ALDERWOODS GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 53 weeks (fiscal year) ended January 3, 2004
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 13, 2003 was $214,249,000 and
$688,000, respectively.
--------------------------

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 / /
--------------------------

At February 28, 2004, there were 39,987,530 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 prior to January 2, 2002, and (f) "Loewen Companies"
refers to Loewen Group, Loewen International and their subsidiaries prior to
January 2, 2002.

All dollar amounts are in United States dollars unless otherwise indicated.
When discussing the Company's financial condition and results of operations,
unless the context otherwise requires, references to "2003" or "fiscal 2003" and
"2002" or "fiscal 2002" refer to the 53 weeks ended January 3, 2004, and the
52 weeks ended December 28, 2002, respectively.

1

PART I

ITEM 1. BUSINESS

OVERVIEW

Alderwoods Group, Inc. is the second largest operator of funeral homes and
cemeteries in North America. As of January 3, 2004, the Company operated 730
funeral homes, 150 cemeteries and 60 combination funeral homes and cemeteries
throughout North America. 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 229
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 a result of the
confirmation and implementation of the Plan;

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

- the reclassification of assets held for sale as discontinued operations
for its fiscal 2003 and 2002 years, without reclassifying fiscal years
prior to 2002.

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 and Canada. For certain financial
information by segment and geographic area, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Note 16 to the
Company's consolidated financial statements as at and for the 53 weeks ended
January 3, 2004 (the "Consolidated Financial Statements") and Note 15 to the
Predecessor's consolidated financial statements.

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Funeral operations constituted approximately 68% of consolidated revenue of the
Company for 2003, compared to approximately 69% for 2002. Cemetery operations
constituted approximately 22% of consolidated revenue of the Company for 2003
and 2002. Insurance operations constituted approximately 10% of consolidated
revenue of the Company for 2003, as compared to approximately 9% for 2002.

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 consolidated 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 January 3, 2004, the cemeteries had approximately $260 million in
perpetual care trust funds, compared to $267 million at December 28, 2002, which
are not reflected in the Consolidated Financial Statements because the principal
is required to stay in trust in perpetuity.

COMBINED FUNERAL AND CEMETERY OPERATIONS

The Company operates 60 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

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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
35 states. These insurance subsidiaries sell a variety of insurance products,
primarily for the funding of pre-need funerals.

DISCONTINUED OPERATIONS

Throughout the reorganization process, the Company engaged in a strategic
market rationalization assessment to dispose of cemetery and funeral operating
locations that did not fit into the Company's market or business strategies, as
well as under-performing locations and excess cemetery land. This program
continued during 2003. The Company believes that the identification of
businesses for disposal is substantially complete. The Company will now focus on
selling the businesses identified for disposal and, on a smaller scale and over
time, continue to assess the Company's portfolio of funeral and cemetery
locations to ensure they continue to fit in the Company's strategy. Once a
property is added to the disposal list, the Company expects to receive a firm
purchase commitment within one year.

During 2003 and 2002, the Company identified 148 funeral, 88 cemetery and
four combination locations for disposal. The funeral locations included all 39
funeral locations in the United Kingdom, which were sold on October 20, 2003.
The Company also identified for disposal its life insurance operations, which
are not strategic to the Company's long-term objectives, and are not in support
of the Company's North American pre-need funeral sales efforts.

As at January 3, 2004, the Company had 64 funeral, 72 cemetery and four
combination locations in North America for disposal. The life insurance
operations held for sale also remained for sale.

The Company has classified all the locations identified for disposal as
assets held for sale in the consolidated balance sheets and recorded any related
operating results, long-lived asset impairment provisions, and gains or losses
recorded on disposition as income from discontinued operations. The Company has
also reclassified the prior fiscal year to reflect any comparative amounts on a
similar basis, including locations sold in 2002.

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, serve approximately 22% of
total funeral calls, and generate approximately 20% of industry revenues in the
United States. The Company's competition in the markets in which 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

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range of merchandise and services to families choosing cremation. In 2003, on an
overall basis, cremations accounted for approximately 36% of all funeral
services performed by the Company, compared to approximately 35% performed in
2002. According to the latest industry studies available, cremations increased
by approximately 1% annually from 1997 to 2002, as a percentage of all funeral
services in the United States and, in 2002, accounted for approximately 28% of
all funeral services performed in the United States. This trend of 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, are subject to interpretation by regulators, vary from jurisdiction to
jurisdiction and are subject to change from time to time. Non-compliance with
these regulations can result in fines or suspension of licenses required to sell
pre-need services and merchandise. In addition, concerns regarding lack of
competition have led a few jurisdictions to enact legislation restricting the
common ownership of funeral homes, cemeteries and related operations within a
specific geographic region.

The Company's operations in the United States must also comply with federal
legislation, including the laws administered by the Occupational Safety and
Health Administration, the Americans with Disabilities Act and the Federal Trade
Commission ("FTC") regulations. The FTC administers the Trade Regulation Rule on
Funeral Industry Practices, the purpose of which is to prevent unfair or
deceptive acts or practices in connection with the provision of funeral goods or
services. Certain regulatory requirements also exist in Canada.

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.

The Company believes that it complies in all material respects with the
provisions of the laws and regulations under which it operates.

EMPLOYEES

At February 28, 2004, the Company employed approximately 8,900 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 employees are good. At February 28, 2004,
approximately 270 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").

5

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. The poor
cash flow was also impacted by the settlement of a litigation matter for an
aggregate consideration of $175.0 million in 1998. As of March 31, 1999, Loewen
Group's consolidated balance sheet reflected approximately $2.1 billion of
long-term debt (of which approximately $742.2 million was due currently) and
approximately $48.8 million of other current debt.

On June 1, 1999 (the "Petition Date"), Loewen Group, approximately 850
United States subsidiaries of Loewen Group (including Loewen International) and
one foreign subsidiary of Loewen Group each voluntarily filed a petition for
creditor protection under Chapter 11 ("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 were intended to preserve, the
NAFTA Claims; and, following these transactions, Loewen Group ceased to
have any employees, meaningful assets or operations;

6

- 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 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 were 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;

- 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 with a maximum
availability of $75 million.

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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 accrual of $13.1 million at January 3, 2004. The Company expects to
complete the remaining reorganization procedures during fiscal year 2004.

ITEM 2. PROPERTIES

The Company's properties consist primarily of funeral homes and cemeteries.
Of the Company's 730 funeral homes at January 3, 2004, 96 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, 361 funeral homes in the United States are
pledged as security for the Company's $325.0 million senior secured facility
entered into on September 17, 2003, and as amended on January 23, 2004 (the
"Credit Agreement"), and 41 funeral homes are pledged as security for mortgages.
As of January 3, 2004, there were 613 funeral homes located in the United States
and 117 in Canada.

The Company operated or provided management and sales services pursuant to
various management and sales agreements to 150 cemeteries at January 3, 2004, of
which the assets of one are pledged as security for mortgages. The cemeteries
(including those in combination funeral homes and cemeteries) operated by the
Company at January 3, 2004, contained an aggregate of approximately 11,600 acres
of which approximately 60% were developed. As at January 3, 2004, there were 146
cemeteries located in the United States and four in Canada.

At January 3, 2004, 57 combination funeral homes and cemeteries were located
in the United States and three were located in Canada. Of the Company's 60
combination funeral homes and cemeteries at January 3, 2004, two were leased and
the balance were owned by the Company. Of the combination funeral homes and
cemeteries located in the United States, five are pledged as security for the
Credit Agreement.

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 72,000 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

The Company is a party to legal proceedings in the ordinary course of its
business, but does not expect the outcome of any 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.

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EXECUTIVE OFFICERS OF ALDERWOODS GROUP

The following table sets forth certain information with respect to executive
officers of Alderwoods Group as of February 28, 2004.

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. Mr. Lacey is also a director of Telus Corporation, Cancer Care Ontario
and Canadian Tire Corporation, Limited.

PAUL A. HOUSTON became a director, President and Chief Executive Officer of
Alderwoods Group on January 2, 2002. From December 1999 to January 2002,
Mr. Houston was President and Chief Executive Officer of Loewen Group and
President of Loewen International. Additionally, Mr. Houston served as a
director of Loewen Group from June 1999 to January 2002. From August 1996 to
October 1999, Mr. Houston was President and Chief Executive Officer of Scott's
Restaurants Inc., a quick service food company. Mr. Houston is also a director
of CFM Corporation.

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 & Compliance, Corporate
Secretary 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

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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, shares of the Company's Common Stock were first issued
on the Effective Date and commenced trading on The NASDAQ Stock Market, Inc.
("Nasdaq") as National Market securities on January 3, 2002, under the symbol
"AWGI".

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 of February 28, 2004, there were 631 record holders of the Common Stock.

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. Covenants in the Credit Agreement and
the Subordinated Bridge Loan Agreement dated as of January 23, 2004, among
Alderwoods Group and Banc of America Bridge, LLC, as administrative agent and
initial bridge lender (the "Bridge Loan"), prohibit the payment of cash
dividends and restrict, and under specified circumstances prohibit, the payment
of other dividends by Alderwoods Group. In addition, covenants in the indenture
governing the Seven-Year Unsecured Notes restrict, and under specified
circumstances prohibit, the payment of dividends by Alderwoods Group. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Other Information -- Restrictions" and Note 6 to the Company's
Consolidated Financial Statements.

RECENT SALES OF UNREGISTERED SECURITIES

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

- 39,878,870 shares of Common Stock;

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

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

- $49.6 million aggregate principal amount of the Company's 12 1/4% Senior
Notes Due 2004;

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

11

- $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).

On January 31, 2003, also in accordance with the Plan, the Company issued in
respect of holders of certain unsecured claims 21,140 shares of Common Stock.

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;

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

- the reclassification of assets held for sale as discontinued operations
for its fiscal 2003 and 2002 years, without reclassifying fiscal years
prior to 2002.

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

12

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 January 3, 2004, December 28, 2002, and
December 31, 2001, and for the 53 weeks ended January 3, 2004, and the 52 weeks
ended December 28, 2002, and, for the Predecessor, consolidated financial and
operating information as at and for the years ended December 31, 2001, 2000 and
1999. 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 in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PREDECESSOR
ALDERWOODS GROUP ---------------------------------
-------------------------------
53 WEEKS ENDED 52 WEEKS ENDED YEAR ENDED DECEMBER 31
JANUARY 3, DECEMBER 28, ---------------------------------
2004 2002 2001 (H) 2000 (I) 1999 (J)
-------------- -------------- --------- -------- ----------
(IN THOUSANDS, (IN THOUSANDS, EXCEPT PER SHARE

EXCEPT PER SHARE AMOUNTS) AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Revenue............................................. $ 740,551 $ 706,148 $ 836,401 $927,684 $1,021,230
Gross margin (a).................................... 146,275 130,665 181,239 262,023 258,529
Provision for goodwill impairment (b)............... -- 228,051 -- -- --
Provision for asset impairment (c).................. 4,699 367 180,658 116,937 428,194
Income (loss) from operations....................... 85,295 (140,941) (132,173) 17,469 (324,656)
Net income (loss) from continuing operations (d).... 10,020 (217,871) (87,160) (57,345) (523,439)
Basic net income (loss) per share from continuing
operations (e).................................... 0.25 (5.46) (1.29) (0.89) (7.18)
Aggregate dividends declared per share.............. -- -- -- -- 0.10

ALDERWOODS GROUP
------------------------------------ PREDECESSOR
-----------------------
AS OF AS OF AS OF
JANUARY 3, DECEMBER 28, DECEMBER 31, AS OF DECEMBER 31,
---------- ---------- ---------- -----------------------
2004 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)

BALANCE SHEET INFORMATION:
Total assets.......................... $3,115,437 $3,200,766 $3,503,103 $3,878,044 $4,059,751
Liabilities subject to
compromise (f)....................... -- -- -- 2,289,497 2,282,601
Total long-term debt including current
maturities (f)(g).................... 630,918 755,581 835,648 73,542 91,204
Stockholders' equity (deficit)........ 544,893 523,402 739,352 (662,768) 383,075

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

(a) For the 53 weeks ended January 3, 2004, and the 52 weeks ended December 28,
2002, gross margin includes depreciation expense not included in the
prior years.

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

(c) 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."

(d) For the Predecessor, represents loss before extraordinary gain, fresh start
valuation adjustments and cumulative effect of accounting change.

13

(e) There are no material differences between basic and diluted loss per share.
For the Predecessor, represents basic loss per share before extraordinary
gain, fresh start valuation adjustments and cumulative effect of accounting
change. 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.

(f) 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.

(g) 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.

(h) 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.

(i) 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.

(j) 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.

14

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

OVERVIEW

Alderwoods Group is the second largest operator of funeral homes and
cemeteries in North America. As of January 3, 2004, the Company operated
730 funeral homes, 150 cemeteries and 60 combination funeral homes and
cemeteries throughout North America.

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 higher volumes in the winter months, primarily due to
higher incidents of deaths due to illnesses brought on by cold weather.

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.
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. The number of cremation
services performed by the Company as a percentage of total services performed
increased to 34% in 2003, compared to 33% for 2002.

Compared to funeral services that involve burials, cremation services
historically generate higher gross profit margins, but lower overall revenues.
Customers using cremation services typically choose lower priced merchandise and
do not purchase the full range of funeral merchandise and services offered, as
cremation services typically range from discount to enhanced services.

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

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

The funeral service industry in North America is highly fragmented,
consisting primarily of small, family-owned businesses that generate about 80%
of industry revenues. 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, serve approximately 22% of total funeral calls, and
generate approximately 20% of industry revenues in the United States.

In 2002, there were approximately 2.4 million deaths in the United States.
According to the United States Bureau of the Census, this number is expected to
increase by approximately 1% annually until 2010, when annual deaths are
expected to reach approximately 2.6 million. This rate of increase is not
expected to significantly influence revenue. The over-50 population is expected
to increase annually by 2% and reach approximately 97.1 million in 2010, which
will provide opportunities for increasing the sale of pre-need services and
merchandise.

Alderwoods Group is a holding company owning, directly or indirectly, the
capital stock of approximately 229 subsidiaries through which the funeral,
cemetery and insurance businesses are operated. Loewen International
(incorporated in Delaware on February 25, 1987), as reorganized and renamed

15

Alderwoods Group, Inc., succeeded to the business previously conducted by Loewen
Group on January 2, 2002.

BUSINESS STRATEGY

OVERVIEW

During 2003 and 2002, its two post-emergence years, 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 that the Company has:

- generated positive operating margins in its business,

- reduced debt outstanding by approximately $125.0 million in 2003, and,
since the Company was launched in January 2, 2002, reduced debt by
approximately $202.8 million from $833.7 million to $630.9 million as at
January 3, 2004;

- refinanced certain debt to eliminate refinancing risk, extend maturities
and lower interest costs for 2004 to an estimated $57.6 million (projected
using interest rates and debt levels in effect at January 3, 2004),
compared to $77.8 million for 2003, and $85.0 million for 2002;

- identified for disposal 148 funeral, 88 cemetery and four combination
locations that did not fit into the Company's market or business
strategies;

- identified for disposal the Company's life insurance operations, which are
not in support of the Company's North American pre-need funeral sales
efforts;

- sold all 39 funeral locations in the United Kingdom and 41 other funeral,
67 cemetery and six combination locations identified for disposal; and

- resolved numerous reorganization issues and outstanding claims.

Looking ahead to 2004, the Company's strategic objectives are to:

- improve the Company's revenues and reduce costs by growing the number of
funeral services, increasing the average revenue per funeral service and
controlling costs;

- build a solid foundation to maintain market share and long-term volume
growth by growing pre-need sales;

- continue to improve the financial condition of the Company by reducing
debt and exploring further opportunities for lowering interest costs; and

- sell the businesses identified for disposal and, on a smaller scale and
over time, continue to assess the Company's portfolio of funeral and
cemetery locations to ensure they continue to fit in the Company's
strategy.

KEY STRATEGIES

IMPROVE THE BALANCE SHEET

The Company successfully reduced its emergence debt level by approximately
24.5% during its first two years 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
improvements in working capital levels. In addition, the Company successfully
refinanced certain of its debt, effectively reducing interest costs. The Company
intends to continue to de-lever its consolidated balance sheet during 2004. The
Company will look to further reduce its average interest rate by refinancing its
debt at lower rates of interest as opportunities arise.

16

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 disposition of assets held
for sale is expected to generate funds that will primarily be utilized for debt
reduction. Finally, although the efforts to withdraw excess contributions and
unwithdrawn earnings from trusts are substantially complete, the Company will
continue its efforts to identify and withdraw such funds. All of these sources
of funds will be pursued to achieve the objective of reducing the Company's
debt.

INTERNAL GROWTH

The Company's continued, but increased, focus on its core businesses will be
directed towards improved levels of internal growth. The Company will focus on
three key areas -- market share, average revenue per funeral service and
pre-need sales -- to achieve internal growth.

The Company plans to initiate market awareness programs in target test
markets that afford the highest growth potential for the investment. The Company
will invest in advertising and promotion, community relations, brand
segmentation and advance planning. Results from these test markets will be used
to support the Company's future marketing expenditures that are expected to
enhance revenue-creation opportunities.

The Company plans to improve its retailing strategies, primarily for at-need
customers, which are expected to increase average revenue per service. The
Company currently is rolling out standardized merchandise display layouts and
pricing presentation in its merchandise selection rooms at its funeral homes.
This merchandising strategy is expected to be rolled out in phases to all of the
Company's funeral homes over the next five years.

The Company has a strong pre-need sales program that builds future revenue
and enhances market awareness. The Company is careful to manage the cash flow
and expense impacts of such a pre-need sales program. In an effort to build on
this program, the Company plans to test a more aggressive pre-need sales program
in 2004. Initially, during 2004, the program will be rolled out in seven
markets. If successful, full roll out over all markets is expected to occur over
the next two years. The program involves recruitment of additional sales
professionals and a new training program for counselors and managers to support
these efforts.

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 to enhance revenues. The
Company plans to offer cremation customers a larger variety of services and
products.

MARKET RATIONALIZATION AND EXPANSION

Throughout the reorganization process, the Company engaged in a strategic
market rationalization program to dispose of operating locations that were
under-performing or did not fit into the Company's market or business
strategies. This program continued during 2003 and 2002.

The Company believes that the identification of businesses for disposal is
substantially complete. The Company will now focus on selling the businesses
identified for disposal and, on a smaller scale and over time, continue to
assess the Company's portfolio of funeral and cemetery locations to ensure they
continue to fit in the Company's strategy. In addition to disposals of operating
locations, the Company will aggressively dispose of surplus real estate holdings
within its markets.

In addition, the Company plans to commence strategic initiatives to improve
its revenue growth. This is expected to be accomplished through, among other
things, strategic, targeted, and well-planned key market development, which meet
the Company's operating philosophy and financial goals. The Company

17

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

The Company recognizes that a culture supporting outstanding customer
service, excellence in administration and strong financial management has not
yet been uniformly established throughout the Company's locations. The Company
believes that it has made improvements in this area and is satisfied with the
progress made to date. However, management is committed to setting the industry
standard for customer service, administration and financial management. The
Company is taking steps to achieve this goal, which include implementing tools
to assist in assessing the performance of individuals consistently throughout
the Company and expanding training programs 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) that 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
the Company's 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.

In addition, 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
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.

18

VALUATION OF LONG-LIVED ASSETS

The Company monitors, for both its continuing and discontinued operations,
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 required, if an indicator of potential impairment is
evident, the Company will review the projected undiscounted future cash flows
associated with the relevant long-lived asset, to determine if such undiscounted
cash flows exceed the carrying amount of the long-lived asset. If it is
determined that the net carrying amount of the long-lived asset 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.

VALUATION 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 the
carrying value 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 reporting unit in total, and
allocating such value to the estimated fair value of the assets and liabilities
of the funeral business reporting unit, 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 results 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 as a result
of the utilization of benefits, which must reduce fresh start goodwill and, if
insufficient goodwill exists, will be credited to additional paid-in capital.)

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

19

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.

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, the Company has reclassified assets held for sale
as discontinued operations for its fiscal 2003 and 2002 years, without
reclassifying fiscal years prior to 2002. 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.

The Company's fiscal year ends the Saturday nearest to December 31 in each
year (whether before or after such date).

The first and second fiscal quarters each consist of 12 weeks and the third
fiscal quarter consists 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 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).

RESULTS OF OPERATIONS

Detailed below are the operating results of the Company for the 53 weeks
ended January 3, 2004, and the 52 weeks ended December 28, 2002, and the
Predecessor for the year ended December 31, 2001. The

20

operating results are expressed in dollar amounts as well as relevant
percentages, presented as a percentage of revenue.

The following provides a detailed discussion of continuing operations, which
consist of those businesses the Company owned and operated both for the entire
current and prior fiscal years and that the Company plans to retain, and those
businesses that have been opened during either the current or prior fiscal years
and that the Company plans to retain. Discontinued operations consist of those
that have been sold or closed during either the current or prior fiscal years
and the businesses that are currently being offered for sale.

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.

53 WEEKS ENDED JANUARY 3, 2004 COMPARED TO 52 WEEKS ENDED DECEMBER 28, 2002

Other information for the 53 weeks ended January 3, 2004, and 52 weeks ended
December 28, 2002, is summarized in the following table. The impact of the 53rd
week was estimated by calculating the weekly

21

average of the 13 weeks ended January 3, 2004. The Company believes the
discussion below regarding the impact of the 53rd week facilitates direct
comparability of fiscal year results.

DISCUSSION OF CONTINUING OPERATIONS

As there have been no material acquisitions or construction of new locations
in 2003 and 2002, results from continuing operations reflect those of "same
site" locations.

Consolidated revenue of $740.5 million for the 53 weeks ended January 3,
2004, increased by $34.4 million, or 4.9%, compared to $706.1 million in 2002,
primarily as a result of an increase of $19.6 million in funeral, cemetery and
insurance revenue and an estimated increase of $14.8 million due to the
additional fifty-third week in fiscal 2003 over fiscal 2002. Consolidated gross
margin as a percentage of revenue increased to 19.8% for the 53 weeks ended
January 3, 2004, from 18.5% in 2002. The percentage increase in gross margin is
attributed to the increases in the gross margins of all businesses.

Funeral revenue of $501.6 million for the 53 weeks ended January 3, 2004,
increased by $14.8 million, compared to $486.8 million in 2002, primarily as a
result of an estimated increase of $9.9 million due to the additional
fifty-third week in 2003 over 2002. After adjusting for the effect of the
fifty-third week, funeral revenue increased by $4.9 million, primarily as a
result of the increase of $77.0, or 2.0%, in average revenue per funeral service
performed, partially offset by a decrease of 1,202, or 0.9%, in the number of
funeral services performed. The increase in average revenue per funeral service
performed was achieved through adjusting the Company's mix of merchandise and
services that were designed to both meet customers' needs and increase revenues.
After adjusting for the effect of the fifty-third week, the number of funeral
services performed during the second half of 2003, increased by 1,066, or 1.6%,
over the second half of 2002. The Company believes that the second half increase
in the number of funeral services performed was the result of the Company's
overall efforts to improve the level of internal growth.

22

The number of cremation services performed as a percentage of total services
performed increased to 34% for the 53 weeks ended January 3, 2004, compared to
33% for 2002. This increase reflects the increasing trend in consumer
preferences for cremation services. The number of cremation services performed
may impact funeral revenue, as the average revenue per cremation service is
typically lower than the average revenue for traditional funeral services.

Funeral gross margin as a percentage of revenue increased slightly to 23.1%
for the 53 weeks ended January 3, 2004, compared to 22.9% in 2002. Decreases in
regional management costs, administration, operating costs, and advertising and
promotion costs for the 53 weeks ended January 3, 2004, compared to 2002, were
partially offset by increases in insurance, benefits and wage costs. Due to the
fixed nature of funeral costs over the short term, the Company's gross margin
percentage is impacted more by the fluctuation in funeral revenue than funeral
costs, as the Company believes that the amount of funeral revenue can be
increased without incurring significantly higher funeral costs.

Pre-need funeral contracts written for the 53 weeks ended January 3, 2004,
were $166.0 million. After adjusting for the effect of the fifty-third week,
pre-need funeral contracts written for the 53 weeks ended January 3, 2004, were
$163.0 million, compared to $161.0 million in 2002. The increase in pre-need
funeral contracts written of $2.0 million was primarily due to the Company's
continuing program to increase pre-need sales. For the 53 weeks ended
January 3, 2004, 26% of funeral volume was derived from backlog, compared to 24%
in 2002. The Company manages the cash impact of its pre-need funeral sales
program primarily by offsetting direct costs, including commissions paid to
counselors, with either general agency commissions received from third party and
related insurance companies or amounts not required to be trusted. In addition,
pre-need funeral sales build the foundation for future funeral revenue and are
expected to generate positive cash flow when the funeral service is performed.

Cemetery revenue of $168.2 million for the 53 weeks ended January 3, 2004,
was $11.7 million, or 7.5%, higher than cemetery revenue in 2002, primarily as a
result of a one-time $3.9 million reversal of accrued perpetual care
liabilities, an estimated increase of $3.6 million due to the additional
fifty-third week in 2003 over 2002, and a $3.9 million adjustment to cemetery
cancellation allowances. In addition, pre-need space sales and recognition of
pre-need merchandise were higher, which were partially offset by declines in
trust and finance income. Cemetery revenue for the 53 weeks ended January 3,
2004, from the Company's Rose Hills operations was $52.0 million, which was
higher than in 2002, primarily due to higher sales of space and merchandise at
the higher end of the product range.

Cemetery gross margin as a percentage of revenue increased to 17.0% for the
53 weeks ended January 3, 2004, compared to 12.0% for 2002, primarily as a
result of a one-time $3.9 million reversal of accrued perpetual care liabilities
and the changes in cemetery revenue discussed above. For the 53 weeks ended
January 3, 2004, wages, benefit, regional management, operating and other costs
decreased, while facilities and selling costs increased compared to 2002. The
Company's ongoing initiative to improve operational efficiencies contributed to
the containment of cost increases.

Pre-need cemetery contracts written for the 53 weeks ended January 3, 2004,
were $83.8 million. After adjusting for the effects of the fifty-third week,
pre-need cemetery contracts for the 53 weeks ended January 3, 2004, were
$82.1 million, $4.2 million higher than in 2002. The increase in pre-need
cemetery contracts written was primarily due to the Company's continuing program
to increase pre-need sales. For the 53 weeks ended January 3, 2004, 80% of
interments were at-need and 20% were pre-need fulfillments. Pre-need cemetery
sales may initially decrease cash flows if the amount of cash initially
collected is insufficient to cover the amount required to be trusted, and sales
commissions and other direct costs paid out. However, this cash flow impact is
not expected to be significant, as the Company sets minimum down payments,
maximum terms and sales commissions rates to maximize cash flow. Generally over
time, pre-need cemetery sales generate positive cash flow and build the
foundation for future cemetery revenue.

Insurance revenue for the 53 weeks ended January 3, 2004, increased
$7.9 million, or 12.6%, compared to 2002, primarily due to increases in premium
and investment income. Insurance premiums are dependent on insurance production,
as increases in insurance production generate increased insurance

23

premiums over time. Insurance production, which represents its participation in
the Company's pre-need funeral contracts for the 53 weeks ended January 3, 2004,
was $69.1 million compared to $58.2 million for 2002. Insurance gross margin as
a percentage of revenue increased to 2.5% for the 53 weeks ended January 3,
2004, compared to 1.0% for 2002, primarily due to the revenue increase being at
a rate higher than that of the cost increase. The Company expects the insurance
gross margin percentage to grow modestly over the near term.

Interest expense on long-term debt for the 53 weeks ended January 3, 2004,
was $77.8 million, a decrease of $7.2 million compared to 2002, primarily
reflecting the effect of debt repayments made by the Company during the
52 weeks ended December 28, 2002, and during the 53 weeks ended January 3, 2004,
which were partially offset by $4.2 million in premiums, fees and unamortized
discount write-off incurred during the 53 weeks ended January 3, 2004, as a
result of the early retirement of the 9.50% Senior subordinated notes, due in
2004, and the previous credit facility entered into on January 2, 2002. As a
result of the debt reduction and lower rates of interest on the Company's debt,
the Company expects interest expense in 2004 to decline compared to 2003.

General and administrative expenses for the Company for the 53 weeks ended
January 3, 2004, were $56.3 million, or 7.6% of consolidated revenue, compared
to $43.2 million, or 6.1% of consolidated revenue in 2002. For the 53 weeks
ended January 3, 2004, general and administrative expenses were reduced by a
$9.0 million decrease in accrued legal expenses as a result of legal claim
settlements and a $3.1 million net interest income received from a tax refund in
connection with the audit of the Predecessor's 1993 through 1998 federal income
tax returns. In addition, a $10.0 million reserve taken against receivables that
arose from a disposition of assets in 2001, and $9.4 million in additional
incentive costs were included in the 53 weeks ended January 3, 2004. During the
52 weeks ended December 28, 2002, general and administrative expenses were
reduced by $4.6 million, as a result of a legal claim settlement.

The Company has a significant portion of its corporate and administrative
functions in Canada. Expenses for these functions are paid principally in
Canadian dollars. Due to the weakening of the US dollar against the Canadian
dollar during 2003, the Company estimates that foreign exchange rate movements
resulted in an additional $5.0 million in general and administrative expense for
the 53 weeks ended January 3, 2004, compared to 2002. The Company continues to
be committed to reducing general and administrative expenses wherever possible.
To achieve this goal, the Company has begun a program to hedge certain Canadian
dollar expenses. The goal of the hedge program is to reduce the Company's
exposure to fluctuations in Canadian dollar foreign exchange rates.

Income tax benefit for the 53 weeks ended January 3, 2004, was $6.3 million
compared to $0.7 million in 2002. The Company's effective tax rate for the
53 weeks ended January 3, 2004, varied from the statutory tax rate, primarily
because the Company favorably settled a federal income tax audit during 2003.
The Company received and recognized a $9.7 million tax benefit for the 53 weeks
ended January 3, 2004, in connection with the audit of the Predecessor's 1993
through 1998 federal income tax returns. 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 January 3, 2004. 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 January 2, 2002, would be
treated as a reduction of goodwill established on January 2, 2002, with any
excess over the value assigned to such goodwill recognized as a capital
transaction.

Previously, the Company designated certain parcels of surplus real estate as
probable for sale, as they do not meet the Company's future geographic and
strategic objectives. During the 53 weeks ended January 3, 2004, the Company
determined that the carrying amounts of certain of these parcels of the surplus
real estate exceeded the fair market value, less estimated costs to sell.
Accordingly, the Company

24

recorded a long-lived asset impairment provision of $4.7 million for the
53 weeks ended January 3, 2004. As at January 3, 2004, the carrying value of
real estate held as probable for sale was $20.0 million.

In accordance with the FAS 142, the Company undertook its annual goodwill
impairment review during the 16 weeks ended October 4, 2003. 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. As a result of the Company's annual goodwill impairment review,
there was no indication of goodwill impairment, as the estimated fair value of
the funeral reporting unit exceeded its carrying amount as at October 4, 2003.

At December 31, 2001, the Company had accrued $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 related activities. Although the Company had expected to
pay out the $57.1 million during 2002, delays experienced in the completion of
the reorganization process resulted in a remaining balance of $26.3 million at
December 28, 2002. The Company has paid or adjusted accruals of $13.2 million
for the 53 weeks ended January 3, 2004, leaving a total accrual of
$13.1 million at January 3, 2004. Though emergence occurred on January 2, 2002,
it is the Company's continuing responsibility to resolve allowed amounts for
unresolved claims. The unresolved claims relate to the allocation of payments
approved by the United States Bankruptcy Court for the District of Delaware and
do not impact the Company's obligations under the settlement process. The
continuing expenditures continue to be paid and charged against the accrual to
complete the remaining reorganization procedures. The Company expects to pay the
remainder during fiscal year 2004. A reconciliation of changes in the
reorganization cost accrual is included in Note 14 to the Company's Consolidated
Financial Statements.

DISCUSSION OF DISCONTINUED OPERATIONS

Throughout the reorganization process, the Company engaged in a strategic
market rationalization assessment to dispose of cemetery and funeral operating
locations that did not fit into the Company's market or business strategies, as
well as under-performing locations and excess cemetery land. This program
continued during 2003. The Company believes that the identification of
businesses for disposal is substantially complete. The Company will now focus on
selling the businesses identified for disposal and, on a smaller scale and over
time, continue to assess the Company's portfolio of funeral and cemetery
locations to ensure they continue to fit in the Company's strategy. Once a
property is added to the disposal list, the Company expects to receive a firm
purchase commitment within one year.

During the 53 weeks ended January 3, 2004, the Company identified 124
funeral, 45 cemetery and four combination locations for disposal. The funeral
locations included all 39 funeral locations in the United Kingdom, as they were
not strategic to the Company's long-term objective to focus capital and
management resources in North America. The Company also identified for disposal
its life insurance operations, which are not strategic to the Company's
long-term objectives, and are not in support of the Company's North American
pre-need funeral sales efforts.

As at January 3, 2004, the Company had 64 funeral, 72 cemetery and four
combination locations in North America for disposal. The life insurance
operations held for sale also remained for sale. The Company's 39 funeral
locations in the United Kingdom were sold on October 20, 2003.

The Company has classified all the locations identified for disposal as
assets held for sale in the consolidated balance sheets and recorded any related
operating results, long-lived asset impairment provisions, and gains or losses
recorded on disposition as income from discontinued operations. The Company has
also reclassified the prior fiscal year to reflect any comparative amounts on a
similar basis, including locations sold in 2002.

25

THE COMPANY'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;

- CHANGES IN THE FISCAL ACCOUNTING PERIODS; AND

- THE RECLASSIFICATION OF ASSETS HELD FOR SALE AS DISCONTINUED OPERATIONS
FOR THE 52 WEEKS ENDED DECEMBER 28, 2002, WITHOUT RECLASSIFYING FISCAL
YEARS PRIOR TO 2002.

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

26

Consolidated revenue for the Company of $706.1 million for the 52 weeks
ended December 28, 2002, decreased $130.3 million, or 15.6%, compared to
$836.4 million for the Predecessor's year ended December 31, 2001, primarily as
a result of the reclassification of $127.3 million to discontinued operations, a
reduction of $62.6 million related to 183 funeral and 150 cemetery locations
sold or closed since January 1, 2001, and $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 $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 $15.9 million in
overall 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 $2.2 million
and cemetery revenue decreased by $32.7 million. Consolidated gross margin for
the 52 weeks ended December 28, 2002, was $130.6 million, a decline of
$50.6 million, or 27.9%, 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 18.5%. 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
and costs, was similarly impacted by the changes affecting comparability of the
Company and the Predecessor, including the reclassifications for discontinued
operations.

Funeral revenue for the Company of $486.8 million for the 52 weeks ended
December 28, 2002, decreased $35.3 million, or 6.8%, compared to $522.1 million
for the Predecessor's year ended December 31, 2001. The decrease is primarily
due to (1) the reclassification of $43.7 million to discontinued operations,
(2) a reduction of $21.2 million related to 183 funeral locations sold or closed
since January 1, 2001, (3) an estimated decrease of $4.1 million from the
difference in the number of days in the Company's and the Predecessor's fiscal
years, and partially offset by (4) an increase of $31.6 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 funeral revenue increased $2.2 million.

The Company performed 142,377 funeral services on an overall basis and
126,686 on a continuing operations basis for the 52 weeks ended December 28,
2002, compared to 142,150 funeral services on an overall basis 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%. On an overall basis 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, decreased
$8.1 million, primarily as a result of (1) the reclassification of
$43.8 million to discontinued operations, (2) a reduction of $21.8 million
related to 183 funeral locations sold or closed since January 1, 2001, (3) a
reduction of $6.9 million due to a reclassification of intercompany commissions
between funeral costs and insurance costs, (4) an estimated decrease of
$2.9 million from the difference in the number of days in the Company's and the
Predecessor's fiscal years, and (5) partially offset by an increase of
$9.0 million and $18.1 million from regional manager and depreciation expense,
respectively, not previously included in funeral costs, an increase of
$24.5 million from the inclusion of Rose Hills. 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.

27

Pre-need funeral contracts written by the Company for the 52 weeks ended
December 28, 2002, were $167.8 million on an overall basis and $161.0 million on
a continuing operations basis, compared to $108.4 million on an overall basis by
the Predecessor for the year ended December 31, 2001. The increase of
$59.4 million on an overall basis was primarily due to (1) the inclusion of
$26.1 million from Rose Hills, now consolidated in the Company's financial
statements, (2) the increase of $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 $4.1 million related to 183 funeral
locations sold or closed since January 1, 2001. For the 52 weeks ended
December 28, 2002, 24% of funeral volume on an overall basis was derived from
the backlog, compared to 22% on an overall basis from the Predecessor's backlog
for the year ended December 31, 2001.

Funeral gross margin of the Company, as a percentage of revenue, decreased
to 19.7% on an overall basis and 22.9% on a continuing operations basis for the
52 weeks ended December 28, 2002, from the Predecessor's 26.5% on an overall
basis for the year ended December 31, 2001, primarily due to the
reclassification of regional manager and depreciation expense. The decline in
overall 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 $156.5 million for the 52 weeks ended
December 28, 2002, decreased $53.6 million, or 25.5%, compared to
$210.1 million for the Predecessor's year ended December 31, 2001. The decrease
is primarily due to the reclassification of $26.3 million to discontinued
operations, a reduction of $41.4 million related to 150 cemetery locations sold
since January 1, 2001, and an estimated decrease of $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 $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 $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
$41.2 million, or 23.0%, primarily as a result of (1) the reclassification of
$30.6 million to discontinued operations (2) a reduction of $24.7 million
related to 150 cemetery locations sold since January 1, 2001, (3) an estimated
decrease of $1.3 million from the difference in the number of days in the
Company's and the Predecessor's fiscal years, which was partially offset by
(4) an increase of $36.1 million from the inclusion of Rose Hills, and (5) an
increase of $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 $26.8 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 $89.7 million on an overall basis and $77.9 million on a
continuing operations basis, $20.7 million higher on an overall basis 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 67,000 on an overall basis for the 52 weeks ended
December 28, 2002, of which 80% were at-need and 20% were pre-need fulfillments.

28

Cemetery gross margin of the Company for the 52 weeks ended December 28,
2002, as a percentage of revenue, decreased to 7.9% on an overall basis and
12.0% on a continuing operations basis, compared to 14.8% on an overall basis
for the Predecessor for the year ended December 31, 2001. The decrease was
primarily due to the fixed nature of certain expenses, the cost reductions of
which were not commensurate with the revenue declines experienced. The key
components of this decline include the impact of the reduced fair value of
revenue deferred at December 31, 2001, and recognized in 2002, and the
additional regional manager and depreciation expense, partially offset by the
inclusion of Rose Hills.

Insurance revenue for the Company for the 52 weeks ended December 28, 2002,
decreased $41.4 million, or 39.7%, compared to the Predecessor for the year
ended December 31, 2001, primarily due to the reclassification of $57.3 million
to discontinued operations, partially offset by higher premium revenue of
$10.8 million and higher realized gains on sale of investments of $5.6 million.
Costs, consisting primarily of benefit and claims costs, commissions, policy
reserve changes, and wages, decreased by $30.3 million for the 52 weeks ended
December 28, 2002, compared to the year ended December 31, 2001. The decrease
was primarily due to the reclassification of $43.8 million to discontinued
operations and the shorter fiscal year in 2002, versus 2001, partially offset by
an increase of $6.9 million due to a reclassification of intercompany
commissions between funeral costs and insurance costs and by higher benefit
claims. As a result of the discontinued operations reclassification, insurance
gross margin for the Company for the 52 weeks ended December 28, 2002, decreased
to 1.0%, 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 6.1% 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 $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 on an overall basis and $228.0 million on a continuing operations
basis 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 obtain the fair value of 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

29

valuation was also affected by the decline in the economy generally, as well as
the decline in funeral industry-specific market values.

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 $20.1 million, and the fair market value, less estimated costs
to sell, was $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 $3.3 million on an
overall basis and $0.4 million for surplus real estate on a continuing
operations basis 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 $85.0 million, an increase of $74.0 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 $1.0 million of discount on the 9.50%
Senior subordinated notes, due in 2004, and $0.9 million of premium on the
12.25% Convertible subordinated notes, due in 2012.

Other expense/income netted to $7.4 million of income for the 52 weeks ended
December 28, 2002. This primarily consisted of net realized gains from certain
surplus real estate, which was partially offset by net expenses, consisting of
other miscellaneous non-operating expenses and income.

Income tax benefit for the Company for the 52 weeks ended December 28, 2002,
was $0.7 million compared to $28.0 million of income tax expense 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.

On an overall basis 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
$7.7 million, purchases of property and equipment and business acquisitions of
approximately $21.4 million and net insurance asset purchases of approximately
$35.9 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.

30

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

The Company derives the majority of its cash from at-need funeral and
cemetery revenue. Cash flow is also impacted by the funeral and cemetery
pre-need activities. Pre-need funeral and cemetery activities are discussed in
detail in Item 1. "Business" and Notes 3, 4 and 5 to the Company's Consolidated
Financial Statements included in Item 8.

Net cash from operating activities was $130.2 million for the 53 weeks ended
January 3, 2004, compared to $67.4 million for 2002. The increase is primarily
due to the Company's initiative to withdraw excess funds from funeral, cemetery
and perpetual care trusts, which after discussions with regulators, resulted in
cash withdrawals of $52.7 million for the 53 weeks ended January 3, 2004. This
initiative is substantially complete and the Company does not expect further
excess funds to be significant. In addition, the Company received a
$15.8 million tax refund including interest in connection with the audit of the
Predecessor's 1993 through 1998 federal income tax returns.

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. Dividends, of which none
were declared for the 53 weeks ended January 3, 2004, are distributable after
regulatory approval is obtained. The cash inflows from operations of the
insurance subsidiaries are primarily generated from insurance premiums, all of
which are invested in insurance invested assets.

Net cash used by investing activities was $61.0 million for the 53 weeks
ended January 3, 2004, compared to $50.6 million for 2002. There was an increase
in the net purchase of insurance invested assets, which consist of fixed income
investments. The change in insurance invested assets results from investment of
policy premiums received, and sales and maturities of securities. In addition,
capital expenditures increased to $25.4 million for the 53 weeks ended
January 3, 2004, and are expected to increase to between $30.0 million and
$35.0 million in 2004. The Company has entered into an agreement to purchase a
building to replace an administration office that is currently leased. The total
capital expenditure for this building during 2004, including renovation costs,
is expected to be $4.4 million, which will increase annual depreciation expense
by approximately $0.2 million and reduce annual lease expense by approximately
$0.3 million.

Net cash used by financing activities was $127.0 million for the 53 weeks
ended January 3, 2004, compared to $79.7 million for 2002. The increase was
primarily due to repayment of debt.

The net increase in cash from discontinued operations was $53.4 million for
the 53 weeks ended January 3, 2004, due to cash from operations of
$24.4 million, of which $8.6 million was from the Company's discontinued life
insurance operations, and cash from investing activities of $31.3 million,
partially offset by cash from financing activities of $2.3 million. The cash
from investing activities included net proceeds of $16.2 million from the sale
of the Company's United Kingdom operations. The Company expects net proceeds of
approximately $100.0 million from the sale of its discontinued operations during
2004, the majority of which it expects to use to reduce debt.

As of January 3, 2004, the Company's cash balance was $41.6 million and the
amount available under the Credit Agreement's $50.0 million revolving credit
facility (the "Revolving Credit Facility") was $50.0 million, less
$10.6 million in outstanding letters of credit. The Company's debt repayment
obligation in 2004 is $11.2 million and aggregates $267.3 million over the next
five years. The Company believes that the Revolving Credit Facility, together
with existing cash, cash flow from operations and expected cash proceeds from
the sale of discontinued operations, will be sufficient to meet the Company's
anticipated capital expenditures, working capital requirements and debt
repayment obligations in the near and intermediate term.

31

LONG-TERM INDEBTEDNESS

The change in the Company's carrying amounts of long-term indebtedness is as
follows:

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

(a) On September 17, 2003, the Company entered into a new $325.0 million senior
secured facility (the "Credit Agreement"), which was funded on
September 29, 2003, and included a $275.0 million term loan (the "Term Loan
B") and the Revolving Credit Facility to replace its previous credit
facility entered into on January 2, 2002. The Revolving Credit Facility
includes $20.0 million available in the form of letters of credit. On
September 29, 2003, the Company borrowed $275.0 million under the Term Loan
B and repaid all outstanding principal amounts and accrued interest under,
and terminated, the 11.00% Senior secured notes, due in 2007, and 9.50%
Senior subordinated notes, due in 2004. As a result of the early retirement,
the Company incurred $4.2 million in call premiums, fees and unamortized
discount write-off during the 53 weeks ended January 3, 2004. In addition
the Company repaid $29.1 million of the Term Loan B during the fourth
quarter of fiscal year 2003.

(b) On June 27, 2003, the Company made an optional redemption of $30.0 million
for a redemption price of $30.0 million, plus accrued interest. On
January 2, 2003, the Company completed a mandatory redemption of
$10.0 million in principal amount, plus accrued interest.

(c) On April 1, 2003, the Company repaid approximately $52.6 million
outstanding, and terminated, the bank credit agreement of its subsidiary,
Rose Hills Company. The $52.6 million repayment was made by drawing
$30.0 million from its then-existing revolving credit facility, and
$22.6 million from cash on hand.

(d) The change represents amortization of premium.

(e) The change represents the net amount of repayments, increases in debt, and
foreign exchange and other adjustments.

(f) On January 23, 2004, the Company entered into a new $25.0 million
subordinated facility that was used to fully redeem all outstanding
principal amounts and accrued interest under, and terminated, the 12.25%
Convertible subordinated notes due in 2012. See Note 22 to the Company's
Consolidated Financial Statements.

The Credit Agreement and 12.25% Senior unsecured notes due in 2009 (the
"Seven-Year Unsecured Notes") are guaranteed by substantially all of the
Company's wholly-owned U.S. subsidiaries, other than the Company's insurance
subsidiaries and certain other excluded subsidiaries. Alderwoods Group, Inc.,
the parent company, has no independent assets or operations, and the guarantees
of its guarantor subsidiaries are full and unconditional, and joint and several.

32

Financial covenants under the Credit Agreement require the Company to
maintain a minimum interest coverage ratio and fixed charge coverage ratio, and
not to exceed a maximum leverage ratio. As at January 3, 2004, the Company met
all of the financial covenants required by the Credit Agreement.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table details the Company's contractual obligations as of
January 3, 2004.

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(a) Includes continuing and discontinued operations. Long-term debt excludes
unamortized premium. See 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 29 years, and are included in Note 10 to the Company's
Consolidated Financial Statements.

(d) The Company entered into an agreement to purchase a building, including
renovations, to use as office premises. As discussed below, purchase orders
are not included in these amounts.

In addition to the operating leases noted in the table above, as at
January 3, 2004, the Company leased approximately 1,250 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 $8.1 million in 2004.

The Company issues purchase orders for the supply of goods and services for
its operations. As at January 3, 2004, there were no significant or unusual
purchase orders outstanding. The Company entered into agreements with certain
suppliers of funeral and cemetery merchandise, and office supplies to obtain
volume discounts. However, none of these agreements have committed purchase
quantities or prices.

33

The following table details the Company's commercial commitments as of
January 3, 2004.

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(a) Relates to the Company's Revolving Credit Facility described more fully in
Note 6 to the Company's Consolidated Financial Statements. The expiry date
of the Revolving Credit Facility is September 29, 2008.

(b) Standby letters of credit primarily relate to a court ordered legal claim,
surety bonds for various pre-need sales trusting requirements.

The Company's forward foreign currency exchange contract and foreign
currency option commitments are described under Item 7A. "-- Quantitative and
Qualitative Disclosures About Market Risk."

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements as of January 3, 2004, consist of operating
leases noted above under "Contractual Obligations and Commercial Commitments."
The Company also has pre-need funeral, cemetery and perpetual care trusts, which
are described more fully in Notes 3, 4 and 5 to the Company's Consolidated
Financial Statements.

OTHER INFORMATION

EBITDA FROM CONTINUING OPERATIONS

The Company's earnings from continuing operations before interest, taxes,
depreciation and amortization, and provision for goodwill impairment and
provision for asset impairment ("EBITDA") are presented in the table below and
reconciled to the Company's net income (loss) from continuing operations. EBITDA
is presented, because it is a widely accepted financial performance indicator.
It is also the basis on which compliance with the financial covenants under the
Company's credit agreements is determined and on which certain of the Company's
compensation plans are based. EBITDA is not a term that has specific meaning in
accordance with U.S. GAAP and may be calculated differently by other companies.
EBITDA should not be considered in isolation, as a substitute for earnings from
operations or

34

cash flow data calculated in accordance with U.S. GAAP, or as a measure of a
company's profitability or liquidity.

EBITDA for the 53 weeks ended January 3, 2004, decreased by $5.8 million
compared to 2002, primarily due to an increase of $11.1 million in other
expenses (income), and a $13.1 million increase in general and administrative
expense, partially offset by a combined $15.7 million increase in funeral,
cemetery and insurance gross margin.

DISPOSITIONS

During the 53 weeks ended January 3, 2004, the Company closed 17 funeral and
one combination locations, and sold 58 funeral, 34 cemetery and three
combination locations for gross proceeds of $26.6 million, including the sale of
all of the Company's 39 funeral locations in the United Kingdom on October 20,
2003. In addition, from the period January 3, 2004, to February 28, 2004, one
funeral location was closed, and three funeral and six cemetery locations with
net assets of $1.5 million were sold for gross proceeds of $1.2 million.

RESTRICTIONS

The Credit Agreement and the indentures governing the Seven-Year Unsecured
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
has the discretion to apply such net proceeds at its option (or as otherwise
required) 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 up to $10.0 million in any fiscal year, but not to exceed
$35.0 million in the aggregate over the life of the Credit Agreement. 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 specified
thresholds, the Company must make mandatory repayments under the Credit
Agreement.

Covenants in the Credit Agreement and the Bridge Loan prohibit the payment
of cash dividends and restrict, and under specified circumstances prohibit, the
payment of dividends by Alderwoods Group. In addition, covenants in the
indenture governing the Seven-Year Unsecured Notes restrict, and under specified
circumstances prohibit, the payment of dividends by Alderwoods Group. The
Company is not expecting to pay any dividends on the Common Stock in the
foreseeable future.

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

35

cash flow from operations of the insurance subsidiaries for the 53 weeks ended
January 3, 2004, was approximately $40.4 million, all of which has been
reinvested in the insurance business.

RECENT ACCOUNTING STANDARDS

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

CONTINUING AND DISCONTINUED LOCATIONS

The Company's number of continuing and discontinued locations by country,
state and province as at January 3, 2004, is summarized in the table below.

36

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K, including,
but not limited to, information regarding the status and progress of the
Company's operating activities, the plans and objectives of the Company's
management, assumptions regarding the Company's future performance and plans,
and any financial guidance provided, as well as certain oral or written
information contained in other material filed with or furnished to the SEC or
elsewhere 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. These forward-looking statements are made subject to certain risks
and uncertainties that could cause actual results to differ materially from
those stated. Risks and uncertainties that could cause or contribute to such
differences include, but are not limited to, those discussed elsewhere in this
Annual Report on Form 10-K and particularly below under "-- Risk Factors" and
above under "Management's Discussion and Analysis of Financial Condition and
Results of Operations." 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 NUMBER OF DEATHS MAY DECREASE. In 2002, there were approximately
2.4 million deaths in the United States. According to the United States Bureau
of the Census, this number is expected to increase by approximately 1% annually
until 2010, when annual deaths are expected to reach approximately 2.6 million,
however longer life spans could reduce the number of deaths. The financial
results of the Company may be affected by any decline in the number of deaths.

37

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 28% of the burials performed in
the United States in 2002, as compared with approximately 10% in 1980, and this
percentage increased by approximately 5% from 1997 to 2002. Compared to
traditional funeral services, cremations have historically generated higher
gross profit percentages but lower overall 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
significant. While the Company believes that future operating cash flow,
together with financing arrangements, will be sufficient to finance operating
requirements under the Company's business plan, the Company's leverage and debt
service requirements could make it more vulnerable to economic downturns in the
markets the Company intends to serve or in the economy generally. The Company's
indebtedness could restrict its ability to obtain additional financing in the
future and, because the Company may be more leveraged than certain of its
competitors, could place the Company at a competitive disadvantage.

2. DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT LIQUIDITY
AND CORPORATE ACTIVITIES. The Credit Agreement, the Bridge Loan and the
indenture governing the Seven-Year Unsecured Notes 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 maintain a minimum interest coverage ratio and fixed
charge coverage ratio, and not to exceed a maximum leverage ratio or maximum
annual amount of capital expenditures and cemetery development expenditures.
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 Agreement 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. 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

38

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
Seven-Year Unsecured 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 Seven-Year Unsecured Notes.

THE TAX RATE IS UNCERTAIN

EFFECTIVE INCOME TAX RATE MAY VARY. The Company expects that its effective
income tax rate for 2004 and beyond may vary significantly from the statutory
tax rate because (1) 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, (2) the losses incurred in certain jurisdictions may not
offset the tax expense in profitable jurisdictions, (3) there are differences
between foreign and United States income tax rates, and (4) many tax years are
subject to audit by different tax jurisdictions.

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.

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 Credit
Agreement and the Bridge Loan prohibit the payment of cash dividends and
restrict, and under certain circumstances prohibit, the payment of other
dividends by Alderwoods Group. In addition, covenants in the indenture governing
the Seven-Year Unsecured Notes restrict, and under certain circumstances
prohibit, the payment of dividends by Alderwoods Group. 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 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, 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.

OTHER RISK FACTORS

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

39

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks for the 53 weeks ended
January 3, 2004, compared to the 52 weeks ended December 28, 2002, except for
the purchase of derivatives discussed below.

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, which is
generally stable politically and economically and is not highly inflationary.

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 January 3, 2004.

The Company has a significant portion of its corporate and administrative
functions in Canada. Expenses for these functions are paid principally in
Canadian dollars and have predictable future cash outflows ("Foreign Currency
Expenditure"). The Company has a program to hedge the variability in the
United States dollar equivalent of a portion of the Foreign Currency Expenditure
due to the fluctuation in the exchange rate between the United States dollar and
Canadian dollar ("Foreign Currency Hedge Program"). The Company uses forward
foreign exchange contracts and foreign exchange option contracts to partially
offset foreign exchange variability. Under the Foreign Currency Hedge Program,
increases or decreases in the Company's foreign exchange exposures are partially
offset by gains and losses on the forward foreign exchange contracts and foreign
exchange option contracts, so as to reduce the magnitude of foreign exchange
transaction gains and losses.

A 1% change in exchange rates would cause approximately $0.1 million
aggregate change in the fair value of the Company's forward foreign exchange
contracts and foreign exchange option contracts. The table below presents the
notional amounts, weighted average foreign exchange rates, and fair values of
the

40

outstanding forward foreign exchange contracts and foreign exchange option
contracts, as of January 3, 2004.

As of January 3, 2004, forward foreign exchange contracts with fair values
of $0.3 million and $0.07 million mature during 2004 and 2005, respectively.

As of January 3, 2004, foreign exchange option contracts with fair values of
$0.3 million and $0.07 million mature during 2004 and 2005, respectively.

Derivative financial instruments involve credit and market risk. Credit risk
arises from the potential for a counterparty to default on its contractual
obligations and is limited to those contracts where the Company would incur a
loss in replacing the defaulted transaction. The Company minimizes this risk by
diversifying through counterparties that are of strong credit quality. The
Company does not enter into derivative financial instruments for trading
purposes.

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. At January 3, 2004, the Company's total fixed rate
debt is $378.5 million, representing approximately 61% of total debt, and has a
weighted average rate of 12.24%. The Company's floating rate exposure of
$245.9 million, represents 39% of total debt and has a weighted average rate of
approximately 4.38%. A 1% change in the applicable floating rate indices would
cause an approximately $2.5 million change in the Company's annual interest
expense.

41

The principal cash flows and the related weighted average interest rates for
the Company's long-term debt as of January 3, 2004, are presented below. The
carrying values of the Company's debt instruments are included in Note 6 to the
Company's Consolidated Financial Statements.

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(1) The Company is required to maintain a minimum interest coverage ratio and
fixed charge coverage ratio, and not to exceed a maximum leverage ratio. The
Company is not to exceed a yearly maximum on capital expenditures and
cemetery development. 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.

The Company's exposure to both equity markets and interest rates reside
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 trusts, that have
significant investments in mutual funds and equity securities that are sensitive
to current market prices. Fluctuations in interest rates and equity markets do
not result in significant current income fluctuation, as the income from
investments held in pre-need funeral trusts and pre-need cemetery merchandise
trusts is not realized until services are performed. Investments held in
pre-need cemetery merchandise trusts and insurance invested assets are
predominately in fixed income securities. The Company manages the mix of
equities and fixed income securities in accordance with policies set by an
investment committee comprised of members of senior management. The investment
committee sets and modifies the mix of investments with the assistance of
independent professional financial advisors. The policy emphasizes a
conservative approach while maintaining acceptable levels of income and capital
appreciation.

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, 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 53 WEEKS ENDED JANUARY 3, 2004, DO NOT
INCLUDE COMPARABLE OPERATING AND CASH FLOW INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 2001. 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 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 January 3, 2004 and December 28, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the fifty-three weeks ended January 3, 2004, and 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 January 3, 2004 and December 28, 2002, and the results of its
operations and its cash flows for the fifty-three weeks ended January 3, 2004,
and 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

February 27, 2004

45

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT NUMBER OF SHARES

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

46

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

47

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBER OF SHARES

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

48

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS 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 January 3, 2004, the
Company operated 730 funeral homes and 150 cemeteries and 60 combination funeral
homes and cemeteries throughout North America.

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 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 confirmation date
or as of a later date, that is not subsequent to the Effective Date, when all
material

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)
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, changes in
accounting policies, certain account classifications and fiscal accounting
periods adopted by the Company and the reclassification of assets held for sale
as discontinued operations for its fiscal 2003 and 2002 years, without
reclassifying fiscal years prior to 2002, 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 53 weeks ended January 3, 2004, do not include
comparable operating and cash flow information for the year ended December 31,
2001. 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
accounting principles, as prescribed by Statement of Financial Accounting
Standards No. 141, "Business

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)
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.

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

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)
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 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 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 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.

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

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

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

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

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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

CEMETERY PROPERTY

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

PROPERTY AND EQUIPMENT

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

Buildings and improvements........................ 10 to 40 years
Automobiles....................................... 2 to 5 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

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)
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 consolidated balance sheets in pre-need funeral and cemetery
contracts.

The Company maintains its cash and cash equivalents with various financial
institutions. As at January 3, 2004, the Company had approximately $30,848,000
(2002 -- $26,691,000) of cash and cash equivalents concentrated 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.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for its derivative financial instruments in accordance
with Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("FAS No. 133"). The
Company records derivative instruments in the consolidated balance sheet as
either an asset or liability measured at its fair value. Changes in the
derivative's fair value are recognized currently in earnings unless specific
hedge accounting criteria are met. The Company formally documents, designates
and assesses the effectiveness of transactions that receive hedge accounting.

The Company has a significant portion of its corporate and administrative
functions in Canada. Expenses for these functions are paid principally in
Canadian dollars and have predictable future cash outflows ("Foreign Currency
Expenditure"). The Company has a program to hedge the variability in the
United States dollar equivalent of a portion of the Foreign Currency Expenditure
due to the fluctuation in the exchange rate between the United States dollar and
Canadian dollar ("Foreign Currency Hedge Program"). The Company uses forward
foreign exchange contracts and foreign exchange option contracts to partially
offset foreign exchange variability. In accordance with FAS No. 133, the Company
has designated the Foreign Currency Hedge Program as qualifying for hedge
accounting.

For derivatives that qualify and are designated as hedges of future cash
flows, the effective portion of changes in fair values (the "Effective Portion")
are reported in stockholders' equity under accumulated other comprehensive
income. The Effective Portion is recognized in earnings and included in general
and administrative expense when the related Foreign Currency Expenditure affects
earnings. In cases where the Company revises its Foreign Currency Expenditure
estimates, the Effective Portion attributable to the extent of any downward
change in the Foreign Currency Expenditure estimates will be reclassified from
accumulated other comprehensive income to current earnings and included in
general and administrative expenses. The Company designates the change in fair
value of forward foreign exchange contracts due to the change in forward points
and the change in fair value of foreign exchange option contracts due to the
change in time value as the "Ineffective Portion." The changes in fair values of
derivatives that are not

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)
designated as hedges and the Ineffective Portion are recognized currently and
included with foreign exchange gains/losses, which are reported in general and
administrative expense.

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 was recorded for the 53 weeks ended January 3, 2004, or 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 income (loss) and net income (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

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)
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 as a result
of the utilization of benefits 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 consolidated 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.

FISCAL YEAR

The Company's fiscal year ends on the Saturday nearest to December 31 in
each year (whether before or after such date).

The first and second fiscal quarters each consist of 12 weeks and the third
fiscal quarter consists of 16 weeks. In order to cause the fourth fiscal quarter
to end on the same day as the fiscal year, 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, due to, among other things, the
reclassification of assets held for sale as discontinued operations.

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 adoption of FAS No. 143 on
December 29, 2002, had no material impact on the Company's 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

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)
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 adoption of FAS No. 145 on December 29, 2002, had no material
impact on the Company's 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 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
adoption of FAS No. 146 had no material impact on the Company's 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 adoption of FIN No. 45 on
December 29, 2002, had no material impact on the Company's financial condition
or results of operations and the disclosure provisions of FIN No. 45 have been
considered in the preparation of the Company's consolidated financial
statements.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (FAS No. 149). FAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement of Financial
Accounting Standards No. 133 ("FAS No. 133"). FAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in FAS No. 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. FAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except as specifically

60

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)
noted in FAS No. 149. FAS No. 149 should be applied prospectively. The adoption
of FAS No. 149 had no impact on the Company's financial condition or results of
operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (FAS No. 150). FAS No. 150 changes the accounting
for certain financial instruments that, under previous guidance, were accounted
for as equity. FAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments: (1) mandatorily redeemable shares, which the
issuer is obligated to buy back in exchange for cash or other assets; (2) put
options and forward purchase contracts that do or may require the issuer to buy
back some of its shares in exchange for cash or other assets; and
(3) obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuer's shares. Most of the guidance in
FAS No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of FAS No. 150 had no
impact on the Company's financial condition or results of operations.

In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits" ("FAS No. 132"). FAS No. 132 improves financial
statement disclosures for defined benefit plans. In an effort to provide the
public with better and more complete information, FAS No. 132 requires that
companies provide more details about their plan assets, benefit obligations,
cash flows, benefit costs and other relevant information. Companies are required
to provide financial statement users with a breakdown of plan assets by
category, such as equity, debt and real estate. A description of investment
policies and strategies and target allocation percentages, or target ranges, for
these asset categories also are required in financial statements. Cash flows
will include projections of future benefit payments and an estimate of
contributions to be made in the next year to fund pension and other
postretirement benefit plans. FAS No. 132 is effective for fiscal years ending
after December 15, 2003, and for quarters beginning after December 15, 2003. The
Company adopted FAS No. 132 on January 3, 2004.

In January 2003, the FASB issued 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 was revised in
December 2003. FIN No. 46 applies to enterprises that have a variable interest
in variable interest entities and is effective for the first financial reporting
period ending after March 15, 2004. Accordingly, FIN No. 46 is applicable to the
Company for the fiscal quarter ending March 27, 2004. The Company is in the
process of evaluating the impact of FIN No. 46 on its financial condition,
results of operations and cash flows and currently believes that its receivables
from funeral and cemetery trusts and perpetual care trust funds will be
consolidated at fair value in the Company's consolidated balance sheet. See
Notes 4 and 5 for a description of funeral, cemetery and perpetual care trusts.

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

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.

Deferred pre-need funeral contract revenue excludes pre-need funeral
contracts funded by insurance policies in force with the Company's subsidiary
insurance companies. 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 amounts
when the funeral service is performed. The cost and fair values (which are based
on quoted

62

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)
market prices of the underlying securities) of the amounts receivable from
funeral trusts (net of taxes payable by the 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
8.00% 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 time 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.

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)
The customer receivables as at January 3, 2004, 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:

64

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
8.00% 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
$261,270,000 and $267,095,000 at January 3, 2004 and December 28, 2002,
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:

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

(a) On September 17, 2003, the Company entered into a new $325,000,000 senior
secured facility (the "Credit Agreement"), which was funded on
September 29, 2003, and included a $275,000,000 term loan (the "Term Loan
B") and a $50,000,000 revolving credit facility (the "Revolving
Credit Facility")

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)
to replace its previous credit facility entered into on January 2, 2002. As
a result, the Company retired the remaining balance of $195,000,000 on its
11.00% Senior secured notes, due in 2007, and the principal amount of
$80,000,000 on its 9.50% Senior subordinated notes, due in 2004. The
Revolving Credit Facility includes $20,000,000 available in the form of
letters of credit. The Revolving Credit Facility is intended to be used
primarily to fund the Company's working capital needs. The Revolving Credit
Facility bears interest at a rate per annum in accordance with graduated
pricing based upon the Company's consolidated leverage ratio, and the
Company has the option to elect the type of borrowing that has an interest
rate equal to either (i) a base rate (4.00% at January 3, 2004), plus 2.00%,
or (ii) LIBOR (1.15% for the three-month LIBOR at January 3, 2004), plus
3.00%. An annual fee of 0.50% is charged on the unused portion of the
Revolving Credit Facility. Material covenants in the Credit Agreement
include a requirement to maintain a minimum interest coverage ratio and
fixed charge coverage ratio, a requirement not to exceed a maximum leverage
ratio, a yearly maximum on capital expenditures and cemetery development and
specified maximum amounts for capital lease obligations, unsecured
indebtedness, acquisitions, certain investments and sales of accounts
receivable. Outstanding principal amounts and interest accrued and unpaid
shall become immediately due and payable and further commitments by the
lender to make loans shall be terminated upon the occurrence of events of
default specified in the Credit Agreement. As of January 3, 2004, the
Company was not in breach of any of the events of default specified in the
Credit Agreement. The Credit Agreement is secured by specified real
property, and substantially all personal property of the Company and
specified subsidiaries. The expiry date of the Credit Agreement is
September 29, 2008.

As of January 3, 2004, the amount available under the Revolving Credit
Facility was $50,000,000, less $10,648,000 in outstanding letters of credit.

(b) On April 1, 2003, the Company repaid all outstanding principal amounts and
accrued interest under, and terminated, the subsidiary credit agreement.

(c) The Company has the option to elect the type of borrowing that has an
interest rate equal to either (i) a base rate (4.00% at January 3, 2004),
plus 2.25% (plus 1.75%, effective January 23, 2004), or (ii) LIBOR (1.15%
for the three-month LIBOR at January 3, 2004), plus 3.25% (plus 2.75%,
effective January 23, 2004). The weighted average rate of interest was 4.48%
at January 3, 2004. The Term Loan B is repayable in quarterly installments
of $2,500,000 from January 3, 2004 to October 9, 2004, $3,750,000 from
January 1, 2005 to October 8, 2005, and $5,000,000 from December 31, 2005 to
June 14, 2008, with a lump sum payment of the then-outstanding amount on the
maturity date.

(d) On September 29, 2003, the Company repaid all outstanding principal amounts
and accrued interest under, and terminated, the 11.00% Senior secured notes,
due in 2007.

(e) On September 29, 2003, the Company repaid all outstanding principal amounts
and accrued interest under, and terminated, the 9.50% Senior subordinated
notes, due in 2004. As a result, the Company paid a premium of $1,266,400
for the early retirement, which is included in interest expense in the
Company's consolidated statement of operations. In addition, an unamortized
discount of $1,376,000 is included in interest expense for the 53 weeks
ended January 3, 2004.

(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

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)
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 January 3, 2004, and December 28, 2002, the conversion rate was
$17.17 per share. The carrying amount includes unamortized premium of
$7,200,000 (2002 -- $8,100,000). The notes are redeemable at the option of
the Company, in whole or in part, at 100% of the stated principal amount,
plus accrued and unpaid interest to (but not including) the applicable
redemption date.

At January 3, 2004, and 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.

The Credit Agreement, 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 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.

In certain change of control situations, the Company is required to make an
offer to purchase the then-outstanding 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 Agreement and the indentures governing the 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 has the discretion to
apply such net proceeds at its option (or as otherwise required) 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 up to
$10,000,000 in any fiscal year, but not to exceed $35,000,000 in the aggregate
over the life of the Credit Agreement. 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 specified thresholds, the Company must make
mandatory repayments under the Credit Agreement.

Material covenants under the indentures governing the 12.25% Senior
unsecured notes due in 2009 and 12.25% Convertible subordinated notes due in
2012 include restrictions placed on the Company and

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)
specified subsidiaries to incur additional indebtedness, pay dividends, repay
subordinate or junior indebtedness, and encumber property or assets.

Maturities of long-term debt principal are as follows:

NOTE 7. INSURANCE ACTIVITIES

At January 3, 2004, and 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.
Fixed maturity securities are classified as available-for-sale and carried at
fair value. Investments in debt securities are evaluated for other than
temporary impairment. 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:

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)
During the 53 weeks ended January 3, 2004, insurance investments classified
as available-for-sale with a cost of $32,331,000 (2002 -- $62,358,000) were sold
for proceeds of $32,454,000 (2002 -- $62,826,000), resulting in $770,000
(2002 -- $1,409,000) and $647,000 (2002 -- $941,000) of realized gains and
losses, respectively. The specific cost method was used to determine the cost of
available-for-sale securities disposed of.

Included in the fair value of insurance investments classified as
available-for-sale are $6,787,000 (2002 -- $9,443,000) and $1,167,000
(2002 -- $2,600) 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:

The Company has determined that unrealized losses in insurance invested
assets are not other-than-temporary, as the unrealized losses were due to
temporary fluctuations in interest rates. Insurance invested assets are
currently predominantly in fixed income securities. The Company manages the mix
of fixed income securities in accordance with policies set by an investment
committee comprised of members of senior management. The investment committee
sets and modifies the mix of investments with the assistance of independent
professional financial advisors. The policy emphasizes a conservative approach
while maintaining acceptable levels of income and capital appreciation. The
unrealized losses and their duration in insurance invested assets as at
January 3, 2004, are shown in the following table.

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

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 January 3, 2004, or December 28, 2002.

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.

Pursuant to the Company's Director Compensation Plan (the "Director
Compensation Plan"), each director of the Company who is not an employee of the
Company or any of its subsidiaries has the option of receiving his or her annual
base retainer and attendance fees in cash, Common stock or a combination
thereof. Further, each participant may elect to have Common stock paid in the
form of deferred Common stock ("Deferred Stock"), which will be credited to a
booking account in the name of the participant. The Deferred Stock is subject to
a deferral period during which the participant has no right to transfer any
rights under his or her Deferred Stock and has no other rights of ownership
therein. The Company has reserved 100,000 shares of Common stock for issuance
under the Director Compensation Plan.

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 53 weeks
ended January 3, 2004, and 52 weeks ended December 28, 2002, and none of the
warrants have been exercised.

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.

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)
The following is a summary of the total number of outstanding stock options:

The following table summarizes information about stock options outstanding
at January 3, 2004:

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 plans. The following
table illustrates the effect on net income (loss) and net income (loss) per
share, if the

71

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)
Company had applied the fair value recognition provisions of FAS No. 123 to
stock-based employee compensation using the Black-Scholes option pricing
methodology.

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 53 weeks ended
January 3, 2004, was $0.96 (2002 -- $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.

72

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)
ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

NOTE 9. LEGAL CONTINGENCIES

The Company is a party to legal proceedings in the ordinary course of its
business, but does not expect the outcome of any 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:

In addition to the automobile leases noted in the table above, as at
January 3, 2004, the Company leased approximately 1,250 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 $8,133,000 in 2004.

Total expense incurred under all operating leases for the 53 weeks ended
January 3, 2004, was $22,896,000 (2002 -- $23,075,000).

73

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)
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 1% and 75% of their eligible compensation. The Company
will match between 50% and 100% of employee contributions to a maximum of either
2% of employees' eligible compensation for certain employees or $2,000 for
others. 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 53 weeks
ended January 3, 2004, was approximately $2,650,000 (2002 -- $2,686,000).

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.

Income (loss) before income taxes 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)
Income tax provision (recovery) consisted of the following:

The Company made income tax payments of $9,920,000 (2002 -- $10,910,000),
excluding income tax refunds of $17,029,000 (2002 -- $8,251,000), during the
53 weeks ended January 3, 2004.

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

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)
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 which it arises,
while any resulting decrease reflecting realization of the benefits of tax
assets that had a

76

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)
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 federal, 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 January 3,
2004 is $112,177,000 (2002 -- $124,854,000).

77

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:

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

A summary of certain balance sheet accounts is as follows:

79

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 4, 2003, and, as a result, there was no indication of
goodwill impairment as at October 4, 2003, as the estimated fair value of the
funeral reporting unit exceeded its carrying amount. A goodwill impairment
provision of $228,051,000 for the funeral reporting unit was recorded for the
52 weeks ended December 28, 2002. The fair value of the funeral reporting unit
was determined by 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 2002 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.

80

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 funeral reporting
unit 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.

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 following table reconciles earnings (loss) 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:

The Company operates principally in the United States and also has
operations in Canada. The Company's United Kingdom operations are classified as
discontinued operations and were disposed of on October 20, 2003. The following
tables depict the revenue earned and the long-lived assets held in the
reportable geographic segments.

82

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)

NOTE 17. PROVISION FOR ASSET IMPAIRMENT

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.

Previously, the Company designated certain parcels of surplus real estate as
held for sale, as they do not meet the Company's future geographic and strategic
objectives. During the 53 weeks ended January 3, 2004, the Company determined
that the carrying amounts of certain parcels of the surplus real estate now
exceeded the fair market value, less estimated cost to sell. Accordingly, the
Company has recorded a long-lived asset impairment provision of $4,699,000 for
the 53 weeks ended January 3, 2004 (2002 -- $367,000).

The fair market value was determined by specific offer or bid, or an
estimate based on comparable recent sales transactions. The asset impairment
provisions include management estimates. As a result, actual results could
differ significantly from these estimates.

NOTE 18. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE

Throughout the reorganization process, the Company engaged in a strategic
market rationalization assessment to dispose of cemetery and funeral operating
locations that did not fit into the Company's market or business strategies, as
well as under-performing locations and excess cemetery land. This program
continued during the 53 weeks ended January 3, 2004. The Company will on a
smaller scale and over time, continue to assess the Company's portfolio of
funeral and cemetery locations to ensure they continue to fit in the Company's
strategy. Once a property is added to the disposal list, the Company expects to
receive a firm purchase commitment within one year.

During the 53 weeks ended January 3, 2004, the Company identified 124
funeral, 45 cemetery and four combination locations for disposal. The funeral
locations included all 39 funeral locations in the United Kingdom, as they were
not strategic to the Company's long-term objective to focus capital and
management resources in North America. The Company also identified for disposal
its life insurance operations, which are not strategic to the Company's
long-term objectives, and are not in support of the Company's North American
pre-need funeral sales efforts.

83

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 18. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
As at January 3, 2004, the Company had 64 funeral, 72 cemetery and four
combination locations in North America for disposal. The life insurance
operations held for sale also remained for sale. The Company's 39 funeral
locations in the United Kingdom were sold on October 20, 2003.

The Company has classified all the locations identified for disposal as
assets held for sale in the consolidated balance sheets and recorded any related
operating results, long-lived asset impairment provisions, and gains or losses
recorded on disposition as income from discontinued operations. The Company has
also reclassified the prior fiscal year to reflect any comparative amounts on a
similar basis, including locations sold in 2002.

Discontinued operations consists of long-lived asset impairment provisions,
gains and losses recorded on disposition, and operating results of the
locations. FAS No. 144 requires that long-lived assets to be disposed of are to
be recorded at the lower of carrying amount or fair market value, less estimated
costs to sell. The fair market value was determined by specific offer or bid, or
an estimate based on comparable recent sales transactions. Impairment provisions
on assets previously identified as held for sale resulted from changes in
previously estimated proceeds, net asset values and closing costs. The
long-lived asset impairment provisions are based on management estimates. As a
result, actual results could differ significantly from these estimates.

84

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 18. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
The carrying amount, the fair market value, less estimated costs to sell,
revenues and costs and impairment provisions for the locations identified as
held for sale are presented in the following tables.

85

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 18. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
Details of assets held for sale at January 3, 2004, are as follows:

Details of assets held for sale at December 28, 2002, are as follows:

86

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 19. INCOME (LOSS) PER SHARE

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

For the 53 weeks ended January 3, 2004, 1,285,000 employee and director
stock options were dilutive to earnings and are included in the calculation of
diluted income (loss) per share. Employee and director stock options to purchase
2,900,000 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.

NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS

As at January 3, 2004, the fair value of all of the Company's derivatives
under the Foreign Currency Hedge Program was an unrealized gain of $737,000
(2002 -- $nil), which is included in other current assets in the Company's
consolidated balance sheet. The Effective Portion is $689,000 (2002 -- $nil) and
is included in accumulated other comprehensive income in the Company's
consolidated balance sheet. The Ineffective Portion is $48,000 and is included
in general and administrative expenses for the 53 weeks ended January 3, 2004
(2002 -- $nil). As at January 3, 2004, a portion of the Company's Foreign
Currency Expenditure from the period January 4, 2004, to June 2005, was hedged.
As at January 3, 2004, the Company estimates that based on current exchange
rates and maturity dates of the Company's derivatives, $544,000 would be
expected to be reclassified from accumulated other comprehensive income to
current earnings and included in general and administrative expenses over the
next 12 months.

87

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)

Certain of the Company's quarterly financial data in the table below have
been restated from the Company's 2003 quarterly reports on Form 10-Q, due to the
reclassification of assets held for sale as discontinued operations.

NOTE 22. SUBSEQUENT EVENTS

On January 23, 2004, the Company entered into a new subordinated credit
facility that was used to fully redeem the $24,679,000 12.25% Convertible
subordinated notes, due in 2012, which became fully redeemable on January 2,
2004, at par, plus accrued interest. This new facility, which matures on
March 31, 2005, carries an interest rate of, at the Company's option, LIBOR
(1.12% for the three-month LIBOR at January 23, 2004), plus 4.50% or base rate
(4.00% at January 23, 2004), plus 3.5%.

Also on January 23, 2004, the Company amended its Term Loan B to reduce the
applicable interest rate by 0.50% from LIBOR, plus 3.25% to LIBOR, plus 2.75%,
or base rate, plus 2.25% to base rate, plus 1.75%, as well as provide the
ability, at the Company's discretion, to borrow up to $25,000,000 of additional
term loans to redeem a portion of the Company's 12.25% Senior unsecured notes,
due in 2009, or provide the ability to repay the new subordinated credit
facility described above.

88

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 53 WEEKS ENDED JANUARY 3, 2004, DO NOT
INCLUDE COMPARABLE OPERATING AND CASH FLOW INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 2001. 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 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.

89

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 year ended December 31, 2001. 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 audit.

We conducted our audit 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
year ended December 31, 2001, 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

90

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

CONSOLIDATED BALANCE SHEET

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

91

THE LOEWEN GROUP INC.
(PREDECESSOR TO 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 CONSOLIDATED FINANCIAL STATEMENTS

92

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

93

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

CONSOLIDATED STATEMENT OF CASH FLOWS

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

94

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

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 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.

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 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.

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 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.

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)
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, 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

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)
of perpetual or endowment care trusts are recognized in current cemetery revenue
and are used to defray the maintenance costs of cemeteries, which are expensed
as incurred. The principal of these perpetual or endowment care trusts 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.

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)
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

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 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

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 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.

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 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 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 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.

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 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

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 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.

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.

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

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

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 4. LIABILITIES SUBJECT TO COMPROMISE AND DEBT (CONTINUED)
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 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

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 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.

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 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, 2001, no
such agreements were outstanding.

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 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.

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

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 8. STOCKHOLDERS' EQUITY (CONTINUED)
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. The Predecessor has determined that, due
to its reorganization the stock options were effectively cancelled.

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 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 year
ended December 31, 2001 was $2,252,778.

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 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, excluding income
tax refunds of $5,160,000, for the year ended December 31, 2001.

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 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:

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 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 for the year ended December 31, 2001.

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 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, the Predecessor recognized approximately $4.4 million 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. The Predecessor evaluates performance based on earnings
from operations of the respective businesses.

116

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 loss from operations of reportable segments
to total loss from operations and identifies the components of "Other" segment
loss 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.

117

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 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:

118

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:

119

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

None.

ITEM 9A. 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. As of January 3, 2004, 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.

There have not been any changes in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated by
the SEC under the Securities Exchange Act of 1934) during the Company's most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain 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, committees
of the Board, and procedures by which stockholders may recommend nominees to the
Board required by this Item, as well as additional information regarding
executive officers and specified information regarding beneficial owners of more
than 10% of any class of the Company's registered equity securities required by
this Item, is incorporated herein by reference to the information provided under
the captions "Proposal No. 1 -- Election of Directors -- Information Regarding
Director Nominees", "The Board, Committees of the Board and Director
Compensation -- Corporate Governance," "The Board, Committees of the Board and
Director Compensation -- Determinations Regarding Director Independence and
Audit Committee Financial Expert," "The Board, Committees of the Board and
Director Compensation -- Board and Committee Meetings and Committees of the
Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" of
Alderwoods Group's Proxy Statement to be filed with the SEC and delivered to
stockholders in connection with Alderwoods Group's annual meeting of
stockholders to be held on May 4, 2004 (the "Proxy Statement").

The Company has adopted a code of ethics that applies to all employees,
including its Chief Executive Officer (principal executive officer) and Chief
Financial Officer (principal financial officer and principal accounting
officer). The Company's Code of Busines Conduct and Ethics is posted on, and is
available, free of charge through, the Company's web site
(http://www.alderwoods.com) in the Corporate Govenance section of the Investor
Relations page. Copies of the code are also available free of charge upon
written request to the Company's Secretary at 311 Elm Street, Suite 1000,
Cincinnati, Ohio 45202-2706.

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," "The Board, Committees of the Board and Director

120

Compensation -- Director Compensation and Other Payments" and "Compensation
Committee Interlocks and Insider Participation" of Alderwoods Group, Inc.'s
Proxy Statement.

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

In accordance with General Instruction G(3), the information regarding
security ownership of certain beneficial owners and management 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.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes the total number of shares of Common Stock
authorized for issuance at January 3, 2004, under the Company's 2002 Equity and
Performance Incentive Plan implemented on January 2, 2002, and the Company's
Director Compensation Plan implemented on January 2, 2002.

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

(1) Includes 70,433 shares under the Director Compensation Plan where each
director of the Company who is not an employee of the Company or any of its
subsidiaries has the option of receiving his or her annual base retainer and
attendance fees in cash, Common Stock or a combination thereof.

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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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 "Principal Auditor Fees" of Alderwoods Group, Inc.'s Proxy
Statement.

121

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 FINANCIAL STATEMENTS

Report of Independent Accountants

Consolidated Balance Sheets as of January 3, 2004 and December 28,
2002

Consolidated Statements of Operations for the 53 Weeks Ended
January 3, 2004 and 52 Weeks Ended December 28, 2002

Consolidated Statements of Stockholders' Equity for the 53 Weeks
Ended January 3, 2004 and 52 Weeks Ended December 28, 2002

Consolidated Statements of Cash Flows for the 53 Weeks Ended
January 3, 2004 and 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 Statement of Operations for the Year Ended December 31,
2001

Consolidated Statement of Stockholders' Equity for the Year Ended
December 31, 2001

Consolidated Statement of Cash Flows for the Year Ended December 31,
2001

Notes to Consolidated Financial Statements

FINANCIAL STATEMENT SCHEDULE

Schedule II -- Valuation and Qualifying Accounts

122

EXHIBITS

123

124

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

* 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 furnished by Alderwoods Group
during the last quarter of fiscal 2003:

125

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALDERWOODS GROUP, INC. AND PREDECESSOR(5)
JANUARY 3, 2004
(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) The balance at the beginning of the period has been adjusted for the
reclassification of discontinued operations.

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

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

126

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 16, 2004 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 16, 2004
Paul A. Houston (Principal Executive
Officer)

Executive Vice
President, Chief
/s/ KENNETH A. SLOAN Financial Officer
------------------------------------------- (Principal Financial Dated: March 16, 2004
Kenneth A. Sloan Officer and Principal
Accounting Officer)

/s/ LLOYD E. CAMPBELL
------------------------------------------- Director Dated: March 16, 2004
Lloyd E. Campbell

/s/ ANTHONY G. EAMES
------------------------------------------- Director Dated: March 16, 2004
Anthony G. Eames

/s/ CHARLES M. ELSON
------------------------------------------- Director Dated: March 16, 2004
Charles M. Elson

127

/s/ DAVID R. HILTY
------------------------------------------- Director Dated: March 16, 2004
David R. Hilty

/s/ OLIVIA KIRTLEY
------------------------------------------- Director Dated: March 16, 2004
Olivia Kirtley

/s/ JOHN S. LACEY
------------------------------------------- Chairman of the Board Dated: March 16, 2004
John S. Lacey

/s/ WILLIAM R. RIEDL
------------------------------------------- Director Dated: March 16, 2004
William R. Riedl

/s/ W. MACDONALD SNOW, JR.
------------------------------------------- Director Dated: March 16, 2004
W. MacDonald Snow, Jr.

128

EXHIBIT 31.1

CERTIFICATION

I, Paul A. Houston, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being
prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.

Dated: March 16, 2004 /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)

129

EXHIBIT 31.2

CERTIFICATION

I, Kenneth A. Sloan, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being
prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.

Dated: March 16, 2004 /s/ KENNETH A. SLOAN
-----------------------------------------
Kenneth A. Sloan
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
CHIEF ACCOUNTING OFFICER)

130

INDEX TO EXHIBITS

131

132

133