED FINANCIAL INFORMATION AND
OTHER INFORMATION OF THE LOEWEN GROUP INC. MAY BE OF LIMITED INTEREST TO
STOCKHOLDERS OF THE COMPANY, AND HAS BEEN INCLUDED IN THE ANNUAL REPORT ON
FORM 10-K FOR 2001, 2000 AND 1999.

34

ALDERWOODS GROUP, INC.
(SUCCESSOR TO THE LOEWEN GROUP INC.)

THE FOLLOWING ALDERWOODS GROUP, INC. CONSOLIDATED BALANCE SHEET ISSUED
SUBSEQUENT TO THE PLAN BECOMING EFFECTIVE IS NOT COMPARABLE WITH THE
CONSOLIDATED FINANCIAL STATEMENTS ISSUED BY THE LOEWEN GROUP INC. PRIOR TO THE
PLAN IMPLEMENTATION, DUE TO THE SIGNIFICANT CHANGES IN THE FINANCIAL AND LEGAL
STRUCTURE OF THE COMPANY AND THE APPLICATION OF FRESH START REPORTING, RESULTING
FROM CONFIRMATION AND IMPLEMENTATION OF THE PLAN. ACCORDINGLY, THE COMPANY'S
FRESH START CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2001, DOES NOT INCLUDE
COMPARATIVE INFORMATION. CERTAIN CONSOLIDATED FINANCIAL INFORMATION OF THE
LOEWEN GROUP INC. MAY BE OF LIMITED INTEREST TO THE STOCKHOLDERS OF THE COMPANY,
AND HAS BEEN INCLUDED FOR 2001, 2000 AND 1999 ELSEWHERE IN THIS FORM 10-K.

35

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Alderwoods Group, Inc.:

We have audited the accompanying consolidated balance sheet of Alderwoods
Group, Inc. as of December 31, 2001. In connection with our audit of the
consolidated balance sheet, we also have audited the information with respect to
the Company in financial statement Schedule II included in Item 14 of the
Company's annual report on Form 10-K. The consolidated balance sheet and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated balance sheet
and financial statement schedule based on our audit.

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

In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Alderwoods
Group, Inc. as of December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statement taken as a whole, presents fairly, in all material respects,
the information set forth therein.

/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada

March 15, 2002

36

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEET

AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS

COMMITMENTS AND CONTINGENCIES (NOTES 6, 9, 10 AND 11)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED BALANCE SHEET

37

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 1. NATURE OF OPERATIONS

Alderwoods Group, Inc., a Delaware corporation, together with its
subsidiaries (collectively, the "Company") is the second-largest operator of
funeral homes and cemeteries in North America. As at December 31, 2001, the
Company operated 825 funeral homes and 217 cemeteries and 65 combination funeral
homes and cemeteries throughout North America and 32 funeral homes in the United
Kingdom.

The Company's funeral operations encompass making funeral, cemetery and
cremation arrangements on an at-need or pre-need basis. The Company's funeral
operations 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.

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, mausoleum crypts and other merchandise), the opening and closing of
graves and cremation services.

The Company's insurance operations sell a variety of life insurance
products, primarily to fund pre-need funeral services.

NOTE 2. BASIS OF PRESENTATION

The consolidated balance sheet includes the accounts of the Company and its
subsidiaries. The Company is the successor to The Loewen Group Inc. (the
"Predecessor") and its subsidiaries, including Loewen Group
International, Inc., a Delaware corporation ("Loewen International"). The
consolidated balance sheet has been prepared using the U.S. dollar as the
functional currency and is presented in accordance with accounting principles
generally accepted in the United States.

EMERGENCE FROM REORGANIZATION PROCEEDINGS

On June 1, 1999 (the "Petition Date"), the Predecessor and each of
approximately 850 United States subsidiaries (including Loewen International)
and one foreign subsidiary voluntarily filed a petition for creditor protection
under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the District of Delaware (the "U.S. Bankruptcy Court"). Concurrent with the
Chapter 11 filing, the Predecessor and 117 Canadian subsidiaries voluntarily
filed an application for creditor protection under the Companies' Creditors
Arrangement Act with the Ontario Superior Court of Justice, Toronto, Ontario,
Canada (the "Canadian Bankruptcy Court") (together with the U.S. Bankruptcy
Court, the "Bankruptcy Courts"). Subsequent to the Petition Date, five
additional subsidiaries of the Predecessor voluntarily filed petitions for
creditor protection and 41 subsidiaries were voluntarily deleted.

On December 5, 2001 and December 7, 2001, the U.S. Bankruptcy Court and the
Canadian Bankruptcy Court, respectively, confirmed the Fourth Amended and
Restated Joint Plan of Reorganization, as modified (the "Plan"), of the
Predecessor and its subsidiaries under creditor protection (the "Debtors"). The
Plan became effective on January 2, 2002 (the "Effective Date") and, for
accounting and reporting purposes, is reflected as of December 31, 2001, because
United States generally accepted accounting principles require that the
financial statements reflect fresh start reporting as of the confirmation date
or as of a later date, that is not subsequent to the Effective Date, when all
material

38

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
conditions precedent to the Plan becoming binding are resolved. Pursuant to the
Plan, the Debtors altered their debt and capital structures and, among other
things:

- completed reorganization transactions that resulted in the ultimate parent
company in the corporate structure being the Company, which was renamed
from Loewen International and now operates the existing businesses of the
Predecessor and Loewen International;

- transferred all of the assets of the Predecessor to the Company at fair
value, except for an aggregate cash amount of $133,500,000, which was
transferred prior to December 31, 2001, by the Predecessor to a disbursing
agent for the sole benefit of certain of the Predecessor's creditors;

- cancelled the stock of certain direct and indirect subsidiaries of the
Predecessor, other than that stock which was owned by the Predecessor or
its direct or indirect subsidiaries;

- paid or issued a combination of cash, new Common stock of the Company,
warrants to purchase new Common stock of the Company and new long-term
debt (see Note 6) to certain holders of liabilities subject to compromise
that were cancelled;

- satisfied certain administrative claims through the issuance of the
Company's 12 1/4% Convertible Subordinated Notes Due 2012 in the aggregate
principal amount of $24,679,000, which are convertible into the Company's
Common stock at a conversion rate equal to $17.17 per share and
379,449 shares of the Company's Common stock, which resulted in the
Company becoming the owner of all of the outstanding common stock of Rose
Hills Holdings Corp. ("Rose Hills");

- assumed, assumed and assigned, or rejected certain executory contracts and
unexpired leases to which any Debtor was a party;

- restructured and simplified the Company's and its subsidiaries' corporate
structure; and

- selected new boards of directors of the Company and its reorganized
subsidiaries.

Due to the significant changes in the financial structure of the Company and
the application of fresh start reporting resulting from confirmation and
implementation of the Plan, the consolidated balance sheet of the Company issued
subsequent to the Plan implementation is not comparable with the consolidated
financial statements issued by the Predecessor prior to the Plan implementation.
Accordingly, the Company's fresh start consolidated balance sheet at
December 31, 2001, does not include comparative information. Certain
consolidated financial and other information concerning the Predecessor may be
of limited interest to the stockholders of the Company, and has been included in
this Form 10-K.

FRESH START REPORTING

The Company has adopted fresh start reporting in accordance with AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7"), which in turn requires application at
the date of Plan implementation of purchase accounting principles, as prescribed
by Statement of Financial Accounting Standards No. 141, "Business Combinations"
("FAS No. 141"), which superceded Accounting Principles Board Opinion ("APB")
No. 16, "Business Combinations." In addition, SOP 90-7 requires the adoption of
any new accounting principles concurrent with the adoption of fresh start
reporting. As such, the Company has adopted Statement of Financial

39

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
("FAS No. 142"). As a result of the adoption of FAS No. 142, goodwill arising
from the Company's reorganization will not be amortized. There is no impact upon
adoption of the impairment provisions of FAS No. 142, because the Company has
applied fresh start reporting concurrent with its adoption. Also concurrent with
fresh start reporting, the Company adopted a revenue recognition policy relating
to pre-need sales of interment rights which differs from that previously applied
by the Predecessor (see Note 3).

Under the principles of fresh start reporting, the Company is required to
record the aggregate value of the Company based on the reorganization value as
set forth in the Plan. The reorganization value of the Company was determined
with the assistance of independent advisors and estimated at the midpoint of the
total enterprise value range (I.E., the fair market value of the Company's debt
and stockholders' equity), which was approximately $1.5 billion. The
reorganization valuation utilized various valuation techniques, including
comparable public company trading multiples, discounted cash flow analysis and
comparable acquisition analysis.

In accordance with the principles of "purchase" accounting, as prescribed by
FAS No. 141 and FAS No. 142, the reorganization value was then allocated to the
Company's identifiable tangible and intangible assets and liabilities based on
their fair values, with the residual recorded as goodwill. As a result of the
application of fresh start reporting, significant adjustments were made to the
Company's historical assets and liabilities, as the fair values varied
significantly from recorded amounts of the Predecessor immediately prior to the
date of Plan adoption at December 31, 2001 (see Note 15).

The following methods and assumptions were used to estimate the fair value
of significant assets and liabilities at December 31, 2001:

Cash and cash equivalents, receivables, inventories, other current assets,
and accounts payable and accrued liabilities: The carrying amounts, which
reflect provisions for uncollectible amounts and for inventory obsolescence,
approximate fair value because of the short term to maturity of these
current assets and liabilities.

Pre-need funeral and cemetery contracts: For funeral and cemetery customer
receivables, the fair value was determined as the present value of expected
future cash flows discounted at the interest rate currently offered by the
Company, which approximates market rates for loans of similar terms to
customers with comparable credit risk. For amounts receivable from funeral
and cemetery trusts, the fair value is based on quoted market prices of the
underlying investments. Amounts receivable from third-party insurance
companies are based on the face value of the policy plus accumulated annual
insurance benefits. Pre-need funeral and cemetery contracts are recorded net
of allowances for expected cancellations and refunds.

Cemetery property: For developed land and undeveloped land, the fair value
was estimated by discounting cash flows from the expected future sales of
cemetery land, reduced by a reasonable profit margin. A maximum term of
30 years was assumed in determining projected sales revenue. Portions of the
Company's cemetery land are situated in areas that cannot be developed due
to geographic or regulatory restrictions. Such cemetery land, together with
portions of land that are not required for sales during the next 30 years
and for which the Company has no current plan to sell, were assigned a fair
value of zero. For mausoleums and lawn crypts, the fair value was based on
the replacement cost

40

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
for similar inventory. It is possible that the Company's future operations
in the near term may result in recoveries on excess land sales that are
different than those assumed in the estimates.

Insurance invested assets and insurance policy liabilities: Insurance
invested assets were stated at market based on quoted market prices. Policy
liabilities were estimated and, together with future premiums and investment
income, were considered to be sufficient to pay future benefits, dividends
and expenses on insurance and annuity contracts. For traditional products,
insurance policy liabilities were computed using the net level premium
method based on estimated investment yields, withdrawals, mortality and
other assumptions that were appropriate at the time that the policies were
issued or, for policies acquired through acquisition, such assumptions were
as of the purchase date. Estimates used were based on the Company's
experience, as adjusted to provide for possible adverse deviation. Future
policy benefits on investment-type contracts reflected the current account
value before applicable surrender charges.

Long-term debt: The fair value of the Company's long-term debt was estimated
by discounting the future cash flows of each instrument at rates for similar
debt instruments of comparable maturities.

Deferred pre-need funeral and cemetery contract revenue: The fair value of
deferred funeral and cemetery contract revenue was based on the larger of,
as applicable, (i) the amount refundable to the customer, if the contract
was written in a jurisdiction requiring refunds upon request by the customer
or upon cancellation for non-payment; (ii) the current amount of an
insurance policy representing the face value and accumulated annual
insurance benefits; or (iii) the present value of the projected future cost
to outsource the fulfillment of the pre-need obligation, based on the
estimated current outsourcing cost and mortality, inflation and interest
rate assumptions. It is possible deferred pre-need funeral and cemetery
contract revenue could change materially in the near term as a result of
actual servicing and cancellation experience.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated balance sheet includes the accounts of the Company and its
subsidiary companies. All subsidiaries are wholly owned at December 31, 2001,
except for a few companies with small minority interests.

All significant intercompany balances have been eliminated in the
consolidated balance sheet.

USE OF ESTIMATES

The preparation of the consolidated balance sheet in accordance with
United States 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 balance sheet. As a result, actual amounts could significantly
differ from those estimates.

FUNERAL OPERATIONS

Sales of at-need funeral services are recorded as revenue when the service
is performed.

41

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pre-need 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 is designated as
beneficiary. Pre-need funeral services contract amounts, together with related
trust fund investment earnings 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.

Selling costs related to the sale of pre-need funeral services are expensed
in the period incurred.

CEMETERY OPERATIONS

Sales of cemetery merchandise and services and at-need cemetery interment
rights are recorded as revenue when the merchandise is delivered or service is
performed.

Sales of pre-need cemetery interment rights are recognized in accordance
with the retail land sales provisions of Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate" ("FAS No. 66").
Accordingly, provided certain collectibility criteria are met, pre-need cemetery
interment right sales of developed cemetery property are deferred until a
specified minimum percentage of the sales price has been collected, while
pre-need cemetery interment right sales of undeveloped cemetery property are
deferred until the cemetery property is developed and a specified minimum
percentage of the sales price has been collected. A portion of the proceeds from
cemetery sales for interment rights is generally required by law to be paid into
perpetual or endowment care trusts. Earnings of perpetual or endowment care
trusts are recognized in current cemetery revenue and are used to defray the
maintenance costs of cemeteries, which are expensed as incurred. The principal
of these perpetual or endowment care trusts cannot be withdrawn by the Company,
and therefore is not included in the Company's consolidated balance sheet.

Pursuant to various state and provincial laws, a portion of the proceeds
from the sale of pre-need merchandise and services may also be required to be
paid into trusts, which are included in pre-need cemetery contracts in the
Company's consolidated balance sheet. Earnings on merchandise and services trust
funds are recognized when the revenue of the associated merchandise or service
is recognized.

Selling costs related to the sale of pre-need cemetery contract revenues are
expensed in the period incurred.

Interest is imputed at a market rate for pre-need cemetery contracts that do
not bear a market rate of interest.

INSURANCE OPERATIONS

For traditional life and participating life products, premiums are
recognized as revenue when due from policyholders. Benefits and expenses are
associated with earned premiums to result in recognition of profits over the
life of the policy contracts. This association is accomplished by means of the
provision for liabilities for future policy benefits and the amortization of
deferred policy acquisition costs.

42

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from annuity contracts represent amounts assessed against contract
holders. Such assessments are principally surrender charges. Policy account
balances for annuities represent the deposits received plus accumulated interest
less applicable accumulated administrative fees.

Investment income, net of investment expenses, and realized gains and losses
related to insurance invested assets are included within revenues.

To the extent recoverable, certain costs of acquiring new insurance business
have been deferred. Such costs consist of first-year commissions in excess of
renewal rates, related fringe benefit costs, and direct underwriting and
issuance costs.

The deferred policy acquisition costs on traditional life products are
amortized with interest over the anticipated premium-paying period of the
related policies, in proportion to the ratio of annual premium revenue to be
received over the life of the policies. Expected premium revenue is estimated by
using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy
acquisition costs is reduced by a provision for possible inflation on
maintenance and settlement expenses.

Also, the present value of future profits of acquired insurance business in
force is amortized over the expected premium-paying period of the policies
acquired.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and term deposits with a term to
maturity at acquisition of 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
plots, lawn crypts, mausoleums or niches and undeveloped land, and is valued at
average cost. Amounts are expensed as revenue from sales of cemetery property is
recognized.

PROPERTY AND EQUIPMENT

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

Buildings and improvements........................ 10 to 40 years
Automobiles....................................... 2 to 6 years
Furniture, fixtures and equipment................. 10 years
Computer hardware and software.................... 3 to 6 years
Leasehold improvements............................ Over the term of the lease or life of the
asset, if shorter

43

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS

Goodwill, resulting from reorganization value in excess of identifiable net
assets, is not amortized, but tested annually for impairment. The Company's
reporting units for goodwill are its reportable funeral and cemetery operating
segments, and its two insurance reporting units.

Identifiable intangible assets consist of deferred insurance policy
acquisition costs, present value of future insurance business profits and
acquired key employee covenants not to compete, which are amortized over their
respective useful lives using a method reflecting the pattern in which such
assets are consumed.

FINANCIAL INSTRUMENTS

Financial instruments that potentially subject the Company to concentrations
of credit or collection risk principally consist of cash and cash equivalents,
customer receivables and receivables from trust and insurance companies
presented on the balance sheet in pre-need funeral and cemetery contracts.

The Company maintains its cash and cash equivalents with various financial
institutions. As at December 31, 2001, the Company had approximately $70,000,000
of cash and cash equivalents at two financial institutions.

Concentrations of credit risk with respect to customer receivables are
minimal, due to the low dollar amount of each receivable, the large number of
customers and the large dispersion of the receivables across many geographic
areas.

Receivables from trust and insurance companies represent customer payments
on pre-need funeral contracts and pre-need cemetery contracts that are placed
into state regulated trusts or used to pay premiums on life insurance contracts,
generally do not subject the Company to significant collection risk. Insurance
funded contracts are subject to supervision by state insurance departments and
are protected in the majority of states by insurance guaranty acts. In addition,
funds placed into certain state regulated trust are limited to federally insured
deposits and or U.S. Government bonds. The Company's policies with respect to
trust fund investments are specifically designed such that investments are
diversified primarily within short term fixed maturity and equity securities and
are maintained with various high quality and reputable financial institutions,
as well as to minimize concentrations of credit risk by not maintaining
disproportionately large balances in any one financial institution.

STOCK OPTION PLAN

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS No. 123"), established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. However, as allowed by FAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of accounting
described below, and has adopted the disclosure requirements of FAS No. 123.

The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, including FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an

44

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interpretation of APB Opinion No. 25," to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price. Any compensation expense recorded is charged against operations
over the service period, which generally matches the option vesting period.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided against deferred tax assets to
the extent recoverability of the asset cannot be considered to be more likely
than not.

In accordance with the principles of fresh start reporting, any future
reduction of valuation allowances established at the Effective Date will reduce
goodwill or, if goodwill has been reduced to zero, increase capital in excess of
par value.

FOREIGN CURRENCY TRANSLATION

The assets and liabilities of the Company's foreign subsidiaries, which have
a functional currency other than the U.S. dollar, are translated into U. S.
dollars at the rates of exchange as at the balance sheet date, and revenue and
expenses are translated at the average rates of exchange for the periods of
operation. The net gains or losses arising from the translations are included in
stockholder's equity as a component of accumulated other comprehensive income in
the consolidated statement of stockholders' equity.

NOTE 4. PRE-NEED FUNERAL ACTIVITIES

The balance in pre-need funeral contracts represents customer receivables,
amounts due from trust funds and third-party insurance companies related to
unperformed, price-guaranteed, pre-need funeral contracts. The components of
pre-need funeral contracts in the consolidated balance sheet are as follows:

45

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 4. PRE-NEED FUNERAL ACTIVITIES (CONTINUED)
For pre-need funeral contract sales, an allowance for cancellations and
refunds is provided at the date of sale based on management's best estimates and
is offset against deferred pre-need funeral contract revenue.

Amounts receivable from funeral trusts represents a portion of the proceeds
from the sale of pre-need funeral services, deposited in accordance with state
and provincial trusting laws with various financial institutions, together with
accrued earnings. The Company will receive these amounts when the funeral
service is performed. The carrying values of the amounts receivable from funeral
trusts equals the fair values of the trust investments, which are as follows:

NOTE 5. PRE-NEED CEMETERY ACTIVITIES

PRE-NEED CEMETERY CONTRACTS

The balance in pre-need cemetery contracts represents customer receivables
and amounts due from trust funds related to unfulfilled, price-guaranteed,
pre-need cemetery contracts. The components of pre-need cemetery contracts in
the consolidated balance sheet are as follows:

For pre-need cemetery contract sales, an allowance for cancellations and
refunds is provided at the date of sale based on management's best estimates and
is offset against deferred pre-need cemetery contract revenue.

Amounts receivable from cemetery trusts represents a portion of the proceeds
from the sale of pre-need merchandise and services, deposited in accordance with
state and provincial trusting laws with various financial institutions, together
with accrued earnings. The Company will receive these amounts

46

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 5. PRE-NEED CEMETERY ACTIVITIES (CONTINUED)
when the merchandise is delivered or service is performed. The carrying values
of the amounts receivable from cemetery trusts equals the fair values of the
trust investments, which are as follows:

PERPETUAL CARE TRUSTS

The perpetual care trust funds are not included in the Company's
consolidated balance sheet, as the principal of these trusts cannot be withdrawn
by the Company. The carrying value of the trust investments was $259,520,000 at
December 31, 2001.

Investment earnings of perpetual care trust funds are recognized in cemetery
revenue when realized and are used to defray the maintenance costs of
cemeteries, which are expensed as incurred.

NOTE 6. LONG-TERM DEBT

Long-term debt consists of the following:

In accordance with fresh start reporting, long-term debt is stated at fair
value. Any resulting premium or discount is amortized over the term of the
relevant debt and included in interest expense.

(a) On January 2, 2002, the Company entered into a revolving credit facility
(the "Credit Facility"). The Credit Facility has a maximum availability
of the lesser of $75,000,000 (including $35,000,000

47

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 6. LONG-TERM DEBT (CONTINUED)
in the form of letters of credit) or an amount (determined pursuant to a
borrowing base calculation) equal to the sum of (a) 80% of eligible
accounts receivable plus (b) the lesser of (i) 50% of the value of
eligible inventory and (ii) $15,000,000 plus (c) the lesser of (i) 25% of
the book value of real property on which the collateral agent for the
lenders has a first priority mortgage and (ii) $40,000,000 less (d) a
reserve against borrowing availability set by the agent for the lenders.
The Credit Facility will be used primarily to fund the Company's working
capital needs and bears interest at a rate per annum equal to the Chase
Bank Rate plus 1% or, at the Company's option, LIBOR plus 2.5%. A fee of
2.5% is charged on letters of credit and a commitment fee of 0.50% is
charged on the unused portion of the Credit Facility. Material covenants
include a requirement to maintain a minimum tangible net worth, monthly
earnings to fixed charge coverage ratio and a yearly maximum on capital
expenditure. The Credit Facility expires on January 2, 2003, and is
secured by certain real property, and substantially all personal property
of the Company and certain of its subsidiaries. At the Effective Date,
the Company could not borrow under the Credit Facility until security was
put in place on certain real property and an initial borrowing base was
calculated.

(b) Subsidiary credit agreement which provides for (1) a senior secured
amortization extended term loan facility in an aggregate principal amount
of $75,000,000, and (2) a senior secured revolving credit facility in an
aggregate principal amount of $10,000,000. The subsidiary is required to
maintain certain defined financial ratios. As of the Effective Date, the
Company was accruing interest at 4.94% on its outstanding borrowings
under the term loan facility. The Company pays a commitment fee of 0.5%
on the unused portion of the revolving credit facility.

(c) On January 2, 2002, the Company issued 11.00% Senior secured notes, due
in 2007. Interest is payable semi-annually commencing on June 15, 2002.
The notes are secured by all personal property (subject to certain
restrictions) of the Company and certain of its subsidiaries, and certain
funeral home real property assets of the Company, subordinated to the
security interests securing the Credit Facility. The notes are redeemable
at any time at the option of the Company at 100% of the stated principal
amount, plus accrued and unpaid interest to (but not including) the
redemption date. Furthermore, the notes are subject to mandatory
redemption in the principal amount of $10,000,000, $20,000,000,
$30,000,000 and $40,000,000, if such amounts are outstanding on
January 2, 2003, January 2, 2004, January 2, 2005 and January 2, 2006,
respectively.

(d) Subsidiary 9.5% Senior subordinated notes, due November 15, 2004. The
indenture limits the subsidiary's payment of dividends and repurchase of
its common stock, and includes certain other restrictions and limitations
on its indebtedness. Interest is payable semi-annually. The security for
the notes is subordinate to the prior claims of the bank credit
agreement. The carrying amount is net of a fair value discount of
$3,200,000.

(e) On January 2, 2002, the Company issued 12.25% Senior unsecured notes,
due in 2004. Interest is payable semi-annually commencing on June 15,
2002. The notes are redeemable at the option of the Company, in whole or
in part, at 100% of the stated principal amount, plus accrued and unpaid
interest to (but not including) the applicable redemption date.

(f) On January 2, 2002, the Company issued 12.25% Senior unsecured notes,
due in 2009. Interest is payable semi-annually commencing on March 15,
2002. The notes are redeemable on January 2,

48

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 6. LONG-TERM DEBT (CONTINUED)
2005, at the option of the Company, in whole or in part, at a price equal
to 106.25% of the stated principal amount if redeemed from January 2,
2005 to January 1, 2006, at a price equal to 103.125% of the stated
principal amount if redeemed from January 2, 2006 to January 1, 2007 and
at a price equal to 100% of the stated principal amount if redeemed on or
after January 2, 2007, plus accrued and unpaid interest to (but not
including) the applicable redemption date.

(g) On January 2, 2002, the Company issued 12.25% Convertible subordinated
notes, due in 2012. Interest is payable semi-annually commencing on
March 15, 2002. The notes are convertible at the holders option at any
time into the Company's Common stock at a price of $17.17 per share,
adjusted for subsequent dividends, stock splits and issuance of rights,
options and warrants. The carrying amount includes a fair value premium
of $ 9,001,000. The notes are redeemable at the option of the Company, in
whole or in part, at 100% of the stated principal amount, plus accrued
and unpaid interest to (but not including) the applicable redemption
date, provided however, that prior to January 2, 2004, the Company may
not optionally redeem the notes unless the then-market price of the
Common Stock is at least 15% greater than the then-applicable
conversion price.

The Credit Facility, 11% Senior secured notes, 12.25% Senior unsecured notes
due in 2004, and 12.25% Senior unsecured notes due in 2009, are guaranteed by
substantially all of Alderwoods Group's wholly-owned U.S. subsidiaries, other
than Rose Hills, Alderwoods Group's insurance subsidiaries and certain other
excluded subsidiaries. Alderwoods Group, the parent company, has no independent
assets or operations, and the guarantees of its guarantor subsidiaries are full
and unconditional, and joint and several. There are no cross-guarantees of debt
between the Company and Rose Hills.

In certain change of control situations, the Company is required to make an
offer to purchase the then-outstanding 11% Senior unsecured notes due in 2007,
12.25% Senior unsecured notes due in 2004 and 12.25% Convertible subordinated
notes due in 2012, equal to 100% of the stated principal amount, and for the
12.25% Senior unsecured notes due in 2009, equal to 101% of the stated principal
amount, plus accrued and unpaid interest to the applicable repurchase date.

The Company will be required to apply net proceeds from the sale of
specified properties to the redemption of the 12.25% Senior unsecured notes due
in 2004, pursuant to procedures set forth in the indenture governing the 12.25%
Senior unsecured notes due in 2004. Furthermore, the indentures governing the
11% Senior unsecured notes due in 2007, 12.25% Senior unsecured notes due in
2009 and 12.25% Convertible subordinated notes due in 2012 will prohibit the
Company from consummating certain asset sales unless: (a) consideration at least
equal to fair market value is received; and (b) except with respect to specified
assets, not less than 75% of the consideration for the asset sale is paid in
cash. Within 270 days of the receipt of net proceeds from any such asset sale,
the Company will be obligated to apply such net proceeds at its option (or as
otherwise required) as follows: (a) with respect to asset sales of specified
properties, to pay the 12.25% Senior unsecured notes due in 2004; and (b) with
respect to all other such asset sales, (i) to pay the Credit Facility and
permanently reduce commitments with respect thereto, or the 12.25% Senior
unsecured notes due in 2004, or (ii) to make capital expenditures or
acquisitions of other assets in the same line of business as the Company or
certain of its subsidiaries or businesses related thereto. To the extent the
Company receives net proceeds from any such asset sale not applied in accordance
with the immediately preceding sentence in excess of certain thresholds, the
Company must offer to purchase 11% Senior unsecured notes due in 2007, 12.25%
Senior unsecured notes

49

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 6. LONG-TERM DEBT (CONTINUED)
due in 2009 or 12.25% Convertible subordinated notes due in 2012 (in that order)
with such excess proceeds.

Material covenants for the Redeemable Debt include restrictions placed on
the Company and certain of its subsidiaries to incur additional indebtedness,
pay dividends, repay subordinate or junior indebtedness, and encumber property
or assets securing additional aggregate indebtedness in excess of $50,000,000.

Maturities of long-term debt principal are as follows:

NOTE 7. INSURANCE ACTIVITIES

Insurance operation investments were recorded at fair value as a result of
the application of fresh start reporting. Fixed maturity and equity securities
are classified as available-for-sale and carried at fair value. Investments in
debt and equity securities are evaluated for other than temporary impairments.
Other than temporary impairment is reflected in current period income as a
realized loss. It is possible that a significant change in economic conditions
in the near term could result in losses that could be significant to the
Company. Insurance invested assets consist of the following:

50

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 7. INSURANCE ACTIVITIES (CONTINUED)
Maturities of fixed maturity securities, excluding mortgage-backed
securities, collateralized mortgage obligations and asset-backed obligations are
estimated as follows:

NOTE 8. STOCKHOLDERS' EQUITY

CAPITAL STOCK

The Company is authorized to issue 10,000,000 shares of preferred stock,
with a par value of $0.01 per share. No shares of preferred stock were issued as
of the Effective Date.

The Company is authorized to issue 100,000,000 shares of Common stock, with
a par value of $0.01 per share. Pursuant to the Plan, the Company issued
39,878,870 shares of Common stock, with an aggregate par value of $398,789 and
capital in excess of par value of $738,953,000, on the Effective Date.

In addition, warrants to purchase 2,992,000 shares of Common stock were
issued. The warrants entitle the holders to purchase, at any time up to
January 2, 2007, shares of Common stock at an exercise price of $25.76 per
share. The exercise price of the warrants exceeded the fair value of the
Company's Common stock on the date of issuance.

STOCK OPTION PLANS

On January 2, 2002, the Company implemented the 2002 Equity and Performance
Incentive Plan (the "Equity Incentive Plan"). The Company's Board of Directors
(or a committee thereof) may determine the awards to be granted under the Equity
Incentive Plan. The Equity Incentive Plan provides for grants of stock options,
restricted stock, deferred shares and other typical equity incentive awards to
the employees and members of the Company's Board of Directors. A total of
4,500,000 shares of Common stock are available for issuance in satisfaction of
awards under the Equity Incentive Plan. Stock options are granted with an
exercise price equal to the stock's fair market value at the date of grant.
Except in certain cases, stock options have 3-year terms and vest at a rate of
25% on the first, 25% on the second and 50% on the third anniversaries of the
date of grant. Initial stock options for 2,410,000 shares were granted under the
Equity Incentive Plan on February 20, 2002 (see Note 16).

NOTE 9. LEGAL CONTINGENCIES

PROPOSED CIVIL RIGHTS CLASS ACTIONS

Since July 2000, ten lawsuits have been filed against Security Industrial
Insurance Company, subsequently renamed Security Plan Life Insurance Company
("Security Industrial"), a subsidiary of the Company, and various other
unrelated insurance companies asserting similar claims and seeking class action
certification.

51

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 9. LEGAL CONTINGENCIES (CONTINUED)
Except as described in this paragraph, the complaints in each of the
lawsuits are almost identical. Plaintiffs allege that the defendants sold life
insurance products to plaintiffs and other African Americans without disclosing
that premiums paid would likely exceed the face value of the policies, and that
plaintiffs paid higher premiums than Caucasian policyholders and received
proportionately lower death benefits. The plaintiffs sought, among other things,
injunctive relief, equitable relief, restitution, disgorgement, increased death
benefits, premium refunds (in one case, with interest), costs and attorney fees.
In several of the cases, Security Industrial filed a motion to dismiss all
claims for failure to state a cause of action and/or for summary judgment.

In December 2000, nine of the cases were transferred to the Judicial Panel
on Multidistrict Litigation (the "MDL Panel") for consolidation for
administrative purposes, where they were assigned to Judge Martin L.C. Feldman
as IN RE INDUSTRIAL LIFE INSURANCE LITIGATION, MDL No. 1382.

On January 9, 2002, the Louisiana State Court gave final approval to a
class-action settlement with respect to the claims in the ten lawsuits. The
Louisiana State Court's final approval determined such settlement to be fair,
reasonable and adequate for the class, which was certified by such court for
settlement purposes only. The settlement provides agreed-upon amounts of
compensation to class members in exchange for a release of all pending and
future claims they may have against the Company and certain of its affiliates.

The Company has recorded a provision for the agreed-upon amounts of
compensation and related costs with respect to these lawsuits within the
Company's consolidated balance sheet. Although the Company believes such
provision is adequate, there can be no assurance that actual payments with
respect to these claims will not exceed such provision.

THE LOEWEN GROUP INC. ET AL. V. THE UNITED STATES OF AMERICA

In October 1998, the Predecessor and Raymond L. Loewen, the then-Chairman
and Chief Executive Officer of the Predecessor, filed a claim against the United
States government for damages under the arbitration provisions of the North
American Free Trade Agreement ("NAFTA"). The claimants 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 VS. THE LOEWEN GROUP INC. Specifically, the plaintiffs allege that they
were subjected to discrimination, a denial of justice, a denial of the fair and
equitable treatment and full protection and security guaranteed by NAFTA and an
uncompensated expropriation, all in violation of NAFTA. The NAFTA claims are
currently the subject of a pending proceeding before an arbitration panel (the
"Arbitration Tribunal") appointed pursuant to the rules of the International
Centre for Settlement of Investment Disputes. In January 2001, the Arbitration
Tribunal issued a ruling rejecting certain of the U.S. government's
jurisdictional challenges and scheduled a hearing on the merits of the NAFTA
claims, held on October 15-19, 2001, the results of which are described below.

In connection with the Company's emergence from reorganization proceedings
on January 2, 2002, the Predecessor effectively transferred to a Canadian
subsidiary of the Company the right to receive any and all proceeds from the
Predecessor's claims described below against the United States. The Company, as
provided for in the Plan, assigned an undivided 25% interest in the net
proceeds, if any, of these claims to a liquidating trust for the benefit of
creditors of certain of the Debtors under the Plan.

52

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 9. LEGAL CONTINGENCIES (CONTINUED)
In January 2002, the United States claimed that the reorganization
constitutes a change of nationality of the NAFTA claims that deprives the
Arbitration Tribunal of jurisdiction over the NAFTA claims. The Arbitration
Tribunal has set a briefing schedule on the jurisdictional issues raised by the
United States. 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 realized by the Company.

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 operations or liquidity.

NOTE 10. COMMITMENTS AND CONTINGENCIES

LEASES

The future annual payments for operating leases, primarily for premises,
automobiles and office equipment, are as follows:

In addition to the automobile leases noted in the table above, as at
December 31, 2001, the Company leased approximately 1,000 vehicles under a
master operating lease agreement, which has a minimum lease term of 12 months.
The Company's practice is to continue these leases on a month-to-month basis
after the expiry of the minimum lease term. Lease payments for these vehicles
are projected to be $6,922,000 in 2002.

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. On a continuing basis, the
Company's business practices are designed to assess and evaluate environmental
risk and, when necessary, conduct appropriate corrective measures. Liabilities
are recorded when known or considered probable and reasonably estimable.

The Company provides for environmental liabilities using its best estimates.
Actual environmental liabilities could differ significantly from these
estimates.

53

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 11. RETIREMENT PLANS

(a) 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. There are no required future
contributions under this plan in respect of past service.

(b) The Company has a Registered Retirement Savings Plan for Canadian
employees who may contribute either 3% or 5% 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 this plan
in respect of past service.

NOTE 12. INCOME TAXES

The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities are as follows:

Although realization of the Company's net deferred tax assets is not
assured, management believes that it is more likely than not that reversals of
deferred tax liabilities provide sufficient taxable income to

54

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 12. INCOME TAXES (CONTINUED)
realize the deferred tax assets after consideration of the valuation allowance.
It is possible that the estimated valuation allowance could change in the near
term due to matters such as the timing and manner of reversals of deferred tax
liabilities, sales of operations and future income or loss. If this occurs, any
resulting increase in the valuation allowance would generally be treated as an
additional income tax expense in the period in which it arises, while any
resulting decrease in the valuation allowance established on the Effective Date
would be treated as a reduction of goodwill with any excess over the value
assigned to goodwill recognized as a capital transaction.

The Company has net operating loss carryforwards of approximately
$600,000,000 that expire at various times between 2002 and 2021. The amount of
loss carryforwards reflects the Company's best estimate of the effects that the
confirmation and implementation of the Plan will have on the reduction and in
some cases elimination of certain net operating loss carryforwards for income
tax purposes. These amounts are subject to final determination. Further, the
Company expects its ability to utilize certain net operating losses to offset
future Company taxable income in any particular year may be limited because
distribution of the Company's Common Stock to the Company's creditors pursuant
to the Plan has resulted in an ownership change as defined in Section 382 of the
Internal Revenue Code. The Company believes that uncertainty exists with respect
to future realization of the loss carryforwards and a full valuation allowance
has been established for the net operating loss carryforwards.

Deferred tax liabilities are not recognized for basis differences related to
investments in foreign subsidiaries that are essentially permanent in duration.

Goodwill that is expected to be deductible for tax purposes at December 31,
2001 is $141,729,000.

NOTE 13. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

55

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 13. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)

NOTE 14. SEGMENT REPORTING

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 (see Note 1).

The Company sells primarily to external customers, though any intersegment
sales or transfers occur at market price. The Company evaluates performance
based on income from operations of the respective businesses.

56

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 14. SEGMENT REPORTING (CONTINUED)
The following table reconciles total assets of reportable segments and
details the components of "Other" segment assets, which is mainly comprised of
corporate assets:

The Company operates principally in the United States and also has
operations in Canada and the United Kingdom. The following table depicts the
long-lived assets held in the reportable geographic segments.

57

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED BALANCE SHEET (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 15. FRESH START REPORTING ADJUSTMENTS

The Predecessor's balance sheet, the effects of the debt discharge, the
effects of fresh start reporting and other adjustments, the acquisition of Rose
Hills and resulting fresh start balance sheet of the Company at December 31,
2001, are presented below.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

62

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES OUTSTANDING

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

63

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

64

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

65

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 1. REORGANIZATION PROCEEDINGS

On June 1, 1999 (the "Petition Date"), The Loewen Group Inc., a British
Columbia corporation (collectively together with its subsidiaries, the
"Predecessor"), and each of approximately 850 United States subsidiaries and one
foreign subsidiary voluntarily filed a petition for creditor protection under
Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") in the U.S. Bankruptcy
Court for the District of Delaware (the "U.S. Bankruptcy Court"). Concurrent
with the Chapter 11 filing, the Predecessor and 117 Canadian subsidiaries
voluntarily filed an application for creditor protection under the Companies'
Creditors Arrangement Act ("Creditors Arrangement Act") with the Ontario
Superior Court of Justice, Toronto, Ontario, Canada (the "Canadian Court" and,
together with the U.S. Bankruptcy Court, the "Bankruptcy Courts"). Subsequent to
the Petition Date, three additional subsidiaries of the Predecessor voluntarily
filed petitions for creditor protection and 41 subsidiaries were voluntarily
deleted.

The Predecessor and its subsidiaries under creditor protection (the
"Debtors") operated their businesses as debtors-in-possession. The United States
trustee for the District of Delaware appointed a statutory committee of
unsecured creditors (the "Official Unsecured Creditors' Committee"). The
proceedings of the Debtors were jointly administered for procedural purposes
only. The Predecessor's United Kingdom, insurance and certain funeral and
cemetery subsidiaries were excluded from the filings.

The Predecessor filed a Fourth Amended Joint Plan of Reorganization, as
modified (the "Plan"), and related Disclosure Statement for itself and other
filing subsidiaries with the U.S. Bankruptcy Court on September 10, 2001. The
Plan was confirmed by the U.S. Bankruptcy Court on December 5, 2001, and was
recognized by the Canadian Court on December 7, 2001. The Plan became effective
on January 2, 2002 (the "Effective Date") and, for accounting and reporting
purposes, is reflected as of December 31, 2001.

Pursuant to the Plan, the following actions were effected on the Effective
Date:

- The Predecessor, through a series of transactions, transferred to its
subsidiary, Loewen Group International, Inc. ("Loewen International"), or
Loewen International subsidiaries, all of its assets, excluding only bare
legal title to its claims against the United States in the pending
arbitration matter ICSID Case No. ARB (AF)/98/3 under the North American
Free Trade Agreement (the "NAFTA Claims"), and transferred to a subsidiary
of Loewen International the right to any and all proceeds from the NAFTA
Claims; these transactions were structured in light of the jurisdictional
and substantive requirements for the maintenance of, and were intended to
preserve, the NAFTA Claims; and, as a result of these transactions, the
Predecessor no longer holds any meaningful assets;

- The Predecessor's ownership of Loewen International was cancelled,
whereupon Loewen International ceased to be affiliated with the
Predecessor. As a result of these actions, Loewen International, which was
reorganized and renamed Alderwoods Group, Inc. ("Alderwoods Group"),
succeeded to the business previously conducted by the Predecessor. All of
the officers and directors of the Predecessor resigned on January 2, 2002.

- The 9.45% Cumulative Monthly Income Preferred Securities, Series A issued
by Loewen Group Capital, L.P. ("Monthly Income Preferred Securities") and
the related obligations were cancelled in exchange for warrants
("Warrants") to purchase 496,800 shares of common stock, par value $0.01

66

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 1. REORGANIZATION PROCEEDINGS (CONTINUED)
per share, of Alderwoods Group ("Common Stock") at an initial price of
$25.76, which Warrants will expire on January 2, 2007;

- The debt claiming the benefit of the collateral trust agreement dated as
of May 15, 1996, among Bankers Trust Company, as trustee, the Predecessor
and certain pledgors (the "Collateral Trust Agreement") was cancelled in
exchange for a combination of the Predecessor's aggregate cash payment of
$131,500,000, 36,728,503 shares of Common Stock and Alderwoods Group's
12 1/4% Senior Notes Due 2009 in the aggregate principal amount of
$330,000,000, Alderwoods Group's 12 1/4% Senior Notes Due 2004 in the
aggregate principal amount of $49,599,000 and Alderwoods Group's 11%
Senior Secured Notes Due 2007 in the aggregate principal amount of
$250,000,000;

- Certain claims were settled in exchange for the Predecessor's aggregate
cash payment of $2,000,000 and 11,648 shares of Common Stock;

- Certain unsecured obligations were cancelled in exchange for an aggregate
of 2,759,270 shares of Common Stock, Warrants to purchase 2,495,200 shares
of Common Stock and all of the interests in a liquidating trust that holds
(a) five-year warrants of reorganized Prime Successions Holdings, Inc.
("Prime") issued to the Predecessor in Prime's recent reorganization
proceeding and (b) an undivided 25% interest in the net proceeds, if any,
of the NAFTA Claims (the "Liquidating Trust");

- Certain administrative claims were satisfied through the issuance of
Alderwoods Group's 12 1/4% Convertible Subordinated Notes Due 2012 in the
aggregate principal amount of $24,647,000, which are convertible into
Common Stock at a conversion rate equal to $17.17 per share and
379,449 shares of Common Stock, which resulted in Alderwoods Group
becoming the owner of all of the outstanding common stock of Rose Hills
Holdings Corp. ("Rose Hills");

- Certain executory contracts and unexpired leases of the Debtor
subsidiaries were reinstated and, such indebtedness, together with
long-term indebtedness of subsidiaries of the Predecessor that were not
Debtors, totaled $44,765,000; and

- Cash payments in the aggregate amount of $31,600,000 were made in respect
of certain convenience, priority and other claims.

Under the Plan, holders of interests in the Predecessor received no
distributions in respect of such interests.

As a result of the foregoing, following the Effective Date, although the
Predecessor has outstanding the same equity securities as were outstanding
immediately prior to the Effective Date, the Predecessor has (i) no assets,
other than bare legal title to the NAFTA Claims, (ii) no right to receive any
proceeds of the NAFTA Claims, (iii) no officers, directors or employees, and
(iv) no affiliation with Alderwoods Group.

67

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 1. REORGANIZATION PROCEEDINGS (CONTINUED)
The following schedule illustrates Alderwoods Group's assumption of the
Predecessor's business, after the effects of debt discharge, the effects of
fresh start reporting and other adjustments, and the acquisition of Rose Hills.

- ------------------------------

(a) Reflects the payment at emergence of (i) payments pursuant to the Plan, and
(ii) payments of administrative and convenience claims. Such amounts include
amounts placed on deposit with a disbursement agent for distribution
to creditors.

68

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 1. REORGANIZATION PROCEEDINGS (CONTINUED)
(b) Reflects the distribution of a combination of cash, new debt, Warrants and
Common Stock pursuant to the Plan in respect of certain claims.

(c) Reflects the write off of the excess of cost over the net assets acquired in
previous acquisitions and adjustments of the Predecessor's identifiable
assets to fair value in accordance with fresh start reporting.

(d) Reflects the consolidation of Rose Hills as a result of its acquisition by
the Company in satisfaction of certain administrative claims pursuant to
the Plan.

(e) Reflects the reorganization value in excess of amounts allocable to
identifiable assets in accordance with fresh start reporting.

(f) Reflects in the fresh start and other adjustments the adoption of accounting
policies and presentation adopted by the Company, which affected certain
assets and liabilities approximately as follows: pre-need funeral contracts
$490 million and deferred pre-need funeral contract revenue $500 million;
cemetery property $23 million and deferred pre-need cemetery contract
revenue $108 million.

(g) Reflects the establishment of Alderwoods Group's stockholders' equity based
on the value of Common Stock and Warrants issued pursuant to the Plan.

NOTE 2. NATURE OF OPERATIONS

The Predecessor was the second-largest operator of funeral homes and
cemeteries in North America. Prior to the Predecessor's reorganization
(see Note 1), effective December 31, 2001, the Predecessor operated 825 funeral
homes and 217 cemeteries throughout North America and 65 combination funeral
homes and cemeteries throughout North America and 32 funeral homes in the United
Kingdom.

The Predecessor made funeral, cemetery and cremation arrangements on an
at-need or pre-need basis. The Predecessor's funeral operations offered 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.

The Predecessor's cemetery operations assisted families in making burial
arrangements and offered a complete line of cemetery products (including a
selection of burial spaces, burial vaults, lawn crypts, caskets, memorials,
niches, mausoleum crypts and other merchandise), the opening and closing of
graves and cremation services.

The Predecessor's insurance companies sold a variety of life insurance
products, primarily to fund pre-need funeral services.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of the
Predecessor and its subsidiaries. The consolidated financial statements have
been prepared using the U.S. dollar as the functional currency and are presented
in accordance with accounting principles generally accepted in the United
States.

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 were wholly owned,

69

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
except for a few companies with small minority interests. The Predecessor's
operating subsidiaries in the United States were held through Loewen
International.

The Predecessor accounts for its investment in companies in which it has
significant influence by the equity method. The Predecessor'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. The equity method carrying value of the investment is
also reduced by any provision for asset impairment and common stock dividends
received.

All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.

USE OF ESTIMATES

The preparation of the consolidated financial statements in accordance with
United States 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.

FUNERAL OPERATIONS

Sales of at-need funeral services, including related merchandise, are
recorded as revenue when the service is performed.

Pre-need 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 Predecessor is
designated as beneficiary. Pre-need funeral services contract amounts, together
with related trust fund investment earnings and annual insurance benefits, are
deferred until the service is performed. The Predecessor estimates that trust
fund investment earnings and annual insurance benefits exceed the increase in
cost over time of providing the related services.

Selling costs related to the sale of pre-need funeral services are expensed
in the period incurred.

CEMETERY OPERATIONS

Sales of at-need interment rights, cemetery merchandise and services are
recorded as revenue when the merchandise is delivered or service is performed.
Sales of pre-need cemetery interment rights are recorded as revenue at the time
of transfer of interment right title, typically when the contract is paid in
full, providing the burial space is available for burial. A portion of the
proceeds from cemetery sales for interment rights is generally required by law
to be paid into perpetual or endowment care trusts. Earnings of perpetual or
endowment care trusts are recognized in current cemetery revenue and are used to
defray the maintenance costs of cemeteries, which are expensed as incurred. The
principal of these perpetual or

70

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
endowment care trusts generally cannot be withdrawn by the Predecessor, and
therefore is not included in the Predecessor's consolidated balance sheet.

Pursuant to various state and provincial laws, a portion of the proceeds
from the sale of pre-need merchandise and services may also be required to be
paid into trusts, which are included in pre-need cemetery contracts in the
Predecessor's consolidated balance sheet. Earnings on merchandise and services
trust funds are recognized when the revenue of the associated merchandise or
service is recognized.

Selling costs related to the sale of pre-need cemetery contract revenues are
expensed in the period incurred.

Interest is imputed at a market rate for pre-need cemetery sales contracts
that do not bear a market rate of interest.

INSURANCE OPERATIONS

The Predecessor accounts for its life insurance operations under United
States generally accepted accounting principles for life insurance companies.

For traditional life and participating life products, premiums are
recognized as revenue when due from policyholders. Benefits and expenses are
associated with earned premiums to result in recognition of profits over the
life of the policy contracts. This association is accomplished by means of the
provision for liabilities for future policy benefits and the amortization of
deferred policy acquisition costs.

Revenues from annuity contracts represent amounts assessed against contract
holders. Such assessments are principally surrender charges. Policy account
balances for annuities represent the deposits received plus accumulated interest
less applicable accumulated administrative fees.

Investment income, net of investment expenses, and realized gains and losses
related to insurance invested assets are included within revenues.

To the extent recoverable, certain costs of acquiring new insurance business
have been deferred. Such costs consist of first-year commissions in excess of
renewal rates, related fringe benefit costs, and direct underwriting and
issuance costs.

The deferred policy acquisition costs on traditional life products are
amortized with interest over the anticipated premium-paying period of the
related policies, in proportion to the ratio of annual premium revenue to be
received over the life of the policies. Expected premium revenue is estimated by
using the same mortality and withdrawal assumptions used in computing
liabilities for future policy benefits. The amount of deferred policy
acquisition costs is reduced by a provision for possible inflation on
maintenance and settlement expenses.

Also, the present value of future profits of acquired insurance business in
force is amortized over the expected premium-paying period of the
policies acquired.

71

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash, restricted 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 mausoleums, and is valued at average cost.
Amounts are expensed when revenue from sales of cemetery plots and mausoleums
are recognized.

PROPERTY AND EQUIPMENT

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

Buildings and improvements........ 10 to 40 years
Automobiles....................... 2 to 6 years
Furniture, fixtures and 6 to 10 years
equipment.......................
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 Predecessor followed the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121").

FAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used or to be disposed of. FAS 121 requires

72

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The review for recoverability (for assets to be held and used)
includes an estimate of the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the estimated expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment provision should be recognized. If
an impairment charge is indicated, long-lived assets to be held and used are
written down to the fair value of the asset.

DEBT ISSUE COSTS

Debt issue costs included in other assets on the consolidated balance sheet
represent the costs of negotiating and securing the Predecessor's long-term debt
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.

FINANCIAL INSTRUMENTS

Financial instruments that potentially subject the Predecessor to
concentrations of credit or collection risk principally consist of cash and cash
equivalents, trade accounts receivable and installment contracts receivable.

The Predecessor maintains its cash and cash equivalents with various high
quality and reputable financial institutions. The Predecessor's policies with
respect to cash and cash equivalents are specifically designed to minimize
concentrations of credit risk.

Concentrations of credit risk with respect to both trade accounts receivable
and installment contracts receivable are minimal, due to the low dollar amount
of each receivable, the large number of customers and the large dispersion of
the receivables across many geographic areas.

DERIVATIVE INSTRUMENTS

Prior to the Chapter 11 and the Creditors Arrangement Act filings, the
Predecessor used derivative transactions with financial institutions primarily
as hedges of other financial transactions. The Predecessor's policies did not
allow leveraged transactions and were designed to minimize credit and
concentration risk with counterparties.

The Predecessor typically used interest rate swap agreements to manage
interest rate exposure on its long-term debt. Differences between the amounts
paid and received would be accrued and accounted for as an adjustment to
interest expense over the life of the swap agreement.

The Predecessor used basic swap and option products to manage its exposure
to interest rate movements when anticipated financing transactions were probable
and the significant characteristics and expected terms were identified. Any gain
or loss as a result of the hedging would be deferred and amortized as an
adjustment to interest expense over the life of the financing instrument hedged.
If at any

73

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
point in time a hedging transaction no longer met the criteria of a hedge, any
gain or loss would be recognized in current earnings.

The Predecessor also used foreign exchange forward contracts, cross currency
swaps, options and futures to hedge the Predecessor's exposure to fluctuations
in foreign exchange rates. Gains or losses as a result of the hedge transaction
would be accounted for as an adjustment to the related transaction.

STOCK ISSUE EXPENSES

The costs of issuing stock, net of income tax recoveries thereon, are
applied to reduce the stated value of such stock.

STOCK OPTION PLAN

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS No. 123"), established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. However, as allowed by FAS No. 123, the Predecessor
has elected to continue to apply the intrinsic value-based method of accounting
described below, and has adopted the disclosure requirements of FAS No. 123.

The Predecessor applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, including FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," issued in March 2000, to account for its fixed plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided against deferred tax assets to
the extent recoverability of the asset cannot be considered more likely than
not.

EARNINGS PER SHARE

Earnings per share is calculated based on earnings attributable to Common
stockholders using the weighted average number of shares of Common stock
outstanding during the respective periods. Fully diluted earnings per share is
not materially different from earnings per share.

74

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

The assets and liabilities of the Predecessor's foreign subsidiaries, which
have a functional currency other than the U.S. dollar, are translated into U. S.
dollars at the rates of exchange as at the balance sheet date, and revenue and
expenses are translated at the average rates of exchange for the periods of
operation. The net gains or losses arising from the translations are included in
stockholders' equity as a component of accumulated other comprehensive income in
the consolidated statement of stockholders' equity.

ACCOUNTING CHANGE

The Predecessor implemented the U.S. Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") effective January 1, 2000, which resulted in a change in revenue
recognition for pre-need funeral contracts and pre-need cemetery contracts. The
Predecessor's previously published financial information for the year ended
December 31, 2000, and for the interim periods during the year ended
December 31, 2001, were prepared on a basis that did not fully reflect the
adoption of SAB 101. The financial statements for 2000 and 2001, presented
herein, have been restated to give effect to SAB 101. Due to the Company's
volume of historical pre-need funeral and cemetery contracts involved in the
restatement and the lack of certain transactional information related to such
contracts, certain estimation methods have been utilized by the Company to
restate revenue, as a result of the implementation of SAB 101.

Payments received for pre-need funeral contracts that are not required to be
trusted are deferred and recognized as revenue at the time the funeral is
performed. Previously, revenue was partially recognized when payments were
received. Direct selling expenses relating to the sale of pre-need funeral
contracts are expensed in the period incurred. Previously, direct selling
expenses were included in other assets and amortized over ten years.

The Predecessor recognizes revenue and related costs for pre-need sales of
interment rights and related merchandise and services at the time the interment
right title is transferred, merchandise is delivered or service is performed.
Previously, revenue and related costs, net of amounts required to be paid into
perpetual care trusts, were recognized at the time the pre-need contract was
signed. Earnings on merchandise and services trust funds are recognized when the
revenue of the associated merchandise or service is recognized. Previously,
earnings on merchandise and services trust funds were recognized in the period
realized.

The cumulative effect of the implementation of SAB 101 through December 31,
1999, resulted in a charge to income of $986,750,000 (net of income taxes of
$108,719,000), or $13.31 per basic and diluted share recorded on January 1,
2000. Pro forma information with respect to the impact of SAB 101 on the
Predecessor's 1999 statement of operations has not been presented, as it is
impractical to determine such amounts because, among other things, the
Predecessor no longer has access to the information necessary

75

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to determine the effect of such adjustment on disposed locations. The effect of
the restatement, as a result of the implementation of SAB 101 effective
January 1, 2000, is summarized below.

COMPARATIVE FIGURES

Certain of the comparative figures have been reclassified to conform to the
presentation adopted in 2001.

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT

Pursuant to the Plan, substantially all liabilities subject to compromise
were settled.

In the Chapter 11 and the Creditors Arrangement Act proceedings,
substantially all unsecured and under-secured liabilities of the Debtors as of
the Petition Date were subject to compromise or other treatment under the Plan.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction were dependent on the outcome of the Chapter 11 and
the Creditors Arrangement Act proceedings have been segregated and classified as
liabilities subject to compromise in the consolidated financial statements.
Generally, all actions to enforce or otherwise effect repayment of pre-Petition
Date liabilities, as well as all pending litigation against the Debtors arising
from pre-Petition Date events, were stayed while the Debtors continued their
business operations as debtors-in-possession, except in instances where the stay
had been lifted by the applicable Bankruptcy Court. The general claims bar date,
which was the last date by which most types of claims against the Predecessor
had to be filed in the U.S. Bankruptcy Court if the claimants wished to receive
any distribution in the Chapter 11 proceedings, was December 15, 1999. In
June 2000 and July 2001, the Predecessor filed amended schedules identifying
additional potential creditors, for which the bar dates were set at July 14,
2000 and August 27, 2001, respectively. The bar date for claims against
operating entities applicable to the Creditors Arrangement Act proceedings was
extended to and expired on March 17, 2000. Pursuant to the Plan, substantially
all liabilities subject to compromise were settled.

As a result of the reorganization proceedings, proofs of claim were filed
against the Debtors in the Bankruptcy Courts. The Debtors resolved proofs of
claim that differed in nature, classification or amount from the Debtors'
records through several means, including negotiations with the affected
claimants, the filing and prosecution of objections and, where appropriate, the
referral of the claims to the alternative dispute resolution procedures (the
"ADR Procedures") approved by the U.S. Bankruptcy Court on February 23, 2000.
The ADR Procedures provided for settlement offer exchange procedures to
facilitate the parties' resolution of the claim on a consensual basis. If the
claim remained unresolved following the

76

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
settlement offer exchange procedures, the claim was submitted to binding or
nonbinding arbitration (depending on the election of the claimant).

Under the U.S. Bankruptcy Code, the Debtors could elect to assume or reject
leases, employment contracts, service contracts and other pre-Petition Date
executory contracts, subject to U.S. Bankruptcy Court approval. Liabilities
related to executory contracts were recorded as liabilities not subject to
compromise, unless the Predecessor decided to reject the contract. Claims for
damages resulting from the rejection, after December 15, 1999, of executory
contracts were subject to separate bar dates.

The principal categories of obligations classified as liabilities subject to
compromise under the reorganization proceedings are identified below. The
amounts in total could vary significantly from the stated amount of proofs of
claim that were filed with the Bankruptcy Courts, and could be subject to future
adjustment depending on Bankruptcy Court action, further developments with
respect to potential disputed claims, and determination as to the value of any
collateral securing claims or other events. Additional claims could also arise
from the rejection of executory contracts by the Debtors.

Under the Plan, liabilities subject to compromise were categorized into a
class of allowed claims and further categorized into divisions. Certain of these
allowed claims would receive a pro rata share of Alderwoods Group Common Stock,
Warrants and interests in the Liquidating Trust. The amount of any claim that
ultimately was allowed by the U.S. Bankruptcy Court could be significantly more
or less than the estimated amount of such claim. As a consequence, the actual
ultimate aggregate amount of allowed unsecured claims could differ significantly
from the amounts recorded in the Predecessor's consolidated financial
statements. Accordingly, the amount of the pro rata distributions of Alderwoods
Group's Common Shares, Warrants and interests in the Liquidating Trust that
ultimately were received by a holder of an allowed unsecured claim could be
adversely or favorably affected by the aggregate amount of claims ultimately
allowed. Distributions of Alderwoods Group's Common Shares, Warrants and
interests in the Liquidating Trust to holders of allowed unsecured claims will
be made on an incremental basis until all claims are resolved.

77

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
The liabilities subject to compromise and debt were as follows:

Litigation against the Predecessor and its filing subsidiaries arising from
events occurring prior to June 1, 1999 and any additional liabilities related
thereto were subject to compromise.

As a result of the Chapter 11 and the Creditors Arrangement Act filings, no
principal or interest payments were made on most pre-Petition Date debt
obligations without Bankruptcy Court approval or until the Plan became
effective.

In March 1999, the Predecessor deferred future dividends applicable to the
Monthly Income Preferred Securities. Since June 1, 1999, as a result of the
Chapter 11 and the Creditors Arrangement Act filings, the Predecessor was in
default of its bank credit agreements, Series D and E senior amortizing

78

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
notes, Series 1 through 7 Senior notes, and PATS and, accordingly, had not made
interest, principal or dividend payments when due on secured, unsecured and
under-secured debt obligations.

Pursuant to U.S. bankruptcy law, interest on unsecured and under-secured
pre-Petition Date debt obligations subject to compromise had not been accrued
after the Petition Date. Interest expense and principal payments were recorded
on most secured vendor financing, including capital lease obligations.
Contractual interest expense not recorded on liabilities subject to compromise
totaled $132,481,000 for the year ended December 31, 2001 (2000 -- $153,964,000,
1999 -- $94,860,000).

The scheduled payments in arrears based on original contractual terms on the
Predecessor's senior debt obligations were as follows:

The Predecessor, Loewen International and all of its U.S. debtor
subsidiaries, as debtors-in-
possession, became parties to a Petition Date $200,000,000 revolving credit
agreement (the "DIP Facility"). On May 24, 2000, the Predecessor, Loewen
International and all of its U.S. debtor subsidiaries entered into a new
debtor-in-possession credit agreement (the "New DIP Facility"), replacing the
DIP Facility. The New DIP Facility was used primarily to fund Loewen
International's working capital needs

79

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
during the course of the reorganization proceedings. The credit limit was
reduced to $100,000,000 and the number of participating banks was reduced from
15 to seven. The material covenants included restrictions on new indebtedness
and asset sales not already approved by the U.S. Bankruptcy Court, a quarterly
interest coverage ratio, and quarterly minimum funeral home gross margin. Use of
the New DIP Facility for letters of credit was limited to a maximum of
$50,000,000. The New DIP Facility matured on June 30, 2001, and was secured by a
perfected security interest in substantially all of the existing and future
assets of Loewen International and its U.S. Debtor subsidiaries (subject only to
valid and perfected pre-Petition Date liens). The lenders under the New DIP
Facility also had the benefit of a "super-priority" administrative expense claim
in Loewen International's reorganization proceedings.

Net cash proceeds, after payment of certain direct selling costs, generated
from the Predecessor's asset disposition program approved by the
U.S. Bankruptcy Court were subject to restrictions on use. The New DIP Facility
required that such proceeds must first be used to repay any outstanding balances
under the New DIP Facility. The remaining cash proceeds were required to be
placed in a segregated deposit account, pending a U.S. Bankruptcy Court order
determining how such cash proceeds should be distributed. As at December 31,
2000, cash in this segregated deposit account amounted to approximately
$23 million.

Loans made under the New DIP Facility bore interest at floating rates of
U.S. Prime plus 1.25% (LIBOR plus 2.75% for Eurodollar advances). A fee of 2.75%
was charged on letters of credit and a commitment fee of 0.50% was charged on
the unused portion of the New DIP Facility. Related debt issue costs were
deferred and were amortized over the remaining life of the New DIP Facility. As
at December 31, 2000, there were no borrowings under the New DIP Facility and
there were letters of credit outstanding of $12,380,000.

In 1996, the Predecessor, Loewen International and a trustee entered into
the Collateral Trust Agreement pursuant to which the senior lenders shared
certain collateral and guarantees on a pari passu basis. The security for
lenders under the Collateral Trust Agreement consisted of (i) all of Loewen
International'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
common shares of substantially all of the subsidiaries in which the Predecessor
directly or indirectly held more than a 50% voting or economic interest, and
(iii) a guarantee by each subsidiary that pledged shares. The security was held
by the trustee for the equal and ratable benefit of the senior lending group.
The senior lending group consisted principally of the lenders under the senior
amortizing notes, senior notes and bank credit agreements as well as the holders
of certain letters of credit.

Subsequent to the execution of the Collateral Trust Agreement, among other
financings, the Predecessor issued the Series 3 and 4 Senior Notes, the
Series 6 and 7 Senior Notes and the PATS (collectively, the "Subject Debt"). The
aggregate principal amount outstanding of the Subject Debt was $1,100,000,000.
In April 2000, the Predecessor announced that there was uncertainty as to the
secured status under the Collateral Trust Agreement with respect to the Subject
Debt. In accordance with the terms of the Collateral Trust Agreement, holders of
future indebtedness or their representatives were to effect registration by
delivering to the collateral trustee Additional Secured Indebtedness
Registration Statements in a form set forth in the Collateral Trust Agreement.
However, Additional Secured

80

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
Indebtedness Registration Statements relating to the Subject Debt were either
not delivered to the collateral trustee or were delivered indicating an
incorrect outstanding amount. The Predecessor confirmed that it satisfied its
obligations under the financing agreements to adopt appropriate corporate
resolutions and to deliver to lender representatives, in connection with
closing, Additional Secured Indebtedness Registration Statements relating to the
Subject Debt. Pursuant to the agreements with lender representatives in
connection with those financings, the Predecessor and Loewen International
treated the Subject Debt as secured under the Collateral Trust Agreement. On
this basis, the total indebtedness owed to the senior lending group subject to
the Collateral Trust Agreement, including holders of certain letters of credit,
at the Petition Date aggregated $2,016,000,000.

The Plan provides for the cancellation of the debt claiming the benefit of
the Collateral Trust Agreement in exchange for a combination of cash, Alderwoods
Group Common Stock and seven-year unsecured notes. Under specified
circumstances, Alderwoods Group could also issue two-year unsecured notes or
five-year secured notes, or both in exchange for cancellation of such debt.

It was not known when the uncertainty would be resolved. Accordingly, the
effects of this contingency, if any, were not reflected in the Predecessor's
consolidated financial statements.

On September 29, 2000, Bankers Trust Company, the trustee under the
Collateral Trust Agreement, filed an adversary proceeding in the
U.S. Bankruptcy Court seeking a declaratory judgment that the Subject Debt was
secured debt and entitled to the benefits of the Collateral Trust Agreement. The
Predecessor was named as a defendant in that proceeding.

Interest expense for the year ended December 31, 2001, included $619,000
(2000 -- $3,142,000, 1999 -- $4,929,000) of debt issue cost amortization and
write-offs.

In 1994, Loewen Group Capital L.P. ("LGC") issued 3,000,000 Monthly Income
Preferred Securities for an aggregate amount of $75,000,000. LGC is a limited
partnership, and Loewen International as its general partner managed its
business and affairs. The Monthly Income Preferred Securities were due
August 31, 2024 and were 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. As a result of
the Chapter 11 filing, the Monthly Income Preferred Securities became
redeemable. The Monthly Income Preferred Securities were subject to an unsecured
guarantee by the Predecessor and Loewen International. Accordingly, the Monthly
Income Preferred Securities have been designated as liabilities subject to
compromise.

NOTE 5. IMPAIRMENT OF ASSETS AND DISPOSITIONS

During 1999, as a result of the Predecessor's reorganization proceedings and
operating performance decline, the Predecessor conducted extensive reviews of
each of its operating locations. The review resulted in the identification of
201 funeral homes and 170 cemeteries as probable for sale and the development of
a program for disposition of these locations, which was approved by the
U.S. Bankruptcy Court in January 2000. As a result, a pre-tax asset impairment
provision for long-lived assets of $428,194,000 was recorded in 1999.

During the first two months of 2001, the Predecessor completed the sale of
49 funeral homes and 43 cemeteries for gross proceeds of $25,267,000. As a
result, and together with the Predecessor's revision

81

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 5. IMPAIRMENT OF ASSETS AND DISPOSITIONS (CONTINUED)
on June 30, 2000, of its estimates of expected proceeds of the locations held
for disposal, an additional pre-tax asset impairment provision of $116,937,000
was provided for in 2000.

During 2001, the Company further revised its estimates of expected proceeds
of the locations held for disposal and identified other locations, which were
not part of the previously-announced disposition properties, as probable for
sale. Consequently, an additional pre-tax asset impairment provision of
$180,658,000 was recorded.

The asset impairment provisions were based on management estimates.

During 2001, the Predecessor sold 124 funeral homes and 119 cemeteries for
gross proceeds of $106,378,000, before closing and other settlement costs of
$601,000, resulting in a pre-tax gain of $173,308,000.

During 2000, the Predecessor sold 101 funeral homes and 33 cemeteries for
gross proceeds of $38,226,000, before closing and other settlement costs of
$2,107,000, resulting in a pre-tax gain of $5,591,000.

In 1999, the Predecessor sold 124 cemeteries and three funeral homes to an
investor group for gross proceeds of $193,000,000, before purchase price
adjustments and transaction costs, resulting in a pre-tax loss of $1,122,000.

NOTE 6. INVESTMENTS

In 1998, the Predecessor concluded that its investments in Prime and Rose
Hills had suffered a decline in value that was other than temporary and wrote
down its investments based on an assumed distribution of Prime's and Rose Hills'
respective stockholders' equity. In 1999, due to the performance of Prime, the
Predecessor wrote off its remaining investment in Prime. No further write down
was made to the investment in Rose Hills in 1999.

Under a Put/Call Agreement entered into with Blackstone Capital Partners II
Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone"), the
majority investor in Prime, in August 1996 (the "Prime Put/Call Agreement"), the
Predecessor had the option to acquire (the "Prime 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 Prime
Put/Call Agreement. Blackstone had the option to sell (the "Prime Put") its
Prime common stock to the Predecessor commencing on the sixth anniversary of the
acquisition, and for a period of two years thereafter, at a price determined
pursuant to the Prime Put/Call Agreement. Under a Put/Call Agreement entered
into with Blackstone and RHI Management Direct L.P. ("RHI") in November 1996
(the "Rose Hills Put/Call Agreement"), the Predecessor had the option to acquire
(the "Rose Hills Call") the Rose Hills common stock owned by Blackstone and RHI
commencing on the fourth anniversary of the acquisition, and for a period of two
years thereafter, at a price determined pursuant to the Rose Hills Put/Call
Agreement. Blackstone and RHI had the option to sell (the "Rose Hills Put")
their Rose Hills common stock to the Predecessor commencing on the sixth
anniversary of the acquisition, and for a period of two years thereafter, at a
price determined pursuant to the Rose Hills Put/Call Agreement.

82

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 6. INVESTMENTS (CONTINUED)
In addition, in 1998 and 1999, the Predecessor determined that its exercise
of the Prime Call and Rose Hills Call was unlikely, and the exercise of the
Prime Put and Rose Hills Put was likely. As a result, based on the Predecessor's
determination of the difference between the estimated put option prices and the
estimated fair value of the majority investor's equity in Prime and Rose Hills,
which was based in part on prevailing market conditions, the Predecessor
recorded contingent losses and corresponding liabilities. The respective
contingent liabilities have been recorded in "Other liabilities," net of the
carrying value of the investment in Rose Hills.

During 2000, Prime was reorganized under Chapter 11 in the U.S. Bankruptcy
Court. Prime's common stock was cancelled and the Predecessor received five-year
warrants to purchase 500,000 new common stock of reorganized Prime at an
exercise price of $16.76 per common share. The Prime plan of reorganization also
provided that 5,000,000 shares of new common stock would be issued to certain
creditors of Prime. Pursuant to the Plan, all of the Prime warrants were
irrevocably transferred to a liquidating trust for the benefit of holders of
certain of the Predecessor's indebtedness.

Blackstone filed proofs of claim against the Predecessor in respect of the
Prime Put, in which Blackstone calculated a Prime Put price of $183,400,000.
Blackstone and RHI also filed proofs of claim against the Predecessor in respect
of the Rose Hills Put, in which Blackstone and RHI calculated a Rose Hills Put
price of $158,800,000.

On April 12, 2001, Blackstone, RHI and the Predecessor entered into a
settlement and resolution of any and all claims, issues and disputes between
such parties relating to or involving Prime or Rose Hills on substantially the
following terms (the "Blackstone Settlement"), which became effective on the
Effective Date:

(i) each of Blackstone and RHI, on the one hand, and the Predecessor and
certain of its affiliates, on the other hand, effective as of the
closing of the transactions described below, released, waived and
discharged the other from any and all claims, demands, rights, causes of
action and controversies arising from or relating to the Prime Put/Call
Agreement (including the rejection thereof), the Rose Hills Put/Call
Agreement or otherwise relating to Prime or Rose Hills;

(ii) Alderwoods Group assumed the Rose Hills Put/Call Agreement as amended
and modified by the agreement entered into to effect the Blackstone
Settlement; and

(iii) the Rose Hills Put/Call Agreement was amended and modified to provide
that:

- the Rose Hills Put was automatically exercised;

- in full satisfaction of all of the Debtors' obligations under the Rose
Hills Put/Call Agreement, Alderwoods Group delivered to Blackstone and
RHI $24,679,000 aggregate principal amount of Alderwoods Group
unsecured subordinated convertible notes, 379,449 shares of Alderwoods
Group Common Stock, with an aggregate value of $6,515,000, and assumed
the obligations under the $445,000 note issued by RHI to Rose Hills;

- in full satisfaction of all of the obligations of Blackstone and RHI
under the Rose Hills Put/Call Agreement, Blackstone and RHI conveyed to
Alderwoods Group all of the Rose Hills common stock owned by them, free
and clear of all liens; and

83

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 6. INVESTMENTS (CONTINUED)
- upon the closing of such transactions, the Rose Hills Put/Call
Agreement terminated and was of no further force or effect.

NOTE 7. INVESTMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR
VALUE OF FINANCIAL INSTRUMENTS

Prior to filing for bankruptcy, the Predecessor used derivative transactions
with financial institutions primarily as hedges of other financial transactions.
The Predecessor does not trade in financial instruments and is not a party to
leveraged derivatives.

SWAP AGREEMENTS AND INTEREST RATE OPTIONS

The Predecessor 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, 2000, and
throughout 2001, no such agreements were outstanding.

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 has been omitted because it is not practicable to determine fair
values with sufficient reliability. Financial instruments with a carrying value
different from their fair value include:

Investments in debt and equity securities are evaluated for other than
temporary impairments. Other than temporary impairment is reflected in current
period income as a realized loss. It is possible that a significant change in
economic conditions in the near term could result in losses that could
be significant.

The fair value determination of insurance invested assets and pre-need
funeral contracts and pre-need cemetery contracts was based on quoted market
prices. Pre-need cemetery contracts for which it was not practicable to estimate
fair value comprised primarily customer installment contracts on pre-need

84

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 7. INVESTMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
cemetery sales, which generally had terms of one to seven years and contractual
or imputed interest ranging from 9.00% to 12.75%.

Due to the Chapter 11 filings, calculation of fair values for the preferred
securities of a subsidiary and liabilities subject to compromise could not be
determined as at December 31, 2000. The amounts settled pursuant to the Plan
were substantially less than the carrying values of the preferred securities of
a subsidiary and liabilities subject to compromise. As detailed in Note 4, the
majority of the Predecessor's long-term debt and the preferred securities of a
subsidiary became subject to compromise effective June 1, 1999.

Pre-need funeral contracts represented amounts deposited in accordance with
state trusting laws with various financial institutions together with accrued
earnings. The Predecessor received the pre-need funeral trust amounts when the
funeral services were performed. The weighted average rate of return for the
year ended December 31, 2000 was 4.3% (1999 -- 2.7%).

Fixed maturity securities, which the Predecessor had the positive intent and
ability to hold to maturity, were classified as held-to-maturity and were
carried at amortized cost. Fixed maturity securities classified as
held-to-maturity were approximately $26,140,000 at December 31, 2000. Debt and
equity securities that were held with the objective of trading to generate
profits on short-term differences in price were carried at fair value, with
changes in fair value reflected in the results of operations. At December 31,
2000, the Predecessor had no securities classified as trading. All other fixed
maturity and equity securities not classified as either held-to-maturity or
trading were classified as available-for-sale and carried at fair value, which
was approximately $702,228,000 at December 31, 2000.

On the insurance invested assets, the Predecessor earned $22,144,000 and
$21,642,000 of investment income for the year ended December 31, 2001 and 2000,
respectively. Included in the market value of insurance invested assets at
December 31, 2000 are $4,522,000 and $7,887,000 of unrealized gains and losses,
respectively. Maturities of fixed maturity securities, excluding mortgage-backed
securities and collateralized mortgage obligations, were estimated as follows:

85

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 7. INVESTMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FAIR
VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Predecessor's mortgage-backed securities and collateralized mortgage
obligations consist of:

NOTE 8. STOCKHOLDERS' EQUITY

(a) AUTHORIZED

200,000,000 First Preferred stock without par value
40,000,000 Class A stock without par value
750,000,000 Common stock without par value

Of the 200,000,000 First Preferred stock, 1,000,000 shares are designated as
7.75% Cumulative Redeemable Convertible First Preferred stock without par value,
Series A, 425,000 shares are designated as Convertible First Preferred stock,
Series B, (see (c) below), and 8,800,000 shares are designated as 6.00%
Cumulative Redeemable Convertible First Preferred stock, Series C ("Series C
Preferred stock") (see (c) below).

(b) ISSUED AND OUTSTANDING SHARES

86

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
(c) FIRST PREFERRED STOCK

First Preferred stock was authorized to 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 Predecessor determined.

During 1994, as part of the Management Equity Investment Plan, 425,000
shares were designated as Convertible First Preferred stock, Series B of the
Predecessor. Each Convertible First Preferred stock was convertible into ten
shares of Common stock at any time prior to July 13, 2011. No shares of
Series B Preferred shares were issued.

The Series C Preferred stock was issued for cash of $157,144,000 by public
offering, net of expenses of $3,776,000, in 1996. The holders of Series C
Preferred stock will have the right at any time before January 1, 2003, to
convert each Series C Preferred stock into that number of shares of Common stock
determined by dividing Cdn. $25.00 by Cdn. $38.125. Thereafter, a holder of
Series C Preferred stock 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 stock into that number of shares of Common stock 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. During 2000, 100 shares of Series C Preferred stock were converted
into 65 shares of Common stock.

The holders of the Series C Preferred stock were entitled, as and when
declared by the Board of Directors, to a fixed preferential cumulative cash
dividend of 6% per year, payable quarterly. In March 1999, the Predecessor
suspended future dividends on its Common stock and deferred future dividends on
its Preferred stock.

In August 2000, a motion was filed in the Canadian Court by RBC Dominion
Securities Inc., Sunrise Partners LLC and Paloma Strategic Fund LP seeking an
order to compel the Predecessor to convert the Preferred stock to Common stock
upon request from the Preferred stockholders. The court denied that motion on
September 29, 2000.

On or after July 1, 1999, the Series C Preferred stock was redeemable by the
Predecessor, 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 could only be effected by the issuance of Common
stock, 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 stock or
payment of a cash amount.

As of October 1, 2001, the Predecessor had deferred payment of dividends for
11 consecutive calendar quarters. Accordingly, this Preferred stock was
convertible into Common stock at a ratio of 9.710 Common shares per Preferred
share. However, the Predecessor was not accepting requests for conversion.

87

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
(d) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")

4,250,000 shares of the Common stock of the Predecessor were reserved upon
adoption by the Predecessor of the MEIP on June 15, 1994. Senior Exchangeable
Debentures (the "Debentures") amounting to $127,670,000 were issued by Loewen
International to a wholly-owned subsidiary of Loewen International formed to act
as agent for the MEIP. The Debentures were due July 15, 2001 and bore 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
Predecessor, each of which will be convertible into ten shares of the Common
stock of the Predecessor. As at December 31, 2000, the MEIP participants had
paid $2,869,000 for option rights to acquire $57,382,000 of Debentures
exercisable as to 50% in 1999, 25% in 2000 and 25% in 2001. If an option expires
unexercised, the participant is entitled to a refund without interest of the
amount paid to acquire such option right. In addition, as at December 31, 2000,
the former Chairman had paid $2,253,000 for the right and obligation to acquire
$45,060,000 of Debentures with the same exercise dates. Pursuant to the Plan,
the Debentures were canceled on the Effective Date.

(e) STOCK OPTION PLANS

The Predecessor had separate fixed stock option plans for its United States
and Canadian employees, which enabled the Predecessor to grant options to its
employees and Directors. The option plans were administered by the Compensation
Committee of the Predecessor's Board of Directors. Granting of stock options has
been suspended since the Petition Date. At December 31, 2000, 1,752,025 options
were exercisable at prices ranging from $0.93 to $41.25 per Common share. The
Predecessor has determined that, due to its reorganization the stock options
were effectively cancelled.

NOTE 9. LEGAL CONTINGENCIES

See Note 1 for a description of the Predecessor's reorganization
proceedings.

Pursuant to the Plan, Alderwoods Group succeeded to the business previously
conducted by the Predecessor. Accordingly, the Predecessor is not party to any
legal contingencies.

88

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 10. REORGANIZATION COSTS

The Predecessor incurred the following pre-tax charges for costs associated
with reorganizing its affairs under the protection of Chapter 11 and the
Creditors Arrangement Act as follows:

Professional fees and other costs include legal, accounting and consulting
services provided to the Predecessor and the Official Unsecured Creditors'
Committee which, subject to court approval, were required to be paid by the
Predecessor as it reorganized under Chapter 11 and the Creditors Arrangement
Act.

In September 1999, the Bankruptcy Courts approved the Key Employee Retention
Plan, a long-term agreement structured to ensure that appropriate employee
levels and expertise were retained during the reorganization process.

NOTE 11. RETIREMENT PLANS

The Predecessor had a 401(K) Retirement Savings Plan for United States
employees who could defer between 2% and 15% of their compensation. The
Predecessor matched 100% of employee contributions to a maximum of 2% of
employees' eligible compensation. There are no required future contributions
under this plan in respect of past service.

The Predecessor had a Registered Retirement Savings Plan for Canadian
employees who could contribute 3% or 5% of their compensation, which was matched
by an equal contribution to the plan by the Predecessor on behalf of employees.
There are no required future contributions under these plans in respect of past
service.

The Predecessor's total expense for these retirement plans for the three
years ended December 31, 2001, 2000 and 1999 was $2,252,778, $2,585,890 and
$2,777,000, respectively.

NOTE 12. INCOME TAXES

The provision or benefit for income taxes included United States federal
income taxes, determined on a consolidated return basis, foreign, state and
local income taxes.

89

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 12. INCOME TAXES (CONTINUED)
Loss before income taxes, extraordinary gain and cumulative effect of
accounting change was as follows:

Income tax provision consisted of the following:

The Predecessor made income tax payments of $17,309,000, $16,331,000 and
$12,917,000, excluding income tax refunds of $5,160,000, $3,306,000 and
$9,313,000, for the years ended December 31, 2001, 2000 and 1999, respectively.

The difference between the U.S. federal statutory income tax rate and the
Predecessor's effective tax rate were as follows:

90

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 12. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities are as follows:

The valuation allowance increased by $325,485,000 for the year ended
December 31, 2000, which includes the cumulative effect of the implementation of
SAB 101 and other U.S. GAAP adjustments through December 31, 1999.

As a result of reorganization, substantially all deferred tax assets and
liabilities, except for certain operating and capital losses carried forward,
were transferred to Alderwoods Group, Inc.

91

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 13. CHANGES IN OTHER NON-CASH BALANCES

Supplemental disclosures related to statements of cash flows consist of the
following:

92

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

93

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)

The activity in deferred pre-need cemetery contract revenue was as follows:

94

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
The realized earnings recognized in the consolidated statement of operations
related to pre-need merchandise and services trusts and perpetual or endowment
care trusts were $29,378,000, $33,526,000 and $26,211,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

The Predecessor's gross pre-need funeral contract sales decreased to
approximately $108 million in 2001 from approximately $119 million in 2000. The
Predecessor estimated that it had a backlog of approximately $1.1 billion in
pre-need funeral contracts as of December 31, 2001. At January 1, 2000, when the
Predecessor implemented SAB 101, approximately $92 million was recorded
representing amounts received but not required to be placed in trust, and
interest earnings on amounts in trust, which had previously been recognized in
revenue. During 2001 and 2000, the Predecessor recognized approximately
$4.4 million and $6.1 million, respectively, of this amount in funeral revenue.

NOTE 15. SEGMENTED INFORMATION

The Predecessor's reportable segments comprised three businesses it
operated, each of which offered different products and services: funeral homes,
cemeteries and insurance (see Note 2).

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 3). The Predecessor
sold primarily to external customers, though any intersegment sales or transfers
occured at market price. In 2001, the inter-company insurance commissions
amounted to $4,911,000 and were eliminated in the Predecessor's consolidated
financial statements (2000 -- $4,454,000, 1999 -- $4,554,000). The Predecessor
evaluates performance based on earnings from operations of the respective
businesses.

95

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 15. SEGMENTED INFORMATION (CONTINUED)
The following table reconciles earnings from operations of reportable
segments to total earnings (loss) and identifies the components of "Other"
segment earnings from operations:

The following table reconciles total assets of reportable segments and
details the components of "Other" segment assets which was mainly comprised of
corporate assets:

96

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 15. SEGMENTED INFORMATION (CONTINUED)
The Predecessor operated principally in North America. Over 90% of its
revenues were earned in the United States. The Predecessor also had operations
in Canada and the United Kingdom. The following tables depict the revenues
earned and the long-term assets held in the reportable geographic segments.

NOTE 16. RELATED PARTY TRANSACTIONS

As part of the acquisition of Osiris Holding Corporation ("Osiris") in 1995,
the Predecessor recorded a liability for the present value of contingent
payments. The contingent payments were due over a five-year period ending in
2001 to the former shareholders of Osiris, two of whom were officers of the
Predecessor. In 1999, the two officers of the Predecessor entered into an
agreement with the Predecessor to purchase 124 cemeteries and three funeral
homes and ended their association with the Predecessor. The balance of the
contingent payments, which was $14,947,000 at December 31, 1998, was paid out of
the proceeds of the sale in 1999 (see Note 5).

In addition, as part of the acquisition of Shipper Management ("Shipper") in
1996, the Predecessor recorded a liability for the present value of contingent
payments. The contingent payments were payable through 2001, to the former
shareholders of Shipper, one of whom was an officer of the Predecessor. In 1999,
the remaining balance of $4,838,000 became subject to compromise, as a result of
the Chapter 11 and the CCAA filings.

At December 31, 2000, current and former officers, directors and employees
were indebted to the Predecessor for approximately $12,875,000. As at
December 31, 2000, an allowance of $10,759,000 was recorded against those
amounts for former officers and employees.

97

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 17. EARNINGS PER SHARE

The basic and diluted earnings per share computations for income (loss)
before extraordinary gain and cumulative effect of accounting change were as
follows:

As a result of the Predecessor's reorganization proceedings, the Predecessor
was not accepting requests to exercise stock options or convert Preferred stock.
Accordingly, there was no Common stock issuable with respect to stock options
and Preferred stock.

NOTE 18. SUMMARIZED CHAPTER 11 AND CREDITORS ARRANGEMENT ACT FINANCIAL
INFORMATION

Summarized financial data for the companies that were under creditor
protection of Chapter 11 and the Creditors Arrangement Act are as follows:

98

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 18. SUMMARIZED CHAPTER 11 AND CREDITORS ARRANGEMENT ACT FINANCIAL
INFORMATION (CONTINUED)

-------------------------------

(a) Net investments in subsidiaries not under creditor protection of
Chapter 11 and the Creditors Arrangement Act include the net assets
of legal subsidiaries, as well as the net assets of cemetery
operations legally owned by third parties. The net assets of the
third parties are included in the Predecessor's consolidated
financial statements, since the Predecessor has the economic risks
and rewards of ownership of the underlying operations.

99

THE LOEWEN GROUP INC.
(PREDECESSOR TO ALDERWOODS GROUP, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)

NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data, which has been restated to give effect to the full
implementation of SAB 101, is as follows:

The effect of the restatement on quarterly financial information as a result
of the implementation of SAB 101 effective January 1, 2000 is summarized below:

100

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

EXECUTIVE OFFICERS OF ALDERWOODS GROUP

The following table sets forth certain information with respect to current
executive officers of Alderwoods Group. Each executive officer holds office
until his successor is elected and qualified or until his earlier resignation or
removal. The ages of the executive officers are shown as of March 11, 2002.

Certain biographical information relating to each of these individuals is
set forth below.

JOHN S. LACEY became the Chairman of the Board of Directors of Alderwoods
Group on January 2, 2002. From January 1999 to January 2002, Mr. Lacey was the
Chairman of the Board of Directors of Loewen Group. In December 1998, Mr. Lacey
became a Director of Loewen Group. 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.

PAUL A. HOUSTON became a director, President and Chief Executive Officer of
Alderwoods Group on January 2, 2002. From December 1999 to January 2002,
Mr. Houston was President and Chief Executive Officer of Loewen Group and
President of Loewen International. Additionally, Mr. Houston served as a
director of Loewen Group from June 1999 to January 2002. From August 1996 to
October 1999, Mr. Houston was President and Chief Executive Officer of Scott's
Restaurants Inc. From April 1995 to August 1996, Mr. Houston was President and
Chief Operating Officer of Scott's Food Services. From December 1992 to
April 1995, Mr. Houston was President of Black Photo Corporation.

KENNETH A. SLOAN became Senior Vice President, Chief Financial Officer of
Alderwoods Group on January 2, 2002. From November 2000 to January 2002,
Mr. Sloan was Senior Vice President, Chief Financial Officer of Loewen
International and of Loewen Group. From September 1987 to September 2000,
Mr. Sloan served as Senior Executive Vice President, Finance and Planning and
Chief Financial Officer of Shoppers Drug Mart Ltd. From May 1983 to
August 1987, Mr. Sloan was Vice President, Finance of Central Canada Grocers and
National Grocers, two divisions of Loblaw Companies Ltd., and from July 1978 to
July 1983 was Vice President, Finance of The Quaker Oats Company of Canada.

101

BRADLEY D. STAM became Senior Vice President, Legal & Asset Management of
Alderwoods Group on January 2, 2002. From February 2000 to January 2002,
Mr. Stam was Senior Vice President, Legal & Asset Management of Loewen
International and of Loewen Group. From March 1998 to February 2000, Mr. Stam
served as Senior Vice President, Law of Loewen Group. From September 1997 until
March 1998, Mr. Stam worked as an independent consultant. 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 Culp, Dwyer, Guterson & Grader.

GORDON D. ORLIKOW became Senior Vice President, People of Alderwoods Group
on January 2, 2002. From February 2000 to January 2002, Mr. Orlikow was Senior
Vice President, People of Loewen International and of Loewen Group. From
November 1999 to February 2000, Mr. Orlikow served as Senior Vice President,
Human Resources of Loewen Group. From March 1999 to November 1999, Mr. Orlikow
was a consultant with PricewaterhouseCoopers. From April 1996 to March 1999,
Mr. Orlikow was Director of Human Resources of BC Rail Ltd. Prior to that time,
Mr. Orlikow was Manager Employment, Training and Development of BC Rail Ltd.

JAMES D. ARTHURS became Senior Vice President, Information and Marketing
Services of Alderwoods Group on January 2, 2002. From May 2000 to January 2002,
Mr. Arthurs was Senior Vice President, Chief Information Officer of Loewen
International and of Loewen Group. From January 2000 to May 2000, Mr. Arthurs
was Vice President, Residential and Industrial Operations for the Trus Joist
Division of the Weyerhaeuser Company. From September 1997 to January 2000,
Mr. Arthurs was General Manager, Distribution Group for MacMillan Bloedel
Limited, and prior to that was with IBM Canada Ltd. in a variety of sales and
management positions from June 1981 to August 1997.

DIRECTORS OF ALDERWOODS GROUP

The Alderwoods Group Bylaws provide that the business and affairs of
Alderwoods Group will be managed under the direction of the Board of Directors
of Alderwoods Group, which consists of nine (9) members.

The following table sets forth certain information with respect to the Board
of Directors of Alderwoods Group. The ages of the directors are as of
March 11, 2002. These individuals serve as directors of Alderwoods Group and
hold office until the first annual meeting of stockholders, which is expected to
occur in 2003, and until his or her successor is elected and qualified.

Certain biographical information relating to each of these individuals is
set forth below.

102

JOHN S. LACEY became the Chairman of the Board of Directors of Alderwoods
Group on January 2, 2002. From January 1999 to January 2002, Mr. Lacey was the
Chairman of the Board of Directors of Loewen Group. In December 1998, Mr. Lacey
became a Director of Loewen Group. 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.

PAUL A. HOUSTON became President and Chief Executive Officer of Alderwoods
Group on January 2, 2002. From December 1999 to January 2002, Mr. Houston was
President and Chief Executive Officer of Loewen Group and President of Loewen
International. Additionally, Mr. Houston served as a director of Loewen Group
from June 1999 to January 2002. From August 1996 to October 1999, Mr. Houston
was President and Chief Executive Officer of Scott's Restaurants Inc. From
April 1995 to August 1996, Mr. Houston was President and Chief Operating Officer
of Scott's Food Services. From December 1992 to April 1995, Mr. Houston was
President of Black Photo Corporation.

WILLIAM R. RIEDL became a director of Alderwoods Group on January 2, 2002.
From December 1998 to January 2002, Mr. Riedl was a director of Loewen Group.
From April 1991 until his retirement in December 2000, Mr. Riedl was President,
Chief Executive Officer and Chairman of the Board of Fairvest Securities
Corporation, a stock brokerage firm.

LLOYD E. CAMPBELL became a director of Alderwoods Group on January 2, 2002.
Mr. Campbell became the Managing Director and Group Head of the Global Equity
Private Placement Group at Rothschild Inc. in June 2001. Mr. Campbell is also a
member of the firm's Investment Banking Committee. Prior to joining Rothschild,
Mr. Campbell was a Managing Director and Head of the Private Finance Group at
Credit Suisse First Boston. He joined Credit Suisse First Boston in 1985. He is
a member of the Board of Directors of Georgetown University, the Upper Manhattan
Empowerment Zone Development Corporation and the Tuskeegee Airmen
Foundation, Inc. Mr. Campbell is also a Chairman and Founder of Pride First
Corporation, a non-profit organization dedicated to improving the scholastic
achievement of young people in New York City.

ANTHONY G. EAMES became a director of Alderwoods Group on January 2, 2002.
Mr. Eames has been the President and Chief Executive Officer of A.G. Eames
Consulting since January 2001. From 1987 to 2001 Mr. Eames served as the
President and Chief Executive Officer of Coca-Cola Ltd., a Canadian subsidiary
of the Coca-Cola Company. Mr. Eames joined Coca-Cola in 1966 in Sydney,
Australia after graduating with first class honors from the University of
Sydney. Mr. Eames held a variety of senior marketing and line management
positions with Coca-Cola in Jakarta, Singapore, Hong Kong, Manila and Atlanta,
Georgia, prior to his move to Toronto in 1987.

CHARLES M. ELSON became a director of Alderwoods Group on January 2, 2002.
Mr. Elson has been the Edgar S. Woolard, Jr. Professor of Corporate Governance
at the University of Delaware since August 2000. From 1990 until that time,
Mr. Elson was Professor of Law at Stetson University College of Law. Mr. Elson
is also a director of Autozone, Inc., Nuevo Energy Corporation and Sunbeam
Corporation.

DAVID HILTY became a director of Alderwoods Group on January 2, 2002.
Mr. Hilty has served in various capacities with the investment bank of Houlihan
Lokey Howard & Zukin since 1990, becoming a Vice President in 1997, Senior Vice
President in 1999 and a Director in 2000. Mr. Hilty is also a director of Axiohm
Transaction Solutions, Inc.

OLIVIA KIRTLEY became a director of Alderwoods Group on January 2, 2002.
Ms. Kirtley is currently self-employed, providing business consulting as a
certified public accountant. Ms. Kirtley has served as Chair of the Board, AICPA
Board of Examiners for the American Institute of Certified Public Accountants, a
national professional organization, from 1998 until recently. Ms. Kirtley held
the positions

103

of Treasurer, Vice President and Chief Financial Officer of Vermont American
Corporation from 1991 to 2000. Ms. Kirtley also serves as a director of Lancer
Corporation and Res-Care, Inc.

W. MACDONALD SNOW became a director of Alderwoods Group on January 2, 2002.
Mr. Snow held various positions with Prudential Insurance Company of America, a
securities broker and investment advisor from 1964 until his retirement in 1996,
becoming Chief Credit Policy Officer and Chief of Staff, Private Placement Group
in 1991 and Strategic Planning Officer in 1994.

SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and beneficial owners of more than
10% of the outstanding shares of Alderwoods Group's Common Stock (collectively,
"reporting persons") to file with the U.S. Securities and Exchange Commission
reports of ownership and changes in ownership of equity securities of Alderwoods
Group. Based solely upon its review of such reports and written representations
from the reporting persons that Form 5 was either filed or not required to be
filed by such reporting persons, the Company believes that all of the reporting
persons complied with the Section 16(a) filing requirements during the year
ended December 31, 2001.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The discussion of executive compensation contained in this section has been
prepared based on the actual compensation paid and benefits provided for the
fiscal year ended December 31, 2001 to executive officers of the Predecessor who
now also serve as executive officers of Alderwoods Group.

The following table sets forth compensation earned during the last two
fiscal years by the person currently serves as Alderwoods Group's Chief
Executive Officer and who served as the Chief Executive Officer of the
Predecessor during 2001 and the Predecessor's five most highly compensated
executive officers, other than the person who served as Chief Executive Officer,
who served as executive officers of the Predecessor at the end of 2001
(collectively, the "Named Executive Officers").

104

SUMMARY COMPENSATION TABLE(1)

- ------------------------

(1) All dollar amounts are expressed in U.S. dollars, unless indicated
otherwise, although certain compensation is paid in Canadian dollars. The
applicable exchange rate to translate amounts expressed in U.S. dollars to
Canadian dollars for 2001 is $1 US = $1.5484 Canadian, (2000 -- $1 US =
$1.4855 Canadian). These rates are based on a weighted average of the Bank
of Canada noon spot rate exchange.

(2) In accordance with SEC rules, the value of perquisites and other personal
benefits, securities and property for each Named Executive Officer that
does not exceed the lesser of $50,000 or 10% of the total of the annual
salary and bonus is not reported herein.

(3) Mr. Lacey served as a director of the Predecessor during 2001 and received
annual director retainer and director meeting fees aggregating $38,000.

(4) Mr. Lacey served as a Director of the Predecessor during 2000 and received
annual director retainer and director meeting fees aggregating $53,250.

(5) Consists of car allowance ($11,625), taxable car allowance ($1,450), club
membership ($2,422), taxable medical benefits ($17) and executive health
reimbursement ($869).

(6) Consists of car allowance ($11,625), taxable car allowance ($1,772), club
membership ($2,422), taxable medical benefits ($17), taxable contributions
to the Predecessor's group registered retirement savings plan ($4,359) and
executive health reimbursement ($869).

(7) Consists of car allowance ($4,847), taxable car allowance ($1,496), club
membership ($6,664), taxable medical benefits ($215) and taxable
contributions to the Predecessor's group registered retirement savings plan
($4,544).

(8) Consists of car allowance ($3,875), taxable car allowance ($307), taxable
medical benefits ($61), taxable contributions to the Predecessor's group
registered retirement savings plan ($4,359), executive health reimbursement
($869), taxable moving allowance ($8,880) and non-taxable moving
allowance ($23,088).

105

(9) Consists of car allowance ($4,039), taxable car allowance ($1,410), taxable
medical benefits ($506), taxable contributions to the Predecessor's group
registered retirement savings plan ($4,544), taxable moving allowance
($19,590) and non-taxable moving allowance ($438).

(10) Consists of car allowance ($3,100), taxable car allowance ($687), taxable
contributions to the Predecessor's group registered savings plan ($4,359)
and executive health reimbursement ($869).

(11) Consists of taxable medical benefits ($471).

(12) Consists of car allowance ($3,100), taxable medical benefits ($60), taxable
contributions to the Predecessor's group registered retirement savings plan
($4,359) and executive health reimbursement ($869).

(13) Consists of car allowance ($3,100), taxable medical benefits ($474),
taxable contributions to the Predecessor's group registered retirement
savings plan ($4,359), executive health reimbursement ($511), taxable moving
allowance ($13,710) and non-taxable moving allowance ($420).

(14) Consists of car allowance ($1,885), taxable medical benefits ($294) and
taxable contributions to Predecessor's group registered retirement savings
plan ($3,029).

EMPLOYMENT AGREEMENTS, BENEFIT PLANS AND RELATED AGREEMENTS

The employment, compensation and benefit arrangements and modifications of
Alderwoods Group for executive officers are described below.

KEY EMPLOYEE RETENTION PROGRAM

Under the Key Employee Retention Program adopted in 1999 by the Predecessor,
83 key employees in senior management positions, other than Messrs. Lacey and
Houston, have received emergence bonuses based primarily upon the successful
reorganization. These members of senior management have been paid a bonus equal
to a percentage of each employee's salary. Such percentages range from 10% up to
50% of an employee's salary, depending on position, and can be paid 50% in cash
and 50% in Common Stock. The Common Stock granted as emergence bonuses was
valued at the average of the daily closing sales price per share of the Common
Stock as reported on Nasdaq for the 30 consecutive trading days immediately
following the Effective Date. One-third of the bonus has been paid and
two-thirds will be paid within 15 days of the date that is six months after the
Effective Date. As of the date of this report, the Company estimates that, if
all of these employees earn and receive their emergence payments, the aggregate
amount of such payments will be valued at approximately $1.7 million; the amount
of such payments to Kenneth A. Sloan, Senior Vice President, Chief Financial
Officer, Bradley D. Stam, Senior Vice President, Legal & Asset Management,
Gordon D. Orlikow, Senior Vice President, People and James D. Arthurs, Senior
Vice President, Information and Marketing Services are approximately $118,000,
$150,000, $64,000 and $70,000, respectively.

All eligible employee's right to participate in the Key Employee Retention
Program is contingent upon the employee's execution of a release and waiver
agreement, under which the employee waived any rights or claims that he or she
may have at law or under pre-petition employment or consulting agreements or
company programs with respect to retention or performance incentive payments or
severance or similar benefits.

EMPLOYMENT AGREEMENTS WITH THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Alderwoods Group has entered into employment agreements with John S. Lacey,
its Chairman, and Paul A. Houston, its President and Chief Executive Officer.
Each employment agreement is for a fixed term ending August 1, 2004, or, if
earlier, the date on which the officer terminates employment. Under their
respective employment agreements, Mr. Lacey receives an annual base salary of
$500,000 and

106

Mr. Houston receives an annual base salary of $600,000. Base salary is subject
to periodic review, and both officers will have an annual bonus opportunity of
up to 100% of base salary based on the achievement of financial performance
goals. In addition, Mr. Lacey received a reorganization bonus of $3 million, and
Mr. Houston received a reorganization bonus of $1.5 million, which were both
paid within 15 days from January 2, 2002. Each employment agreement also
provides for customary executive benefits.

Under the employment agreements, Mr. Lacey and Mr. Houston received a grant
of stock options. Pursuant to the employment agreements, Mr. Lacey and
Mr. Houston (a) each received a grant of stock options in connection with the
Effective Date exercisable to purchase 495,000 shares of Common Stock and
(b) the options so granted become exercisable in cumulative installments with
respect to 25% of the shares on the date of grant, 25% of the shares on
November 1, 2002 and the remaining 50% of the shares on November 1, 2003. Such
options were granted on February 20, 2002.

If either officer is terminated without cause (as defined in their
respective employment agreements), all stock options will become immediately
exercisable, and the officer will be entitled to severance benefits in the
amount of 24 months base salary paid in a lump sum, benefit coverage for the
remaining term of the employment agreement and a prorated bonus for the year of
termination determined without regard to financial performance. In the event of
a change in control, the officer will be entitled to the same severance benefits
if, within two years after the change in control, he is terminated without cause
or if he resigns because of certain adverse changes in his compensation,
benefits or position. In addition, if an agreement that would result in a change
in control is entered into, each officer may submit his resignation for any
reason prior to, but effective upon, the date of the change in control and
receive the severance benefits described above.

The employment agreements also provide for tax gross-up payments if the
severance benefits are subject to the excise tax imposed under the Internal
Revenue Code on so-called excess parachute payments. For purposes of the
employment agreements, a "change in control" is defined as the occurrence of any
one of the following events: (a) the acquisition by any individual, entity or
group of beneficial ownership of 30% or more of the combined voting power of
Alderwoods Group (excluding acquisitions as a result of issuances of stock
directly from Alderwoods Group and approved by the Incumbent Board (as defined
below); acquisitions by Alderwoods Group; acquisitions by an employee benefit
plan (or related trust) sponsored or maintained by Alderwoods Group or any of
its subsidiaries; and acquisitions by persons pursuant to a Business Combination
(as defined below) that would not constitute a change in control); (b) the
consummation of a reorganization, amalgamation, merger or consolidation, a sale
or disposition of all or substantially all of the assets of Alderwoods Group, or
other transaction (a "Business Combination") in which all or substantially all
of the individuals and entities who were beneficial owners of voting stock of
Alderwoods Group immediately prior to such Business Combination beneficially
own, immediately following such Business Combination, less than 40% of the
combined voting power of the entity resulting from the Business Combination;
(c) individuals who constitute the Board of Alderwoods Group (the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board of
Alderwoods Group (except that if an individual becomes a director subsequent to
the Effective Date and his or her election or nomination for election was
approved by a vote of at least two-thirds of the directors then comprising the
Incumbent Board, such individual will be deemed to be a member of the Incumbent
Board, but excluding any individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board of
Alderwoods Group); or (d) the approval by the stockholders of Alderwoods Group
of a complete liquidation or dissolution of Alderwoods Group, except pursuant to
a Business Combination that would not constitute a change in control.

Mr. Lacey became the Chairman of Alderwoods Group, and Mr. Houston the
President and Chief Executive Officer of Alderwoods Group, as of January 2,
2002. In addition, a wholly owned Canadian subsidiary of Alderwoods Group (the
"Canadian Subsidiary") assumed the obligations of the Predecessor

107

under the former employment agreements with Messrs. Lacey and Houston and a
management services agreement has been entered into between Alderwoods Group and
the Canadian Subsidiary providing for the provision of management services by
the Canadian Subsidiary to Alderwoods Group and certain of its other
subsidiaries.

EMPLOYMENT AGREEMENTS WITH OTHER EXECUTIVE OFFICERS

On January 2, 2002, Alderwoods Group entered into employment agreements
with: (a) Kenneth A. Sloan, Senior Vice President, Chief Financial Officer;
(b) Bradley D. Stam, Senior Vice President, Legal and Asset Management;
(c) Gordon D. Orlikow, Senior Vice President, People; and (d) James D. Arthurs,
Senior Vice President, Information and Marketing Services.

The annual base salary for each of these individuals as follows:
Mr. Sloan -- $235,000; Mr. Stam -- $300,000; Mr. Orlikow -- $160,000; and
Mr. Arthurs -- $175,000. These executive officers are entitled to one year of
salary and bonus if the executive's employment is terminated (not following a
change in control) for any reason other than termination for cause or voluntary
resignation. In the event of a change in control of Alderwoods Group, each of
these executives will be entitled to severance benefits if such executive's
employment is terminated without cause (as defined in the employment agreements)
or if the executive resigns because of certain adverse changes in compensation,
benefits or position during either the two-year period following the change in
control or the one-year period prior to a change in control, but after
discussions have begun that ultimately lead to a change in control. For purposes
of these agreements, the definition of a "change in control" is substantially
identical to the definition of such term contained in the employment agreements
for Mr. Lacey and Mr. Houston (referenced above). The severance benefits
following a change in control under the employment agreements will consist of a
lump sum payment equal to two times the executive's base salary and two times
the executive's annual bonus (calculated at not less than the highest annual
bonus earned in any of the three years preceding the year in which the change in
control occurred), plus continued benefit coverage for a period of two years. In
addition, vesting with respect to stock options or other long-term incentive
compensation will accelerate, and any restrictions on the payment of such
compensation will lapse, on a change in control, and the executive is entitled
to a tax gross-up payment in the event the severance benefits are subject to the
excise tax imposed under the Internal Revenue Code on so-called excess parachute
payments.

If either officer is terminated without cause prior to the first anniversary
of the Effective Date, all stock options will become immediately exercisable,
and the officer will be entitled to severance benefits in the amount of
24 months base salary paid in a lump sum, benefit coverage for the remaining
term of the employment agreement and a prorated bonus for the year of
termination determined without regard to financial performance. In the event of
a change in control, the officer will be entitled to the same severance benefits
if, within two years after the change in control, he is terminated without cause
or if he resigns because of certain adverse changes in his compensation,
benefits or position. However, if such termination should occur after the first
anniversary of the Effective Date, such officer shall be entitled to 12 months
base salary paid in a lump sum and all other bonus and other benefits as
described above.

EQUITY INCENTIVE PLAN

Alderwoods Group has implemented the 2002 Equity Incentive Plan (the "Equity
Incentive Plan") to attract, retain and motivate key employees. The Board of
Alderwoods Group (or a committee thereof) determines the awards to be granted
under the Equity Incentive Plan. The Equity Incentive Plan provides for grants
of stock options to the employees and members of the Alderwoods Group's Board of
Directors of Alderwoods Group. A total of 4,500,000 shares were reserved for
issuance in satisfaction of awards under the Equity Incentive Plan. On
February 20, 2002, as contemplated by the Plan, grants of options covering up to
2,410,000 shares were made. All shares available under the Equity Incentive Plan
not covered by the options granted on February 20, 2002, will remain available
for future grants under the Equity Incentive Plan.

108

The option grants made as of March 11, 2002 include grants to the
individuals serving as executive officers and directors of Alderwoods Group as
follows:

The options granted on February 20, 2002 will become exercisable in
cumulative installments with respect to 25% of the shares on the first and
second anniversaries of the date of grant and with respect to the remaining 50%
of the shares on the third anniversary of the date of grant; provided, however,
that in the case of options granted to Messrs. Lacey and Houston, pursuant to
their employment agreements such options became exercisable with respect to 25%
of the shares on the date of grant, will become exercisable with respect to 25%
of the shares on November 1, 2002 and will become exercisable with respect to
the remaining 50% of the shares on November 1, 2003.

ANNUAL INCENTIVE PAYMENTS

Under an annual incentive plan, Alderwoods Group expects to motivate and
reward designated key employees for the achievement of annual corporate,
departmental or individual goals and objectives through new annual cash
incentives. The new annual incentives will compensate key employees chosen by
the Compensation Committee of the Board of Alderwoods Group based on certain
performance levels.

DIRECTOR COMPENSATION AND COMPENSATION COMMITTEE INTERLOCKS

DIRECTOR COMPENSATION

Each director of Alderwoods Group who is not an employee of Alderwoods Group
or any of its subsidiaries will be paid an annual base retainer fee of $30,000,
plus meeting fees of $1,500 for attendance at each in-person meeting, and $250
for attendance at each telephonic meeting, of the Board of Alderwoods Group or a
committee thereof. The chairman of each committee will receive an additional
annual fee of $5,000. Pursuant to the Director Compensation Plan of Alderwoods
Group (the "Director Compensation Plan"), each such director will have the
option of receiving such fees in cash, Common Stock or a combination thereof.
Members of the Board of Alderwoods Group who are also employees of Alderwoods
Group or any of its subsidiaries will receive no additional compensation for
service on the Board of Alderwoods Group.

109

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Neither the Board of Directors of Loewen International nor any committee
thereof has ever made compensation decisions regarding the executive officers of
Loewen International. The executive officers of Loewen International have
historically received compensation for their services to Loewen Group and its
subsidiaries, including Loewen International; thus, the Compensation Committee
and Board of Directors of Loewen Group previously made such compensation
decisions. The Board of Alderwoods Group has established a Compensation
Committee effective as of January 15, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of the Common Stock of Alderwoods Group as of March 11, 2002 by
(a) each person to own beneficially more than 5% of Common Stock of Alderwoods
Group to the extent known by the management, (b) each executive officer and
director of Alderwoods Group and (c) all executive officers and directors of
Alderwoods Group, as a group. Unless otherwise indicated, the named persons
exercise sole voting and investment power over the shares that are shown as
beneficially owned by them. As of March 11, 2002, 39,899,089 shares of Common
Stock were outstanding.

- ------------------------

* Less than 1%.

110

(1) Based on the terms of the Plan and information currently available to
Alderwoods Group, it believes that Oaktree Capital Management, LLC, Angelo,
Gordon & Co., L.P. and Franklin Mutual Advisers, LLC are the only persons or
entities that beneficially own 5% or more of the Common Stock outstanding.

(2) Based on a Schedule 13G filed by Oaktree Capital Management, LLC with the
SEC on January 29, 2002 and information currently available to Alderwoods
Group. Includes 645 shares of Common Stock that Oaktree Capital
Management, LLC has the right to purchase at an initial exercise price of
$25.76 per share pursuant to the Warrants.

(3) Based on a Schedule 13G filed by Angelo, Gordon & Co., L.P. with the SEC on
March 11, 2002 and information currently available to Alderwoods Group.
Includes 1,437,332 shares that Angelo, Gordon & Co., L.P. has the right to
acquire upon the conversion of the Company's Convertible Subordinated Notes
at an initial conversion rate of $17.17 per share.

(4) Based on information currently available to Alderwoods Group.

(5) Consists of options granted to Messrs. Lacey and Houston on February 20,
2002, which are currently exercisable.

(6) Pursuant to the Director Compensation Plan, each director may elect to take
all or a portion of the fees he or she receives for services as a director
in the form of Common Stock. The Company does not know whether any director
will so elect within 60 days, and the number of shares that could be
received pursuant to such an election is indeterminable.

(7) Includes currently exercisable options to purchase 252,749 shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with his relocation upon becoming Senior Vice President,
Information and Marketing Services, James D. Arthurs and his spouse obtained a
non-interest bearing loan from the Predecessor. As of December 31, 2001, an
amount of $498,192 was outstanding, which was the largest aggregate amount
outstanding during 2001. The loan is payable in full in August 2004.

In connection with his relocation upon becoming Senior Vice President,
People, Gordon D. Orlikow and his spouse obtained a non-interest bearing loan
from the Predecessor. As of December 31, 2001, $87,907 was outstanding under
this loan, which was the largest aggregate amount outstanding during 2001. The
loan is payable in full in November 2003.

Alderwoods Group has retained the firm of Business.Ca to provide certain
consulting and computer programming services to its internal information
technology division. The son of the President and Chief Executive Officer of
Alderwoods Group is a senior officer in this company. This service provider was
paid approximately $160,000 in 2001, and it is anticipated that it will receive
an amount of approximately $200,000 in 2002.

111

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT:

FINANCIAL STATEMENTS

ALDERWOODS GROUP, INC., CONSOLIDATED BALANCE SHEET

Report of Independent Accountants

Consolidated Balance Sheet as of December 31, 2001

Notes to Consolidated Balance Sheet

THE LOEWEN GROUP INC., CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Accountants

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements

FINANCIAL STATEMENT SCHEDULE

Schedule II -- Valuation and Qualifying Accounts

EXHIBITS

112

113

114

- ------------------------

* Indicates management contract or compensatory plan or arrangement.

(B) REPORTS ON FORM 8-K

There were no Current Reports on Form 8-K filed by Alderwoods Group during
the last quarter of fiscal 2001.

The following Current Reports on Form 8-K were filed by the Predecessor
during the last quarter of fiscal 2001:

115

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALDERWOODS GROUP, INC.
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)

- ------------------------

(1) Primarily related to disposals in connection with locations sold and the
acquisition of Rose Hills.

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

(3) Fresh start and other adjustments and the acquisition of Rose Hills.

(4) Cumulative effect of change in accounting principle.

(5) Amounts prior to December 31, 2001, reflect predecessor valuation and
qualifying accounts.

116

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.

ALDERWOODS GROUP, INC.

By: /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
Dated: March 26, 2002 PRESIDENT AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Paul A. Houston
and Kenneth A. Sloan, 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 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
Form 10-K has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

President, Chief
/s/ PAUL A. HOUSTON Executive Officer and
------------------------------------------- Director Dated: March 26, 2002
Paul A. Houston (Principal Executive
Officer)

Senior Vice President,
/s/ KENNETH A. SLOAN Chief Financial
------------------------------------------- Officer Dated: March 26, 2002
Kenneth A. Sloan (Principal Financial
Officer)

Vice President,
/s/ DWIGHT K. HAWES Controller
------------------------------------------- (Principal Accounting Dated: March 26, 2002
Dwight K. Hawes Officer)

/s/ LLOYD E. CAMPBELL
------------------------------------------- Director Dated: March 26, 2002
Lloyd E. Campbell

/s/ ANTHONY G. EAMES
------------------------------------------- Director Dated: March 26, 2002
Anthony G. Eames

117

/s/ CHARLES M. ELSON
------------------------------------------- Director Dated: March 26, 2002
Charles M. Elson

------------------------------------------- Director Dated: March 26, 2002
David Hilty

/s/ OLIVIA KIRTLEY
------------------------------------------- Director Dated: March 26, 2002
Olivia Kirtley

/s/ JOHN S. LACEY
------------------------------------------- Chairman of the Board Dated: March 26, 2002
John S. Lacey

/s/ WILLIAM R. RIEDL
------------------------------------------- Director Dated: March 26, 2002
William R. Riedl

/s/ W. MACDONALD SNOW
------------------------------------------- Director Dated: March 26, 2002
W. MacDonald Snow

118

EXHIBIT LIST

- ------------------------

119