ALDERWOODS GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 12 weeks (fiscal quarter) ended March 27, 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

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

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

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

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

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

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APPLICABLE ONLY TO CORPORATE ISSUERS

At April 24, 2004, there were 39,995,522 shares of Common Stock outstanding.

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ALDERWOODS GROUP, INC.

i

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

EXPRESSED IN THOUSANDS OF DOLLARS
EXCEPT NUMBER OF SHARES

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

2

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

EXPRESSED IN THOUSANDS OF DOLLARS EXCEPT NUMBER OF SHARES

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

3

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

EXPRESSED IN THOUSANDS OF DOLLARS

SEE ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

4

ALDERWOODS GROUP, INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1. NATURE OF OPERATIONS

Alderwoods Group, Inc., a Delaware corporation ("Alderwoods Group" and
together with its subsidiaries unless the context otherwise requires, the
"Company") is the second-largest operator of funeral homes and cemeteries in
North America. As at March 27, 2004, the Company operated 721 funeral homes and
138 cemeteries and 61 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The interim 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, and non-controlling interests in
funeral, cemetery and perpetual care trusts.

All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements. The interim consolidated financial
statements have been prepared using the U.S. dollar and are presented in
accordance with United States generally accepted accounting principles ("GAAP").

The interim consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which in management's opinion
are necessary for a fair presentation of the financial results as of March 27,
2004 and for the 12 weeks ended March 27, 2004. Except for the new accounting
policy described under "Accounting change" and matters discussed under
"Comparability" below, the interim consolidated financial statements have been
prepared on a basis consistent with the accounting policies described in the
Company's Annual Report on Form 10-K for the 53 weeks ended January 3, 2004, as
filed with the U.S. Securities and Exchange Commission ("SEC") and should be
read in conjunction therewith.

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

5

ALDERWOODS GROUP, INC.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

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

STOCK OPTION PLAN

The Financial Accounting Standards Board's ("FASB") 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 12 weeks ended March 27, 2004, or the
12 weeks ended March 22, 2003, 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.

6

ALDERWOODS GROUP, INC.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPARABILITY

Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current year, including, among other things, the
identification of assets held for sale as discontinued operations, and
reclassification of amounts receivable from third-party insurance companies
offset by an equal amount of deferred pre-need funeral contract revenue.

ACCOUNTING CHANGE

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which was revised in December 2003
("FIN No. 46R"). FIN No. 46R clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to enterprises that have a
variable interest in variable interest entities, and is effective no later than
the end of the first reporting period that ends after March 15, 2004.

The Company elected to adopt FIN No. 46R at the beginning of its 2004 fiscal
year on January 4, 2004. The adoption of FIN No. 46R resulted in the
consolidation of the funeral and cemetery merchandise and service, and perpetual
care trusts in the Company's consolidated balance sheet, but did not change the
legal relationships among the funeral trusts, cemetery trusts, perpetual care
trusts, the Company, and its holders of pre-need contracts. The adoption of
FIN No. 46R has not materially impacted the Company's net income or its
consolidated statement of cash flows, however other impacts include:

(a) Funeral and cemetery merchandise and service trusts

Beginning January 4, 2004, the Company records the assets in the funeral
and cemetery merchandise and service trusts as trust investments at their
fair value in accordance with the FASB's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("FAS No. 115").

The liabilities of the trust consist principally of the trusted portion
of the Company's obligation to the pre-need contract holders, which is
reflected as non-controlling interest in the trusts.

Beginning January 4, 2004, realized earnings from funeral and cemetery
merchandise and service trust investments and related expenses of the
trusts are recognized in other expense (income). In addition, the
accretion of the non-controlling interest in the trusts is included as
interest expense in other expense (income). Unrealized gains and losses
of funeral and cemetery merchandise and service trust investments are
recorded in both trust investments and, net of tax, in non-controlling
interest in funeral and cemetery trusts in the Company's consolidated
balance sheet.

(b) Perpetual care trusts

Beginning January 4, 2004, the Company records the assets in the
perpetual care trusts as trust investments at their fair value in
accordance with the FAS No. 115.

The principal in perpetual care trusts is required to be held in
perpetuity and is not redeemable by the Company or the customer.
Accordingly, the equity interest in the perpetual care trusts is
presented as a non-controlling interest in perpetual care trusts between
liabilities and stockholders' equity in the Company's consolidated
balance sheet.

7

ALDERWOODS GROUP, INC.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized earnings from cemetery perpetual care trust investments are
recognized in other expense (income) in accordance with FAS No. 115.
Accretion expense on the non-controlling interest in perpetual care
trusts is also recorded in other expense (income). To the extent of
qualifying cemetery maintenance costs, distributable earnings from the
perpetual care trusts are recognized in cemetery revenue. Beginning
January 4, 2004, unrealized gains and losses of perpetual care trust
investments are recorded in both cemetery perpetual care trust
investments and, net of tax, in non-controlling interest in perpetual
care trusts in the Company's consolidated balance sheet. Generally, net
capital gains of cemetery perpetual care trust investments are not
eligible for distribution to the Company.

As a result of the consolidation of the funeral and cemetery merchandise and
service trusts, and perpetual care trusts, the Company recorded the following as
at January 4, 2004:

Creditors of the consolidated trusts have no recourse to the general credit
of the Company, except as provided under contracts executed by the Company or
its subsidiaries.

NOTE 3. PRE-NEED FUNERAL RECEIVABLES AND TRUST RECEIVABLES

The balance in pre-need funeral receivables and trust investments represents
customer receivables and funeral trust investments related to unperformed,
price-guaranteed, pre-need funeral contracts. The

8

ALDERWOODS GROUP, INC.

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

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

NOTE 3. PRE-NEED FUNERAL RECEIVABLES AND TRUST RECEIVABLES (CONTINUED)
components of pre-need funeral receivables and trust investments in the
consolidated balance sheets are as follows:

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

Amounts receivable from funeral trusts represent 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 as at January 3, 2004.

At March 27, 2004, the fair value of funeral trust investments classified as
available-for-sale securities was based on quoted market prices. The carrying
values of restricted cash and equivalents, and other investments approximate
their fair values, due to their short-term to maturity. Funeral trust
investments are evaluated for other-than-temporary impairment.
Other-than-temporary impairment is required to be reflected in current earnings
as a realized loss. It is possible that changes in interest rates, equity prices
and other economic conditions in the near term could result in
other-than-temporary impairment that could be significant to the Company.

At January 4, 2004, the Company adopted FIN No. 46R. The transitional
provisions do not require restatement of previously issued financial statements.
Accordingly, the table below shows funeral trust investments at their fair
values.

Beginning January 4, 2004, earnings from the funeral trust investments,
including realized gains and losses are recorded in other expense (income).

9

ALDERWOODS GROUP, INC.

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

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

NOTE 3. PRE-NEED FUNERAL RECEIVABLES AND TRUST RECEIVABLES (CONTINUED)
During the 12 weeks ended March 27, 2004, funeral trust available-for-sale
securities with a cost of $4,862,000 were sold for proceeds of $5,009,000,
resulting in $165,000 and $18,000 of realized gains and losses, respectively.
The average cost method was used to determine the cost of funeral trust
available-for-sale securities disposed of.

Included in the fair value of funeral trust investments at March 27, 2004,
are $7,727,000 (January 3, 2004--$5,870,000) and $102,000 (January 3,
2004--$351,000) of unrealized gains and losses, respectively.

The Company has determined that unrealized losses in the funeral trust
investments are not other-than-temporary, as the unrealized losses were due to
temporary fluctuations in interest rates and equity prices. The Company
recommends to the trustee 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 within the investment parameters set by various state and provincial
regulators and with the assistance of independent professional financial
advisors. The policy emphasizes a conservative approach while maintaining
acceptable levels of income and capital appreciation. The Company's funeral
trust investment unrealized losses and their duration as at March 27, 2004, are
shown in the following table.

Maturities of fixed income securities are estimated as follows:

10

ALDERWOODS GROUP, INC.

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

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

NOTE 4. PRE-NEED CEMETERY RECEIVABLES AND TRUST INVESTMENTS

The components of pre-need cemetery receivables and trust investments in the
consolidated balance sheets are as follows:

Amounts receivable from cemetery trusts represent 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 as at January 3, 2004. The Company will recognize and
generally receive these amounts when the merchandise is delivered or service is
performed.

For pre-need cemetery contract sales, other than sales of pre-need cemetery
interment rights, which are recognized in accordance with the retail land sales
provisions of Statement of Financial Accounting Standards No. 66, "Accounting
for Sales of Real Estate," 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 funeral and cemetery revenue. For
customer receivables, an allowance is provided at the time of the pre-need
cemetery contract sale.

At March 27, 2004, the fair value of cemetery merchandise and service trust
investments classified as available-for-sale securities was based on quoted
market prices. The carrying values of restricted cash and equivalents, and other
investments approximate their fair values, due to their short-term to maturity.
Cemetery trust investments are evaluated for other-than-temporary impairment.
Other-than-temporary impairment is required to be reflected in current earnings
as a realized loss. It is possible that changes in interest rates, equity prices
and other economic conditions in the near term could result in other than
temporary impairment that could be significant to the Company.

At January 4, 2004, the Company adopted FIN No. 46R, the transitional
provisions of which do not require restatement of previously issued financial
statements. Accordingly, the table below shows cemetery merchandise and service
trust investments at their fair values.

11

ALDERWOODS GROUP, INC.

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

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

NOTE 4. PRE-NEED CEMETERY RECEIVABLES AND TRUST INVESTMENTS (CONTINUED)
Beginning January 4, 2004, earnings from the cemetery merchandise and
service trust investments, including realized gains and losses are recorded in
other expense (income).

During the 12 weeks ended March 27, 2004, cemetery merchandise and service
trust available-for-sale securities with a cost of $8,892,000 were sold for
proceeds of $9,185,000, resulting in $305,000 and $12,000 of realized gains and
losses, respectively. The average cost method was used to determine the cost of
cemetery trust available-for-sale securities disposed of.

Included in the fair value of cemetery merchandise and service trust
investments at March 27, 2004, are $12,081,000 (January 3, 2004--$8,550,000) and
$27,000 (January 3, 2004--$434,000) of unrealized gains and losses,
respectively.

The Company has determined that unrealized losses in the cemetery
merchandise and service trust investments are not other-than-temporary, as the
unrealized losses were due to temporary fluctuations in interest rates and
equity prices. The Company recommends to the trustee 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 within the investment parameters set by
various state and provincial regulators and with the assistance of independent
professional financial advisors. The policy emphasizes a conservative approach
while maintaining acceptable levels of income and capital appreciation. The
Company's cemetery merchandise and service trust investment unrealized losses
and their duration as at March 27, 2004, are shown in the following table.

Maturities of fixed income securities are estimated as follows:

NOTE 5. PERPETUAL CARE TRUSTS

A portion of the proceeds from cemetery sales for interment rights is
generally required by law to be paid into perpetual care trusts.

12

ALDERWOODS GROUP, INC.

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

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

NOTE 5. PERPETUAL CARE TRUSTS (CONTINUED)
At January 4, 2004, the Company adopted FIN No. 46R, which requires the
consolidation of perpetual care trusts. Previously, perpetual care trusts were
not consolidated, as the principal in these perpetual care trusts cannot be
withdrawn by the Company.

At March 27, 2004, the fair value of perpetual care trust investments
classified as available-for-sale securities were based on quoted market prices.
The carrying values of restricted cash and equivalents, and other investments
approximate their fair values, due to their short-term to maturity. Perpetual
care trust investments are evaluated for other-than-temporary impairment.
Other-than-temporary impairment is reflected as a reduction in perpetual care
trust investments with an offsetting reduction in non-controlling interest in
perpetual care trust. It is possible that changes in interest rates, equity
prices and other economic conditions in the near term could result in other than
temporary impairment that could be significant to the Company.

The transitional provisions of FIN No. 46R do not require restatement of
previously issued financial statements. Accordingly, the table below shows
perpetual care trust investments at their fair values at March 27, 2004, with no
comparative information.

Available-for-sale
Fixed income securities................................... $198,101
Equity securities......................................... 26,033
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Total available-for-sale.................................... 224,134
Restricted cash and equivalents............................. 12,771
Other....................................................... 693
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Perpetual care trust investments............................ $237,598
========

During the 12 weeks ended March 27, 2004, perpetual care trust
available-for-sale securities with a cost of $9,879,000 were sold for proceeds
of $10,035,000, resulting in $194,000 and $38,000 of realized gains and losses,
respectively. The average cost method was used to determine the cost of
perpetual care trust available-for-sale securities disposed of.

Included in the fair value of cemetery perpetual care trust investments at
March 27, 2004, are $5,046,000 and $490,000 of unrealized gains and losses,
respectively.

The Company has determined that unrealized losses in the perpetual care
trust investments are not other-than-temporary, as the unrealized losses were
due to temporary fluctuations in interest rates and equity prices. The Company
recommends to the trustee 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 within the investment parameters set by various state and provincial
regulators and with the assistance of independent professional financial
advisors. The policy emphasizes a conservative approach while maintaining
acceptable levels of income

13

ALDERWOODS GROUP, INC.

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

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

NOTE 5. PERPETUAL CARE TRUSTS (CONTINUED)
and capital appreciation. The Company's perpetual care trust investment
unrealized losses and their duration as at March 27, 2004, are shown in the
following table.

Maturities of fixed income securities are estimated as follows:

14

ALDERWOODS GROUP, INC.

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

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

NOTE 6. LONG-TERM DEBT

Long-term debt consists of the following:

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(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") to replace its previous credit facility entered into on
January 2, 2002. On January 23, 2004, the Company amended the Credit
Agreement to (i) permit the repayment of the 12.25% convertible subordinated
notes, due in 2012, (ii) permit the borrowing of 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 to repay the new subordinated bridge loan,
due in 2005 (the "Bridge Loan") entered into on January 23, 2004, and
(iii) reduce the applicable Term Loan B 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%. 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 an interest rate equal to either (i) a
base rate (4.00% at March 27, 2004), plus 2.00% (based upon the Company's
consolidated leverage ratio at March 27, 2004), or (ii) LIBOR (1.10% for the
three-month LIBOR at March 27, 2004), plus 3.00% (based upon the Company's
consolidated leverage ratio at March 27, 2004). 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, annual 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
March 27, 2004, the Company was in compliance with all covenants and was not
in breach of any provision of the Credit Agreement that would cause an event
of default to occur. The Credit Agreement is secured by specified real
property, and substantially all personal property of

15

ALDERWOODS GROUP, INC.

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

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
Alderwoods Group and specified subsidiaries. The expiry date of the Credit
Agreement is September 29, 2008.

As of March 27, 2004, the amount available under the Revolving Credit
Facility was $50,000,000, less $10,958,000 in outstanding letters of credit.

(b) The Company has the option to elect an interest rate equal to either (i) a
base rate (4.00% at March 27, 2004), plus 1.75%, or (ii) LIBOR (1.10% for
the three-month LIBOR at March 27, 2004), plus 2.75%. The weighted average
rate of interest was 3.96% at March 27, 2004. The Term Loan B is repayable
in quarterly installments (subject to reduction for optional prepayments) 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. The Company has prepaid the required quarterly installments
up to and including the second quarter of its 2005 fiscal year.

(c) The Bridge Loan expires on March 31, 2005, and carries an interest rate of,
at the Company's option, (i) base rate (4.00% at March 27, 2004), plus 3.50%
or (ii) LIBOR (1.10% for the three-month LIBOR at March 27, 2004), plus
4.50%. The weighted average rate of interest was 5.62% at March 27, 2004.
The Bridge Loan was used to fully redeem and terminate the 12.25%
Convertible subordinated notes, due in 2012.

(d) On January 2, 2002, the Company issued 12.25% Senior unsecured notes, due in
2009. Interest is payable semi-annually on March 15 and September 15. The
notes are redeemable on and after January 2, 2005, at the option of the
Company, in whole or in part, at a price equal to 106.25% of the stated
principal amount if redeemed from January 2, 2005 to January 1, 2006, at a
price equal to 103.125% of the stated principal amount if redeemed from
January 2, 2006 to January 1, 2007 and at a price equal to 100% of the
stated principal amount if redeemed on or after January 2, 2007, plus
accrued and unpaid interest to (but not including) the applicable
redemption date. On April 21, 2004, the Company repurchased the principal
amount of $9,248,000 at a premium of $1,110,000, plus accrued interest.

(e) On January 23, 2004, the Company terminated its obligations under the 12.25%
Convertible subordinated notes, due in 2012, which were fully redeemed, at
par, on February 23, 2004. As a result, an unamortized premium of $7,200,000
is included as a reduction of interest expense for the 12 weeks ended
March 27, 2004.

The Credit Agreement, the Bridge Loan and the 12.25% Senior unsecured notes
due in 2009, 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% 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, the Bridge Loan and the indenture governing the 12.25%
Senior unsecured notes due in 2009 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

16

ALDERWOODS GROUP, INC.

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

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

NOTE 6. LONG-TERM DEBT (CONTINUED)
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 invest in operating assets (or to enter into definitive
agreements for the reinvestment of such net proceeds that are consummated within
360 days following the receipt thereof) up to an additional $10,000,000 of such
net proceeds in any fiscal year, but no more than $35,000,000 in the aggregate
over the life of the Credit Agreement may be applied to make capital
expenditures. 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 the Company. In addition, covenants in the indenture
governing the 12.25% Senior unsecured notes due in 2009 restrict, and under
specified circumstances prohibit, the payment of dividends by the Company.

NOTE 7. 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.

17

ALDERWOODS GROUP, INC.

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

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

NOTE 8. CHANGES IN OTHER NON-CASH BALANCES

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

18

ALDERWOODS GROUP, INC.

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

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

NOTE 9. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

19

ALDERWOODS GROUP, INC.

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

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

NOTE 9. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)

NOTE 10. 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. There has been no change in the basis of this
segmentation, accounting policies of the segments, except for the accounting
change and reclassifications described in Note 2, or the basis of measurement of
segment profit or loss from that disclosed in the Company's Annual Report on
Form 10-K for the 53 weeks ended January 3, 2004, as filed with the SEC.

20

ALDERWOODS GROUP, INC.

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

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

NOTE 10. SEGMENT REPORTING (CONTINUED)
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.

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

NOTE 11. 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.

21

ALDERWOODS GROUP, INC.

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

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

NOTE 11. PROVISION FOR ASSET IMPAIRMENT (CONTINUED)
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 12 weeks ended March 27, 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 $612,000 for the
12 weeks ended March 27, 2004 (2003 -- $83,000).

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 12. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE

Over the previous two fiscal years, 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. The Company
believes this program is substantially complete. 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.

As at March 27, 2004, the Company had 60 funeral, 61 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 periods to reflect any comparative amounts on
a similar basis.

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.

22

ALDERWOODS GROUP, INC.

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

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

NOTE 12. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
The operating results of discontinued operations are summarized in the
following table.

23

ALDERWOODS GROUP, INC.

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

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

NOTE 12. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
Details of assets held for sale at March 27, 2004, are as follows:

24

ALDERWOODS GROUP, INC.

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

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

NOTE 12. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
Details of assets held for sale at January 3, 2004, are as follows:

NOTE 13. EARNINGS PER SHARE

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

For the 12 weeks ended March 27, 2004, 1,849,000 employee and director stock
options were dilutive to earnings and are included in the calculation of diluted
earnings per share. Employee and director stock options to purchase 2,400,000
shares of Common stock were not included in the computation of diluted earnings
per share, because they were anti-dilutive.

NOTE 14. SUBSEQUENT EVENT

On April 21, 2004, the Company repurchased the principal amount of
$9,248,000 of the 12.25% Senior unsecured notes, due in 2009, at a premium of
$1,110,000, plus accrued interest.

25

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

OVERVIEW

Alderwoods Group, Inc. ("Alderwoods Group" and, together with its
sudsidiaries unless the context otherwise requires, the "Company") is the second
largest operator of funeral homes and cemeteries in North America. As of
March 27, 2004, the Company operated 721 funeral homes, 138 cemeteries and
61 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.

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.

CRITICAL ACCOUNTING POLICIES

Accounting policies that the Company believes are both most important to the
portrayal of the Company's financial condition and results, and require
management's most difficult, subjective or complex judgments are described under
Item 7. "-- Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Alderwoods Group's Annual Report on Form 10-K for the
53 weeks ended January 3, 2004, as filed with the U.S. Securities and Exchange
Commission ("SEC").

BASIS OF PRESENTATION

The Company's accounting information contained in this Quarterly Report on
Form 10-Q is presented on the basis of United States generally accepted
accounting principles ("GAAP"). This discussion and analysis of financial
condition and results of operations of the Company are based upon and should be
read in conjunction with the Company's interim consolidated financial statements
included in Item 1 of this Quarterly Report on Form 10-Q (including the notes
thereto).

RESULTS OF OPERATIONS

Detailed below are the operating results of the Company for the 12 weeks
ended March 27, 2004, and the 12 weeks ended March 22, 2003. The 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 business operations the Company owned and operated both for the
entire current and prior fiscal quarters and that the Company plans to retain,
and those business operations that have been opened during either the current or
prior fiscal quarters and that the Company plans to retain. Discontinued
operations consist of those business operations that have been sold or closed
during either the current or prior fiscal quarters and the business operations
that are currently being offered for sale.

26

The operations of the Company comprise three business segments: funeral
homes, cemeteries and insurance. Additional segment information is provided in
Note 10 of the Company's interim consolidated financial statements included in
Item 1 of this Quarterly Report on Form 10-Q.

12 WEEKS ENDED MARCH 27, 2004 COMPARED TO 12 WEEKS ENDED MARCH 22, 2003

Other information for the 12 weeks ended March 27, 2004, and 12 weeks ended
March 22, 2003, is summarized in the following table.

27

CONTINUING OPERATIONS

As there have been no material acquisitions or construction of new locations
in 2004 and 2003, results from continuing operations reflect those of "same
site" locations.

Consolidated revenue of $179.2 million for the 12 weeks ended March 27,
2004, increased by $11.7 million, or 7.0%, compared to $167.5 million for the
corresponding period in 2003, primarily as a result of increases in all business
segment revenues. Consolidated gross margin as a percentage of revenue increased
to 19.4% for the 12 weeks ended March 27, 2004, from 19.0% for the corresponding
period in 2003. The percentage increase in gross margin is attributed to the
increases in all business segment gross margins.

Funeral revenue of $124.1 million for the 12 weeks ended March 27, 2004,
increased by $2.6 million, compared to $121.5 million for the corresponding
period in 2003, primarily as a result of an increase of $120, or 3.1%, in
average revenue per funeral service performed, and a 13.2% increase in cremation
revenue, partially offset by a decrease of 293, or 0.9%, in the number of
funeral services performed. The increase in average revenue per funeral service
performed was achieved through adjusting the pricing and mix of merchandise and
services offered to customers that were designed to both meet customers' needs
and increase revenues.

The number of cremation services performed as a percentage of total services
performed increased to 35% for the 12 weeks ended March 27, 2004, compared to
34% for the corresponding period in 2003. The Company believes that the increase
in cremation revenue and the number of cremation services performed are due to
the increasing customer preference for cremation services, as well as the
Company's efforts to offer customers a larger variety of cremation services and
products. 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 23.3%
for the 12 weeks ended March 27, 2004, compared to 23.2% for the corresponding
period in 2003. The slight increase in gross margin was primarily due to the
increase in funeral revenue and decrease in selling expenses, partially offset
by increases in cost of goods sold, benefits, insurance, wages, and facilities
costs. Due to the fixed nature of funeral costs over the short term, the Company
believes that the amount of funeral revenue can be increased without incurring
significantly higher funeral costs, which could favorably impact funeral gross
margins.

Pre-need funeral contracts written for the 12 weeks ended March 27, 2004,
were $40.9 million, compared to $39.3 million for the corresponding period in
2003. The Company is continuing its program to increase pre-need sales. For the
12 weeks ended March 27, 2004, 27% of funeral volume was derived from backlog,
compared to 26% for the corresponding period in 2003. 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 $36.7 million for the 12 weeks ended March 27, 2004, was
$3.0 million, or 8.8%, higher than cemetery revenue for the corresponding period
in 2003, primarily as a result of higher recognition of pre-need space and
merchandise revenue, and at-need space and merchandise sales at the higher end
of the product range.

Cemetery gross margin as a percentage of revenue increased to 13.7% for the
12 weeks ended March 27, 2004, compared to 9.1% for the corresponding period in
2003, primarily as a result of the increase in cemetery revenue being at a
higher rate than that of the cost increase. The Company's ongoing initiative to
improve operational efficiencies contributed to the containment of cost
increases.

28

Pre-need cemetery contracts written for the 12 weeks ended March 27, 2004,
were $18.2 million, $2.4 million higher than for the corresponding period in
2003. The increase in pre-need cemetery contracts written was primarily due to
the Company's continuing program to increase pre-need sales. For the 12 weeks
ended March 27, 2004, 67% of interments were at-need and 33% 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 commission 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 12 weeks ended March 27, 2004, increased
$6.1 million, or 49.7%, compared to the corresponding period in 2003, primarily
due to increases in premium and investment income. Insurance premiums are
dependent on insurance production, as increases in insurance production generate
increased insurance premiums over time. Insurance production, which represents
the insurance segment's participation in the Company's pre-need funeral
contracts for the 12 weeks ended March 27, 2004, was $24.1 million compared to
$16.2 million for corresponding period in 2003. Insurance gross margin as a
percentage of revenue increased slightly to 4.9% for the 12 weeks ended
March 27, 2004, compared to 4.8% for the corresponding period in 2003, 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 12 weeks ended March 27, 2004,
was $6.2 million, a decrease of $12.7 million compared to the corresponding
period in 2003, reflecting the effect of lower effective interest rates and debt
repayments made by the Company during 2002, 2003, and during the 12 weeks ended
March 27, 2004. In addition, an unamortized premium of $7.2 million was credited
to interest expense for the 12 weeks ended March 27, 2004, as a result of the
early retirement of the 12.25% Convertible subordinated notes, due in 2012. As a
result of the debt reduction and lower rates of interest on the Company's
remaining debt, the Company expects interest expense in 2004 to decline compared
to 2003.

General and administrative expenses for the Company for the 12 weeks ended
March 27, 2004, were $11.7 million, or 6.5% of consolidated revenue, compared to
$7.2 million, or 4.3% of consolidated revenue for the corresponding period in
2003. During the 12 weeks ended March 22, 2003, general and administrative
expenses were reduced by $5.0 million, as a result of a legal claim settlement.

Income tax expense for the 12 weeks ended March 27, 2004, was $6.0 million
compared to income tax benefit of $9.1 million for the corresponding period in
2003. The effective rate of tax was 34.6% for the 12 weeks ended March 27, 2004,
compared to the effective rate of benefit of 168.9% for the 12 weeks ended
March 22, 2003. For the 12 weeks ended March 27, 2004, the effective tax rate
varied from the statutory tax rate, as a result of the favorable settlement of
an income tax audit of $0.5 million and the impact of state and foreign income
taxes. For the 12 weeks ended March 22, 2003, the effective income tax rate
varied from the statutory rate, primarily because of a $9.7 million favorable
settlement of a federal income tax audit, and the effect of losses from
discontinued operations more than offsetting income from continuing operations.
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 March 27, 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.

29

Previously, the Company designated certain parcels of surplus real estate as
probable for sale, because these parcels do not meet the Company's future
geographic and strategic objectives. During the 12 weeks ended March 27, 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 recorded a long-lived asset impairment provision
of $0.6 million for the 12 weeks ended March 27, 2004. The Company recorded a
$1.1 million gain on sale on the disposition of surplus real estate for the 12
weeks ended March 27, 2004. As at March 27, 2004, the carrying value of real
estate held in continuing operations as probable for sale was $19.3 million.

At December 31, 2001, the Company had accrued $57.1 million of
reorganization costs related to costs incurred during the predecessor company's
reorganization, as well as costs incurred in connection with the actual
emergence and various related activities. As at March 27, 2004, the balance of
$12.8 million of reorganization costs, primarily consisting of accruals for a
trustee fee dispute and legal fee reimbursements, has been included in accounts
payable and accrued liabilities.

DISCONTINUED OPERATIONS

Over the previous two fiscal years, 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. The Company
believes that the identification of business operations for disposal is
substantially complete. The Company will now focus on selling the business
operations 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.

The Company continues to move forward with its divestiture program. During
the 12 weeks ended March 27, 2004, the Company reduced its estimated expected
proceeds on the assets held for sale based upon recently received bids. As a
result, the Company recorded a $13.0 million long-lived asset impairment
provision within discontinued operations for the 12 weeks ended
March 27, 2004.

As at March 27, 2004, the Company had 60 funeral, 61 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 periods to reflect any comparative amounts on
a similar basis.

During the 12 weeks ended March 27, 2004, the Company closed three funeral
locations and sold five funeral and 11 cemetery locations for gross proceeds of
$2.3 million.

COMPARABILITY OF BALANCE SHEET INFORMATION

The Company has reclassified amounts receivable from third-party insurance
receivables with an equal and offsetting amount of deferred pre-need funeral
contract revenue. Accordingly, set forth below is the effect of this
reclassification on total assets for the Company as of January 3, 2004,
December 28, 2002,

30

and December 31, 2001. The predecessor company did not include amounts
receivable from third-party insurance companies in its consolidated balance
sheets.

PRE-NEED FUNERAL AND CEMETERY BACKLOG FOR CONTINUING OPERATIONS

The Company's backlog represents pre-need funeral and cemetery arrangements
with customers. These arrangements are subject to trust or insurance funding
requirements. The activities in the Company's funeral backlog, excluding the
effects of unrealized gains and losses on trust investments, were as follows:

The activities in the Company's cemetery backlog, excluding the effects of
unrealized gains and losses on trust investments, were as follows:

31

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" in Alderwoods Group's Annual Report on Form 10-K
for the 53 weeks ended January 3, 2004, as filed with the SEC, and Notes 3 and 4
to the Company's interim consolidated financial statements included in Item 1.
of this Quarterly Report on Form 10-Q.

Net cash from operating activities was $5.1 million for the 12 weeks ended
March 27, 2004, compared to $23.0 million for the corresponding period in 2003.
The decrease is primarily due to the decrease of $8.0 million in withdrawals of
excess funds from funeral and cemetery trusts. The initiative to withdraw excess
trust funds was substantially completed in 2003, and the Company does not expect
further excess trust funds to be significant. In addition, for the 12 weeks
ended March 22, 2003, there was a $7.5 million cash receipt of a legal claim
settlement.

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 12 weeks ended March 27, 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 $1.7 million for the 12 weeks
ended March 27, 2004, compared to $4.4 million for the corresponding period in
2003. There was an increase in the net purchase of insurance invested assets,
which consist of fixed income investments. Proceeds on disposition of assets and
investments, primarily consisting of surplus real estate, increased by
$7.2 million for the 12 weeks ended March 27, 2004, compared to the
corresponding period in 2003. 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 $9.3 million for the 12 weeks
ended March 27, 2004, compared to $11.3 million for the corresponding period in
2003. The decrease was primarily due to the higher net repayment of debt during
the corresponding period in 2003.

The net decrease in cash from discontinued operations was $0.3 million for
the 12 weeks ended March 27, 2004, due to cash from operations of $0.7 million,
offset by cash used by investing activities of $0.8 million, and cash used by
financing activities of $0.1 million. The Company expects net proceeds of
approximately $85.0 million from the sale of its discontinued operations during
2004, the majority of which it expects to use to reduce debt.

As of March 27, 2004, the Company's cash balance was $35.4 million and the
amount available under the Credit Agreement's $50.0 million revolving credit
facility was $50.0 million, less $11.0 million in outstanding letters of credit.
The Company's debt repayment obligation over the next 12 months is
$11.8 million and aggregates $612.8 million over the next five years. The
Company believes that the Revolving Credit Facility (as defined below), 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.

32

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 a $50.0 million revolving credit facility (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 January 23, 2004, the Company
amended the Credit Agreement to permit (i) the repayment of the 12.25%
Convertible subordinated notes, due in 2012, (ii) the borrowing of up to
$25.0 million of additional term loans to redeem a portion of the Company's
12.25% Senior unsecured notes, due in 2009, or to repay the new subordinated
bridge loan, due in 2005 (the "Bridge Loan") entered into on January 23,
2004, and (iii) reduce the applicable Term Loan B 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%. The Company repaid $4.0 million of the Term Loan B
during the 12 weeks ended March 27, 2004.

(b) The Bridge Loan was used to fully redeem all outstanding principal amounts
and accrued interest under the 12.25% Convertible subordinated notes due in
2012.

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

On April 21, 2004, the Company repurchased the principal amount of
$9.2 million of the 12.25% Senior unsecured notes, due in 2009, at a premium of
$1.1 million, plus accrued interest.

The Credit Agreement, the Bridge Loan, and the 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.

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 March 27, 2004, the Company met
all of the financial covenants required by the Credit Agreement.

33

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table details the Company's contractual obligations of
continuing and discontinued operations as of March 27, 2004. Significant changes
to long-term debt are discussed above under "Long-Term Indebtedness."

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

(a) See Note 6 to the Company's interim consolidated financial statements
included in Item 1 of this Quarterly Report on Form 10-Q.

(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 28 years.

(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
March 27, 2004, the Company leased approximately 1,240 vehicles under a master
operating lease agreement, which has a minimum lease term of 12 months. The
Company's practice is to continue these leases on a month-to-month basis after
the expiry of the minimum lease term. Lease payments for these vehicles are
projected to be $7.8 million over the next 12 months.

The Company issues purchase orders for the supply of goods and services for
its operations. As at March 27, 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.

The following table details the Company's commercial commitments as of
March 27, 2004.

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

(a) Relates to the Revolving Credit Facility described more fully in Note 6
to the Company's interim consolidated financial statements included in
Item 1 of this Quarterly Report on Form 10-Q. The expiry date of the
Revolving Credit Facility is September 29, 2008.

34

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

At March 27, 2004, the aggregate fair value of the Company's forward foreign
currency exchange contracts and foreign currency option contracts was an asset
of $0.2 million. There has been no material change in the Company's forward
foreign currency exchange contract and foreign currency option commitments,
which are described under Item 7A. "-- Quantitative and Qualitative Disclosures
About Market Risk" in the Company's Annual Report on Form 10-K for the 53 weeks
ended January 3, 2004, as filed with the SEC.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements as of March 27, 2004, consist of operating
leases noted above under "Contractual Obligations and Commercial Commitments."

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

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 invest in operating assets (or to enter into definitive agreements
for the reinvestment of such net proceeds that are consummated within 360 days
following the receipt thereof) up to an additional $10.0 million of such net
proceeds in any fiscal year, but no more than $35.0 million in the aggregate
over the life of the Credit Agreement may be applied to make capital
expenditures. To the extent the Company receives net proceeds from any such
asset sale not applied in accordance with the immediately preceding

35

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 cash flow from
operations of the insurance subsidiaries for the 12 weeks ended March 27, 2004,
was approximately $11.3 million, all of which has been reinvested in the
insurance business.

36

CONTINUING AND DISCONTINUED LOCATIONS

The Company's number of continuing and discontinued locations by country,
state and province as at March 27, 2004, is summarized in the table below.

37

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the Company's exposure to certain market risks,
see Item 7A. "-- Quantitative and Qualitative Disclosures About Market Risk" in
the Company's Annual Report on Form 10-K for the 53 weeks ended January 3, 2004,
as filed with the SEC. As of March 27, 2004, there were no material changes in
such matters disclosed in the Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. As of March 27, 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.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q,
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
Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, the
following important factors, among others, could cause future results to differ
materially from estimates, predictions or projections.

FUTURE REVENUES ARE UNCERTAIN

1. VOLUME, MIX AND MARGINS ARE UNCERTAIN. Revenue is significantly
affected by the volume of services rendered and the mix and pricing of services
and products sold. Cemetery revenues are also significantly affected by the
fulfillment of previously sold pre-need cemetery contracts and the writing of

38

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. Similarly, funeral
and cemetery revenues are impacted by trust income on funeral and cemetery
merchandise and service trust funds. 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.

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

39

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 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

40

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 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.

41

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding the Company's legal proceedings, see Note 7
to the Company's interim consolidated financial statements included in Part I of
this Quarterly Report on Form 10-Q, which Note 7 is incorporated herein by
reference.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

In accordance with 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"), the Company issued in respect of holders
of certain unsecured claims 5,977 shares of Common Stock on January 30, 2004.

Section 1145(a)(1) of Chapter 11 of title 11 of the United States Code (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 pre-petition 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. Alderwoods Group believes that the offer and sale of the Common
Stock under the Plan satisfies 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.

42

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

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

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.

(B) REPORTS ON FORM 8-K

The following Current Report on Form 8-K was furnished by Alderwoods Group
during the first quarter of fiscal 2004:

45

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/ KENNETH A. SLOAN
-----------------------------------------
Kenneth A. Sloan
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
Dated: May 10, 2004 PRINCIPAL ACCOUNTING OFFICER)

46

INDEX TO EXHIBITS

49

EXHIBIT 31.1

CERTIFICATION

I, Paul A. Houston, certify that:

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

2. Based on my knowledge, this 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: May 10, 2004 /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)

50

EXHIBIT 31.2

CERTIFICATION

I, Kenneth A. Sloan, certify that:

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

2. Based on my knowledge, this 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: May 10, 2004 /s/ KENNETH A. SLOAN
-----------------------------------------
Kenneth A. Sloan
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)