ALDERWOODS GROUP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 16 weeks ended October 5, 2002

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

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

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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

Former name, former address and former fiscal year, if changed since
last report: N/A

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 / /

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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 / /

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APPLICABLE ONLY TO CORPORATE ISSUERS

At November 2, 2002, there were 39,938,901 shares of Common Stock
outstanding.

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ALDERWOODS GROUP, INC.

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(1) ALTHOUGH NOT COMPARABLE, CERTAIN CONSOLIDATED FINANCIAL INFORMATION AND
OTHER INFORMATION OF THE LOEWEN GROUP INC. MAY BE OF LIMITED INTEREST TO
STOCKHOLDERS OF ALDERWOODS GROUP, INC. AND HAS BEEN INCLUDED IN THIS
QUARTERLY REPORT ON FORM 10-Q.

i

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

THE FOLLOWING ALDERWOODS GROUP, INC. INTERIM CONSOLIDATED FINANCIAL
STATEMENTS ISSUED SUBSEQUENT TO 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") BECOMING EFFECTIVE ARE NOT
COMPARABLE WITH THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS ISSUED BY THE
LOEWEN GROUP INC. (THE "PREDECESSOR") PRIOR TO THE PLAN IMPLEMENTATION, DUE TO
THE SIGNIFICANT CHANGES IN THE FINANCIAL AND LEGAL STRUCTURE OF ALDERWOODS
GROUP, INC., THE APPLICATION OF FRESH START REPORTING AS AT DECEMBER 31, 2001,
RESULTING FROM CONFIRMATION AND IMPLEMENTATION OF THE PLAN, AND CHANGES IN
ACCOUNTING POLICIES AND FISCAL ACCOUNTING PERIODS ADOPTED BY THE COMPANY.
ACCORDINGLY, ALDERWOODS GROUP, INC.'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE 16 WEEKS ENDED OCTOBER 5, 2002, AND 40 WEEKS ENDED OCTOBER 5,
2002, DO NOT INCLUDE COMPARABLE OPERATING AND CASH FLOW INFORMATION. CERTAIN
INTERIM CONSOLIDATED FINANCIAL INFORMATION OF THE LOEWEN GROUP INC. MAY BE OF
LIMITED INTEREST TO THE STOCKHOLDERS OF ALDERWOODS GROUP, INC. AND HAS BEEN
INCLUDED FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001, AND NINE MONTHS ENDED
SEPTEMBER 30, 2001, IN THIS QUARTERLY REPORT ON FORM 10-Q.

1

PART I

ITEM 1. FINANCIAL STATEMENTS

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS

COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5)

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

2

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

3

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

4

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

5

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 1. NATURE OF OPERATIONS

Alderwoods Group, Inc., a Delaware corporation ("Alderwoods Group"),
together with its subsidiaries (collectively, the "Company") is the
second-largest operator of funeral homes and cemeteries in North America. As at
October 5, 2002, the Company operated 788 funeral homes and 185 cemeteries and
64 combination funeral homes and cemeteries throughout North America and
39 funeral homes in the United Kingdom.

The Company's funeral operations encompass making funeral 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company is the successor to The Loewen
Group Inc. and its subsidiaries, including Loewen Group International, Inc., a
Delaware corporation ("Loewen International") that was renamed Alderwoods
Group, Inc. The interim 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.

The interim consolidated financial statements include the accounts of all
subsidiary companies and all adjustments, consisting only of normal recurring
adjustments, which in management's opinion are necessary for a fair presentation
of the financial results for the interim period. The interim consolidated
financial statements have been prepared on a basis consistent with the
accounting policies described in the Company's Annual Report as at December 31,
2001, on Form 10-K as filed with the U.S. Securities and Exchange Commission
("SEC") and should be read in conjunction therewith.

The results of operations for interim periods are not necessarily indicative
of the results that may be expected for the full fiscal year or for any other
interim period.

USE OF ESTIMATES

The preparation of the interim 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 interim consolidated financial statements and the reported
amounts of revenues and expenses for the reporting period. As a result, actual
amounts could significantly differ from those estimates.

6

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CHANGE IN FISCAL YEAR

On March 6, 2002, the Board of Directors of the Company approved a change in
the Company's fiscal year end from December 31 to the Saturday nearest to
December 31 in each year (whether before or after such date). This change is
effective for fiscal year 2002, which will end on December 28, 2002. No
transition report for the change in fiscal year was required.

In connection with the change in fiscal year end, the Company also realigned
its fiscal quarters. The first and second fiscal quarters will each consist of
12 weeks and the third fiscal quarter will consist of 16 weeks. The fourth
fiscal quarter will typically consist of 12 weeks, but this period may be
altered, if necessary, in order to cause the fourth fiscal quarter to end on the
same day as the fiscal year, as described above. As a result of this, the fourth
fiscal quarter will consist of 13 weeks in certain years.

NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS

The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), requires
that goodwill be reviewed for impairment annually, as well as upon the
occurrence of certain events that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Under FAS 142, goodwill
impairment is deemed to exist, and must then be further assessed, if a reporting
unit's carrying amount exceeds its estimated fair value. The Company's reporting
units are funeral, cemetery and insurance, which are consistent with the
Company's operating segments. All of the Company's goodwill is recorded in the
funeral reporting unit. In accordance with FAS 142, the Company undertook its
annual goodwill impairment review during the 16 weeks ended October 5, 2002,
and, as a result, a goodwill impairment provision of $242,204,000 for the
funeral reporting unit was recorded for the 16 weeks ended October 5, 2002. In
calculating the goodwill impairment provision, the fair value of the funeral
reporting unit was determined by independent advisors using a discounted cash
flow valuation methodology. The methods used to fair value the identifiable
assets and liabilities were consistent with the methods used at "fresh start."

The funeral reporting unit goodwill impairment provision was primarily the
result of a reduction of the projected financial results used in the valuation
of the funeral reporting unit compared to those used during the reorganization
process and the determination of reorganization value as set forth in the Fourth
Amended Joint Plan of Reorganization of Loewen Group International, Inc., its
Parent Corporation and Certain of their Debtor Subsidiaries, as modified. The
financial projections were reduced principally due to actual 2002 operating
results. The lower valuation was also affected by the decline in the economy
generally, as well as the decline in funeral industry-specific market values.

7

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The changes in the carrying amount of goodwill for the 40 weeks ended
October 5, 2002, are as follows:

NOTE 4. LONG-TERM DEBT

Long-term debt consists of the following:

(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 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

8

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 4. LONG-TERM DEBT (CONTINUED)
(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. The Credit Facility may be used
primarily to fund the Company's working capital needs and initially bears
interest at a rate per annum equal to the J.P. Morgan Chase & Co. prime
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, required earnings
before interest, taxes, and depreciation and amortization to fixed charge
coverage ratios and a yearly maximum on capital expenditures. The Credit
Facility expires on January 2, 2003, and is secured by specified real
property and substantially all personal property of the Company and
specified subsidiaries. On November 14, 2002, the Company announced a
one-year extension of the Credit Facility expiring January 2, 2004. As of
October 5, 2002, the Company's borrowing base was approximately
$65,000,000, less approximately $21,800,000 in outstanding letters
of credit.

(b) Subsidiary credit agreement 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, which remains undrawn at
October 5, 2002. The subsidiary is required to maintain certain defined
financial ratios. As of October 5, 2002, the Company was accruing
interest at 4.94% on its outstanding borrowings under the term loan
facility. The Company pays a commitment fee of 0.50% on the unused
portion of the revolving credit facility. The subsidiary credit agreement
is payable, subject to certain conditions, in the principal amount of
approximately $5 million in 2002, $26 million in May 2003, and
$26 million upon maturity in November 2003.

(c) On January 2, 2002, the Company issued 11.00% Senior secured notes, due
in 2007. Interest is payable semi-annually on June 15 and December 15.
The first interest payment was made on June 17, 2002. The notes are
secured by all personal property (subject to certain restrictions) of the
Company and specified subsidiaries, and specified 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 3, 2005 and January 2, 2006, respectively. On
July 25, 2002, the Company completed an optional redemption of
$15,000,000 in principal amount, plus accrued interest.

(d) The indenture for the subsidiary 9.5% Senior subordinated notes, due
November 15, 2004, 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 described in note (b), above. The carrying amount is net
of an unamortized discount of $2,463,000 (December 31,
2001 -- $3,200,000).

(e) On January 2, 2002, the Company issued 12.25% Senior unsecured notes,
due in 2004. On April 26, 2002, the notes were redeemed for a total
redemption price of $49,599,000, plus accrued interest to (but not
including) April 26, 2002.

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

9

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 4. LONG-TERM DEBT (CONTINUED)
(g) On January 2, 2002, the Company issued 12.25% Convertible subordinated
notes, due in 2012. Interest is payable semi-annually on March 15 and
September 15. The notes are convertible at the holders' option at any
time into the Company's Common stock at an initial conversion rate of
$17.17 per share, adjusted for subsequent dividends, stock splits and
issuance of rights, options and warrants. The carrying amount includes
unamortized premium of $8,308,000 (December 31, 2001 -- $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 due in 2007, 12.25% Senior
unsecured notes due in 2009 and 12.25% Convertible subordinated notes due in
2012, are guaranteed by substantially all of Alderwoods Group's wholly-owned
U.S. subsidiaries, other than Rose Hills Holding Corp. ("Rose Hills") and its
subsidiaries, Alderwoods Group's insurance subsidiaries and other specified
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 or its subsidiaries.

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

The indentures governing the 11% Senior secured notes due in 2007, 12.25%
Senior unsecured notes due in 2009 and 12.25% Convertible subordinated notes due
in 2012 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 cash and cash equivalents. Within 270 days
of the receipt of net proceeds from any such asset sale, the Company is
obligated to apply such net proceeds at its option (or as otherwise required) as
follows: (a) to pay the Credit Facility and permanently reduce commitments with
respect thereto, or (b) to make capital expenditures or acquisitions of other
assets in the same line of business as the Company or specified 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 secured notes due in 2007, 12.25% Senior unsecured notes due in 2009
or 12.25% Convertible subordinated notes due in 2012 (in that order) with such
excess proceeds.

Material covenants under the long-term debt documents include restrictions
placed on the Company and specified subsidiaries to incur additional
indebtedness, pay dividends, repay subordinate or junior indebtedness, or
encumber property or assets.

10

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 5. CONTINGENCIES

(a) 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.

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") in the United States District
Court for the Eastern District of Louisiana 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. The tenth case was pending
in state court in Ascension Parish, Louisiana (the "Louisiana State Court").

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 interim consolidated financial statements. 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

11

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 5. CONTINGENCIES (CONTINUED)
rules of the International Centre for Settlement of Investment Disputes. In
January 2001, the Arbitration Tribunal issued a ruling rejecting certain of the
United States government's jurisdictional challenges and scheduled a hearing on
the merits of the NAFTA claims, held on October 15-19, 2001. A motion relating
to the jurisdiction of this matter was heard on June 5, 2002. The matter is now
pending before the Arbitration Tribunal.

Pursuant to the Plan, the Predecessor, through a series of transactions,
transferred to the Company all of its assets, excluding legal title to the NAFTA
claims, and transferred to the Company 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 the
Predecessor 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 the Predecessor,
dated July 25, 2000, was transferred to a liquidating trust for the benefit of
creditors of the Predecessor. 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.

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.

(b) 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's policies are also designed to control environmental risk upon
acquisition, through extensive due diligence and corrective measures taken prior
to acquisition. Management endeavors to ensure that environmental issues are
identified and addressed in advance of acquisition or are covered by an
indemnity by the seller or an offset to the purchase price.

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

12

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 6. CHANGES IN OTHER NON-CASH BALANCES

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

13

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 7. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

14

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 8. SEGMENTED INFORMATION

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. There has been no change in the basis of this
segmentation, accounting policies of the segments, or the basis of measurement
of segment profit or loss from that disclosed in the Company's Annual Report as
at December 31, 2001, on Form 10-K as filed with the SEC.

The following table reconciles loss from operations of reportable segments
to total loss from operations and identifies the components of "Other" segment
loss from operations:

15

ALDERWOODS GROUP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 8. SEGMENTED INFORMATION (CONTINUED)
The following table reconciles loss from operations of reportable segments
to total loss from operations and identifies the components of "Other" segment
loss from operations:

NOTE 9. LOSS PER SHARE

The basic and diluted loss per share computations for net loss were as
follows:

Employee and director stock options to purchase 3,515,000 shares of Common
stock, and the 12.25% Convertible subordinated notes, due in 2012, were not
included in the computation of diluted earnings per share, because they were
anti-dilutive.

NOTE 10. STOCKHOLDER RIGHTS PLAN

On March 6, 2002, Alderwoods Group's Board of Directors ("Board of
Directors") adopted a short-term stockholder rights plan ("Stockholder Rights
Plan"). The Stockholder Rights Plan, which has an 18-month term, was not
established in response to any pending takeover bid for the Company. In
connection with the Stockholder Rights Plan, the Board of Directors, on
March 6, 2002, declared a dividend distribution of one right for each share of
Common stock. The Company also entered into a rights agreement ("Rights
Agreement"), dated as of March 6, 2002, with Wells Fargo Bank, Minnesota,
National Association ("Wells Fargo"), whereby Wells Fargo agreed to act as
rights agent. The Rights Agreement and a summary description of the rights are
available as an exhibit to the Company's report on Form 8-K filed with the SEC
on March 13, 2002.

16

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

THE FOLLOWING INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF THE LOEWEN
GROUP INC. (THE "PREDECESSOR") ARE NOT COMPARABLE WITH THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS ISSUED BY ALDERWOODS GROUP, INC. SUBSEQUENT TO THE
IMPLEMENTATION OF 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"), DUE TO THE SIGNIFICANT CHANGES IN THE
FINANCIAL AND LEGAL STRUCTURE OF ALDERWOODS GROUP, INC. AND THE APPLICATION OF
FRESH START REPORTING, AS AT DECEMBER 31, 2001, RESULTING FROM CONFIRMATION AND
IMPLEMENTATION OF THE PLAN AND CHANGES IN ACCOUNTING POLICIES AND FISCAL
ACCOUNTING PERIODS ADOPTED BY THE COMPANY. ACCORDINGLY, ALDERWOODS
GROUP, INC.'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE 16
WEEKS ENDED OCTOBER 5, 2002, AND 40 WEEKS ENDED OCTOBER 5, 2002, DO NOT INCLUDE
COMPARABLE OPERATING AND CASH FLOW INFORMATION. CERTAIN INTERIM CONSOLIDATED
FINANCIAL INFORMATION OF THE LOEWEN GROUP INC. MAY BE OF LIMITED INTEREST TO THE
STOCKHOLDERS OF ALDERWOODS GROUP, INC., AND HAS BEEN INCLUDED FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2001, AND NINE MONTHS ENDED SEPTEMBER 30, 2001, IN
THIS QUARTERLY REPORT ON FORM 10-Q.

17

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

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

18

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

19

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 1. REORGANIZATION PROCEEDINGS

For information regarding the Predecessor's reorganization proceedings, see
Note 1 to the Predecessor's consolidated financial statements included in
Alderwoods Group, Inc.'s ("Alderwoods Group") Annual Report as at December 31,
2001, on Form 10-K as filed with the U.S. Securities and Exchange Commission
("SEC"). There have been no material changes to the reorganization proceedings
reported therein.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim 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.

The interim consolidated financial statements include the accounts of all
subsidiary companies and all adjustments, including normal recurring
adjustments, which in management's opinion are necessary for a fair presentation
of the financial results for the interim period. The interim consolidated
financial statements have been prepared consistent with the accounting policies
described in the Predecessor's consolidated financial statements included in
Alderwoods Group's Annual Report as at December 31, 2001, on Form 10-K as filed
with the SEC and should be read in conjunction therewith.

USE OF ESTIMATES

The preparation of the interim 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 interim 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.

ACCOUNTING CHANGE

The Predecessor implemented the SEC'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 three and nine months ended
September 30, 2001, was prepared on a basis that did not fully reflect the
adoption of SAB 101. The interim financial statements presented herein, have
been restated to give effect to SAB 101. Due to the 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 Alderwoods Group to restate the
Predecessor's revenue, as a result of the implementation of SAB 101. These
estimation methods have been consistently applied.

In accordance with 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.

20

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with SAB 101 the Predecessor recognized revenue and related
costs for pre-need sales of interment rights and related merchandise and
services at the time the interment right title was transferred, merchandise was
delivered or service was 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 were recognized when the revenue of the associated merchandise or
service was 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. The effect of the restatement, as a result of the implementation of
SAB 101 effective January 1, 2000, is summarized below.

NOTE 3. 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 for the District of Delaware in January 2000. As a result,
a pre-tax asset impairment provision for long-lived assets of $428,194,000 was
recorded in 1999.

At March 31, 2001, June 30, 2001, and September 30, 2001, the Predecessor
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,
additional pre-tax asset impairment provisions of $15,306,000, $125,175,000 and
$14,703,000 for the three months ended March 31, 2001, June 30, 2001, and
September 30, 2001, respectively, were recorded.

The asset impairment provisions were based on management estimates.

During the three months ended September 30, 2001, the Predecessor sold 18
funeral homes and five cemeteries for gross proceeds of $4,649,000, before
closing and net settlement cost recovery of $(34,000), resulting in a pre-tax
gain of $4,683,000. During the nine months ended September 30, 2001, the
Predecessor sold 95 funeral homes and 75 cemeteries for gross proceeds of
$56,595,000, before closing and other settlement costs of $324,000, resulting in
a pre-tax gain of $56,271,000.

21

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 4. CHANGES IN OTHER NON-CASH BALANCES

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

22

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 5. 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.

The following table reconciles earnings from operations of reportable
segments to total earnings from operations and identifies the components of
"Other" segment loss from operations:

The following table reconciles loss from operations of reportable segments
to total loss from operations and identifies the components of "Other" segment
loss from operations:

23

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF DOLLARS)

NOTE 6. LOSS PER SHARE

The basic and diluted earnings per share computations for net income was 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 at September 30, 2001.

24

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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.

OVERVIEW

Alderwoods Group is the second largest operator of funeral homes and
cemeteries in North America. As of October 5, 2002, the Company operated
788 funeral homes, 185 cemeteries and 64 combination funeral homes and
cemeteries throughout North America and 39 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,
cemetery and insurance businesses are operated.

CRITICAL ACCOUNTING POLICIES

Accounting policies that the Company believes are both most important to the
portrayal of the Company's financial condition and results, and require
management's most difficult, subjective or complex judgements are described
under Item 7. "-- Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Alderwoods Group's Annual Report as at
December 31, 2001, on Form 10-K as filed with the U.S. Securities and Exchange
Commission ("SEC").

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.

Certain interim consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Quarterly Report on Form 10-Q. However, due to the
significant changes in the financial structure of the Company, the application
of "fresh start" reporting as at December 31, 2001, and as a result of the
confirmation and implementation of 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") and changes in
accounting policies and fiscal accounting periods adopted by the Company, the
interim consolidated financial and other information of the Company issued
subsequent to the Plan implementation are not comparable with the interim
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
Company compared to the

25

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 Quarterly Report on
Form 10-Q is presented on the basis of United States generally accepted
accounting principles ("GAAP"). Historically, the Predecessor's interim
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 interim consolidated financial
statements. In addition, the Predecessor had not in its prior Quarterly Reports
on Form 10-Q fully implemented the SEC's 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 interim consolidated financial statements included
in this Quarterly Report on Form 10-Q have been restated to the full extent
necessary to comply with U.S. GAAP and the implementation of SAB 101.

On March 6, 2002, the Board of Directors of the Company approved a change in
the Company's fiscal year end from December 31 to the Saturday nearest to
December 31 in each year (whether before or after such date). This change is
effective for fiscal year 2002, which will end on December 28, 2002. No
transition report for the change in fiscal year was required.

In connection with the change in fiscal year end, the Company also realigned
its fiscal quarters. The first and second fiscal quarters will each consist of
12 weeks and the third fiscal quarter will consist of 16 weeks. The fourth
fiscal quarter will typically consist of 12 weeks, but this period may be
altered, if necessary, in order to cause the fourth fiscal quarter to end on the
same day as the fiscal year, as described above. As a result of this, the fourth
fiscal quarter will consist of 13 weeks in certain years.

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 interim consolidated financial statements and
the Predecessor's interim consolidated financial statements included in Part I
of this Quarterly Report on Form 10-Q (including the notes thereto).

RESULTS OF OPERATIONS

THE INTERIM RESULTS OF OPERATIONS OF THE COMPANY ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE FULL FISCAL YEAR OR FOR
ANY OTHER INTERIM PERIOD. ADDITIONALLY, A COMPARISON OF FINANCIAL PERFORMANCE
WITH THE PREDECESSOR IS NOT MEANINGFUL AND SHOULD BE REVIEWED WITH CAUTION DUE
TO:

- SIGNIFICANT CHANGES IN THE FINANCIAL STRUCTURE OF THE COMPANY;

- APPLICATION OF FRESH START REPORTING AT DECEMBER 31, 2001, AS A RESULT OF
THE CONFIRMATION AND IMPLEMENTATION OF THE PLAN;

- CHANGES IN ACCOUNTING POLICIES AND CERTAIN ACCOUNT CLASSIFICATIONS ADOPTED
UPON EMERGENCE; AND

- CHANGES IN THE FISCAL YEAR AND THE LENGTH OF QUARTERLY PERIODS.

ACCORDINGLY, A BLACK LINE HAS BEEN DRAWN TO SEPARATE AND DISTINGUISH BETWEEN
THE INTERIM CONSOLIDATED OPERATING RESULTS THAT RELATE TO THE COMPANY AND THE
PREDECESSOR.

Detailed below are the operating results of the Company for the 16 weeks
ended October 5, 2002, and 40 weeks ended October 5, 2002, and the Predecessor
for the three months ended September 30, 2001, and nine months ended
September 30, 2001. The operating results are expressed in dollar amounts as
well as relevant percentages, presented as a percentage of revenue, except for
income taxes, which are presented as a percentage of earnings before income
taxes.

The operations of the Company comprise, and the operations of the
Predecessor comprised, three businesses: funeral homes, cemeteries and
insurance. Additional segment information is provided in

26

Note 8 and Note 5 of the Company's and Predecessor's interim consolidated
financial statements, respectively.

16 WEEKS ENDED OCTOBER 5, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY FOR THE 16 WEEKS ENDED OCTOBER 5, 2002, ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE FULL FISCAL
YEAR OR FOR ANY OTHER INTERIM PERIOD. ADDITIONALLY, A COMPARISON OF FINANCIAL
PERFORMANCE WITH THE PREDECESSOR IS NOT MEANINGFUL AND SHOULD BE REVIEWED WITH
CAUTION DUE TO:

- SIGNIFICANT CHANGES IN THE FINANCIAL STRUCTURE OF THE COMPANY;

- APPLICATION OF FRESH START REPORTING AT DECEMBER 31, 2001, AS A RESULT OF
THE CONFIRMATION AND IMPLEMENTATION OF THE PLAN;

- CHANGES IN ACCOUNTING POLICIES AND CERTAIN ACCOUNT CLASSIFICATIONS ADOPTED
UPON EMERGENCE; AND

- CHANGES IN THE FISCAL YEAR AND THE LENGTH OF QUARTERLY PERIODS.

Consolidated revenue for the Company of $240.5 million for the 16 weeks
ended October 5, 2002, increased approximately $39.1 million, or 19.4%, compared
to approximately $201.4 million for the Predecessor's three months ended
September 30, 2001, primarily as a result of approximately $33.7 million from
the difference in the number of days in the Company's third quarter versus the
Predecessor's third quarter, and approximately $22.7 million of Rose Hills
Holding Corp. ("Rose Hills") revenue now consolidated in the Company's results,
which was previously accounted for on an equity investment basis,

27

partially offset by approximately $17.9 million related to 81 funeral and
80 cemetery locations sold or closed since July 1, 2001. Consolidated gross
margin for the 16 weeks ended October 5, 2002, was approximately $26.4 million,
a decline of approximately $20.2 million, or 43.2%, from the Predecessor's
consolidated gross margin of approximately $46.6 million for the three months
ended September 30, 2001. As a percentage of consolidated revenue, consolidated
gross margin of the Company similarly declined from the Predecessor's 23.1% to
11.0%. The percentage decrease in consolidated gross margin is primarily
attributed to the decline in funeral and cemetery gross margin (excluding the
respective gross margin from Rose Hills, which reflects higher margin for
cemetery and funeral) and insurance gross margin. Consolidated gross margin, as
with revenue, was similarly impacted by the changes affecting comparability of
the Company and the Predecessor.

Funeral revenue for the Company of $149.4 million for the 16 weeks ended
October 5, 2002, increased by $28.1 million, or 23.1%, compared to
$121.3 million for the Predecessor's three months ended September 30, 2001. The
increase is primarily due to (1) an estimated increase of approximately
$25.0 million from the difference in number of days in the Company's third
quarter versus the Predecessor's third quarter, and (2) an increase of
approximately $8.4 million from the inclusion of Rose Hills, now consolidated in
the Company's operating results, which more than offset a reduction of
approximately $6.0 million related to 81 funeral locations sold or closed since
July 1, 2001. In addition, at locations in operation for all of the 16 weeks
ended October 5, 2002, and the three months ended September 30, 2001, and after
adjusting for the difference in the number of days in the respective quarters,
the Company estimates that funeral revenue increased approximately $0.7 million
and the number of funeral services performed decreased by 0.6%. Overall average
funeral revenue per service for the Company for the 16 weeks ended October 5,
2002, was $3,719, compared to $3,682 for the Predecessor in the three months
ended September 30, 2001.

Funeral costs for the 16 weeks ended October 5, 2002, increased by
approximately $40.9 million, primarily as a result of (1) an estimated increase
of approximately $18.5 million from the difference in the number of days in the
Company's third quarter versus the Predecessor's third quarter, (2) an increase
of approximately $6.9 million from the inclusion of Rose Hills, and (3) an
increase of approximately $8.5 million from regional manager and depreciation
expense not previously included in funeral costs, partially offset by a
reduction of approximately $2.9 million related to 81 funeral locations sold or
closed since July 1, 2001.

Pre-need funeral contracts written by the Company for the 16 weeks ended
October 5, 2002, were approximately $51.9 million, compared to $29.1 million by
the Predecessor for the three months ended September 30, 2001. The Company
estimates that it has a backlog of approximately $1.2 billion in pre-need
funeral contracts as of October 5, 2002. Approximately 16% of funeral volume for
the 16 weeks ended October 5, 2002, was derived from the backlog, compared to
approximately 22% from the Predecessor's backlog for the three months ended
September 30, 2001.

Overall funeral gross margin of the Company, as a percentage of revenue,
decreased to 12.2% for the 16 weeks ended October 5, 2002, from the
Predecessor's 25.6% for the three months ended September 30, 2001, primarily due
to the increase in costs being at a rate higher than that commensurate with the
revenue increase. The decline in gross margin as a percentage of revenue was
also affected by the additional regional manager and depreciation expense,
partially offset by the inclusion of Rose Hills.

Cemetery revenue for the Company of $53.2 million for the 16 weeks ended
October 5, 2002, increased approximately $1.3 million, or 2.6%, compared to
$51.9 million for the Predecessor's three months ended September 30, 2001. The
increase is primarily due to (1) an estimated increase of approximately
$8.7 million from the difference in number of days in the Company's third
quarter versus the Predecessor's third quarter, and (2) an increase of
approximately $14.3 million from the inclusion of Rose Hills, now consolidated
in the Company's operating results, partially offset by a reduction of
approximately $11.9 million related to cemetery locations sold since July 1,
2001. In addition, at locations

28

in operation for all of the 16 weeks ended October 5, 2002, and the three months
ended September 30, 2001, and after adjusting for the difference in the number
of days in the respective quarters, the Company estimates that cemetery revenue
declined approximately $9.8 million, of which $12.3 million was due to lower
pre-need revenue. Pre-need revenue is impacted by the quantity of spaces sold,
merchandise installed and services performed, as well as, to the extent revenue
was deferred at December 31, 2001, the impact of fresh start reporting and the
established fair value of the related deferred revenue being recognized.

Cemetery costs for the 16 weeks ended October 5, 2002, increased by
approximately $9.4 million, primarily as a result of (1) an increase of
approximately $7.9 million from the difference in the number of days in the
Company's third quarter versus the Predecessor's third quarter, and (2) an
increase of approximately $10.5 million from the inclusion of Rose Hills,
partially offset by a reduction of approximately $5.7 million related to
80 cemetery locations sold since July 1, 2001.

Pre-need cemetery contracts written by the Company during the 16 weeks ended
October 5, 2002, were approximately $27.4 million, approximately $7.9 million
higher than those written by the Predecessor for the three months ended
September 30, 2002, as the decrease due to 80 cemetery locations sold since
July 1, 2001, was more than offset by the effect of the longer fiscal quarter in
2002 versus 2001, and by the inclusion of Rose Hills' operating results and
improved pre-need sales. Interments were approximately 17,700 for the 16 weeks
ended October 5, 2002, of which approximately 82% were at-need and 18% were
pre-need fulfillments.

Overall cemetery gross margin of the Company for the 16 weeks ended
October 5, 2002, as a percentage of revenue, decreased to 3.8%, compared to
19.4% for the Predecessor for the three months ended September 30, 2001. The
decrease was primarily due to the fixed nature of certain expenses, the cost
increases of which were higher than that commensurate with the revenue increase
experienced. The key components of the cemetery gross margin decline include the
impact of the reduced fair value of revenue deferred at December 31, 2001, and
recognized in 2002, and the additional regional manager and depreciation
expense, partially offset by the inclusion of Rose Hills.

Insurance revenue for the Company for the 16 weeks ended October 5, 2002,
increased by approximately $9.7 million, or 34.4%, compared to the Predecessor
for the three months ended September 30, 2001, primarily due to the difference
in the number of days in the Company's third quarter versus the Predecessor's
third quarter. Costs, consisting primarily of benefit and claims costs,
commissions, policy reserve changes, and wages, increased by approximately
$9.0 million. As a result of the rate of revenue increase being more than offset
by the higher rate of cost increases, primarily due to increased benefits and
claim costs the overall insurance gross margin for the Company for the 16 weeks
ended October 5, 2002, decreased to 16.3%, compared to 19.4% for the Predecessor
for the three months ended September 30, 2001.

General and administrative expenses for the Company for the 16 weeks ended
October 5, 2002, were approximately $10.1 million, or 4.2% of consolidated
revenue, substantially lower than the $17.1 million, or 8.5% of consolidated
revenue, of the Predecessor for the three months ended September 30, 2001. The
decline was due in part to a $5.0 million bonus accrual reversal, as it was
determined unlikely that certain 2002 performance targets would be met.
Additionally, the decline was due to the effects of classification in 2002 of
certain regional manager costs as operating costs and depreciation as general
and administrative expenses, estimated at approximately $6.7 million, being
partially offset by the effects of the longer fiscal quarter in 2002, versus
2001, estimated at approximately $1.8 million. The classifications in 2002 more
appropriately reflect the nature and source of such costs in line with industry
practice. In addition, certain benefits continue to be derived from previous
process and system enhancements developed throughout the Predecessor's
reorganization process and now in place for the Company.

As a result of the Company's adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") on
December 31, 2001, goodwill is not amortized,

29

but will be tested annually for impairment. The Predecessor's depreciation and
amortization of $13.6 million for the three months ended September 30, 2001,
included approximately $3.9 million of amortization of names and reputations.

Under FAS 142, goodwill impairment is deemed to exist, and must then be
further assessed, if a reporting unit's carrying amount exceeds its estimated
fair value. The Company's reporting units are funeral, cemetery and insurance,
which are consistent with the Company's operating segments. All of the Company's
goodwill is recorded in the funeral reporting unit. In accordance with FAS 142,
the Company undertook its annual goodwill impairment review during the 16 weeks
ended October 5, 2002, and, as a result, a goodwill impairment provision of
$242.2 million for the funeral reporting unit was recorded for the 16 weeks
ended October 5, 2002. In calculating the goodwill impairment provision, the
fair value of the funeral reporting unit was determined by independent advisors
using a discounted cash flow valuation methodology. The methods used to fair
value the identifiable assets and liabilities were consistent with the methods
used at "fresh start."

The funeral reporting unit goodwill impairment provision was primarily the
result of a reduction of the projected financial results used in the valuation
of the funeral reporting unit compared to those used during the reorganization
process and the determination of reorganization value as set forth in the Plan.
The financial projections were reduced principally due to actual 2002 operating
results. The lower valuation was also affected by the decline in the economy
generally, as well as the decline in funeral industry-specific market values.

Interest expense for the Company on long-term debt for the 16 weeks ended
October 5, 2002, was approximately $26.2 million, an increase of approximately
$25.0 million compared to the Predecessor for the three months ended
September 30, 2001, primarily reflecting interest expense on the Company's new
debt issued on the Effective Date pursuant to the Plan, and Rose Hills' debt
assumed by the Company at the same time. Interest expense includes amortization
of approximately $0.3 million of discount on the 9.50% Senior subordinated
notes, due in 2004 and approximately $0.3 million of premium on the 12.25%
Convertible subordinated notes, due in 2012.

Income tax recovery for the Company for the 16 weeks ended October 5, 2002,
was approximately $0.1 million, compared to approximately $10.7 million of
income tax expense for the Predecessor for the three months ended September 30,
2001. The Company's effective tax rate for the 16 weeks ended October 5, 2002,
varied from the statutory tax rate, primarily because (1) the provision for
goodwill impairment is not deductible for tax purposes, (2) the income tax
benefits related to the pre-tax book loss from United States funeral and
cemetery operations were fully offset by an increase in the valuation allowance,
and (3) the losses incurred in the United States are not available to offset the
tax expense in profitable jurisdictions. Future income and losses 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 October 5, 2002. 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 had approximately $45.5 million of cash and cash equivalents at
October 5, 2002, a decrease of approximately $29.0 million since June 15, 2002,
due primarily to the $15.0 million partial redemption of the 11.00% Senior
secured notes due in 2007, on July 25, 2002, partially offset by operating cash
flow of $6.5 million for the 16 weeks ended October 5, 2002. In addition, the
Company had net proceeds on asset sales of $2.7 million, purchases of property
and equipment of $7.0 million and net insurance asset purchases of approximately
$13.9 million. The Company also made payments on the bank credit agreement,
promissory notes and capitalized obligations of approximately $2.3 million.

30

40 WEEKS ENDED OCTOBER 5, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY FOR THE 40 WEEKS ENDED OCTOBER 5, 2002, ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE FULL FISCAL
YEAR OR FOR ANY OTHER INTERIM PERIOD. ADDITIONALLY, A COMPARISON OF FINANCIAL
PERFORMANCE WITH THE PREDECESSOR IS NOT MEANINGFUL AND SHOULD BE REVIEWED WITH
CAUTION DUE TO:

- SIGNIFICANT CHANGES IN THE FINANCIAL STRUCTURE OF THE COMPANY;

- APPLICATION OF FRESH START REPORTING AT DECEMBER 31, 2001, AS A RESULT OF
THE CONFIRMATION AND IMPLEMENTATION OF THE PLAN;

- CHANGES IN ACCOUNTING POLICIES AND CERTAIN ACCOUNT CLASSIFICATIONS ADOPTED
UPON EMERGENCE; AND

- CHANGES IN THE FISCAL YEAR AND THE LENGTH OF QUARTERLY PERIODS.

Consolidated revenue for the Company of $629.8 million for the 40 weeks
ended October 5, 2002, decreased approximately $3.8 million, or 0.6%, compared
to approximately $633.6 million for the Predecessor's nine months ended
September 30, 2001, primarily as a result of a reduction of approximately
$53.4 million related to 158 funeral and 150 cemetery locations sold or closed
since January 1, 2001, which was partially offset by approximately $9.1 million
estimated to be the aggregate effect of the difference in the number of days in
the Company's first, second and third quarters versus the Predecessor's first,
second and third quarters, and by approximately $58.9 million of Rose Hills'
revenue now consolidated in the Company's results, which was previously
accounted for on an equity investment basis, and an increase of approximately
$12.4 million of insurance revenue. Consolidated gross margin for the 40 weeks
ended

31

October 5, 2002, was approximately $104.8 million, a decline of approximately
$50.4 million, or 32.5%, from the Predecessor's consolidated gross margin of
approximately $155.2 million for the nine months ended September 30, 2001. As a
percentage of consolidated revenue, consolidated gross margin of the Company
similarly declined from the Predecessor's 24.5% to 16.6%. The percentage
decrease in consolidated gross margin is primarily attributed to the decline in
funeral and cemetery gross margin (excluding the respective gross margin from
Rose Hills, which reflect higher margin for cemetery and funeral), and insurance
gross margin. Consolidated gross margin, as with revenue, was similarly impacted
by the changes affecting comparability of the Company and the Predecessor.

Funeral revenue for the Company of $407.7 million for the 40 weeks ended
October 5, 2002, increased approximately $12.7 million, or 3.2%, compared to
$395.0 million for the Predecessor's nine months ended September 30, 2001. The
increase is primarily due to (1) an estimated increase of approximately
$6.8 million from the difference in the number of days in the Company's first,
second and third quarters versus the Predecessor's first, second and third
quarters, and (2) an increase of approximately $24.2 million from the inclusion
of Rose Hills, now consolidated in the Company's operating results, which was
partially offset by a reduction of approximately $17.7 million related to
158 funeral locations sold or closed since January 1, 2001. In addition, at
locations in operation for all of the 40 weeks ended October 5, 2002, and the
nine months ended September 30, 2001, and after adjusting for the difference in
the number of days in the respective periods, the Company estimates that funeral
revenue decreased approximately $0.6 million and the number of funeral services
performed increased by 0.1%. Overall average funeral revenue per service for the
Company for the 40 weeks ended October 5, 2002, was $3,706, compared to $3,670
for the Predecessor in the nine months ended September 30, 2001.

Funeral costs for the 40 weeks ended October 5, 2002, increased
approximately $38.1 million, primarily as a result of (1) an estimated increase
of approximately $4.9 million from the difference in the number of days in the
Company's first, second and third quarters versus the Predecessor's first,
second and third quarters, (2) an increase of approximately $18.4 million from
the inclusion of Rose Hills, and (3) an increase of approximately $20.6 million
from regional manager and depreciation expense not previously included in
funeral costs, partially offset by a reduction of approximately $13.8 million
related to 158 funeral locations sold or closed since January 1, 2001.

Pre-need funeral contracts written by the Company for the 40 weeks ended
October 5, 2002, were approximately $129.4 million, compared to $84.1 million by
the Predecessor for the nine months ended September 30, 2001. Approximately 23%
of funeral volume for the 40 weeks ended October 5, 2002, was derived from the
backlog, compared to approximately 22% from the Predecessor's backlog for the
nine months ended September 30, 2001.

Overall funeral gross margin of the Company, as a percentage of revenue,
decreased to 20.5% for the 40 weeks ended October 5, 2002, from the
Predecessor's 27.6% for the nine months ended September 30, 2001, primarily due
to the increase in costs being at a rate higher than that commensurate with the
revenue increase. The decline in gross margin as a percentage of revenue was
affected by the additional regional manager and depreciation expense, partially
offset by the inclusion of Rose Hills.

Cemetery revenue for the Company of $131.3 million for the 40 weeks ended
October 5, 2002, decreased approximately $28.9 million, or 18.1%, compared to
$160.2 million for the Predecessor's nine months ended September 30, 2001. The
decrease is primarily due to a reduction of approximately $35.6 million related
to 150 cemetery locations sold since January 1, 2001, which was partially offset
by an increase of approximately $34.7 million from the inclusion of Rose Hills,
now consolidated in the Company's operating results, and an estimated increase
of approximately $2.3 million from the difference in the number of days in the
Company's first, second and third quarters versus the Predecessor's first,
second and third quarters. At locations in operation for all of the 40 weeks
ended October 5, 2002, and the nine months ended September 30, 2001, and after
adjusting for the difference in the number of days in the respective quarters,
the Company estimates that cemetery revenue declined approximately
$30.3 million,

32

due to lower pre-need revenue. Pre-need revenue is impacted by the quantity of
spaces sold, merchandise installed and services performed, as well as, to the
extent revenue was deferred at December 31, 2001, the impact of fresh start
reporting and the established fair value of the related deferred revenue being
recognized.

Cemetery costs for the 40 weeks ended October 5, 2002, decreased
approximately $1.0 million, primarily as a result of a reduction of
approximately $18.1 million related to 150 cemetery locations sold since
January 1, 2001, which was more than offset by an increase of approximately
$26.9 million from the inclusion of Rose Hills, and an increase of approximately
$2.0 million from the difference in the number of days in the Company's first,
second and third quarters versus the Predecessor's first, second and third
quarters. In addition, at locations in operation for all of the 40 weeks ended
October 5, 2002, and the nine months ended September 30, 2001, and after
adjusting for the difference in the number of days in the respective periods,
the Company estimates that cemetery costs declined approximately $11.8 million,
due to lower costs of goods sold, primarily from the lower pre-need revenue.

Pre-need cemetery contracts written by the Company during the 40 weeks ended
October 5, 2002, were approximately $67.7 million, approximately $6.9 million
higher than those written by the Predecessor for the nine months ended
September 30, 2002. The increase was due to the inclusion of Rose Hills'
operating results, the cumulative effect of the longer fiscal period in 2002
versus 2001 and improved pre-need sales, which was partially offset by the
decrease due to 150 cemetery locations sold since January 1, 2001. Interments
were approximately 52,800 for the 40 weeks ended October 5, 2002, of which
approximately 80% were at-need and 20% were pre-need fulfillments.

Overall cemetery gross margin of the Company for the 40 weeks ended
October 5, 2002, as a percentage of revenue, decreased to 4.7%, compared to
21.3% for the Predecessor for the nine months ended September 30, 2001. The
decrease was primarily due to the fixed nature of certain expenses, the cost
reductions of which were not commensurate with the revenue declines experienced.
The key components of this decline include the impact of the reduced fair value
of revenue deferred at December 31, 2001, and recognized in 2002, and the
additional regional manager and depreciation expense, partially offset by the
inclusion of Rose Hills.

Insurance revenue for the Company for the 40 weeks ended October 5, 2002,
increased approximately $12.4 million, or 15.8%, compared to the Predecessor for
the nine months ended September 30, 2001, primarily due to higher premium
revenue of approximately $10.0 million and higher investment income of
approximately $2.4 million. Costs, consisting primarily of benefit and claims
costs, commissions, policy reserve changes, and wages, increased for the 40
weeks ended October 5, 2002, compared to the nine months ended September 30,
2001. The increase was primarily due to higher benefit claims, the longer fiscal
period in 2002, versus 2001, and the classification of certain costs in 2002 to
more appropriately reflect the nature of such costs. As a result of higher
investment revenue, overall insurance gross margin for the Company for the 40
weeks ended October 5, 2002, increased to 16.3%, compared to 15.3% for the
Predecessor for the nine months ended September 30, 2001.

General and administrative expenses for the Company for the 40 weeks ended
October 5, 2002, were $33.7 million, or 5.3% of consolidated revenue,
substantially lower than the $49.4 million, or 7.8% of consolidated revenue, of
the Predecessor for the nine months ended September 30, 2001. The decline was
due in part to a $5.0 million bonus accrual reversal, as it was determined
unlikely that certain 2002 performance targets would be met. Additionally, the
decline was due to the effects of classification in 2002 of certain regional
manager costs as operating costs and depreciation as general and administrative
expenses, approximately $20.2 million, which was partially offset by the effects
of the longer fiscal period in 2002, versus 2001, approximately $0.6 million.
The classifications in 2002 more appropriately reflect the nature and source of
such costs in line with industry practice. In addition, certain benefits
continue to be derived from previous process and system enhancements developed
throughout the Predecessor's reorganization process and now in place for the
Company.

33

As a result of the Company's adoption of FAS 142 on December 31, 2001,
goodwill is not amortized, but will be tested annually for impairment. The
Predecessor's depreciation and amortization of $39.9 million for the nine months
ended September 30, 2001, included approximately $12.3 million of amortization
of names and reputations.

Under FAS 142, goodwill impairment is deemed to exist, and must then be
further assessed, if a reporting unit's carrying amount exceeds its estimated
fair value. The Company's reporting units are funeral, cemetery and insurance,
which are consistent with the Company's operating segments. All of the Company's
goodwill is recorded in the funeral reporting unit. In accordance with FAS 142,
the Company undertook its annual goodwill impairment review during the 16 weeks
ended October 5, 2002, and, as a result, a goodwill impairment provision of
$242.2 million for the funeral reporting unit was recorded for the 40 weeks
ended October 5, 2002. In calculating the goodwill impairment provision, the
fair value of the funeral reporting unit was determined by independent advisors
using a discounted cash flow valuation methodology. The methods used to fair
value the identifiable assets and liabilities were consistent with the methods
used at "fresh start."

The funeral reporting unit goodwill impairment provision was primarily the
result of a reduction of the projected financial results used in the valuation
of the funeral reporting unit compared to those used during the reorganization
process and the determination of reorganization value as set forth in the Plan.
The financial projections were reduced principally due to actual 2002 operating
results. The lower valuation was also affected by the decline in the economy
generally, as well as the decline in funeral industry-specific market values.

Interest expense for the Company on long-term debt for the 40 weeks ended
October 5, 2002, was approximately $67.4 million, an increase of approximately
$61.5 million compared to the Predecessor for the nine months ended
September 30, 2001, primarily reflecting interest expense on the Company's new
debt issued on the Effective Date pursuant to the Plan, and Rose Hills' debt
assumed by the Company at the same time. Of this amount, approximately
$1.9 million was related to the 12.25% Senior unsecured notes due in 2004, which
were redeemed by the Company on April 26, 2002. Interest expense includes
amortization of approximately $0.7 million of discount on the 9.50% Senior
subordinated notes, due in 2004, and approximately $0.7 million of premium on
the 12.25% Convertible subordinated notes, due in 2012.

Income tax expense for the Company for the 40 weeks ended October 5, 2002,
was approximately $4.6 million compared to approximately $0.5 million of income
tax recovery for the Predecessor for the nine months ended September 30, 2001.
The Company's effective tax rate for the 40 weeks ended October 5, 2002, varied
from the statutory tax rate, primarily because (1) the provision for goodwill
impairment is not deductible for tax purposes, and (2) the losses incurred in
the United States are not available to offset the tax expense in profitable
jurisdictions. Future income and losses 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 October 5, 2002. 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's decrease in cash and cash equivalents of $56.0 million from
December 31, 2001 to October 5, 2002, is due primarily to the $49.6 million
redemption of the 12.25% Senior unsecured notes, due in 2004, on April 26, 2002,
and the $15.0 million partial redemption of the 11.00% Senior secured notes, due
in 2007, on July 25, 2002, partially offset by operating cash flow of
$43.8 million for the 40 weeks ended October 5, 2002. In addition, the Company
had net proceeds on asset sales of approximately $18.6 million, purchases of
property and equipment of approximately $13.5 million and net insurance asset

34

purchases of approximately $29.3 million. The Company made payments on the bank
credit agreement, promissory notes and capitalized obligations of approximately
$11.4 million.

At December 31, 2001, the Company had accrued approximately $57.1 million of
reorganization costs related to costs incurred during the Predecessor's
reorganization, as well as costs incurred in connection with the actual
emergence and various activities related thereto. Of this amount, the Company
paid approximately $10.1 million and $32.0 million during the 16 weeks and 40
weeks ended October 5, 2002, respectively, resulting in a balance of
approximately $23.1 million. While at this time the Company expects to pay the
remaining balance during the remainder of fiscal year 2002, potential delays in
the completion of the reorganization process may result in the payment of some
portion of these reorganization costs in fiscal year 2003.

LIQUIDITY AND CAPITAL RESOURCES

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. For information regarding debt securities,
see Item 7. "-- Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report as at December 31, 2001,
on Form 10-K as filed with the SEC. There have been no material changes to the
disclosure on debt securities made in such Form 10-K, except as described below.

As of October 5, 2002, the Company's borrowing base was approximately
$65.0 million under the revolving credit facility (the "Revolving Credit
Facility"), less approximately $21.8 million in outstanding letters of credit.

The Revolving Credit Facility, 11% Senior secured notes due in 2007 (the
"Five-Year Secured Notes"), 12.25% Senior unsecured notes due in 2009 (the
"Seven-Year Unsecured Notes") and 12.25% Convertible subordinated notes due in
2012 (the "Convertible Subordinated Notes"), are guaranteed by substantially all
of Alderwoods Group's wholly-owned U.S. subsidiaries, other than Rose Hills and
its subsidiaries, 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 or its subsidiaries.

On April 17, 2002, the Company called for the redemption of all its
outstanding 12.25% Senior unsecured notes, due in 2004 (the "Two-Year Unsecured
Notes"). On April 26, 2002, all outstanding Two-Year Unsecured Notes were
redeemed for a total redemption price of $49.6 million, plus accrued interest to
(but not including) April 26, 2002. On July 25, 2002, the Company completed an
optional redemption of $15.0 million in principal amount, plus accrued interest,
of the 11.00% Senior secured notes, due in 2007.

The existing $75 million Revolving Credit Facility expires on January 2,
2003, and has been and is expected to remain undrawn for 2002, except for issued
Letters of Credit, totaling approximately $22 million (reduced to $15 million
subsequent to the quarter end), that secure various service arrangements for the
Company. On November 14, 2002, the Company announced a one-year extension of the
Revolving Credit Facility expiring January 2, 2004. The Company expects that the
Revolving Credit Facility and its existing and projected cash flows will be
sufficient to maintain its current level of operating activities through 2003.

A portion of the Company's Rose Hill's non-recourse subsidiary debt matures
in 2003, approximately $26 million in May 2003 and $26 million in
November 2003, and while Rose Hill's cash flows will be sufficient to meet its
operating needs through the first quarter of 2003, Rose Hill's projected cash
flows will not be sufficient to meet these principal repayment requirements.
However, though no agreement has yet

35

been finalized, the Company and Rose Hills continue to actively pursue various
refinancing options and expect that an agreement will be finalized prior to the
initial payment due in May 2003.

The Company's earnings before interest, taxes, depreciation and amortization
of capital assets and amortization of grave spaces and provision for goodwill
impairment ("EBITDA") and recurring free cash flow for the 16 weeks and 40 weeks
ended October 5, 2002, are presented in the table below. Recurring free cash
flow is calculated by adjusting cash provided by operations to exclude
non-recurring items, and then subtracting maintenance capital expenditures.
EBITDA and recurring free cash flow are not terms that have specific meaning in
accordance with U.S. GAAP and may be calculated differently from other
enterprises. They should not be considered in isolation from net earnings or
operating cash flow measures calculated in accordance with U.S. GAAP.

ACQUISITIONS AND DISPOSITIONS

During the 40 weeks ended October 5, 2002, the Company acquired seven
funeral homes in the United Kingdom for approximately $0.9 million.

During the 40 weeks ended October 5, 2002, the Company sold or closed
34 funeral homes, 31 cemeteries and one combination funeral home and cemetery
for net proceeds of approximately $18.6 million. At October 5, 2002, the Company
had 12 funeral homes and 22 cemeteries under signed agreements for sale, with
net assets and expected proceeds of approximately $3.4 million.

On July 2, 2002, the Company completed the purchase of the stock held by the
minority interest shareholder in certain Texas entities. Under the terms of such
purchase agreement, the Company paid $5.4 million to acquire all of the minority
interests, resulting in 100% ownership of all Texas operating locations.

RESTRICTIONS

The indentures governing the Five-Year Secured Notes, the Seven-Year
Unsecured Notes and the 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 cash or cash

36

equivalents. 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) to pay the Revolving Credit Facility and
permanently reduce commitments with respect thereto, or (b) 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.

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 Seven-Year Unsecured Notes and the
Convertible Subordinated Notes and in the Revolving Credit Facility restrict the
ability of Alderwoods Group to pay dividends and may prohibit the payment of
dividends and certain other payments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the Company's exposure to certain market risks,
see Item 7A. "--Quantitative and Qualitative Disclosures About Market Risk" in
the Company's Annual Report as at December 31, 2001, on Form 10-K as filed with
the SEC. As of October 5, 2002, there have been no material developments with
respect to such matters since such Form 10-K was filed, except as noted below.

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. The current mix of fixed and floating rate debt
was determined by the Plan. At October 5, 2002, the Company's total fixed rate
debt was $702.2 million, representing approximately 93% of total debt, and had a
weighted average interest rate of 11.39%. The Company's floating interest rate
exposure of $57.2 million at October 5, 2002, represents approximately 7% of
total debt and had a weighted average interest rate of 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 principal cash flows and the related weighted average interest rates as
of October 5, 2002, are presented below. The carrying values of the Company's
debt instruments are included in Note 4 to the Company's interim consolidated
financial statements.

QUANTITATIVE DISCLOSURE OF MARKET RISKS

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

(1) 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 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.

37

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Within the 90-day period prior to the filing of this report, an
evaluation was carried out, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective.

Subsequent to the date of their evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls.

38

PART II

ITEM 1. LEGAL PROCEEDINGS

For information regarding the Company's legal proceedings, see Note 5 to the
Company's interim consolidated financial statements included in Part I of this
Quarterly Report on Form 10-Q, which Note 5 is incorporated herein by reference.

ITEM 5. OTHER INFORMATION

STOCKHOLDER PROPOSALS

The Company has selected May 1, 2003, as the date for its 2003 annual
meeting of stockholders. Rule 14a-8 under the Securities Exchange Act of 1934,
as amended, requires that any stockholder proposals be submitted to the Company
for action at the Company's annual meeting of stockholders not less than
120 calendar days before the date of any proxy statement that the Company
released to stockholders last year, or, if the Company did not send such a proxy
statement (which the Company did not, given the reorganization of the
Predecessor), a reasonable time before the Company begins to print and mail the
proxy statement for its 2003 annual meeting of stockholders. The Company had
previously disclosed its belief that the proxy statement would be mailed on or
about March 1, 2003, for its 2003 annual meeting of stockholders and that,
therefore, a reasonable time before such mailing for the purpose of any
stockholder proposals would be a deadline of November 1, 2002. The Company now
believes that the proxy statement will be mailed on or about April 1, 2003, and
has extended the deadline for stockholder proposals to December 2, 2002.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, 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 ARE UNCERTAIN. 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.

39

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.

6. DISPOSITIONS MAY ADVERSELY AFFECT REVENUES. Revenue is also affected by
the level of 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
$765.1 million as of October 5, 2002. 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 Revolving Credit Facility and the indentures
governing the Five-Year Secured 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
one 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

40

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
Revolving Credit 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 indenture governing the
Five-Year Secured Notes is secured by collateral which consists of
(i) substantially all personal property (other than capital stock) and (ii) the
material funeral home real property assets pledged under the Revolving Credit
Facility of the Company and certain of its wholly owned subsidiaries. The rights
of the holders of the Five-Year Secured Notes to this collateral will be
subordinate to those of the lenders under the 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
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. 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, the
Company or its other subsidiaries. The Five-Year Secured 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 obligations of
Alderwoods Group to pay amounts due on the Five-Year Secured Notes, the
Seven-Year Unsecured Notes or the Convertible Subordinated Notes, as applicable.

THE TAX RATE IS UNCERTAIN

1. EFFECTIVE INCOME TAX RATE MAY VARY. The Company expects that its
effective income tax rate for 2002 and beyond may vary significantly from the
statutory tax rate because (i) the provision for goodwill impairment is not
deductible for tax purposes, (ii) income tax benefits may be offset by an
increase in the valuation allowance due to the uncertainty regarding the ability
to utilize the benefits in the future, (iii) the utilization of net operating
loss carryforwards of certain foreign operating subsidiaries, (iv) the losses
incurred in certain jurisdictions may not offset the tax expense in profitable
jurisdictions, (v) there are differences between foreign and United States
income tax rates, and (vi) many tax years are subject to audit by different
tax jurisdictions.

2. FEDERAL TAX AUDIT COULD IMPACT TAX RATE. In connection with the audit
of the Predecessor's 1993 through 1998 federal income tax returns, the Company
and the Internal Revenue Service have reached a tentative agreement that
resolves certain issues that were in dispute. This tentative agreement has been
submitted to the Congressional Joint Committee on Taxation ("Joint Committee")
for its review and approval. If approved by the Joint Committee, this tentative
agreement would have a significant positive effect on the Company's future tax
rate in the year of settlement. However, the ultimate outcome and timing of the
final resolution cannot be determined at this time.

41

CAPITAL STOCK: LACK OF ESTABLISHED MARKET AND DIVIDENDS NOT ANTICIPATED;
ANTI-TAKEOVER EFFECTS

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 The NASDAQ Stock Market, Inc. 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 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 death care 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 Seven-Year Unsecured Notes
and the Convertible Subordinated Notes and in the Revolving Credit 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. Alderwoods Group has also changed its fiscal
year and the length of quarterly periods. In addition, historically the
financial statements of the Predecessor did not consolidate the assets,
liabilities and results of operations of Rose Hills Holding Corp. as do 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

42

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 interim consolidated
financial statements of the Predecessor included elsewhere in this Quarterly
Report on Form 10-Q.

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, the
Predecessor filed claims against the government of the United States
(the "NAFTA Claims") seeking damages under the arbitration provisions of the
North American Free Trade Agreement ("NAFTA"). Pursuant to the Plan, the
Predecessor, through a series of transactions, transferred to the Company all of
its assets, excluding legal title to the NAFTA Claims, and transferred to the
Company 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 the Predecessor 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 the Predecessor, dated July 25, 2000, was
transferred to a liquidating trust for the benefit of creditors of the Debtors.
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 panel appointed
pursuant to the rules of the International Centre For Settlement of Investment
Disputes 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.

43

4. IMPLEMENTATION OF NEW CEMETERY CONTRACT MANAGEMENT SYSTEM IS
ONGOING. 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 consolidated 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.

WEB SITE ACCESS TO PERIODIC AND
CURRENT REPORTS

The Company makes its periodic and current reports available, free of
charge, through its web site as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.

44

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

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

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.

(b) REPORTS ON FORM 8-K

There were no Current Reports on Form 8-K filed by the Company during the
16 weeks ended October 5, 2002.

48

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ALDERWOODS GROUP, INC.

By: /s/ KENNETH A. SLOAN
----------------------------------------------
Kenneth A. Sloan
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(Principal Financial Officer
Dated: November 14, 2002 and Chief Accounting Officer)

49

CERTIFICATIONS

I, Paul A. Houston, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alderwoods
Group, Inc.;

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

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

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

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

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

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

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

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

Date: November 14, 2002 By: /s/ PAUL A. HOUSTON
-----------------------------------------------
Paul A. Houston
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)

50

I, Kenneth A. Sloan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alderwoods
Group, Inc.;

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

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

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

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

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

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

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

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

Date: November 14, 2002 By: /s/ KENNETH A. SLOAN
----------------------------------------------
Kenneth A. Sloan
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
CHIEF ACCOUNTING OFFICER)

51

EXHIBIT LIST