ALDERWOODS GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 52 weeks ended December 28, 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

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

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

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

WARRANTS TO PURCHASE COMMON STOCK
(Title of class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /X/ No / /

The aggregate market value of the Common Stock and Warrants to purchase
Common Stock held by non-affiliates of the registrant (assuming that the
registrant's only affiliates are its officers and directors), based on their
closing prices on the Nasdaq Stock Market on June 14, 2002 was $295,038,000 and
$3,261,000, respectively.

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APPLICABLE ONLY TO REGISTRANTS 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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At February 28, 2003, there were 39,965,392 shares of Common Stock
outstanding and Warrants to purchase 2,992,000 shares of Common Stock
outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Listed hereunder is the document to be incorporated by reference and the
Parts of the Form 10-K into which portions of the document will be incorporated:

TABLE OF CONTENTS

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GENERAL INFORMATION

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

All dollar amounts are in United States dollars unless otherwise indicated.

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PART I

ITEM 1. BUSINESS

OVERVIEW

Alderwoods Group, Inc. is the second largest operator of funeral homes and
cemeteries in North America. As of December 28, 2002, the Company operated 763
funeral homes, 185 cemeteries and 62 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 (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")
under 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"). Alderwoods Group is a holding company
owning, directly or indirectly, the capital stock of approximately 270
subsidiaries through which the funeral, cemetery and insurance businesses are
operated. The principal executive office of the Company is located at 311 Elm
Street, Suite 1000, Cincinnati, Ohio 45202.

BASIS OF ACCOUNTING

Alderwoods Group succeeded to substantially all of the assets and operations
of Loewen Group on the Effective Date, and continues to operate the businesses
previously conducted by the Loewen Companies. The Company's accounting
information contained in this Form 10-K is presented on the basis of United
States generally accepted accounting principles ("GAAP").

Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Form 10-K. However, the consolidated financial and other
information of the Company issued subsequent to implementation of the Plan are
not comparable with the consolidated financial information and other information
issued by the Predecessor prior to implementation of the Plan due to:

- the significant changes in the financial and legal structure of the
Company;

- the application of "fresh start" reporting as explained in Note 2 to the
Company's consolidated financial statements as at and for the 52 weeks
ended December 28, 2002 (the "Consolidated Financial Statements"), as a
result of the confirmation and implementation of the Plan described below;
and

- changes in accounting policies, certain account classifications and fiscal
accounting periods adopted by the Company.

Furthermore, Loewen Group had implemented an asset disposition program to
dispose of properties that did not fit into Loewen Group's strategic plans.

BUSINESS OPERATIONS

The Company's segments primarily consist of the funeral and cemetery
activities of its operating subsidiaries. The Company's segments also include an
insurance business in support of the core funeral and cemetery operations.
Within the Company's segments, the Company maintains a regional operating
structure for the funeral and cemetery business that is organized into multiple
geographic regions in the United States, Canada and the United Kingdom. For
certain financial information by segment and geographic area, see "Management's
Discussion and Analysis of Financial Condition and Results of

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Operations -- Management's Discussion and Analysis of Alderwoods Group
and -- Management's Discussion and Analysis of Predecessor," Note 16 to the
Company's Consolidated Financial Statements and Note 15 to the Predecessor's
consolidated financial statements. Funeral operations constituted approximately
64% of consolidated revenue of the Company for 2002, compared to approximately
62% for the Predecessor in 2001. Cemetery operations constituted approximately
22% of consolidated revenue of the Company for 2002, compared to approximately
25% for the Predecessor in 2001. Insurance operations constituted approximately
14% of consolidated revenue of the Company for 2002, as compared to
approximately 13% for the Predecessor in 2001.

FUNERAL OPERATIONS

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 funeral operations
generally experience slightly higher sales in the winter months, primarily due
to higher incidents of deaths due to illnesses brought on by cold weather.

Amounts paid for funeral services are recorded as revenue at the time the
service is performed. Payments made for pre-need funeral contracts are either
placed in trust or are used on behalf of the purchaser of the pre-need contract
to pay premiums on life insurance polices, under which the Company is designated
as the beneficiary. At the date of performing a pre-need funeral service, the
original contract amount, together with related accrued earnings from trust and
increased insurance benefits, is recorded as funeral revenue.

CEMETERY OPERATIONS

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

Provided certain collectibility criteria are met, pre-need cemetery
interment right sales of developed cemetery property are deferred until a
minimum percentage of the sales price has been collected, while pre-need
cemetery interment right sales of undeveloped cemetery property are deferred and
revenue is recognized on a percentage of completion basis. Pre-need sales of
cemetery merchandise or services are deferred until the delivery of such
merchandise or performance of such services occurs.

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

Pursuant to various state and provincial laws, the Company provides for the
long-term maintenance of its cemetery properties by placing a portion, typically
10% to 15%, of the proceeds from the sale of interment rights into a perpetual
care trust fund (these amounts are generally contributed to trust when the
contract is fully paid). As allowed by these laws, the income earned on these
funds is used to partially offset the maintenance costs of operating the
cemeteries. At December 28, 2002, the cemeteries had approximately $274 million
in perpetual care trust funds, compared to $259 million at December 31, 2001,
which are not reflected in the Consolidated Financial Statements because the
principal is required to stay in trust in perpetuity.

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COMBINED FUNERAL AND CEMETERY OPERATIONS

The Company operates 62 combination funeral homes and cemeteries in which a
funeral operation is physically located within or adjoining a cemetery
operation. The Company's combination operations allow synergies between funeral
and cemetery sales, and reduction in personnel, equipment and other costs. In
addition, customers are provided with the convenience of a single location to
purchase funeral and cemetery services and merchandise.

INSURANCE OPERATIONS

The Company operates several insurance subsidiaries licensed in a total of
32 jurisdictions. These insurance subsidiaries sell a variety of life insurance
products, primarily for the funding of pre-need funerals.

DEATH CARE INDUSTRY

COMPETITION

The funeral service industry in North America is highly fragmented,
consisting primarily of small, family-owned businesses. There are approximately
22,000 funeral homes and 10,500 cemeteries in the United States. The Company
believes the four largest public operators of funeral homes and cemeteries --
Service Corporation International, Alderwoods Group, Inc., Stewart
Enterprises, Inc. and Carriage Services, Inc. -- operate approximately 12% and
9% of the funeral homes and cemeteries, respectively, in the United States, with
approximately 22% of total funeral calls served. The Company's competition in
the markets it operates generally arise from one or more of the above public
operators in addition to independent operators of funeral homes and cemeteries
for at-need and pre-need business. The market share of a single funeral home or
cemetery in any community is often a function of the name, reputation and
location of that funeral home or cemetery. Gains or losses in market share
within a community are usually realized over a number of years.

CREMATION

Substantially all of the Company's funeral homes provide basic cremation
services through Company owned or third party crematories, and the Company has
proprietary programs designed to provide a full range of merchandise and
services to families choosing cremation. In 2002, cremations accounted for
approximately 36% of all funeral services performed by the Company, compared to
approximately 34% performed by the Predecessor in 2001. According to the latest
industry studies available, cremations increased by approximately 1% annually
from 1997 to 2001, as a percentage of all funeral services in the United States
and, in 2001, accounted for approximately 27% of all funeral services performed
in the United States. This trend to increasing cremations is expected to
continue into the future.

REGULATION

The funeral service and cemetery industry is regulated primarily on a state
and provincial basis with a vast majority of jurisdictions requiring licensing
and supervision of individuals who provide funeral-related services. Most
jurisdictions also regulate the sale of pre-need services and the administration
of any resulting trusts or insurance contracts. The laws and regulations are
complex, subject to interpretation by regulators, and vary from jurisdiction to
jurisdiction. Non-compliance with these regulations can result in fines or
suspension of licenses required to sell pre-need services and merchandise. In
addition, concerns regarding lack of competition have led a few jurisdictions to
enact legislation restricting the common ownership of funeral homes, cemeteries
and related operations within a specific geographic region.

The Company's operations in the United States must also comply with federal
legislation, including the laws administered by the Occupational Safety and
Health Administration, the Americans with

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Disabilities Act and the Federal Trade Commission ("FTC") regulations. The FTC
administers the Trade Regulation Rule on Funeral Industry Practices, the purpose
of which is to prevent unfair or deceptive acts or practices in connection with
the provision of funeral goods or services. Certain regulatory requirements also
exist in Canada and the United Kingdom.

The Company's 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. Actual
environmental liabilities could differ significantly from the Company's
estimates.

The Company's insurance subsidiaries are subject to regulation by the states
in which they are domiciled and the states in which their products are sold.

EMPLOYEES

At February 22, 2003, the Company employed approximately 9,500 people, with
approximately 530 people employed at the executive and administrative offices in
Cincinnati, Ohio, Toronto, Ontario and Burnaby, British Columbia. The Company
believes that relationships with these employees are good, but recognizes
employees have concerns over the challenges facing the Company. At February 22,
2003, approximately 120 of the Company's employees were members of collective
bargaining units.

WEB SITE ACCESS TO PERIODIC AND CURRENT REPORTS

The Company makes its periodic and current reports available, free of
charge, through its web site at http://www.alderwoods.com as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the United States Securities and Exchange Commission ("SEC").

PREDECESSOR OVERVIEW

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

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

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

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

The Bankruptcy Court confirmed the Plan on December 5, 2001, the Canadian
Court recognized the Plan on December 7, 2001, and the Plan became effective on
January 2, 2002.

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

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

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

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

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

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

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

- Certain unsecured obligations were cancelled in exchange for an aggregate
of 2,759,270 shares of Common Stock, Warrants to purchase 2,495,200 shares
of Common Stock and all of the interests in

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a liquidating trust that holds (a) five-year warrants of reorganized Prime
Successions Holdings, Inc. ("Prime") issued to Loewen Group in Prime's
reorganization proceeding and (b) an undivided 25% interest in the net
proceeds, if any, of the NAFTA Claims;

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

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

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

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

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

During the Company's first year of operations, subsequent to the Effective
Date, the Company had a continuing obligation to resolve residual bankruptcy
claims of allowed amounts, most of which were procedural oriented. In this
regard, at fresh start, the Company estimated its cost to complete and resolve
such pending matters and established an accrual of $57.1 million. Though the
Company had anticipated completing all remaining reorganization matters and
tasks during fiscal 2002, various delays experienced resulted in a number of
items still not being completed. Although the estimated amounts were accrued at
emergence, the continuing activities and associated costs, primarily legal fees,
general Chapter 11 costs, legal reorganization costs, and adversary proceeding
costs, continue to be incurred to complete the remaining reorganization
procedures. Accordingly, the Company has estimated the remaining costs and has a
remaining balance of $26.3 million at December 28, 2002. The Company expects to
complete the remaining reorganization procedures during fiscal year 2003.

ITEM 2. PROPERTIES

The Company's properties consist primarily of funeral homes and cemeteries.
Of the Company's 802 funeral homes at December 28, 2002, 106 were leased
facilities and the balance were owned by the Company. In some cases, the Company
has a right of first refusal and/or an option to purchase its leased premises.
Of the funeral homes owned by the Company, 379 funeral homes in the United
States are pledged as security for the Credit Facility and 51 funeral homes are
pledged as security for other debt. As of December 28, 2002, there were 643
funeral homes located in the United States, 120 in Canada and 39 in the United
Kingdom.

The Company operated or provided management and sales services pursuant to
various management and sales agreements to 185 cemeteries at December 28, 2002,
of which the assets of two are pledged as security for debt. The cemeteries
(including those in combination funeral homes and cemeteries) operated by the
Company at December 28, 2002, contained an aggregate of approximately 12,600
acres of which approximately 60% were developed. As at December 28, 2002, there
were 181 cemeteries located in the United States and four in Canada.

At December 28, 2002, 59 combination funeral homes and cemeteries were
located in the United States and three in Canada. Of the Company's 62
combination funeral homes and cemeteries at

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December 28, 2002, one was leased and the balance were owned by the Company. Of
the combination funeral homes and cemeteries located in the United States, eight
are pledged as security for the Credit Facility and three are pledged as
security for other debt.

The Company's office in Cincinnati, Ohio occupies approximately 21,000
square feet of leased office space. The Company's office in Toronto, Ontario
occupies approximately 19,000 square feet of leased office space. The Company's
office in Burnaby, British Columbia occupies approximately 69,000 square feet of
leased office space.

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

ITEM 3. LEGAL PROCEEDINGS

PROPOSED CIVIL RIGHTS CLASS ACTIONS

Since July 2000, ten lawsuits were filed against Security Industrial
Insurance Company, subsequently renamed Security Plan Life Insurance Company, a
subsidiary of the Company, and various other unrelated insurance companies
asserting similar claims and seeking class action certification. The complaints
in each of the lawsuits were virtually identical alleging 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.

On January 9, 2002, the Louisiana State Court gave final approval to a
class-action settlement with respect to the claims in the 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 provided agreed-upon amounts of
compensation to class members in exchange for a release of all pending and
future claims they may have against the Company and certain of its affiliates.
The Company has recorded a provision for the agreed-upon amounts of compensation
and related costs with respect to these lawsuits within the Company's
Consolidated Financial Statements.

During the fourth quarter of fiscal 2002, the agreed upon amounts of
compensation to all class members were paid and settled in accordance with the
terms of the settlement described above.

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

In October 1998, the Predecessor and Raymond L. Loewen, the then-Chairman
and Chief Executive Officer of the Predecessor, filed a claim against the United
States government for damages under the arbitration provisions of NAFTA. The
claimants contend that they were damaged as a result of breaches by the United
States of its obligations under NAFTA in connection with certain litigation in
the State of Mississippi entitled O'KEEFE VS. THE LOEWEN GROUP INC.
Specifically, the plaintiffs allege that they were subjected to discrimination,
a denial of justice, a denial of the fair and equitable treatment and full
protection and security guaranteed by NAFTA and uncompensated expropriation, all
in violation of NAFTA. The NAFTA claims are currently the subject of a pending
proceeding before an arbitration panel (the "Arbitration Tribunal") appointed
pursuant to the rules of the International Centre for Settlement of Investment
Disputes. In January 2001, the Arbitration Tribunal issued a ruling rejecting
certain of the U.S. government's jurisdictional challenges and scheduled a
hearing on the merits of the NAFTA claims, held on October 15-19, 2001. A motion
relating to the jurisdiction of this matter was heard on June 5, 2002. The
matter is now pending before the Arbitration Tribunal.

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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.

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

None.

EXECUTIVE OFFICERS OF ALDERWOODS GROUP

The following table sets forth certain information with respect to executive
officers of Alderwoods Group as of February 22, 2003.

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

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

PAUL A. HOUSTON became a director, President and Chief Executive Officer of
Alderwoods Group on January 2, 2002. From December 1999 to January 2002,
Mr. Houston was President and Chief Executive Officer of Loewen Group and
President of Loewen International. Additionally, Mr. Houston served as a
director of Loewen Group from June 1999 to January 2002. From August 1996 to
October 1999,

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Mr. Houston was President and Chief Executive Officer of Scott's
Restaurants Inc., a quick service food company.

ROSS S. CARADONNA became Executive Vice President, Chief Information Officer
of Alderwoods Group on January 22, 2003. From September 2002 to January 21,
2003, Mr. Caradonna was Senior Vice President, Chief Information Officer of
Alderwoods Group. From September 2001 to September 2002, Mr. Caradonna served as
Senior Vice President, Chief Information Officer of Sobey's Inc., a grocery
retailer and distributor. From October 2000 to July 2001, Mr. Caradonna was a
Senior Retail Consultant with Karabus Management. From June 1991 to
September 2000, Mr. Caradonna served as Senior Vice President, Chief Information
Officer of Scott's Hospitality Inc., an international consumer service company.

CAMERON R.W. DUFF became Senior Vice President, Corporate Development of
Alderwoods Group in June 2002. From March 2001 until March 2002, Mr. Duff was a
partner in the law practice of Donahue Ernst & Young. From July 2000 to February
2001, Mr. Duff was a consultant to TD Bank Financial Group, a provider of
financial products and services. From July 1997 to June 2000, Mr. Duff was Vice
President, Business Development & Corporate Strategy for CT Financial Services
Inc., a provider of financial products and services.

ELLEN NEEMAN became Senior Vice President, Legal and Compliance of
Alderwoods Group in June 2002. From May 2001 to January 2002, Ms. Neeman was
Vice President & Corporate Secretary for 724 Solutions, Inc., a provider of
Internet infrastructure software. From March 2000 to April 2001, Ms. Neeman was
Vice President & Corporate Secretary for Geac Computer Corporation Limited, a
software provider. From March 1997 to January 2000, Ms. Neeman was Senior Vice
President, General Counsel & Corporate Secretary for UniHost Corporation, a
company engaged in hotel ownership, franchising and management businesses.

RICHARD J. SCULLY became Senior Vice President, Sales and Marketing of
Alderwoods Group in January 2003. From June 2001 to January 2003, Mr. Scully was
Vice President, Sales and Marketing of Alderwoods Group. From 2000 to
June 2001, Mr. Scully served as Director, E-Commerce of Tucows International
Corp., an internet channel management company. From 1989 to 2000, Mr. Scully was
Director, Knowledge Management at Glaxowellcome Canada Inc., a pharmaceutical
manufacturing and marketing company.

KENNETH A. SLOAN became Executive Vice President, Chief Financial Officer of
Alderwoods Group on January 22, 2003. From January 2, 2002, to
January 21, 2003, Mr. Sloan was Senior Vice President, Chief Financial Officer
of Alderwoods Group. From November 2000 to January 2002, Mr. Sloan was Senior
Vice President, Chief Financial Officer of Loewen Group and of Loewen
International. From September 1987 to September 2000, Mr. Sloan served as Senior
Executive Vice President, Finance and Planning and Chief Financial Officer of
Shoppers Drug Mart Ltd., an operator of drug stores.

No executive officer of Alderwoods Group is related by blood, marriage or
adoption to any director or other executive officer of Alderwoods Group.

There are no arrangements or understandings between any executive officer of
Alderwoods Group and any other person pursuant to which the executive officer
was selected as an executive officer of Alderwoods Group.

10

PART II

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

MARKET INFORMATION

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

The following table sets forth, for the periods indicated, the range of high
and low sales prices of the Company's Common Stock, as reported on Nasdaq.

As at February 22, 2003, there were 491 and 418 record holders of the Common
Stock and Warrants, respectively.

DIVIDEND POLICY

Since the Effective Date, Alderwoods Group has not paid any cash dividends,
and it is not anticipated that Alderwoods Group will pay any dividends on the
Common Stock in the foreseeable future. In addition, covenants in the respective
indentures governing the Five-Year Secured Notes, the Seven-Year Unsecured
Notes, the Convertible Subordinated Notes and in the Credit Facility restrict
the ability of Alderwoods Group to pay dividends and may prohibit the payment of
dividends and certain other payments.

RECENT SALES OF UNREGISTERED SECURITIES

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

- 39,878,870 shares of Common Stock;

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

- $250 million aggregate principal amount of the Company's 11% Senior
Secured Notes Due 2007; (on July 25, 2002, the Company completed an
optional redemption of $15 million in principal amount, plus accrued
interest and, on January 2, 2003, completed a mandatory redemption of
$10 million in principal amount, plus accrued interest);

- $49.6 million aggregate principal amount of the Company's 12 1/4% Senior
Notes Due 2004 (on April 26, 2002, all outstanding notes were redeemed for
a total redemption price of $49.6 million, plus accrued interest to (but
not including) April 26, 2002);

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

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

11

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

ITEM 6. SELECTED FINANCIAL DATA

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

Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Form 10-K. However, the consolidated financial and other
information of the Company issued subsequent to the Plan implementation are not
comparable with the consolidated financial information and other information
issued by the Predecessor prior to the Plan implementation due to:

- the significant changes in the financial and legal structure of the
Company;

- the application of "fresh start" reporting as explained in Note 2 to the
Company's Consolidated Financial Statements, as a result of the
confirmation and implementation of the Plan; and

- changes in accounting policies, and certain account classifications and
fiscal accounting periods adopted by the Company.

Furthermore, Loewen Group had implemented an asset disposition program to
dispose of properties that did not fit into Loewen Group's strategic plans.
Accordingly, the accompanying selected consolidated financial information should
be reviewed with caution, and the Predecessor's selected consolidated financial
information should not be relied upon as being indicative of future results of
the Company or providing an accurate comparison of financial performance. A
black line has been drawn to separate and distinguish between the consolidated
financial information that relates to the Company and the consolidated financial
information that relates to the Predecessor.

Set forth below is certain selected consolidated financial and operating
information for the Company as of December 28, 2002, and December 31, 2001 and
for the 52 weeks ended December 28, 2002, and, for the Predecessor, consolidated
financial and operating information as of and for the years ended

12

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

ALDERWOODS
GROUP
---------------
PREDECESSOR
----------------------------------------------
52 WEEKS ENDED
YEAR ENDED DECEMBER 31
----------------------------------------------
DECEMBER 28,
2002 2001 (E) 2000 (F) 1999 (G) 1998 (H)
--------------- --------- -------- ---------- ----------
(IN THOUSANDS,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

EXCEPT PER
SHARE AMOUNTS)
INCOME STATEMENT INFORMATION:
Revenue................................ $ 833,453 $ 836,401 $927,684 $1,021,230 $1,104,492
Gross margin (j)....................... 139,767 181,239 262,023 258,529 269,705
Provision for goodwill impairment
(a).................................. 242,204 -- -- -- --
Provision for asset impairment (i)..... 3,283 180,658 116,937 428,194 333,900
Earnings (loss) from operations........ (148,908) (132,173) 17,469 (324,656) (260,127)
Loss before extraordinary gain, fresh
start valuation adjustments and
cumulative effect of accounting
change............................... (233,744) (87,160) (57,345) (523,439) (594,257)
Basic loss per share before
extraordinary gain, fresh start
valuation adjustments and cumulative
effect of accounting change (b)...... (5.86) (1.29) (0.89) (7.18) (8.15)
Aggregate dividends declared per
share................................ -- -- -- -- 0.10

ALDERWOODS GROUP
--------------------------------- PREDECESSOR
------------------------------------
AS OF AS OF
DECEMBER 28 DECEMBER 31 AS OF DECEMBER 31
--------------- --------------- ------------------------------------
2002 2001 2000 1999 1998
--------------- --------------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)

BALANCE SHEET INFORMATION:
Total assets................... $3,170,049 $3,503,103 $3,878,044 $4,059,751 $4,709,654
Liabilities subject to
compromise (c)............... -- -- 2,289,497 2,282,601 --
Total long-term debt (c)(d).... 759,670 835,648 73,542 91,204 2,343,014
Stockholders' equity
(deficit).................... 523,402 739,352 (662,768) 383,075 913,365

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

(a) See Note 15 to the Company's Consolidated Financial Statements.

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

(c) For the Predecessor, under-secured and unsecured debt obligations (including
the Monthly Income Preferred Securities) were reclassified to liabilities
subject to compromise for 2000 and 1999, as a result of the Chapter 11 and
the Creditors Arrangement Act filings. For 1998, Monthly Income Preferred
Securities of $75.0 million are included in long-term debt.

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

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

13

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

(g) The financial results of the Predecessor for the year ended December 31,
1999, include $59 million of pre-tax charges representing impairment of
investments and accrual of contingent losses on investments and $93 million
of reorganization costs. The 1999 results exclude $95 million of contractual
interest expense applicable to certain pre-Petition Date debt obligations,
which were subject to compromise as a result of the Chapter 11
and Creditors Arrangement Act filings.

(h) The financial results of the Predecessor for the year ended December 31,
1998, include $315 million of pre-tax charges representing impairment of
investments and accrual of contingent losses on investments.

(i) Predecessor provision for asset impairment includes goodwill impairment as
determined under the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."

(j) For the 52 weeks ended December 28, 2002, gross margin includes depreciation
expense not previously included in the prior years.

14

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF ALDERWOODS GROUP

OVERVIEW

Alderwoods Group is the second largest operator of funeral homes and
cemeteries in North America. As of December 28, 2002, the Company operated 763
funeral homes, 185 cemeteries and 62 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 (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. Alderwoods Group is a
holding company owning, directly or indirectly, the capital stock of
approximately 270 subsidiaries through which the funeral, cemetery and insurance
businesses are operated.

BUSINESS STRATEGY

OVERVIEW

After several years of reorganization, and the past year focusing on
stabilization of the core businesses, the Company's existing portfolio of
businesses continues to reflect Loewen Group's past aggressive acquisition
program. As a result, a number of operating locations do not provide the
necessary synergies or economies of scale within desired key markets.
Additionally, the extended period of time of the reorganization proceedings and
the early negotiation of the new capitalization structure has created a
continuing burdensome debt level, at interest rates that are high compared to
current rates. Last, as a further legacy of Loewen Group's past acquisition
program, the Company continues to strive to meld varying work cultures and
business approaches across the many markets in which it operates.

During 2002, its first post-emergence year, the Company focused on
stabilizing its core business operations, reducing debt to the extent possible
while maintaining stable cash flow for operating purposes, and completing many
residual tasks associated with its successful emergence from reorganization
proceedings on January 2, 2002. The successful results of this strategy are
evident in the positive operating margins of its businesses, reduction of
approximately 10% of total debt, and resolution of numerous reorganization
issues.

Looking ahead to 2003, the Company's strategic objectives are to:

- continue to improve the financial condition of the Company by further
reducing debt,

- increase the Company's focus on its core businesses,

- strategically develop key markets with the highest profit and growth
potential, and

- build a solid foundation for long-term volume growth.

KEY STRATEGIES

IMPROVE THE BALANCE SHEET

The Company successfully reduced its emergence debt level by approximately
10% during its first year of operations. Such reduction came from the generation
of strong operating cash flow, the sale of non-strategic operating locations and
real estate, the recovery of excess trust fund contributions and

15

improvements in working capital levels. The Company intends to continue to
aggressively strive to further de-leverage its balance sheet during 2003.

To achieve this objective, the Company expects cash flow from operations to
be adequate to maintain existing operations and capital needs, allowing some of
the excess to be used to pay down debt further. Additionally, the Company's
market rationalization strategy, described below, is expected to generate funds
that will primarily be utilized for debt reduction. Finally, the Company
continues to enhance its trusting processes and information systems to determine
whether prior excess contributions and unwithdrawn earnings from prior years'
exist. Any adjustments identified through this will be withdrawn as
determinable. All of these sources of funds will be pursued to achieve the
objective of decreasing the Company's existing debt level.

The Company's wholly-owned subsidiary, Rose Hills, will require payment or
refinancing of approximately $53 million of its debt during 2003, which it will
be unable to generate from its existing operations. Accordingly, the Company has
negotiated with its own lenders, the ability to utilize up to $30 million of the
Company's existing Credit Facility for Rose Hills' required debt repayment. This
ability, combined with funds from the Company's cash on hand, will enable Rose
Hills to satisfy the immediate liquidity needs associated with this debt
repayment.

INTERNAL GROWTH

The Company's continued, but increased, focus on its core businesses will be
directed toward improved levels of internal growth. To accomplish this, the
Company plans to improve its retailing strategies, primarily for at-need
customers, which are expected to increase average revenue per service. Improved
targeting and expansion of services to various customer groups based on
ethnicity, religious and other demographic traits, are expected to enhance
revenue-creation opportunities. The Company will continue a strong pre-need
sales program that builds future revenue and enhances market awareness, but also
manages the cash flow and expense impacts of such a pre-need sales program.

Industry data shows that cremation continues to be an increasing choice of
many consumers. This shift away from the traditional funeral service appears
indicative of the changing demographics of society, the increased mobility of
the population, and the change in view towards memorialization alternatives.
This shift is seen as an opportunity for the Company, by offering customers who
choose cremation a variety of service types and other products that are expected
to provide enhanced revenues. Last, the Company will continue to enhance its
cost control measures.

MARKET RATIONALIZATION

Throughout the reorganization process, the Company engaged in a strategic
market rationalization program to dispose of operating locations that did not
fit into the Company's market or business strategies, as well as
under-performing operating locations. This program continued during 2002,
primarily to complete strategic dispositions previously identified during the
reorganization process.

Now, as the Company enhances its focus on operations, it plans to continue
to assess the markets in which it operates, and evaluate the long-term potential
of each, to determine whether or not it fits into the Company's overall business
strategy. This evaluation will encompass many key factors, including
demographics, size, ethnicity, competition and growth potential. Over time, the
Company expects to market for disposal operating locations that do not meet the
strategic, long-term objectives of the Company. In addition to operating
location disposals, the Company will continue to assess its real estate holdings
within its markets, to determine the optimal use or potential sale.

16

MARKET EXPANSION

In addition, though the Company will be focused on a market rationalization
strategy as described above, it also plans to commence strategic initiatives to
improve its top-line growth. This is expected to be accomplished through, among
other things, strategic, targeted, and well-planned key market development
opportunities, which meet the Company's operating philosophy and financial
goals. The Company expects such controlled growth will help strengthen the
Company's core operations, enabling further synergies and operating
efficiencies.

The Company also intends to continue its strategy to develop more
combination operating locations to provide enhanced, seamless service to
customers. Such combination opportunities may be determined within the Company's
underlying base of operating locations, as well as through strategic
acquisitions.

CULTURAL TRANSFORMATION

As a result of the accumulation of many individual operating businesses and
a prolonged period under Chapter 11 protection, a culture supporting customer
service, excellence in administration and financial management is not yet
prevalent throughout the Company. Accordingly, management intends to implement
tools to assist in assessing people performance, as well as training for
customer service and local management skills.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements are prepared in accordance
with U.S. GAAP, which require management to make estimates and assumptions (see
Note 3 to the Consolidated Financial Statements), which impact all of its
business segments. Management believes that, of the significant accounting
policies described in Note 3 to the Company's Consolidated Financial Statements,
the following are the most important to the representation of the Company's
financial position, results of operations and cash flows. These require
management's most difficult, subjective and complex judgment efforts. All of
these critical accounting policies have been discussed and reviewed with the
Company's audit committee.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

Management must make estimates of the expected uncollectible or refundable
amounts of accounts receivable, both at-need and pre-need, primarily affecting
its funeral and cemetery business segments. Accordingly, a reserve for
uncollectible or refundable installment contracts and trade accounts is
determined, based primarily on historical experience of collections and write
offs, as well as other analytical procedures, such as assessment of the change
in the aging of receivables. These analyses are applied to different categories
of receivables, based on their differing characteristics, to provide an estimate
of expectation that is as representative as possible of the related receivable
category. Due to the significant number of estimates and projections utilized in
determining an expected rate of uncollectible or refundable receivables, actual
results of collections could be materially different from these estimates.

The Company's revenue recognition method for pre-need cemetery interment
rights is dependent on management's assessment of the collectibility of the
related receivables. If management's collectibility assumptions are not
achieved, future pre-need cemetery interment rights revenue would be accounted
for under the installment method.

DEPRECIATION OF LONG-LIVED ASSETS

Property, plant and equipment maintained by each of the Company's business
segments are depreciated over their respective estimated useful lives, which
vary depending on the nature of the asset (see Note 3 to the Company's
Consolidated Financial Statements). Depreciation is determined on a

17

straight-line basis over the estimated useful lives of the long-lived assets.
The estimated useful lives of the long-lived assets may be significantly
affected by such factors as changing market conditions, impairment,
obsolescence, or regulatory changes or requirements.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company monitors the continued propriety of the carrying values of its
long-lived assets, primarily property, plant and equipment, and cemetery
property in the funeral and cemetery business segments, on an ongoing basis, in
accordance with accounting requirements. As prescribed, if an indicator of
potential impairment is evident, the Company will review the projected
undiscounted future cash flows associated with the relevant long-lived assets,
to determine if such undiscounted cash flows exceed the carrying amount of the
long-lived assets. If it is determined that the net carrying amount of the
long-lived assets is not recoverable, then an adjustment would be made to reduce
the net carrying amount to the fair value amount of the long-lived asset. The
Company utilizes the most current internally-generated and publicly available
information to develop its estimates of future undiscounted cash flows
including, among other things, estimated lives, residual values, and terminal
values, and believes such estimates to be reasonable. Additionally,
determination of fair values of long-lived assets may also involve various
methods of estimation, if comparable independent fair values are not readily
available. Accordingly, different assumptions related to cash flows or fair
values of long-lived assets could materially affect the Company's estimates.

IMPAIRMENT OF GOODWILL

Goodwill of the funeral business segment is not amortized, but rather tested
annually, as well as on the occurrence of certain significant events, as
prescribed by relevant accounting requirements, to determine whether or not it
has been impaired. Such annual testing entails determining an estimated fair
value of goodwill ("implied goodwill") for comparison to the carrying amount of
goodwill, to assess whether or not impairment has occurred. Impairment occurs
when the estimated fair value of goodwill associated with the funeral business
segment is less than the respective carrying amount of such goodwill, resulting
in a write down to the estimated fair value of goodwill. Determination of the
estimated fair value of goodwill entails determining the estimated fair value of
the funeral business segment in total, and allocating such value to the
estimated fair value of the assets and liabilities of the funeral business
segment, in a method similar to purchase accounting. Such determination involves
many complex assumptions, including underlying cash flow projections, fair value
estimates, and comparability reviews, which include, among other things,
estimated discount rates, lives, residual values, and terminal values, which the
Company believes are reasonable. Accordingly, if any estimates or related
underlying assumptions change in the future, the Company may be required to
record goodwill impairment charges that result.

ACCOUNTING FOR INCOME TAXES

The Company must estimate income taxes for its business segments, in each of
the jurisdictions in which such business segments operate. This involves
estimating actual current tax expense, assessing temporary differences resulting
from different treatment of various assets and liabilities for book and tax
purposes, such as depreciation, and evaluating potential tax exposures based on
current relevant facts and circumstances. The determination of temporary
differences associated with assets and liabilities result in deferred tax assets
or liabilities, which are recorded in the Company's Consolidated Financial
Statements. The Company then assesses the likelihood that it will recover or
realize its deferred tax assets from expected future taxable income and, to the
extent that recovery is estimated to be not likely, establishes a corresponding
valuation allowance. In general, to the extent that a valuation allowance
increases or decreases in a period, it will be included as an expense or
recovery within the tax provision for such period. (This will not be the case
for a decrease in the valuation allowance established at fresh start, which must
reduce fresh start goodwill and, if insufficient goodwill exists, will be
credited to additional paid-in capital.)

18

Significant management judgment is required in determining the income tax
provision, deferred tax assets and liabilities, and any related valuation
allowance or change therein. Accordingly, if actual results differ from the
estimates or the estimates are adjusted by management in the future, it could
materially impact the Company's financial position and results of operations.

LIABILITIES FOR FUTURE POLICY BENEFITS

The Company calculates and maintains liabilities for future policy benefits
for the estimated future payment of claims to policyholders based on actuarial
assumptions, such as mortality (life expectancy), morbidity (health expectancy),
persistency, and interest rates, which are based on the Company's historical
experience. The assumptions used are considered to be appropriate at the time
the policies are issued (or, if applicable, on the date fresh start accounting
was implemented). An additional provision is made for most insurance products to
allow for possible adverse deviation from the assumptions assumed. The
liabilities established are based on extensive estimates, assumptions and
historical experience. Accordingly, establishing such liabilities is an
uncertain process, and it is possible that actual claims will exceed estimated
liabilities, which could materially impact the Company's financial position and
results of operations.

FRESH START REPORTING

As a result of the application of fresh start reporting on the Effective
Date, the following methods and assumptions were used to estimate the fair value
of significant assets and liabilities at December 31, 2001:

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

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

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

Insurance invested assets and insurance policy liabilities: The fair value
of insurance invested assets was based on quoted market prices. The fair
value of insurance policy liabilities was based on an estimate of the amount
which, together with future premiums and investment income, would be
sufficient to pay future benefits, dividends and expenses on insurance and
annuity contracts. Insurance policy liabilities were computed using the net
level premium method, which involved interest assumptions, and withdrawal,
mortality and morbidity assumptions as of the Effective Date.

19

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

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

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 consolidated financial and other information concerning the
Predecessor may be of limited interest to stockholders of the Company and has
been included in this Form 10-K. However, due to the significant changes in the
financial structure of the Company, the application of "fresh start" reporting
as explained in Note 2 to the Company's Consolidated Financial Statements as a
result of the confirmation and implementation of the Plan and changes in
accounting policies and fiscal accounting periods adopted by the Company, the
consolidated financial and other information of the Company issued subsequent to
the Plan implementation are not comparable with the consolidated financial
information and other information issued by the Predecessor prior to the Plan
implementation. Furthermore, Loewen Group had implemented an asset disposition
program to dispose of properties that did not fit into Loewen's strategic plans.
Accordingly, management's discussion and analysis of financial condition and
results of operations of the Company compared to the Predecessor should be
reviewed with caution, and should not be relied upon as being indicative of
future results of the Company or providing an accurate comparison of
financial performance.

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 ended on December 28, 2002.

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 Consolidated Financial Statements and the
Predecessor's consolidated financial statements included in Item 8 of this
Form 10-K (including the notes thereto).

20

RESULTS OF OPERATIONS

A COMPARISON OF FINANCIAL PERFORMANCE WITH THE PREDECESSOR IS NOT MEANINGFUL
AND SHOULD BE REVIEWED WITH CAUTION DUE TO:

- SIGNIFICANT CHANGES IN THE FINANCIAL AND LEGAL 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 ACCOUNTING PERIODS.

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

Detailed below are the operating results of the Company for the 52 weeks
ended December 28, 2002, and the Predecessor for the year ended December 31,
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.

21

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 Note 16 and Note 15 of
the Company's and Predecessor's consolidated financial statements, respectively.

ALDERWOODS GROUP
---------------------------
52 WEEKS 52 WEEKS
PREDECESSOR
-------------------------------
ENDED ENDED
DECEMBER 28, DECEMBER 28, YEAR ENDED YEAR ENDED
2002 2002 DECEMBER 31, DECEMBER 31,
2001 2001
------------ ------------ -------------- --------------
(IN (PERCENTAGES) (IN MILLIONS) (PERCENTAGES)
MILLIONS)

Revenue
Funeral........................ $ 530.6 63.7 $ 522.1 62.4
Cemetery....................... 182.8 21.9 210.1 25.1
Insurance...................... 120.1 14.4 104.2 12.5
------- ----- ------- -----
Total........................ $ 833.5 100.0 $ 836.4 100.0
------- ----- ------- -----
Gross margin
Funeral........................ $ 104.3 19.7 $ 138.4 26.5
Cemetery....................... 14.5 7.9 31.1 14.8
Insurance...................... 21.0 17.5 11.7 11.2
------- ----- ------- -----
Total........................ 139.8 16.8 181.2 21.7
------- ----- ------- -----
Expenses
General and administrative..... 43.2 5.2 75.7 9.1
Depreciation and
amortization................. -- -- 57.0 6.8
Provision for goodwill
impairment................... 242.2 29.1 -- --
Provision for asset
impairment................... 3.3 0.4 180.7 21.6
------- ----- ------- -----
Loss from operations............. (148.9) (17.9) (132.2) (15.8)
Interest on long-term debt....... 85.4 10.2 11.0 1.3
Reorganization costs............. -- -- 87.2 10.4
Loss (gain) on disposal of
subsidiaries and other expenses
(income)....................... (5.5) (0.7) (171.2) (20.4)
------- ----- ------- -----
Loss before income taxes and
extraordinary items............ (228.8) (27.4) (59.2) (7.1)
Income taxes..................... 4.9 n/a 28.0 n/a
------- ----- ------- -----
Loss before extraordinary
items.......................... (233.7) (28.0) (87.2) (10.4)
Extraordinary gain on debt
discharge...................... -- -- 959.0 114.7
Fresh start valuation
adjustments.................... -- -- (228.1) (27.3)
------- ----- ------- -----
Net income (loss)................ $(233.7) (28.0) $ 643.7 77.0
======= ===== ======= =====

SUCCESSOR'S 52 WEEKS ENDED DECEMBER 28, 2002 COMPARED TO PREDECESSOR'S YEAR
ENDED DECEMBER 31, 2001

A COMPARISON OF FINANCIAL PERFORMANCE WITH THE PREDECESSOR IS NOT MEANINGFUL
AND SHOULD BE REVIEWED WITH CAUTION DUE TO:

- SIGNIFICANT CHANGES IN THE FINANCIAL AND LEGAL 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 ACCOUNTING PERIODS.

22

Consolidated revenue for the Company of $833.5 million for the 52 weeks
ended December 28, 2002, decreased $2.9 million, or 0.4%, compared to
$836.4 million for the Predecessor's year ended December 31, 2001, primarily as
a result of a reduction of approximately $62.6 million related to 183 funeral
and 150 cemetery locations sold or closed since January 1, 2001, and
approximately $5.5 million estimated to be the aggregate effect of the
difference in the number of days in the Company's and the Predecessor's fiscal
years, offset partially by approximately $79.8 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 $15.9 million of
insurance revenue. In addition, at locations in operation for all of the
52 weeks ended December 28, 2002, and the year ended December 31, 2001, and
after adjusting for the difference in the number of days in the respective
periods, the Company estimates that funeral revenue increased by approximately
$2.2 million and cemetery revenue decreased by approximately $32.7 million.
Consolidated gross margin for the 52 weeks ended December 28, 2002, was
$139.8 million, a decline of $41.4 million, or 22.9%, from the Predecessor's
consolidated gross margin of $181.2 million for the year ended December 31,
2001. As a percentage of consolidated revenue, consolidated gross margin of the
Company similarly declined from the Predecessor's 21.7% to 16.8%. 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), partially
offset by an increase in 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 $530.6 million for the 52 weeks ended
December 28, 2002, increased $8.5 million, or 1.6%, compared to $522.1 million
for the Predecessor's year ended December 31, 2001. The increase is primarily
due to (1) an increase of approximately $31.6 million from the inclusion of Rose
Hills, now consolidated in the Company's operating results, and (2) partially
offset by a reduction of approximately $21.2 million related to 183 funeral
locations sold or closed since January 1, 2001, and (3) an estimated decrease of
approximately $4.1 million from the difference in the number of days in the
Company's and the Predecessor's fiscal years. In addition, at locations in
operation for all of the 52 weeks ended December 28, 2002, and the year ended
December 31, 2001, and after adjusting for the difference in the number of days
in the respective periods, the Company estimates that funeral revenue increased
approximately $2.2 million.

The Company performed approximately 142,400 funeral services for the
52 weeks ended December 28, 2002, compared to approximately 142,150 funeral
services for the year ended December 31, 2001. At locations in operation for all
of the 52 weeks ended December 28, 2002, and the year ended December 31, 2001,
the Company estimates that funeral services performed decreased by 0.3%. Overall
average funeral revenue per funeral service for the Company for the 52 weeks
ended December 28, 2002, was $3,726, compared to $3,672 for the Predecessor in
the year ended December 31, 2001.

Funeral costs for the 52 weeks ended December 28, 2002, increased
$42.6 million, primarily as a result of (1) an increase of approximately
$9.0 million and $18.1 million from regional manager and depreciation expense,
respectively, not previously included in funeral costs, (2) an increase of
approximately $24.5 million from the inclusion of Rose Hills, (3) partially
offset by a reduction of approximately $21.8 million related to 183 funeral
locations sold or closed since January 1, 2001, and (4) an estimated decrease of
approximately $2.9 million from the difference in the number of days in the
Company's and the Predecessor's fiscal years. In addition, at locations in
operation for all of the 52 weeks ended December 28, 2002, and the year ended
December 31, 2001, and after adjusting for the difference in the number of days
in the respective periods, the Company estimates that funeral costs increased by
approximately $15.7 million, due to higher wages, cost of goods sold and selling
expenses, primarily from higher pre-need revenue.

Pre-need funeral contracts written by the Company for the 52 weeks ended
December 28, 2002, were approximately $167.8 million, compared to
$108.4 million by the Predecessor for the year ended

23

December 31, 2001. The increase of $59.4 million was primarily due to (1) the
inclusion of approximately $26.1 million from Rose Hills, now consolidated in
the Company's financial statements, (2) the increase of approximately
$38.3 million from funeral locations in operation for all of the 52 weeks ended
December 28, 2002, and the year ended December 31, 2001, due to increased sales
efforts during the year, and (3) partially offset by a reduction of
approximately $4.1 million related to 183 funeral locations sold or closed since
January 1, 2001. Approximately 24% of funeral volume for the 52 weeks ended
December 28, 2002, was derived from the backlog, compared to approximately 22%
from the Predecessor's backlog for the year ended December 31, 2001.

Overall funeral gross margin of the Company, as a percentage of revenue,
decreased to 19.7% for the 52 weeks ended December 28, 2002, from the
Predecessor's 26.5% for the year ended December 31, 2001, primarily due to the
reclassification of regional manager and depreciation expense. The decline in
gross margin as a percentage of revenue was also affected by the increase in
costs being at a rate higher than that commensurate with the revenue increase,
partially offset by the inclusion of Rose Hills.

Cemetery revenue for the Company of $182.8 million for the 52 weeks ended
December 28, 2002, decreased $27.3 million, or 13.0%, compared to
$210.1 million for the Predecessor's year ended December 31, 2001. The decrease
is primarily due to a reduction of approximately $41.4 million related to
150 cemetery locations sold since January 1, 2001, and an estimated decrease of
approximately $1.4 million from the difference in the number of days in the
Company's and the Predecessor's fiscal years, which was partially offset by an
increase of approximately $48.2 million from the inclusion of Rose Hills, now
consolidated in the Company's operating results. In addition, at locations in
operation for all of the 52 weeks ended December 28, 2002, and the year ended
December 31, 2001, and after adjusting for the difference in the number of days
in the respective periods, the Company estimates that cemetery revenue declined
approximately $32.7 million, primarily due to lower pre-need revenue, partially
offset by increased at-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 52 weeks ended December 28, 2002, decreased
$10.7 million, or 5.9%, primarily as a result of (1) a reduction of
approximately $24.7 million related to 150 cemetery locations sold since
January 1, 2001, (2) an estimated decrease of approximately $1.3 million from
the difference in the number of days in the Company's and the Predecessor's
fiscal years, which was offset by (3) an increase of approximately
$36.1 million from the inclusion of Rose Hills, and (4) an increase of
approximately $3.3 million and $2.8 million from regional manager and
depreciation expense, respectively, not previously included in cemetery costs.
In addition, at locations in operation for all of the 52 weeks ended
December 28, 2002, and the year ended December 31, 2001, and after adjusting for
the difference in the number of days in the respective periods, the Company
estimates that cemetery costs declined approximately $26.9 million, due to lower
costs of goods sold, primarily from lower pre-need revenue, and lower wages and
administration costs.

Pre-need cemetery contracts written by the Company during the 52 weeks ended
December 28, 2002, were approximately $89.7 million, approximately
$20.7 million higher than those written by the Predecessor for the year ended
December 31, 2001. The increase was due to the inclusion of Rose Hills'
operating results and improved pre-need sales, which was partially offset by the
decrease due to 150 cemetery locations sold since January 1, 2001, and the
effect of the shorter fiscal year in 2002 versus 2001. Interments were
approximately 67,000 for the 52 weeks ended December 28, 2002, of which
approximately 80% were at-need and 20% were pre-need fulfillments.

Overall cemetery gross margin of the Company for the 52 weeks ended
December 28, 2002, as a percentage of revenue, decreased to 7.9%, compared to
14.8% for the Predecessor for the year ended December 31, 2001. The decrease was
primarily due to the fixed nature of certain expenses, the cost

24

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. Removing the results of cemeteries sold or held for
sale for the 52 weeks ended December 28, 2002, cemetery revenue would have been
$169.9 million, and gross margin would have been 9.6% of revenue, an increase of
21.5% in gross margin from that otherwise calculated for 2002.

Insurance revenue for the Company for the 52 weeks ended December 28, 2002,
increased $15.9 million, or 15.2%, compared to the Predecessor for the year
ended December 31, 2001, primarily due to higher premium revenue of
approximately $10.8 million and higher realized gains on sale of investments of
approximately $5.6 million. Costs, consisting primarily of benefit and claims
costs, commissions, policy reserve changes, and wages, increased for the
52 weeks ended December 28, 2002, compared to the year ended December 31, 2001.
The increase was primarily due to higher benefit claims and the classification
of certain costs in 2002 to more appropriately reflect the nature of such costs,
partially offset by the shorter fiscal year in 2002, versus 2001. As a result of
higher revenue, overall insurance gross margin for the Company for the 52 weeks
ended December 28, 2002, increased to 17.5%, compared to 11.2% for the
Predecessor for the year ended December 31, 2001.

General and administrative expenses for the Company for the 52 weeks ended
December 28, 2002, were $43.2 million, or 5.2% of consolidated revenue,
substantially lower than the $75.7 million, or 9.1% of consolidated revenue, of
the Predecessor for the year ended December 31, 2001. The decline was due to the
classification in 2002 of certain regional manager costs as operating costs,
which were partially offset by a portion of depreciation, being classified as
general and administrative expenses. The classifications in 2002 more
appropriately reflect the nature and source of such costs in line with industry
practice. After adjusting for the reclassifications, general and administrative
costs declined by approximately $7.5 million, or 14.3%, for the 52 weeks ended
December 28, 2002, compared to the year ended December 31, 2001. 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
emergence, goodwill is not amortized, but is tested annually for impairment. The
Predecessor's depreciation and amortization of $57.0 million for the year ended
December 31, 2001, included approximately $16.3 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 value 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 was recorded for the 52 weeks ended December 28, 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 in 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.

25

During the 52 weeks ended December 28, 2002, the Company identified eight
additional funeral homes and 36 additional cemeteries as probable for sale, but
not sold as at December 28, 2002, as they do not meet the Company's future
geographic and strategic objectives. In addition, of the remaining funeral homes
and cemeteries that were previously identified by the Predecessor as probable
for sale during its reorganization proceedings, 14 funeral homes and 26
cemeteries either had signed agreements for sale or were being negotiated for
sale at December 28, 2002. The carrying amount of these 22 funeral homes and
62 cemeteries was approximately $20.1 million, and the fair market value, less
estimated costs to sell, was approximately $16.8 million. The fair market value
was determined by specific offer or bid, or an estimate based on comparable
recent sales transactions. As a result, a pre-tax long-lived asset impairment
provision of approximately $3.3 million was recorded for the 52 weeks ended
December 28, 2002.

Interest expense for the Company on long-term debt for the 52 weeks ended
December 28, 2002, was approximately $85.4 million, an increase of approximately
$74.4 million compared to the Predecessor for the year ended December 31, 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
$1.0 million of discount on the 9.50% Senior subordinated notes, due in 2004,
and approximately $0.9 million of premium on the 12.25% Convertible subordinated
notes, due in 2012.

Other expense/income netted to approximately $5.5 million of income for the
52 weeks ended December 28, 2002. This primarily consisted of approximately
$7.3 million of net realized gains from dispositions of funeral homes,
cemeteries and certain excess real estate, which was partially offset by
approximately $1.8 million of net expenses, consisting of other miscellaneous
non-operating expenses and income.

Income tax expense for the Company for the 52 weeks ended December 28, 2002,
was approximately $4.9 million compared to approximately $28.0 million of income
tax for the Predecessor for the year ended December 31, 2001. The Company's
effective tax rate for the 52 weeks ended December 28, 2002, varied from the
statutory tax rate, primarily because (1) the provision for goodwill impairment
is not deductible for tax purposes, (2) the tax benefits generated by enacted
United States tax legislation provide retroactive relief to the Company, 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 December 28, 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 reflecting realization of the benefits of tax assets that had
a corresponding valuation allowance established on the Effective Date would be
treated as a reduction of goodwill established on the Effective Date, with any
excess over the value assigned to such goodwill recognized as a
capital transaction.

The Company's decrease in cash and cash equivalents of $55.4 million from
December 31, 2001 to December 28, 2002, is due primarily to the $49.6 million
redemption of the 12.25% Senior unsecured notes, due in 2004, on April 26, 2002,
the $15.0 million partial redemption of the 11.00% Senior secured notes, due in
2007, on July 25, 2002, payments on promissory notes and capitalized obligations
of approximately $9.0 million, and an $8.9 million repayment of Rose Hills' bank
credit agreement, partially offset by operating cash flow of $68.7 million for
the 52 weeks ended December 28, 2002. In addition, the Company had net proceeds
on asset sales of approximately $21.2 million, purchases of property and
equipment and business acquisitions of approximately $25.2 million and net
insurance asset purchases of approximately $38.6 million. As a result of a
review of the outstanding receivables during 2002 and its ongoing collection
efforts, the Company wrote off against the allowance for doubtful accounts
approximately $21.9 million of its receivables.

26

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 or adjusted accruals of approximately $30.8 million during the 52 weeks
ended December 28, 2002. Although the Company expected to pay the $57.1 million
during 2002, delays experienced in the completion of the reorganization process
resulted in the remaining balance of $26.3 million at December 28, 2002. Though
emergence occurred on the Effective Date, it is the Company's continuing
responsibility to resolve allowed amounts for unresolved claims. Although actual
payments were set aside at emergence, the continuing costs, primarily legal
fees, general Chapter 11 costs, legal reorganization costs and adversary
proceeding costs, continue to be incurred to complete the remaining
reorganization procedures. The Company expects to pay the remainder during
fiscal year 2003. A reconciliation of changes in the reorganization accrual is
included in Note 14 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

INTRODUCTION

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

(a) Five-Year Secured Notes in an aggregate principal amount of
$250 million bearing interest at 11% per annum and due in 2007
($15 million redeemed during fiscal 2002, and $10 million redeemed in
January 2003);

(b) Two-Year Unsecured Notes in an aggregate principal amount of
$49.6 million bearing interest at 12 1/4% per annum and due in 2004
(fully redeemed during fiscal 2002);

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

(d) Convertible Subordinated Notes in an aggregate principal amount of
$24.7 million bearing interest at 12 1/4% per annum and due in 2012. The
carrying amount of $32.8 million includes an unamortized premium of
$8.1 million. The Convertible Subordinated Notes are convertible at any
time into the Company's Common Stock at an initial conversion rate of
$17.17 per share, adjusted for subsequent dividends, stock splits and
issuance of rights, options and warrants. At December 28, 2002, the
conversion rate was $17.17 per share.

As a result of the implementation of the Plan, the Company now owns all of
the outstanding capital stock of Rose Hills. As of December 28, 2002, Rose Hills
Company had outstanding $52.6 million under a bank credit agreement,
$26.3 million of which matures in May 2003 and $26.3 million of which matures in
November, 2003, and $77.8 million (net of $2.2 million fair value discount) of
outstanding 9 1/2% Senior Subordinated Notes due November 2004.

27

LONG-TERM INDEBTEDNESS

The Company's carrying amounts of long-term indebtedness as of December 28,
2002, are as follows:

LONG-TERM INDEBTEDNESS

As a condition to the Plan becoming effective, the Company entered into the
Credit Facility. The Credit Facility has a maximum availability of the lesser of
$75 million or an amount (determined pursuant to a borrowing base calculation)
equal to the sum of (a) 80% of eligible accounts receivable plus (b) the lesser
of (i) 50% of the value of eligible inventory and (ii) $15 million plus (c) the
lesser of (i) 25% of the book value of real property on which the collateral
agent for the exit lenders has a first priority mortgage and (ii) $40 million.
Up to $35 million of the Credit Facility is available in the form of letters of
credit. Borrowings under the Credit Facility bear interest at a rate per annum
equal to the J.P. Morgan Chase & Co. prime rate (1.5625% at December 28, 2002),
plus 1% or, at the Company's option, LIBOR (1.4% at December 28, 2002), plus
2.5%. As of December 28, 2002, the Company's borrowing base was approximately
$70.1 million under the Credit Facility, less approximately $12.1 million in
outstanding letters of credit that secure various service arrangements for the
Company.

On November 14, 2002, the expiry date of the Credit Facility was extended to
January 2, 2004. Subsequently, on February 14, 2003, the terms of the Credit
Facility were further amended to allow the Company to draw up to $30.0 million
(the "Rose Hills Special Advance") from the Credit Facility for the purpose of
assisting in the repayment of the principal amount of $52.6 million outstanding
under Rose Hills' bank credit agreement and coming due in 2003. In addition, the
amendment provided that while any amount under the Rose Hills Special Advance is
outstanding, the Company requires lender approval to borrow any other amount
from the Credit Facility, the aggregate amount outstanding under letters of
credit may not exceed $14.0 million, and the Credit Facility will be
additionally secured by personal and specified real property of Rose Hills and
its subsidiaries. Also, on February 14, 2003, the expiry date of the Credit
Facility was further extended to April 30, 2004.

The Company expects that its existing and projected cash flows will be
sufficient to maintain its current level of operating activities through 2003.

The 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, except as contemplated by the amended Credit Facility as a result
of the Rose Hills Special Advances, 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

28

between the Company and Rose Hills or its subsidiaries, except as contemplated
by the amended Credit Facility as a result of the Rose Hills Special Advances.

On April 17, 2002, the Company called for the redemption of all its
outstanding 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, and, on January 2, 2003, completed a
mandatory redemption of $10.0 million in principal amount, plus accrued
interest, of the Five-Year Secured Notes.

The Company's Rose Hills' non-recourse subsidiary senior secured debt of
$52.6 million matures in 2003, approximately $26.3 million in May 2003 and
approximately $26.3 million in November 2003. The Company intends to retire in
full the $52.6 million outstanding on or before May 1, 2003 as described above.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table details the Company's amounts of payments due under
various contractual obligations with terms greater than one year as of
December 28, 2002.

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

(a) Long-term debt excludes unamortized premium and discount. Long-term debt and
promissory notes and capitalized obligations are included in long-term debt
in Note 6 to the Company's Consolidated Financial Statements.

(b) Promissory notes and capitalized obligations include non-competition
agreements and capitalized lease obligations.

(c) Operating leases are primarily for premises and automobiles, expire over the
next one to 24 years, and are included in Note 10 to the Company's
Consolidated Financial Statements.

In addition to the operating leases noted in the table above, as at
December 28, 2002, the Company leased approximately 1,100 vehicles under a
master operating lease agreement, which has a minimum lease term of 12 months.
The Company's practice is to continue these leases on a month-to-month basis
after the expiry of the minimum lease term. Lease payments for these vehicles
are projected to be $7.7 million in 2003.

29

The following table details the Company's amounts of commercial commitments
as of December 28, 2002.

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

(a) Relates to the Company's Credit Facility, which has a borrowing base of
$70.1 million, less outstanding letters of credit and Rose Hills secured
revolving credit facility of $10 million. Except for outstanding letters of
credit described in (b) below, there were no outstanding balances under the
Credit Facility or Rose Hills revolving credit facility. On November 14,
2002, the expiry date of the Credit Facility was extended to January 2,
2004, and on February 14, 2003, the expiry date was further extended to
April 30, 2004. The Rose Hills revolving credit facility expires on
April 1, 2003, and is not expected to be renewed.

(b) Standby letters of credit primarily relate to a court ordered legal claim,
surety bonds for various pre-need sales trusting requirements and security
for certain automobile operating leases and cash management services.

OTHER INFORMATION

The Company's earnings before interest, taxes, depreciation and
amortization, and provision for goodwill and asset impairment ("EBITDA") and
recurring free cash flow for the 52 weeks ended December 28, 2002, are presented
in the table below. Recurring free cash flow is calculated by adjusting cash
provided by operations to exclude certain operating items specified in the
table, 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. EBITDA and recurring free cash
flow are presented herein as additional performance criteria, that are used by
the Company and considered relevant to investors, to be compared with other
enterprises in the death care industry.

ACQUISITIONS AND DISPOSITIONS

During the 52 Weeks ended December 28, 2002, the Company acquired seven
funeral homes in the United Kingdom for approximately $0.9 million.

During the 52 Weeks ended December 28, 2002, the Company sold or closed
59 funeral homes, 31 cemeteries and three combination funeral homes and
cemeteries for net proceeds of approximately $21.2 million. At December 28,
2002, the Company had seven funeral homes and 21 cemeteries under signed
agreements for sale, with net assets and expected proceeds of approximately
$3.1 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 Credit Facility and the indentures governing the Five-Year Secured
Notes, the Seven-Year Unsecured Notes and the Convertible Subordinated Notes
prohibit the Company from consummating certain asset sales unless
(a) consideration at least equal to fair market value is received and
(b) except with respect to specified assets, not less than 75% of the
consideration for the asset sale is paid in cash or cash 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 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. The cash flow from
operations of the insurance subsidiaries for the 52 weeks ended December 28,
2002, was approximately $39.0 million.

The Company is not expecting 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 Credit Facility restrict the Company's
ability to pay dividends and may prohibit the payment of dividends and certain
other payments.

RECENT ACCOUNTING STANDARDS

See Note 3 to the Company's Consolidated Financial Statements included in
Item 8.

31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PREDECESSOR

FINANCIAL CONDITION

PREPETITION FINANCIAL RESULTS AND OVERLEVERAGE

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

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

BASIS OF PRESENTATION

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

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

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

32

RESULTS OF OPERATIONS

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

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

33

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

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

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

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

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

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

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

34

Overall cemetery gross margin, as a percentage of cemetery revenue,
decreased to 14.8% for the year ended December 31, 2001, from 31.9% in 2000,
primarily due to the large declines in at-need and pre-need revenue and finance
income. As well, higher wage and other fixed costs at locations not sold and the
fixed nature of other cemetery expenses, contributed to expense reductions that
were not commensurate with the revenue declines experienced.

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

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

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

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

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

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

Income taxes for the year ended December 31, 2001 were $28.0 million,
compared to income tax of $22.5 million in 2000. The Predecessor's tax rate for
the years ended December 31, 2001 and 2000 varied

35

from the statutory tax rate because tax benefits generated by the Predecessor's
losses were largely offset by a resultant increase in the valuation allowance
against the Predecessor's deferred tax assets. In addition, a substantial
portion of goodwill amortization and reorganization costs are not deductible for
tax purposes and losses incurred in certain jurisdictions may not offset the tax
expense in profitable jurisdictions. Future income and losses, and the
disposition of certain locations, may require the Company to record a change in
the valuation allowance of tax assets that were taken into account in
determining the net amount of liability for deferred income taxes recorded on
its balance sheet at December 31, 2001. If this occurs, any resulting increase
in the valuation allowance would generally be treated as an additional income
tax expense in the period in which it arises, while any resulting decrease in
the valuation allowance established on the Effective Date would be treated as a
reduction of goodwill with any excess over the value assigned to goodwill
recognized as a capital transaction.

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

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

DISPOSITIONS

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

36

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain statements made in this Form 10-K, including certain statements made
in the section entitled "Management's Discussion and Analysis of Alderwoods
Group -- Business Strategy" and "Quantitative and Qualitative Disclosures about
Market Risk," in other filings made with the SEC, and elsewhere (including oral
statements made on behalf of the Company) are forward-looking statements within
the meaning of Section 27A(i) of the Securities Act of 1933 and
Section 21E(i) of the Securities Exchange Act of 1934. The words "believe,"
"may," "will," "estimate," "continues," "anticipate," "intend," "expect" and
similar expressions identify these forward-looking statements. Certain events or
circumstances, including those described below under the caption "Risk Factors,"
could cause actual results to differ materially from those estimated, projected
or predicted. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

RISK FACTORS

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

FUTURE REVENUES ARE UNCERTAIN

1. VOLUME, MIX AND MARGINS 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.

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 is
estimated to have declined by 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 is
estimated to have 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 the latest industry studies
available, cremations represented approximately 27% of the burials performed in
the United States in 2001, as compared with approximately 10% in 1980, and this
percentage increased by approximately 1% annually from 1997 to 2001. Compared to
traditional funeral services, cremations have historically generated similar
gross profit percentages but lower

37

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 affected by the
level of dispositions, which may or may not be significant.

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
$759.7 million as of December 28, 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.

The Company's Rose Hills' non-recourse subsidiary senior secured debt of
$52.6 million matures in 2003, approximately $26.3 million in May 2003 and
approximately $26.3 million in November 2003. Although, the Company intends to
retire in full the $52.6 million outstanding on or before May 1, 2003, it
amended the Credit Facility to obtain the Rose Hills Special Advance needed to
finance this retirement. The restrictions under the amended Credit Facility,
which require the Company to obtain lender approval to borrow any other amount
from the Credit Facility until the Rose Hills Special Advance is repaid and
limit the amount that can be outstanding under letters of credit, may exacerbate
the risks noted in the preceding paragraph.

2. DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT LIQUIDITY
AND CORPORATE ACTIVITIES. The 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
certain of its subsidiaries). These covenants could prohibit the Company from
making acquisitions and adversely affect the Company's ability to finance future
operations by limiting the incurrence of additional indebtedness or requiring
equity issuance proceeds to be applied to reduce indebtedness. In addition, the
Company is required to achieve specified earnings to fixed charges ratios and
specified levels of tangible net worth. Adverse operating results could cause
the Company to be unable to achieve these financial ratios and tests, in which
event, unless the Company were able to obtain appropriate waivers with respect
to non-compliance, certain of the Company's long-term debt would be in default
and the holders thereof could accelerate the maturities of such debt.

3. SUBSIDIARY STOCK IS SUBJECT TO SECURITY INTERESTS. The capital stock of
subsidiaries directly owned by Alderwoods Group or a subsidiary guarantor of the
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 Five-Year Secured Notes
Indenture is secured by collateral which consists of (i) substantially all
personal property (other than capital stock) and (ii) the material funeral

38

home real property assets pledged under the Credit Facility of the Company and
certain of its wholly owned subsidiaries. The rights of the holders of the
Five-Year Notes to this collateral will be subordinate to those of the lenders
under the 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,
Alderwoods Group 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 that
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 2003 and beyond may vary significantly from the
statutory tax rate because (i) 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, (ii) the losses incurred in certain
jurisdictions may not offset the tax expense in profitable jurisdictions,
(iii) there are differences between foreign and United States income tax rates,
and (iv) 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 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.

CAPITAL STOCK: DIVIDENDS NOT ANTICIPATED; ANTI-TAKEOVER EFFECTS

1. 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 as to the degree of price volatility in the market for the Common
Stock and Warrants. 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 funeral
industry in particular or unfavorable publicity. Additionally, there can be no
assurance that the market value of the Common Stock will exceed the exercise
price of the Warrants at any time prior to their expiration.

39

2. DIVIDENDS ARE NOT ANTICIPATED; PAYMENT OF DIVIDENDS IS SUBJECT TO
RESTRICTION. Alderwoods Group is not expecting 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 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. The shareholders rights plan will expire in September
2003, and there is presently no extension or renewal contemplated by
the Company.

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.

40

3. OUTCOME OF NAFTA CLAIMS IS IMPOSSIBLE TO PREDICT. In October 1998, the
Predecessor filed the NAFTA Claims against the government of the United States
seeking damages under the arbitration provisions of 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 Loewen Group, dated July 25, 2000, was
transferred to the Liquidating Trust. Although the Company believes that these
actions should not affect the NAFTA Claims, the government of the United States,
respondent in the NAFTA proceeding, has asserted that these actions have
divested the Arbitration Tribunal of jurisdiction over some or all of the
claims. The Company does not believe that it is possible at this time to predict
the final outcome of this proceeding or to establish a reasonable estimate of
the damages, if any, that may be awarded, or the proceeds, if any, that may be
received in respect of the NAFTA Claims.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company's exposure to interest rate fluctuations resides primarily in
the United States, and the Company's exposure to currency exchange rate
fluctuations resides primarily in investments and operations in Canada and, to a
lesser extent, the United Kingdom, each of which is generally stable politically
and economically and is not highly inflationary. The Company has not entered
into any derivative instruments at December 28, 2002.

The Company intends to implement strategies to manage its mix of floating
and fixed rate debt through the use of derivatives, primarily in the form of
interest rate and currency swap transactions. No such instruments were in place
at December 28, 2002.

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 December 28, 2002, the Company's total fixed rate
debt is $701.1 million, representing approximately 93% of total debt, and has a
weighted average rate of 11.39%. The Company's floating rate exposure of
$52.6 million, represents 7% of total debt and has a weighted average rate of
approximately 4.9%. A one percent change in the applicable floating rate indices
would cause an approximately $0.5 million change in the Company's annual
interest expense.

The Company's exposure to equity prices resides primarily in the United
States. The sale of pre-need funeral contracts, pre-need cemetery merchandise
and insurance products results in the Company having significant investment in,
and supervising the management of the trusts that have significant investments
in mutual funds and equity securities which are sensitive to current market
prices. Fluctuations in interest and equity market rates on investments held in
pre-need funeral trusts and pre-need cemetery merchandise trusts do not result
in significant current income fluctuation, as the income is not realized until
services are performed. Investments of pre-need cemetery merchandise trusts and
insurance invested assets are currently predominately in fixed income
securities. The Company manages the mix of equities and fixed income securities
in accordance with policies set by an investment committee comprised of members
of senior management. The investment committee sets and modifies the mix of
investments with the

41

assistance of independent professional financial advisors. The policy emphasizes
a conservative approach while maintaining acceptable levels of income and
capital appreciation.

The principal cash flows and the related weighted average interest rates for
the Company's long-term debt as of December 28, 2002, are presented below. The
carrying values of the Company's debt instruments are included in Note 6 to the
Company's 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.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

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

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

43

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

THE FOLLOWING ALDERWOODS GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS
ISSUED SUBSEQUENT TO THE PLAN IMPLEMENTATION ARE NOT COMPARABLE WITH THE
CONSOLIDATED FINANCIAL STATEMENTS ISSUED BY THE LOEWEN GROUP INC. PRIOR TO THE
PLAN IMPLEMENTATION, DUE TO THE SIGNIFICANT CHANGES IN THE FINANCIAL AND LEGAL
STRUCTURE OF THE COMPANY, THE APPLICATION OF FRESH START REPORTING AT
DECEMBER 31, 2001, RESULTING FROM CONFIRMATION AND IMPLEMENTATION OF THE PLAN
AND CHANGES IN ACCOUNTING POLICIES, CERTAIN ACCOUNT CLASSIFICATIONS AND FISCAL
ACCOUNTING PERIODS ADOPTED BY THE COMPANY. ACCORDINGLY, THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE 52 WEEKS ENDED DECEMBER 28, 2002, DO
NOT INCLUDE COMPARABLE OPERATING AND CASH FLOW INFORMATION. CERTAIN CONSOLIDATED
FINANCIAL INFORMATION OF THE LOEWEN GROUP INC. MAY BE OF LIMITED INTEREST TO THE
STOCKHOLDERS OF THE COMPANY, AND HAS BEEN INCLUDED FOR 2001 AND 2000 ELSEWHERE
IN THIS FORM 10-K.

44

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Alderwoods
Group, Inc. as at December 28, 2002 and December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fifty-two weeks ended December 28, 2002. In connection with our audits of
the consolidated financial statements, we also have audited the information with
respect to the Company in financial statement Schedule II included in Item 15 of
the Company's annual report on Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alderwoods
Group, Inc. as at December 28, 2002, and December 31, 2001, and the results of
its operations and its cash flows for the fifty-two weeks ended December 28,
2002, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.

/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada

March 6, 2003

45

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT NUMBER OF SHARES OUTSTANDING

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

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

46

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

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

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

49

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1. NATURE OF OPERATIONS

Alderwoods Group, Inc., a Delaware corporation, together with its
subsidiaries (collectively, the "Company") is the second-largest operator of
funeral homes and cemeteries in North America. As at December 28, 2002, the
Company operated 763 funeral homes and 185 cemeteries and 62 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. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company,
its subsidiaries and operations controlled by the Company through sales and
management agreements. The Company is the successor to The Loewen Group Inc.
(the "Predecessor") and its subsidiaries, including Loewen Group
International, Inc., a Delaware corporation ("Loewen International"). The
consolidated 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.

EMERGENCE FROM REORGANIZATION PROCEEDINGS

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

On December 5, 2001 and December 7, 2001, the U.S. Bankruptcy Court and the
Canadian Bankruptcy Court, respectively, confirmed the Fourth Amended and
Restated Joint Plan of Reorganization, as modified (the "Plan"), of the
Predecessor and its subsidiaries under creditor protection (the "Debtors"). The
Plan became effective on January 2, 2002 (the "Effective Date") and, for
accounting and reporting purposes, is reflected as of December 31, 2001, because
United States generally accepted accounting principles require that the
financial statements reflect fresh start reporting as of the

50

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
confirmation date or as of a later date, that is not subsequent to the Effective
Date, when all material conditions precedent to the Plan becoming binding
are resolved. Pursuant to the Plan, the Debtors altered their debt and capital
structures and, among other things:

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

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

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

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

- satisfied certain administrative claims through the issuance of the
Company's 12 1/4% Convertible Subordinated Notes Due 2012 in the aggregate
principal amount of $24,679,000, which are convertible into the Company's
Common stock at an initial conversion rate of $17.17 per share and
379,449 shares of the Company's Common stock, which resulted in the
Company becoming the owner of all of the outstanding common stock of Rose
Hills Holdings Corp. ("Rose Hills"), which in turn owns 100% of the
outstanding common stock of Rose Hills Company;

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

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

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

Due to the significant changes in the financial and legal structure of the
Company, the application of fresh start reporting 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, the
consolidated financial statements of the Company issued subsequent to the Plan
implementation are not comparable with the consolidated financial statements
issued by the Predecessor prior to the Plan implementation. Accordingly, the
Company's consolidated financial statements as at and for the 52 weeks ended
December 28, 2002, do not include comparable operating and cash flow
information. Certain consolidated financial and other information concerning the
Predecessor may be of limited interest to the stockholders of the Company and
has been included elsewhere in this Form 10-K.

FRESH START REPORTING

At December 31, 2001, the Company adopted fresh start reporting in
accordance with AICPA Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), which in
turn required application at the date of Plan implementation of purchase

51

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
accounting principles, as prescribed by Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS No. 141"), which superceded
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations." In
addition, SOP 90-7 requires the adoption of any new accounting principles
concurrent with the adoption of fresh start reporting. As such, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," ("FAS No. 142") on December 31, 2001. As a result of the
adoption of FAS No. 142, goodwill arising from the Company's reorganization is
not amortized. Also concurrent with fresh start reporting, the Company adopted a
revenue recognition policy relating to pre-need sales of interment rights which
differed from that previously applied by the Predecessor (see Note 3).

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

In accordance with the principles of "purchase" accounting, as prescribed by
FAS No. 141 and FAS No. 142, the reorganization value was then allocated to the
Company's identifiable tangible and intangible assets and liabilities based on
their fair values, with the residual recorded as goodwill. As a result of the
application of fresh start reporting, significant adjustments were made to the
Company's historical assets and liabilities, as the fair values varied
significantly from recorded amounts of the Predecessor immediately prior to the
date of Plan adoption at December 31, 2001 (see Note 19).

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

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

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

Cemetery property: For developed land and undeveloped land, the fair value
was estimated by discounting cash flows from the expected future sales of
cemetery land, reduced by a reasonable profit margin. A maximum term of
30 years was assumed in determining projected sales revenue. Portions of the
Company's cemetery land are situated in areas that could not be developed
due to geographic or

52

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 2. BASIS OF PRESENTATION (CONTINUED)
regulatory restrictions. Such cemetery land, together with portions of land
that were not required for sales during the next 30 years and for which the
Company had no plan to sell, were assigned a fair value of zero. For
mausoleums and lawn crypts, the fair value was based on the replacement cost
for similar inventory. It is possible that the Company's future operations
in the near term may result in recoveries on excess land sales that are
different than those assumed in the estimates.

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

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

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
its subsidiary companies and operations controlled by the Company through sales
and management agreements. All subsidiaries are wholly owned, except for a few
companies with small minority interests.

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

USE OF ESTIMATES

The preparation of the consolidated financial statements in accordance with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. As a result, actual amounts could
significantly differ from those estimates.

53

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUNERAL OPERATIONS

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

Pre-need funeral services contracts provide for future funeral services,
generally determined by prices prevailing at the time the contract is signed.
The payments made under the contract, in part, are either placed in trust or are
used to pay the premiums of life insurance policies under which the Company is
designated as beneficiary. Pre-need funeral services contract amounts, together
with related trust fund investment earnings and annual insurance benefits, are
deferred until the service is performed. The Company estimates that trust fund
investment earnings and annual insurance benefits exceed the increase in cost
over time of providing the related services.

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

CEMETERY OPERATIONS

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

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

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

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

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

INSURANCE OPERATIONS

For traditional life and participating life products, premiums are
recognized as revenue when due from policyholders. Benefits and expenses are
associated with earned premiums to result in recognition of

54

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
profits over the life of the policy contracts. This association is accomplished
by means of the provision for liabilities for future policy benefits and the
amortization of deferred policy acquisition costs.

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

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

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

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

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

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and term deposits with a term to
maturity at acquisition of less than or equal to 90 days.

INVENTORIES

Inventories are carried at the lower of cost, determined primarily on a
specific identification basis or a first-in first-out basis, and net realizable
value.

CEMETERY PROPERTY

Cemetery property, including capitalized interest, consists of developed
plots, lawn crypts, mausoleums or niches and undeveloped land, and is valued at
average cost. Amounts are expensed as revenue from sales of cemetery property is
recognized.

55

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

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

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

GOODWILL AND INTANGIBLE ASSETS

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

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

FINANCIAL INSTRUMENTS

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

The Company maintains its cash and cash equivalents with various financial
institutions. As at December 28, 2002, the Company had approximately $16,984,000
(2001 -- $70,000,000) of cash and cash equivalents at two financial
institutions.

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

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

56

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A summary of the cost and fair values of financial instruments is as
follows:

The carrying amount of cash and cash equivalents, receivables, and accounts
payable and accrued liabilities approximates fair value due to the short-term
maturities of these instruments.

STOCK OPTION PLAN

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS No. 123"), Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an Amendment of FASB Statement No. 123," ("FAS No. 148"),
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. However, as
allowed by FAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described below, and has adopted the
disclosure requirements of FAS No. 123 and FAS No. 148.

The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, including FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," to account for its fixed plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Any compensation
expense recorded is charged against operations over the service period, which
generally matches the option vesting period. No stock-based employee
compensation cost is recorded for the 52 weeks ended December 28, 2002, as all
options granted under the Company's stock option plan had an exercise price
equal to or greater than the market value of the underlying Common stock on the
grant date. The following table illustrates the effect on net loss and net

57

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loss per share, if the Company had applied the fair value recognition provisions
of FAS No. 123 to stock-based employee compensation.

INCOME TAXES

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

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

FOREIGN CURRENCY TRANSLATION

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

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 ended on December 28, 2002.

58

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In connection with the change in fiscal year end, the Company also realigned
its fiscal quarters. In fiscal 2002, the first, second and fourth fiscal
quarters each consisted of 12 weeks and the third fiscal quarter consisted of
16 weeks.

In order to cause the fourth fiscal quarter to end on the same day as the
fiscal year, as described above, the fourth fiscal quarter will consist of
13 weeks in certain years.

COMPARIBILITY

Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year.

RECENT ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("FAS No. 143"). FAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. FAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. FAS No. 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002, with early application encouraged. The Company believes that the
adoption of FAS No. 143 will have no material impact on its financial condition
or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" ("FAS No. 145"). As a result of the
rescission of Statement of Financial Accounting Standards No. 4 and 64, gains
and losses from extinguishments of debt are to be accounted for under the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations -- Reporting the Effect of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
FAS No. 145 also rescinds Statement of Financial Accounting Standards No. 44,
"Accounting for Intangible Assets of Motor Carriers." FAS No. 145 amends
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. FAS
No. 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. FAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company believes that the adoption of FAS No. 145 will have no
material impact on its financial condition or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS No. 146"). FAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." FAS No. 146 requires that

59

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. FAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability.
FAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company believes that on adoption, FAS No. 146 will
have no material impact on its financial condition or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements
No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45").
FIN No. 45 clarifies the requirements of Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies," relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
The disclosure provisions of FIN No. 45 are effective for financial statements
of interim or annual periods that end after December 15, 2002. The provisions of
FIN No. 45 for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company has considered the
disclosure requirements of FIN No. 45 in the preparation of these consolidated
financial statements. The Company does not currently believe that it has
outstanding instruments that, if they had been subject to the measurement
provisions of FIN No. 45, would have materially impacted its reported financial
condition or results of operations.

In December 2002, the FASB issued FAS No. 148. FAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. In addition, FAS
No. 148 amends the disclosure requirements of FAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has adopted the disclosure provisions of
FAS No. 148 and has presented the pro forma effects of FAS No. 123 for the 52
weeks ended December 28, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities." FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. FIN No. 46 applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1, 2003. FIN No. 46 applies
to public enterprises as of the beginning of the applicable interim or annual
period. Although the Company is continuing to consider the implications of
FIN No. 46, it currently believes that the adoption of FIN No. 46 will have no
material impact on its financial condition or results of operations.

60

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 4. PRE-NEED FUNERAL ACTIVITIES

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

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

The activities in deferred pre-need funeral contract revenue were
as follows:

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

61

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 4. PRE-NEED FUNERAL ACTIVITIES (CONTINUED)
amounts when the funeral service is performed. The cost and fair values (which
are based on quoted market prices of the underlying securities) of the amounts
receivable from funeral trusts are as follows:

It is not practicable to estimate the fair value of customer receivables,
because of the large number of individual contracts, which generally have terms
of one to seven years and contractual or imputed interest rates ranging from
9.00% to 12.75% per annum.

NOTE 5. PRE-NEED CEMETERY ACTIVITIES

PRE-NEED CEMETERY CONTRACTS

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

For pre-need cemetery contract sales, other than sales of pre-need cemetery
interment rights, which are recognized in accordance with FAS No. 66, an
allowance for cancellations and refunds is provided at the date of sale based on
management's best estimates and is offset by an allowance against deferred
pre-need cemetery contract revenue. For sales of pre-need cemetery interment
rights, an allowance is provided at the time of sale.

62

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 5. PRE-NEED CEMETERY ACTIVITIES (CONTINUED)
The customer receivables as at December 28, 2002, are expected to mature
as follows:

The activities in deferred pre-need cemetery contract revenue were
as follows:

Amounts receivable from cemetery trusts represents a portion of the proceeds
from the sale of pre-need merchandise and services, deposited in accordance with
state and provincial trusting laws with various financial institutions, together
with accrued earnings. The Company will recognize and generally receive these
amounts when the merchandise is delivered or service is performed. The cost and
fair values (which are based on quoted market prices of the underlying
securities) of the amounts receivable from cemetery trusts (net of taxes payable
by the trusts) are as follows:

63

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 5. PRE-NEED CEMETERY ACTIVITIES (CONTINUED)
It is not practicable to estimate the fair value of customer receivables,
because of the large number of individual contracts, which generally have terms
of one to seven years and contractual or imputed interest rates ranging from
9.00% to 12.75% per annum.

PERPETUAL CARE TRUSTS

The perpetual care trust funds are not included in the Company's
consolidated balance sheets, as the principal of these trusts cannot be
withdrawn by the Company. The carrying value of the trust investments was
$274,443,000 and $259,520,000 at December 28, 2002, and December 31, 2001,
respectively.

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

NOTE 6. LONG-TERM DEBT

Long-term debt consists of the following:

64

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
At December 28, 2002, the fair value of long-term debt was estimated based
on quoted market prices, where applicable, and discounted future cash flows of
each instrument at rates for similar debt instruments of comparable maturities.
At December 31, 2001, the long-term debt carrying values were equal to their
fair values, as a result of the application of fresh start reporting.

(a) On January 2, 2002, the Company entered into an exit financing 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
(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 is used
primarily to fund the Company's working capital needs and as more fully
described below, may be used to repay the subsidiary credit agreement
described below, and bears interest at a rate per annum equal to the
J.P. Morgan Chase & Co. prime rate (1.5625% at December 28, 2002), plus
1% or, at the Company's option, LIBOR (1.4% at December 28, 2002), 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 a fixed charge coverage ratio, and a yearly maximum on
capital expenditures. The Credit Facility is secured by specified real
property, and substantially all personal property of the Company and
specified subsidiaries.

On November 14, 2002, the expiry date of the Credit Facility was extended
to January 2, 2004. On February 14, 2003, the terms of the Credit
Facility were further amended to allow the Company to draw up to
$30,000,000 (the "Rose Hills Special Advance") from the Credit Facility
for the purpose of assisting in the repayment of the principal amount of
$52,642,000 outstanding under Rose Hills' bank credit agreement (as
discussed below in (b)). In addition, the amendment provided that while
any amount under the Rose Hills Special Advance is outstanding, the
Company requires lender approval to borrow any other amount from the
Credit Facility, the aggregate amount outstanding under letters of credit
may not exceed $14,000,000 and the Credit Facility will be additionally
secured by specified personal and real property of Rose Hills and its
subsidiaries. Also, on February 14, 2003, the expiry date of the Credit
Facility was further extended to April 30, 2004. As of December 28, 2002,
the Company's borrowing base was approximately $70,074,000, less
approximately $12,088,000 in outstanding letters of credit.

(b) Subsidiary credit agreement which provides for (1) a senior secured
amortization extended term loan facility in an aggregate principal amount
of $75,000,000, and (2) a senior secured revolving credit facility in an
aggregate principal amount of $10,000,000, which remains undrawn at
December 28, 2002. The subsidiary is required to maintain certain defined
financial ratios and there are restrictions on the payment of dividends
to the Company. The credit agreement bears interest, at the Company's
option, at the reference rate of the agent acting on behalf of the
financial institutions, plus 2%, or under a Eurodollar option, at a
reserve adjusted Eurodollar rate, plus 3%. As of December 28, 2002,
interest was charged at a rate of 4.94% on outstanding borrowings under
the term loan facility. The Company pays a commitment fee of 0.50% on the

65

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
unused portion of the revolving credit facility. The subsidiary credit
agreement is payable, subject to certain conditions, in the principal
amount of approximately $26,321,000 in May 2003, and approximately
$26,321,000 in November 2003. The Company expects to use the Rose Hills
Special Advance to repay these amounts.

(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 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 and specified
subsidiaries, 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, $40,000,000 and $135,000,000, if
such amounts are outstanding on January 2, 2003, January 2, 2004,
January 3, 2005, January 2, 2006 and January 2, 2007, respectively. On
July 25, 2002, the Company completed an optional redemption of
$15,000,000 in principal amount, plus accrued interest and, on
January 2, 2003, completed a mandatory redemption of $10,000,000 in
principal amount, plus accrued interest.

(d) The indenture for the subsidiary 9.5% Senior subordinated notes, due
November 15, 2004, with an effective annual interest rate of 11.13%,
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 $2,200,000 (2001 -- $3,200,000).

(e) On January 2, 2002, the Company issued 12.25% Senior unsecured notes,
due in 2004. Interest was payable semi-annually commencing on June 15,
2002. 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.

(g) On January 2, 2002, the Company issued 12.25% Convertible subordinated
notes, due in 2012, with an effective annual interest rate of 8.6%.
Interest is payable semi-annually on March 15 and September 15. The notes
are convertible at the holder's 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. At December 28, 2002, the conversion rate was $17.17 per
share. The carrying amount includes unamortized premium of $8,100,000
(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

66

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
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 Company's 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 and its subsidiaries, except as
contemplated by the amended Credit Facility as a result of the Rose Hills
Special Advance, 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, except as contemplated
by the amended Credit Facility as a result of the Rose Hills Special Advance.

In certain change of control situations, the Company is required to make an
offer to purchase the then-outstanding 11% Senior unsecured notes due in 2007
and 12.25% Convertible subordinated notes due in 2012, at a price equal to 100%
of their stated principal amount, and for 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 Credit Facility and the indentures governing the 11% Senior unsecured
notes due in 2007, 12.25% Senior unsecured notes due in 2009 and 12.25%
Convertible subordinated notes due in 2012 prohibit the Company from
consummating certain asset sales unless: (a) consideration at least equal to
fair market value is received; and (b) except with respect to specified assets,
not less than 75% of the consideration for the asset sale is paid in cash.
Within 270 days of the receipt of net proceeds from any such asset sale, the
Company will be obligated to apply such net proceeds at its option (or as
otherwise required) as follows: (a) 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 unsecured 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 indentures governing the 11% Senior unsecured
notes due in 2007, 12.25% Senior unsecured notes due in 2009 and 12.25%
Convertible subordinated notes due in 2012 include restrictions placed on the
Company and specified subsidiaries to incur additional indebtedness, pay
dividends, repay subordinate or junior indebtedness, and encumber property or
assets.

67

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt principal are as follows:

NOTE 7. INSURANCE ACTIVITIES

At December 28, 2002, the fair value of insurance operation investments
classified as available-for-sale were based on quoted market prices. The
carrying values of cash and short-term investments and other investments
approximate their fair values, due to their short-term to maturity. At
December 31, 2001, insurance operation investments were recorded at fair value
as a result of the application of fresh start reporting. Fixed maturity
securities are classified as available-for-sale and carried at fair value.
Investments in debt securities are evaluated for other than temporary
impairments. Other than temporary impairment is reflected in current period
income as a realized loss. It is possible that a significant change in economic
conditions in the near term could result in losses that could be significant to
the Company. Insurance invested assets carrying and fair values consist of the
following:

During the 52 weeks ended December 28, 2002, insurance investments
classified as available-for-sale with a cost of $238,969,000 were sold for
proceeds of $241,708,000, resulting in $5,258,000 and $2,519,000 of realized
gains and losses, respectively.

68

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 7. INSURANCE ACTIVITIES (CONTINUED)
Included in the fair value of insurance investments classified as
available-for-sale are $23,410,000 and $188,000 of unrealized gains and losses,
respectively.

Maturities of fixed maturity securities, excluding mortgage-backed
securities, collateralized mortgage obligations and asset-backed obligations are
estimated as follows:

NOTE 8. STOCKHOLDERS' EQUITY

CAPITAL STOCK

The Company is authorized to issue 10,000,000 shares of preferred stock,
with a par value of $0.01 per share. No shares of preferred stock were issued as
of December 28, 2002, or December 31, 2001.

The Company is authorized to issue 100,000,000 shares of Common stock, with
a par value of $0.01 per share. The Company has 179,428 shares of Common stock
held in reserve, but unissued, for possible future issuance in connection with
certain class 11 claims under the Plan. During the 52 weeks ended December 28,
2002, the Company issued 62,401 shares of Common stock, with an aggregate par
value of $624 and capital in excess of par value of $758,000. Pursuant to the
Plan, the Company issued 39,878,870 shares of Common stock, with an aggregate
par value of $398,789 and capital in excess of par value of $738,953,000, on the
Effective Date.

In addition, warrants to purchase 2,992,000 shares of Common stock were
issued on the Effective Date. The warrants entitle the holders to purchase, at
any time up to January 2, 2007, shares of Common stock at an exercise price of
$25.76 per share. The exercise price of the warrants exceeded the fair value of
the Company's Common stock on the date of issuance and throughout the 52 weeks
ended December 28, 2002, and none of the warrants have been exercised.

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

69

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
filed with the SEC on March 13, 2002. The Rights Amendment will expire in
September 2003, and no extension or renewal is presently contemplated by
the Company.

STOCK OPTION PLANS

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

The following is a summary of the total number of outstanding stock options
and the maximum number of stock options available for grant:

The following table summarizes information about stock options outstanding
at December 28, 2002:

FAS No. 123 requires disclosure of pro forma amounts to reflect the impact
as if the Company had elected to adopt the optional fair value expense
recognition provisions of FAS No. 123 for its stock option

70

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
plans. Accordingly, the Company's net loss and loss per Common share would have
been increased to the pro forma amounts indicated below for the 52 weeks ended
December 28, 2002:

Net loss:
As reported............................................... $(233,744)
Pro forma, net of tax..................................... $(237,315)

The fair value of stock options used to compute the pro forma net loss and
loss per Common share disclosures was calculated as of the grant date, using the
Black-Scholes option-pricing model with the following assumptions:

The weighted average fair value of the Company's stock options, calculated
using the Black-Scholes option-pricing model, granted during the 52 weeks ended
December 28, 2002, was $2.93 per option.

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including the expected price volatility and option life.
The expected option life is based on the Predecessor's historical experience as
well as the vesting periods and terms of the stock options. The Company uses
expected volatility rates, which are based on a combination of the Company's
historical volatility rates, plus the historical volatility rates of other
companies in the death care industry, trended into future years. Changes in the
subjective input assumptions can materially affect the fair value estimate, and
therefore the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's stock options.

NOTE 9. LEGAL CONTINGENCIES

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.

71

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 9. LEGAL CONTINGENCIES (CONTINUED)
Specifically, the plaintiffs allege that they were subjected to discrimination,
a denial of justice, a denial of the fair and equitable treatment and full
protection and security guaranteed by NAFTA and an uncompensated expropriation,
all in violation of NAFTA. The NAFTA claims are currently the subject of a
pending proceeding before an arbitration panel (the "Arbitration Tribunal")
appointed pursuant to the rules of the International Centre for Settlement of
Investment Disputes. In January 2001, the Arbitration Tribunal issued a ruling
rejecting certain of the U.S. government's jurisdictional challenges and
scheduled a hearing on the merits of the NAFTA claims, held on October 15-19,
2001. 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.

NOTE 10. COMMITMENTS AND CONTINGENCIES

LEASES

The future annual payments for operating leases with terms greater than one
year, primarily for premises, automobiles and office equipment, are as follows:

72

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition to the automobile leases noted in the table above, as at
December 28, 2002, the Company leased approximately 1,100 vehicles under a
master operating lease agreement, which has a minimum lease term of 12 months.
The Company's practice is to continue these leases on a month-to-month basis
after the expiry of the minimum lease term. Lease payments for these vehicles
are projected to be $7,734,000 in 2003.

Total expense incurred under all operating leases for the 52 weeks ended
December 28, 2002, was $23,829,000.

ENVIRONMENTAL CONTINGENCIES AND LIABILITIES

The Company's operations are subject to numerous environmental laws,
regulations and guidelines adopted by various governmental authorities in the
jurisdictions in which the Company operates. On a continuing basis, the
Company's business practices are designed to assess and evaluate environmental
risk and, when necessary, conduct appropriate corrective measures. Liabilities
are recorded when known or considered probable and reasonably estimable.

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

NOTE 11. RETIREMENT PLANS

The Company has a 401(K) Retirement Savings Plan for United States employees
who may defer between 2% and 75% of their eligible compensation. The Company
will match 100% of employee contributions to a maximum of 2% of employees'
eligible compensation. There are no required future contributions under this
plan in respect of past service.

The Company has a Registered Retirement Savings Plan for Canadian employees
who may contribute either 3% or 5% of their compensation which is matched by an
equal contribution to the plan by the Company on behalf of employees. There are
no required future contributions under this plan in respect of past service.

The Company's total expense for these retirement plans for the 52 weeks
ended December 28, 2002, was approximately $2,255,000.

NOTE 12. INCOME TAXES

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

73

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 12. INCOME TAXES (CONTINUED)
Loss before income taxes was as follows:

Income tax provision (recovery) consisted of the following:

The Company made income tax payments of $10,910,000, excluding income tax
refunds of $8,251,000, during the 52 weeks ended December 28, 2002.

The difference between the U.S. federal statutory income tax rate and the
effective tax rate was as follows:

74

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

Although realization of the Company's net deferred tax assets is not
assured, management believes that it is more likely than not that reversals of
deferred tax liabilities and the expected profitability of the Company's
insurance operations over the next 15 years will provide sufficient taxable
income to realize the deferred tax assets after consideration of the valuation
allowance. It is possible that the estimated valuation allowance could change in
the near term due to matters such as the timing and manner of reversals of
deferred tax liabilities, sales of operations and future income or loss. If this
occurs, any resulting increase in the valuation allowance would generally be
treated as an additional income tax expense in the period in

75

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 12. INCOME TAXES (CONTINUED)
which it arises, while any resulting decrease reflecting realization of the
benefits of tax assets that had a corresponding valuation allowance established
on the Effective Date would be treated as a reduction of goodwill established on
the Effective Date, with any excess over the value assigned to such goodwill
recognized as a capital transaction.

As a result of the Company's emergence from bankruptcy, all federal net
operating loss carryforwards of the Company generated prior to emergence and
during fiscal 2002, have been eliminated. As a result, the Company's net
operating loss carryforwards pertaining to State, local, and foreign
jurisdictions will expire as follows:

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

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

Goodwill that is expected to be deductible for tax purposes at December 28,
2002 is $124,854,000 (2001 -- $141,729,000).

76

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 13. CHANGES IN OTHER NON-CASH BALANCES

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

77

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

78

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)

NOTE 15. GOODWILL

FAS No. 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
No. 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
No. 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
52 weeks ended December 28, 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 with a
discount rate, comparable with other enterprises in the death care industry,
adjusted for risks associated with differences in company size, certain
characteristics specific to the Company and cash flow projection risk. 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.

79

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 15. GOODWILL (CONTINUED)
The changes in the carrying amount of goodwill for the 52 weeks ended
December 28, 2002, are as follows:

NOTE 16. SEGMENT REPORTING

The Company's reportable segments are comprised of the three businesses it
operates, each of which offers different products and services: funeral homes,
cemeteries and insurance (see Note 1).

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

80

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 16. SEGMENT REPORTING (CONTINUED)
The following table reconciles earnings from operations of reportable
segments to total earnings (loss) and identifies the components of "Other"
segment earnings from operations:

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

81

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 16. SEGMENT REPORTING (CONTINUED)
The Company operates principally in the United States and also has
operations in Canada and the United Kingdom. The following tables depict the
revenue earned and the long-lived assets held in the reportable geographic
segments.

NOTE 17. IMPAIRMENT OF ASSETS

In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
No. 144"), the Company reviews its long-lived assets for impairment when changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. FAS No. 144 requires that long-lived assets to be held and used be
recorded at the lower of carrying amount or fair value. Long-lived assets to be
disposed of are to be recorded at the lower of carrying amount or fair value,
less estimated cost to sell.

During the 52 weeks ended December 28, 2002, the Company identified eight
additional funeral homes and 36 additional cemeteries as probable for sale, but
not sold as at December 28, 2002, as they do not meet the Company's future
geographic and strategic objectives. In addition, of the remaining funeral homes
and cemeteries that were previously identified by the Predecessor as probable
for sale during its reorganization proceedings, 14 funeral homes and
26 cemeteries either had signed agreements for sale or were being negotiated for
sale at December 28, 2002. The carrying amount of these 22 funeral homes and
62 cemeteries was approximately $20,088,000, and the fair market value, less
estimated costs to sell, was approximately $16,805,000. The fair market value
was determined by specific offer or bid, or an estimate based on comparable
recent sales transactions. As a result, a pre-tax long-lived asset impairment
provision of $3,283,000 was recorded during the 52 weeks ended December 28,
2002. These funeral homes had revenues and costs of $3,828,000 and $4,423,000,
respectively, and these cemeteries had revenues and costs of $11,702,000 and
$12,926,000, respectively, for the 52 weeks ended December 28, 2002.

82

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 17. IMPAIRMENT OF ASSETS (CONTINUED)
The asset impairment provision was based on management estimates. As a
result, actual results could differ significantly from these estimates.

NOTE 18. LOSS PER SHARE

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

Employee and director stock options to purchase 3,470,000 shares of Common
stock, and shares reserved for issuance pursuant to the 12.25% Convertible
subordinated notes, due in 2012, were not included in the computation of diluted
loss per share, because they were anti-dilutive.

83

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 19. FRESH START REPORTING ADJUSTMENTS

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

NOTE 21. SUBSEQUENT EVENTS

On January 2, 2003, the Company completed a mandatory redemption of
$10,000,000 in principal amount, plus accrued interest, of its 11.00% Senior
secured notes, due in 2007.

On February 14, 2003, the terms of the Credit Facility were amended to allow
the Company to draw up to $30,000,000 from the Credit Facility for the purpose
of assisting in the repayment of the principal amount of $52,642,000 outstanding
under Rose Hills' bank credit agreement. In addition, the amendment provided
that while any amount under the Rose Hills Special Advance is outstanding, the
Company requires lender approval to borrow any other amount from the Credit
Facility, the aggregate amount outstanding under letters of credit may not
exceed $14,000,000 and the Credit facility will be additionally secured by
specified real property of Rose Hills. Also, on February 14, 2003, the expiry
date of the Credit Facility was extended to April 30, 2004.

In February 2003, the Company identified two additional funeral homes and 16
additional cemeteries with net assets of approximately $14,466,000, as probable
for sale, as they do not meet the Company's future geographic and strategic
objectives. The Company has not yet determined the estimated proceeds from the
expected sale of these funeral homes and cemeteries.

85

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

THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF THE LOEWEN GROUP INC. ARE
NOT COMPARABLE WITH THE CONSOLIDATED FINANCIAL STATEMENTS ISSUED BY ALDERWOODS
GROUP, INC. SUBSEQUENT 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 AT DECEMBER 31, 2001, RESULTING FROM
CONFIRMATION AND IMPLEMENTATION OF THE PLAN, AND CHANGES IN ACCOUNTING POLICIES,
CERTAIN ACCOUNT CLASSIFICATIONS AND FISCAL ACCOUNTING PERIODS ADOPTED BY
ALDERWOODS GROUP, INC. ACCORDINGLY, ALDERWOODS GROUP, INC.'S CONSOLIDATED
FINANCIAL STATEMENTS AS AT AND FOR THE 52 WEEKS ENDED DECEMBER 28, 2002, DO NOT
INCLUDE COMPARABLE OPERATING AND CASH FLOW INFORMATION. CERTAIN 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 2001 AND 2000
IN THIS FORM 10-K.

HISTORICALLY, THE PREDECESSOR'S CONSOLIDATED FINANCIAL STATEMENTS WERE
PRESENTED IN ACCORDANCE WITH CANADIAN GAAP, AND MATERIAL DIFFERENCES BETWEEN
CANADIAN GAAP AND U.S. GAAP WERE EXPLAINED IN A NOTE TO THE PREDECESSOR'S
CONSOLIDATED FINANCIAL STATEMENTS. IN ADDITION, THE PREDECESSOR HAD NOT
PREVIOUSLY FULLY IMPLEMENTED THE SEC STAFF ACCOUNTING BULLETIN NO. 101, "REVENUE
RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 101"), AS A RESULT OF THE
PREDECESSOR'S ONGOING REORGANIZATION PROCEEDINGS. THE PREDECESSOR'S HISTORICAL
FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS
FORM 10-K HAVE BEEN RESTATED TO THE FULL EXTENT NECESSARY TO COMPLY WITH
U.S. GAAP AND THE IMPLEMENTATION OF SAB 101, EFFECTIVE JANUARY 1, 2000.

86

REPORT OF INDEPENDENT ACCOUNTANTS

The Loewen Group Inc.

We have audited the consolidated balance sheet of The Loewen Group Inc. as
at December 31, 2001 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2001 and
2000. In connection with our audits of the consolidated financial statements, we
also have audited the information with respect to the Predecessor in financial
statement Schedule II included in Item 15 of the Predecessor's annual report on
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Predecessor's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Predecessor as at
December 31, 2001, and the results of its operations and its cash flows for the
years ended December 31, 2001 and 2000, in accordance with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada

March 15, 2002

87

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

CONSOLIDATED BALANCE SHEET

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

88

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

89

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

90

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

91

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1. REORGANIZATION PROCEEDINGS

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

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

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

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

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

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

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

92

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

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

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

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

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

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

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

93

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

94

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

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

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

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

NOTE 2. NATURE OF OPERATIONS

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

The Predecessor made funeral and cremation arrangements on an at-need or
pre-need basis. The Predecessor's funeral operations offered a full range of
funeral services, including the collection of remains, registration of death,
professional embalming, use of funeral home facilities, sale of caskets and
other merchandise and transportation to a place of worship, funeral chapel,
cemetery or crematorium.

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

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

BASIS OF CONSOLIDATION

The accounts of all subsidiary companies have been included in the
consolidated financial statements from their respective dates of acquisition of
control or formation. All subsidiaries were wholly owned,

95

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

The Predecessor accounts for its investment in companies in which it has
significant influence by the equity method. The Predecessor's proportionate
share of income (loss) as reported, net of amortization of excess purchase price
over net assets acquired, is included in income and added to (deducted from) the
cost of the investment. The equity method carrying value of the investment is
also reduced by any provision for asset impairment and common stock dividends
received.

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

USE OF ESTIMATES

The preparation of the consolidated financial statements in accordance with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. As a result, actual results could
significantly differ from those estimates.

FUNERAL OPERATIONS

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

Pre-need funeral services provide for future funeral services, generally
determined by prices prevailing at the time the contract is signed. The payments
made under the contract, in part, are either placed in trust or are used to pay
the premiums of life insurance policies under which the Predecessor is
designated as beneficiary. Pre-need funeral services contract amounts, together
with related trust fund investment earnings and annual insurance benefits, are
deferred until the service is performed. The Predecessor estimates that trust
fund investment earnings and annual insurance benefits exceed the increase in
cost over time of providing the related services.

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

CEMETERY OPERATIONS

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

96

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

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

INSURANCE OPERATIONS

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

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

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

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

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

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

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

97

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

Cash and cash equivalents include cash, restricted cash and term deposits
with an initial maturity less than or equal to 90 days.

INVENTORIES

Inventories are carried at the lower of cost, determined primarily on a
specific identification basis or a first in first out basis, and net realizable
value.

CEMETERY PROPERTY

Cemetery property, including capitalized interest, consists of developed and
undeveloped cemetery property and mausoleums, and is valued at average cost.
Amounts are expensed when revenue from sales of cemetery plots and mausoleums
are recognized.

PROPERTY AND EQUIPMENT

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

Buildings and improvements........ 10 to 40 years
Automobiles....................... 2 to 6 years
Furniture, fixtures and 6 to 10 years
equipment.......................
Computer hardware and software.... 6 years
Leasehold improvements............ Over the term of the lease plus one renewal

NAMES AND REPUTATIONS

The amount paid for the names and reputations of operations acquired is
equivalent to the excess of the purchase price over the fair value of
identifiable net assets acquired, as determined by management. Amortization is
provided on a straight-line basis over 40 years.

Covenants not to compete included with names and reputations on the
consolidated balance sheet represent amounts capitalized for non-competition
agreements with certain key management personnel of acquired operations.
Amortization of such prepaid covenants not to compete is provided on a
straight-line basis over the terms of the relevant agreements, typically ten
years.

IMPAIRMENT OF LONG-LIVED ASSETS

The Predecessor followed the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121").

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

98

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

DEBT ISSUE COSTS

Debt issue costs included in other assets on the consolidated balance sheet
represent the costs of negotiating and securing the Predecessor's long-term debt
and are included in interest expense on a straight-line basis over the
respective term of the related instrument. These costs include legal fees,
accounting fees, underwriting and agency fees and other related costs.

FINANCIAL INSTRUMENTS

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

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

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

DERIVATIVE INSTRUMENTS

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

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

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

99

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

STOCK ISSUE EXPENSES

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

STOCK OPTION PLAN

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

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

INCOME TAXES

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

EARNINGS PER SHARE

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

100

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

ACCOUNTING CHANGE IN 2001

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

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

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

The cumulative effect of the implementation of SAB 101 through December 31,
1999, resulted in a charge to income of $986,750,000 (net of income taxes of
$108,719,000), or $13.31 per basic and diluted share recorded on January 1,
2000.

COMPARATIVE FIGURES

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

101

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT

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

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

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

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

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

Under the Plan, liabilities subject to compromise were categorized into a
class of allowed claims and further categorized into divisions. Certain of these
allowed claims would receive a pro rata share of

102

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
Alderwoods Group Common Stock, Warrants and interests in the Liquidating Trust.
The amount of any claim that ultimately was allowed by the U.S. Bankruptcy Court
could be significantly more or less than the estimated amount of such claim. As
a consequence, the actual ultimate aggregate amount of allowed unsecured claims
could differ significantly from the amounts recorded in the Predecessor's
consolidated financial statements. Accordingly, the amount of the pro rata
distributions of Alderwoods Group's Common Stock, Warrants and interests in the
Liquidating Trust that ultimately were received by a holder of an allowed
unsecured claim could be adversely or favorably affected by the aggregate amount
of claims ultimately allowed. Distributions of Alderwoods Group's Common Stock,
Warrants and interests in the Liquidating Trust to holders of allowed unsecured
claims will be made on an incremental basis until all claims are resolved.

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

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

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

Net cash proceeds, after payment of certain direct selling costs, generated
from the Predecessor's asset disposition program approved by the
U.S. Bankruptcy Court were subject to restrictions on use. Certain cash proceeds
were required to be placed in a segregated deposit account, pending a
U.S. Bankruptcy Court order determining how such cash proceeds should be
distributed. As at December 31, 2000, cash in this segregated deposit account
amounted to approximately $23 million.

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

Subsequent to the execution of the Collateral Trust Agreement, among other
financings, the Predecessor issued the Series 3 and 4 Senior Notes, the
Series 6 and 7 Senior Notes and the PATS (collectively, the "Subject Debt"). The
aggregate principal amount outstanding of the Subject Debt was $1,100,000,000.
In April 2000, the Predecessor announced that there was uncertainty as to the
secured

103

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

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

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

In 1994, Loewen Group Capital L.P. ("LGC") issued 3,000,000 Monthly Income
Preferred Securities for an aggregate amount of $75,000,000. LGC is a limited
partnership, and Loewen International as its general partner managed its
business and affairs. The Monthly Income Preferred Securities were due
August 31, 2024 and were subject to redemption at par at the option of LGC, in
whole or in part, from time to time on or after August 31, 2004. As a result of
the Chapter 11 filing, the Monthly Income Preferred Securities became
redeemable. The Monthly Income Preferred Securities were subject to an unsecured
guarantee by the Predecessor and Loewen International. Accordingly, the Monthly
Income Preferred Securities have been designated as liabilities subject to
compromise.

NOTE 5. IMPAIRMENT OF ASSETS AND DISPOSITIONS

During 1999, as a result of the Predecessor's reorganization proceedings and
operating performance decline, the Predecessor conducted extensive reviews of
each of its operating locations. The review resulted in the identification of
201 funeral homes and 170 cemeteries as probable for sale and the development of
a program for disposition of these locations, which was approved by the
U.S. Bankruptcy

104

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 5. IMPAIRMENT OF ASSETS AND DISPOSITIONS (CONTINUED)
Court in January 2000. As a result, a pre-tax asset impairment provision for
long-lived assets of $428,194,000 was recorded in 1999.

During the first two months of 2001, the Predecessor completed the sale of
49 funeral homes and 43 cemeteries for gross proceeds of $25,267,000. As a
result, and together with the Predecessor's revision on June 30, 2000, of its
estimates of expected proceeds of the locations held for disposal, an additional
pre-tax asset impairment provision of $116,937,000 was provided for in 2000.

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

The asset impairment provisions were based on management estimates.

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

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

NOTE 6. INVESTMENTS

Under a Put/Call Agreement entered into with Blackstone Capital Partners II
Merchant Banking Fund L.P. and certain affiliates (together, "Blackstone"), the
majority investor in Prime, in August 1996 (the "Prime Put/Call Agreement"), the
Predecessor had the option to acquire (the "Prime Call") Blackstone's Prime
common stock and Blackstone had the option to sell (the "Prime Put") its Prime
common stock to the Predecessor. Under a Put/Call Agreement entered into with
Blackstone and RHI Management Direct L.P. ("RHI") in November 1996 (the "Rose
Hills Put/Call Agreement"), the Predecessor had the option to acquire the Rose
Hills common stock owned by Blackstone and RHI and Blackstone and RHI had the
option to sell (the "Rose Hills Put") their Rose Hills common stock to the
Predecessor.

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

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

105

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 6. INVESTMENTS (CONTINUED)
On April 12, 2001, Blackstone, RHI and the Predecessor entered into a
settlement and resolution of any and all claims, issues and disputes between
such parties relating to or involving Prime or Rose Hills on substantially the
following terms (the "Blackstone Settlement"), which became effective on the
Effective Date:

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

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

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

- the Rose Hills Put was automatically exercised;

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

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

- upon the closing of such transactions, the Rose Hills Put/Call
Agreement terminated and was of no further force or effect.

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

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

SWAP AGREEMENTS AND INTEREST RATE OPTIONS

The Predecessor entered into swap agreements and interest rate options with
a number of different commercial banks and financial institutions to manage its
interest rate exposure on fixed rate long-term debt. At December 31, 2000, and
throughout 2001, no such agreements were outstanding.

106

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 8. STOCKHOLDERS' EQUITY

(a) AUTHORIZED

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

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

(b) ISSUED AND OUTSTANDING SHARES

(c) FIRST PREFERRED STOCK

First Preferred stock was authorized to be issued from time to time in one
or more series and in such numbers and with such special rights and restrictions
as the directors of the Predecessor determined.

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

The Series C Preferred stock was issued for cash of $157,144,000 by public
offering, net of expenses of $3,776,000, in 1996. The holders of Series C
Preferred stock will have the right at any time before January 1, 2003, to
convert each Series C Preferred stock into that number of shares of Common stock
determined by dividing Cdn. $25.00 by Cdn. $38.125. Thereafter, a holder of
Series C Preferred stock will have the right on January 1, 2003, and on the
first business day of each quarter thereafter, to convert all or part of such
Series C Preferred stock into that number of shares of Common stock determined
by dividing Cdn. $25.00 plus accrued and unpaid dividends by the greater of
Cdn. $3.00 and 95% of the Current Market Price (as defined) on the date of
conversion. During 2000, 100 shares of Series C Preferred stock were converted
into 65 shares of Common stock.

107

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
The holders of the Series C Preferred stock were entitled, as and when
declared by the Board of Directors, to a fixed preferential cumulative cash
dividend of 6% per year, payable quarterly. In March 1999, the Predecessor
suspended future dividends on its Common stock and deferred future dividends on
its Preferred stock.

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

On or after July 1, 1999, the Series C Preferred stock was redeemable by the
Predecessor, upon giving not less than 30 days notice, at a redemption price
equal to Cdn. $25.00 per share together with accrued and unpaid dividends. Prior
to July 1, 2001, the redemption could only be effected by the issuance of Common
stock, determined by dividing the redemption price by the greater of Cdn. $3.00
and 95% of the current market price at the date of redemption. On and after
July 1, 2001, the redemption may be effected by the issuance of Common stock or
payment of a cash amount.

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

(d) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")

4,250,000 shares of the Common stock of the Predecessor were reserved upon
adoption by the Predecessor of the MEIP on June 15, 1994. Senior Exchangeable
Debentures (the "Debentures") amounting to $127,670,000 were issued by Loewen
International to a wholly-owned subsidiary of Loewen International formed to act
as agent for the MEIP. The Debentures were due July 15, 2001 and bore interest
at floating rates. Each $300.40 of principal amount of Debentures will be
exchangeable for one Convertible First Preferred share, Series B of the
Predecessor, each of which will be convertible into ten shares of the Common
stock of the Predecessor. As at December 31, 2000, the MEIP participants had
paid $2,869,000 for option rights to acquire $57,382,000 of Debentures
exercisable as to 50% in 1999, 25% in 2000 and 25% in 2001. If an option expires
unexercised, the participant is entitled to a refund without interest of the
amount paid to acquire such option right. In addition, as at December 31, 2000,
the former Chairman had paid $2,253,000 for the right and obligation to acquire
$45,060,000 of Debentures with the same exercise dates. Pursuant to the Plan,
the Debentures were canceled on the Effective Date.

(e) STOCK OPTION PLANS

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

108

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 9. LEGAL CONTINGENCIES

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

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

NOTE 10. REORGANIZATION COSTS

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

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

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

NOTE 11. RETIREMENT PLANS

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

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

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

109

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 12. INCOME TAXES

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

Loss before income taxes, extraordinary gain and cumulative effect of
accounting change was as follows:

Income tax provision consisted of the following:

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

110

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 12. INCOME TAXES (CONTINUED)
The difference between the U.S. federal statutory income tax rate and the
Predecessor's effective tax rate were as follows:

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

NOTE 13. CHANGES IN OTHER NON-CASH BALANCES

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

111

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 13. CHANGES IN OTHER NON-CASH BALANCES (CONTINUED)

NOTE 14. DEFERRED PRE-NEED REVENUE

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

The realized earnings recognized in the consolidated statement of operations
related to pre-need merchandise and services trusts and perpetual or endowment
care trusts were $29,378,000 and $33,526,000 for the years ended December 31,
2001 and 2000, respectively.

112

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 14. DEFERRED PRE-NEED REVENUE (CONTINUED)
The Predecessor's gross pre-need funeral contract sales decreased to
approximately $108 million in 2001 from approximately $119 million in 2000. The
Predecessor estimated that it had a backlog of approximately $1.1 billion in
pre-need funeral contracts as of December 31, 2001. At January 1, 2000, when the
Predecessor implemented SAB 101, approximately $92 million was recorded
representing amounts received but not required to be placed in trust, and
interest earnings on amounts in trust, which had previously been recognized in
revenue. During 2001 and 2000, the Predecessor recognized approximately
$4.4 million and $6.1 million, respectively, of this amount in funeral revenue.

NOTE 15. SEGMENTED INFORMATION

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

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

113

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

114

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 16. EARNINGS PER SHARE

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

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

NOTE 17. SUMMARIZED CHAPTER 11 AND CREDITORS ARRANGEMENT ACT FINANCIAL
INFORMATION

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

115

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

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

116

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding executive officers required by this Item is
incorporated herein by reference to the information contained in Part I of this
report under the caption "Executive Officers of Alderwoods Group." In accordance
with General Instruction G(3), the information regarding directors required by
this Item is incorporated herein by reference to the information provided under
the captions "Election of Directors -- Information Regarding Director Nominees"
and "Section 16 (a) Beneficial Ownership Reporting Compliance" of Alderwoods
Group's Proxy Statement to be filed with the SEC.

ITEM 11. EXECUTIVE COMPENSATION

In accordance with General Instruction G(3), the information required by
this Item is incorporated herein by reference to the information provided under
the captions "Executive Compensation," Agreements with Named Executive
Officers," "Meetings and Committees of the Board of Directors -- Director
Compensation and Other Payments" and "Compensation Committee Interlocks and
Insider Participation" of Alderwoods Group, Inc.'s Proxy Statement to be filed
with the SEC.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

In accordance with General Instruction G(3), the information required by
this Item is incorporated herein by reference to the information provided under
the caption "Beneficial Ownership of Principal Stockholders, Directors and
Management" of Alderwoods Group, Inc.'s Proxy Statement to be filed with the
SEC.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes the total number of shares of Common Stock
authorized for issuance at December 28, 2002, under the Company's 2002 Equity
and Performance Incentive Plan implemented on January 2, 2002, which is the
Company's only equity compensation plan.

117

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In accordance with General Instruction G(3), the information required by
this Item is incorporated herein by reference to the information provided under
the caption "Certain Relationships and Related Transactions" of Alderwoods
Group, Inc.'s Proxy Statement to be filed with the SEC.

ITEM 14. 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 the Company's
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.

118

PART IV

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

(A) DOCUMENTS FILED AS PART OF THIS REPORT:

FINANCIAL STATEMENTS

ALDERWOODS GROUP, INC., CONSOLIDATED BALANCE SHEET

Report of Independent Accountants

Consolidated Balance Sheets as of December 28, 2002 and
December 31, 2001

Consolidated Statement of Operations for the 52 Weeks Ended
December 28, 2002

Consolidated Statement of Stockholders' Equity for the 52 Weeks Ended
December 28, 2002

Consolidated Statement of Cash Flows for the 52 Weeks Ended
December 28, 2002

Notes to Consolidated Financial Statements

THE LOEWEN GROUP INC., CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Accountants

Consolidated Balance Sheet as of December 31, 2001

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

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

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

Notes to Consolidated Financial Statements

FINANCIAL STATEMENT SCHEDULE

Schedule II -- Valuation and Qualifying Accounts

EXHIBITS

119

120

121

122

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

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.

(B) REPORTS ON FORM 8-K

The following Current Report on Form 8-K was filed by Alderwoods Group
during the last quarter of fiscal 2002:

123

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALDERWOODS GROUP, INC. AND PREDECESSOR(5)
DECEMBER 28, 2002
(IN THOUSANDS OF DOLLARS)

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

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

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

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

(4) Cumulative effect of change in accounting principle.

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

(6) Primarily due to the cumulative effect of the Plan implementation.

124

SIGNATURES

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

ALDERWOODS GROUP, INC.

By: /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
Dated: March 25, 2003 PRESIDENT AND CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Paul A. Houston
and Kenneth A. Sloan, and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this report necessary or advisable to enable the
registrant to comply with the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such changes in this report as the
aforesaid attorney-in-fact deems appropriate.

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

President, Chief
/s/ PAUL A. HOUSTON Executive Officer and
------------------------------------------- Director Dated: March 25, 2003
Paul A. Houston (Principal Executive
Officer)

Executive Vice
President, Chief
/s/ KENNETH A. SLOAN Financial Officer
------------------------------------------- (Principal Financial Dated: March 25, 2003
Kenneth A. Sloan Officer and Principal
Accounting Officer)

/s/ LLOYD E. CAMPBELL
------------------------------------------- Director Dated: March 25, 2003
Lloyd E. Campbell

/s/ ANTHONY G. EAMES
------------------------------------------- Director Dated: March 25, 2003
Anthony G. Eames

/s/ CHARLES M. ELSON
------------------------------------------- Director Dated: March 25, 2003
Charles M. Elson

125

/s/ DAVID R. HILTY
------------------------------------------- Director Dated: March 25, 2003
David R. Hilty

/s/ OLIVIA KIRTLEY
------------------------------------------- Director Dated: March 25, 2003
Olivia Kirtley

/s/ JOHN S. LACEY
------------------------------------------- Chairman of the Board Dated: March 25, 2003
John S. Lacey

/s/ WILLIAM R. RIEDL
------------------------------------------- Director Dated: March 25, 2003
William R. Riedl

/s/ W. MACDONALD SNOW
------------------------------------------- Director Dated: March 25, 2003
W. MacDonald Snow

126

CERTIFICATIONS

I, Paul A. Houston, certify that:

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

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the 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
annual report whether 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.

By: /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Dated: March 25, 2003 (PRINCIPAL EXECUTIVE OFFICER)

127

I, Kenneth A. Sloan, certify that:

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

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the 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
annual report whether 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.

By: /s/ KENNETH A. SLOAN
-----------------------------------------
Kenneth A. Sloan
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
Dated: March 25, 2003 CHIEF ACCOUNTING OFFICER)

128

EXHIBIT LIST

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129