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 June 19, 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 July 17, 2004, there were 40,001,069 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 based on total revenue and number of locations. As at June 19,
2004, the Company operated 716 funeral homes and 130 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, and mausoleum crypts), 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 consolidated financial statements include the accounts of the
Company, its subsidiary companies and operations controlled by the Company
through sales and management agreements. All subsidiaries are wholly owned,
except for a few companies with small minority interests. The interim
consolidated financial statements also include the accounts of the funeral
trusts, cemetery merchandise and service trusts and perpetual care trusts in
which the Company has a variable interest and is the primary beneficiary.

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 June 19,
2004, and for the 12 and 24 weeks ended June 19, 2004, and June 14, 2003. 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, expenses, and cash
flows 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 and 24 weeks ended June 19, 2004, or
the 12 and 24 weeks ended June 14, 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 Company does not
consolidate certain funeral trusts for which the Company does not absorb a
majority of their expected losses and, therefore, is not considered a primary
beneficiary of these funeral trusts under FIN No. 46R. 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 in which the Company is the
primary beneficiary 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 FAS No. 115.

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)
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.

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 on 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.

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 INVESTMENTS

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 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.

Certain of the funeral trusts have not been consolidated, because the
Company is not the primary beneficiary. Accordingly, they are reported as
amounts receivable from funeral trusts. 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. The Company will
recognize and generally receive these amounts when the merchandise is delivered
or service is performed.

At June 19, 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.

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

During the 12 weeks ended June 19, 2004, funeral trust available-for-sale
securities with a cost of $5,052,000 were sold for proceeds of $5,543,000,
resulting in $659,000 and $168,000 of realized gains and losses, respectively.
During the 24 weeks ended June 19, 2004, funeral trust available-for-sale
securities with a cost of $9,914,000 were sold for proceeds of $10,552,000,
resulting in $824,000 and $186,000 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 June 19, 2004,
are $3,932,000 (January 3, 2004--$5,870,000) and $716,000 (January 3,
2004--$351,000) of unrealized gains and losses, respectively.

The Company generally 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 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 capital preservation
approach while maintaining acceptable levels of income and capital appreciation.

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's
funeral trust investment unrealized losses and their duration as at June 19,
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 June 19, 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, realized investment 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 June 19, 2004, cemetery merchandise and service
trust available-for-sale securities with a cost of $17,972,000 were sold for
proceeds of $17,961,000, resulting in $384,000 and $395,000 of realized gains
and losses, respectively. During the 24 weeks ended June 19, 2004, cemetery
merchandise and service trust available-for-sale securities with a cost of
$26,864,000 were sold for proceeds of $27,146,000, resulting in $689,000 and
$407,000 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 June 19, 2004, are $5,035,000 (January 3, 2004--$8,550,000) and
$1,130,000 (January 3, 2004--$434,000) of unrealized gains and losses,
respectively.

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 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 capital preservation approach while
maintaining acceptable levels of income and capital appreciation.

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's cemetery merchandise and service trust investment
unrealized losses and their duration as at June 19, 2004, are shown in the
following table.

Maturities of fixed income securities are estimated as follows:

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. CEMETERY PERPETUAL CARE TRUST INVESTMENTS

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

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 June 19, 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 June 19, 2004, with no
comparative information.

Available-for-sale
Fixed income securities................................... $191,797
Equity securities......................................... 26,218
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Total available-for-sale.................................... 218,015
Restricted cash and equivalents............................. 14,886
Other....................................................... 704
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Perpetual care trust investments............................ $233,605
========

During the 12 weeks ended June 19, 2004, perpetual care trust
available-for-sale securities with a cost of $14,739,000 were sold for proceeds
of $14,767,000, resulting in $149,000 and $121,000 of realized gains and losses,
respectively. During the 24 weeks ended June 19, 2004, perpetual care trust
available-for-sale securities with a cost of $24,618,000 were sold for proceeds
of $24,802,000, resulting in $343,000 and $159,000 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
June 19, 2004, are $1,265,000 and $4,085,000 of unrealized gains and losses,
respectively.

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 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 capital preservation approach while
maintaining acceptable levels of income and capital appreciation.

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

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. CEMETERY PERPETUAL CARE TRUST INVESTMENTS (CONTINUED)
equity prices. The Company's perpetual care trust investment unrealized losses
and their duration as at June 19, 2004, are shown in the following table.

Maturities of fixed income securities are estimated as follows:

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. 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

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 (CONTINUED)
Company's 12.25% Senior unsecured notes, due in 2009 (the "Seven-Year
Unsecured Notes"), 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 June 19, 2004), plus 2.00% (based upon the Company's
consolidated leverage ratio at June 19, 2004), or (ii) LIBOR (1.53% for the
three-month LIBOR at June 19, 2004), plus 3.00% (based upon the Company's
consolidated leverage ratio at June 19, 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
June 19, 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 Alderwoods Group and
specified subsidiaries. The expiry date of the Credit Agreement is
September 29, 2008.

As of June 19, 2004, the amount available under the Revolving Credit
Facility was $50,000,000, less $11,147,000 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 June 19, 2004), plus 1.75%, or (ii) LIBOR (1.53% for the
three-month LIBOR at June 19, 2004), plus 2.75%. The weighted average rate
of interest was 4.02% at June 19, 2004. The Term Loan B is repayable in
quarterly principal 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 principal 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 June 19, 2004), plus 3.50%
or (ii) LIBOR (1.53% for three-month LIBOR at June 19, 2004), plus 4.50%.
The weighted average rate of interest was 5.63% at June 19, 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 the Seven-Year Unsecured Notes.
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

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)
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. The premium is included in interest
expense for the 24 weeks ended June 19, 2004.

(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 24 weeks ended
June 19, 2004.

The Credit Agreement, the Bridge Loan and the Seven-Year Unsecured Notes 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 Seven-Year Unsecured Notes at a price
equal to 101% of their stated principal amount, plus accrued and unpaid interest
to the applicable repurchase date.

The Credit Agreement, the agreement governing the Bridge Loan, and the
indenture governing the Seven-Year Unsecured Notes restrict the Company's
ability to engage in asset sales. The Credit Agreement and the agreement
governing the Bridge Loan prohibit dispositions of assets unless the assets
disposed of fulfill the requirements of specified exceptions. One such specified
exception is dispositions of any of a group of identified "discontinued assets;"
another is dispositions of assets not exceeding $35,000,000 book value in the
aggregate over the life of the Credit Agreement, provided that (i) the
consideration received is at least equal to fair market value and (ii) not less
than 75% of the consideration 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 enter into agreements for such
investment which agreements are consummated within 360 days of such receipt of
asset sale proceeds). In addition, up to $10,000,000 of such net proceeds in any
fiscal year (but not in excess of $35,000,000 in the aggregate over the term of
the Credit Agreement) may be applied to make capital expenditures. To the extent
the Company receives net proceeds in excess of additional specified thresholds
and such excess is not applied to invest in operating assets or make capital
expenditures as described in the two immediately preceding sentences, the
Company must make mandatory repayments under the Credit Agreement.

Covenants in the Credit Agreement and the agreement governing 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 Seven-Year Unsecured Notes 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.

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 8. CHANGES IN OTHER NON-CASH BALANCES

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

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 9. SUPPLEMENTARY FINANCIAL INFORMATION

A summary of certain balance sheet accounts is as follows:

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 (CONTINUED)

The trust investment and non-controlling interest balances do not have
comparable 2003 balances due to the Company adopting FIN No. 46R at the
beginning of its 2004 fiscal year on January 4, 2004.

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.

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.

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 10. SEGMENT REPORTING (CONTINUED)

The following table reconciles earnings from operations of reportable
segments to total earnings from operations 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.

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 of these surplus parcels of real estate
exceeded their fair market value, less estimated costs to sell. During the
12 weeks ended

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 11. PROVISION FOR ASSET IMPAIRMENT (CONTINUED)
June 19, 2004, the Company removed certain locations from discontinued
operations because they were no longer going to be sold, or were going to be
sold for higher proceeds as real estate. As a result, the Company reversed
$2,013,000 of long-lived asset impairment provision previously recognized in
discontinued operations (2003 -- provision for asset impairment of $3,493,000).
The Company has recorded a net long-lived asset impairment provision of $278,000
for the 24 weeks ended June 19, 2004 (2003 -- $3,576,000).

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.

During the 12 weeks ended June 14, 2003, the Company identified Security
Plan Life Insurance Company as a non-strategic asset, because it was not part of
the Company's pre-need funeral sales efforts. On June 17, 2004, the Company
announced the signing of an agreement by its subsidiary Mayflower National Life
Insurance Company to sell all the outstanding shares of Security Plan Life
Insurance Company for $85,000,000 to Citizens Insurance Company of America. This
transaction is conditional upon the parties having obtained all necessary
approvals and consents from the applicable regulatory authorities. The Company
currently expects the transaction to be concluded in October 2004. After payment
of applicable taxes and expenses, and recapitalization of Mayflower National
Life Insurance Company, the Company expects to realize net proceeds of
approximately $50,000,000, which it expects will be used to further reduce
long-term debt. On closing, the Company is expected to record a pre-tax gain on
the sale of approximately $17,000,000.

As at June 19, 2004, the Company had 59 funeral, 53 cemetery and four
combination locations for disposal.

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. All discontinued operations financial information presented
under the insurance segment relate to Security Plan Life Insurance Company.

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. Depreciation and amortization is not recorded once an asset has
been identified as held for sale. The fair market value was determined by
specific offer or bid, or an estimate based on comparable recent sales

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 12. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE (CONTINUED)
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.

The operating results of discontinued operations are summarized in the
following table.

Details of assets held for sale at June 19, 2004, are as follows:

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 non-controlling interest in perpetual care trusts of $260,482,000
included in the Company's consolidated balance sheet includes $26,709,000, which
represents the non-controlling interest in perpetual care trusts for
discontinued operations of assets held for sale.

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 (loss)
were as follows:

For the 12 and 24 weeks ended June 19, 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.

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 14. SUBSEQUENT EVENT

OPTIONAL REPAYMENT OF LONG-TERM DEBT

On June 29, 2004, and July 1, 2004, the Company optionally prepaid an
aggregate principal amount of $15,000,000 of the Term Loan B from cash on hand.

TENDER OFFER AND CONSENT SOLICITATION

On July 22, 2004, the Company commenced a cash tender offer (the "Tender
Offer") and consent solicitation for any and all of its $320,752,000 outstanding
principal amount of Seven-Year Unsecured Notes.

The total consideration to be paid for each $1,000 principal amount of the
Seven-Year Unsecured Notes validly tendered in the offer will be based on a
fixed spread of 50 basis points over the yield to maturity on the price
determination date of the 1.75% U.S. Treasury Note due December 31, 2004, and
accrued and unpaid interest up to, but not including, the date of payment for
the Seven-Year Unsecured Notes will also be paid. The price determination date
will be August 5, 2004, unless the Company extends the expiration time of the
Tender Offer prior to August 5, 2004, or after August 5, 2004 by more than
three business days, in which case the new price determination date will be the
tenth business day immediately preceeding the expiration time as so extended but
no earlier than the first business day after public announcement of such
extension.

In connection with the Tender Offer, the Company is soliciting consents (the
"Consent Solicitation" and, together with the Tender Offer, the "Offer") to
certain proposed amendments to eliminate substantially all of the restrictive
covenants, as well as certain events of default, in the indenture governing the
Seven-Year Unsecured Notes. The Company is offering to make a consent payment
which is included in the total consideration described above of $30.00 per
$1,000 principal amount of Seven-Year Unsecured Notes to holders who validly
tender their Seven-Year Unsecured Notes and deliver their consents at or prior
to 5:00 p.m., New York City time, on August 4, 2004, unless extended
(the "Consent Payment Deadline"). Holders may not tender their Seven-Year
Unsecured Notes without delivering consents or deliver consents without
tendering their Seven-Year Unsecured Notes. The Tender Offer is scheduled to
expire on August 18, 2004, unless extended or earlier terminated. However, no
consent payments will be made in respect of Seven-Year Notes tendered after
5:00 p.m., New York City time on August 4, 2004. Tendered Seven-Year Unsecured
Notes may not be withdrawn and consents may not be revoked after the Consent
Payment Deadline.

The Offer is subject to the satisfaction of certain conditions, including
the receipt of financing and the receipt of consents of holders representing a
majority in principal amount of the Seven-Year Unsecured Notes. Any extension,
delay, termination or amendment of the Offer will be followed as promptly as
practicable by a public announcement thereof.

NEW SENIOR UNSECURED NOTES

The Company also announced on July 22, 2004, that it intends to offer up to
$200,000,000 aggregate principal amount of new senior unsecured notes, due in
2012 in a transaction exempt from the registration requirements of the
Securities Act of 1933 and that the Company is negotiating an amendment to the
Credit Agreement. The Company expects the amendment to the Credit Agreement to
(i) increase the principal amount of term loan borrowings under the facility by
$175,000,000, (ii) extend the term loan maturity and reduce the amortization
payments, (iii) increase availability under the revolving portion of

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 14. SUBSEQUENT EVENT (CONTINUED)
the Credit Agreement from $50,000,000 to $75,000,000 and (iv) provide greater
financial flexibility. The new senior unsecured notes to be offered have not
been registered under the Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable exemption from the
registration requirements. The new senior unsecured notes will rank equally with
any future unsecured indebtedness of the Company. The Company intends to use the
net proceeds of the proposed offering, together with cash on hand and additional
term loan borrowings pursuant to an amendment to the Credit Agreement, to
repurchase the Seven-Year Unsecured Notes, and to repay all amounts outstanding
under the Bridge Loan, and to pay related premiums, fees and expenses.

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 based on total
revenue and number of locations. As of June 19, 2004, the Company operated
716 funeral homes, 130 cemeteries and 61 combination funeral homes and
cemeteries throughout North America. As of June 14, 2003, the Company operated
753 funeral homes, 167 cemeteries and 61 combination funeral homes and
cemeteries throughout North America and 39 funeral homes in the United Kingdom.

The Company's funeral operations encompass making funeral and cremation
arrangements on an at-need or pre-need basis. The Company's funeral operations
offer a full range of funeral services, including the collection of remains,
registration of death, professional embalming, use of funeral home facilities,
sale of caskets and other merchandise and transportation to a place of worship,
funeral chapel, cemetery or crematorium. The Company's 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 and
24 weeks ended June 19, 2004 and June 14, 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 of fiscal 2004 and that the Company
plans to retain, and those business operations that have been opened during
either the current or prior fiscal quarters of fiscal 2004 and that the Company
plans to retain. Discontinued

26

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.

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 JUNE 19, 2004 COMPARED TO 12 WEEKS ENDED JUNE 14, 2003

Other information for the 12 weeks ended June 19, 2004, and 12 weeks ended
June 14, 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 $164.1 million for the 12 weeks ended June 19, 2004,
decreased by $2.4 million, or 1.5%, compared to $166.5 million for the
corresponding period in 2003, primarily as a result of decreases in the funeral
and cemetery revenues, which were partially offset by an increase in insurance
revenue. Consolidated gross margin as a percentage of revenue decreased to 17.5%
for the 12 weeks ended June 19, 2004, from 19.8% for the corresponding period in
2003.

Funeral revenue of $108.1 million for the 12 weeks ended June 19, 2004,
decreased by $3.2 million, compared to $111.3 million for the corresponding
period in 2003, primarily as a result of a decrease of 1,302, or 4.6%, in the
number of funeral services performed, partially offset by an increase of $71, or
1.8%, in average revenue per funeral service performed. The increase in average
revenue per funeral service performed was achieved through adjusting the pricing
and mix of merchandise and services offered to customer families that were
designed both to meet customer family needs and to increase revenues.

The number of cremation services performed as a percentage of total services
performed increased to 35% for the 12 weeks ended June 19, 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 customer families 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 a traditional funeral service.

Funeral gross margin as a percentage of revenue decreased to 21.2% for the
12 weeks ended June 19, 2004, compared to 22.0% for the corresponding period in
2003. The decrease in gross margin was primarily due to the decrease in funeral
revenue, partially offset by decreases in benefits, operating and selling
expenses. Due to the fixed nature of funeral costs over the short term, the
Company believes that decreases in funeral revenue will not result in a
corresponding decrease in funeral costs, which negatively impacts funeral gross
margins.

Pre-need funeral contracts written for the 12 weeks ended June 19, 2004,
were $44.8 million, compared to $36.2 million for the corresponding period in
2003. The Company is continuing its program to increase pre-need sales. For the
12 weeks ended June 19, 2004, 26% of funeral volume was derived from backlog,
compared to 25% 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. The Company believes that pre-need funeral sales are
important, because generally over time, they build the foundation for future
funeral revenue and are expected to generate positive cash flow when the funeral
service is performed.

Cemetery revenue of $38.3 million for the 12 weeks ended June 19, 2004, was
$3.2 million, or 7.5%, lower than cemetery revenue for the corresponding period
in 2003. The increases in at-need service revenue during the 12 weeks ended
June 19, 2004, compared to the corresponding period in 2003, were more than
offset by a decrease in other revenue because the Company recorded a one-time
$3.9 million reversal of accrued perpetual care liabilities during the 12 weeks
ended June 14, 2003.

Cemetery gross margin as a percentage of revenue decreased to 13.9% for the
12 weeks ended June 19, 2004, compared to 19.2% for the corresponding period in
2003, primarily as a result of the decrease in cemetery revenue.

Pre-need cemetery contracts written for the 12 weeks ended June 19, 2004,
were $21.0 million, $1.0 million lower than for the corresponding period in
2003. The decrease in pre-need cemetery contracts

28

written was primarily due to the decrease in pre-need space sales. For the
12 weeks ended June 19, 2004, 66% of interments were at-need and 34% 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. The Company believes that pre-need cemetery sales are important,
because generally over time, they generate positive cash flow and build the
foundation for future cemetery revenue.

Insurance revenue for the 12 weeks ended June 19, 2004, increased
$4.0 million, or 28.9%, compared to the corresponding period in 2003, primarily
due to increases in premium and investment income. Insurance premium revenue is
up in 2004 primarily due to the impact of the Company's subsidiary, Rose Hills,
beginning to sell the Company's insurance products. 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 June 19, 2004, was $24.9 million compared to
$15.0 million for corresponding period in 2003. Insurance gross margin as a
percentage of revenue decreased to 2.7% for the 12 weeks ended June 19, 2004,
compared to 3.7% for the corresponding period in 2003, primarily due to the cost
increase, particularly policy reserves, being at a rate higher than that of the
revenue 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 June 19, 2004, was
$14.5 million, a decrease of $3.9 million compared to the corresponding period
in 2003, reflecting the effect of lower effective interest rates and debt
repayments made by the Company during 2003 and the 12 weeks ended June 19, 2004,
which were partially offset by a premium of $1.1 million included in interest
expense for the 12 weeks ended June 19, 2004, as a result of the repurchase of
the principal amount of $9.3 million of the 12.25% Senior unsecured notes, due
in 2009. 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
June 19, 2004, were $9.5 million, or 5.8% of consolidated revenue, compared to
$11.9 million, or 7.2% of consolidated revenue for the corresponding period in
2003. During the 12 weeks ended June 19, 2004, a $0.9 million legal claim
accrual was reversed, as the Company obtained approvals for insurance coverage
for these costs. In addition, general and administrative expenses were reduced
by $1.2 million for corporate receivable recoveries that were previously fully
reserved against.

Income tax expense for the 12 weeks ended June 19, 2004, was $1.8 million
compared to $1.2 million for the corresponding period in 2003. The effective
rate of tax was 39.9% for the 12 weeks ended June 19, 2004, compared to 238.6%
for the 12 weeks ended June 14, 2003. For the 12 weeks ended June 19, 2004, and
June 14, 2003, the effective tax rate varied from the statutory tax rate,
primarily because the losses incurred in certain jurisdictions did not offset
the tax expenses in profitable jurisdictions. Future income and losses may
require the Company to record a change in the valuation allowance of tax assets
that were taken into account in determining the net amount of liability for
deferred income taxes recorded on its balance sheet at June 19, 2004. If this
occurs, any resulting increase in the valuation allowance would generally be
treated as an additional income tax expense in the period in which it arises,
while any resulting decrease reflecting realization of the benefits of tax
assets that had a corresponding valuation allowance established on January 2,
2002, would be treated as a reduction of goodwill established on January 2,
2002, with any excess over the value assigned to such goodwill recognized as a
capital transaction.

Previously, the Company designated certain parcels of surplus real estate as
probable for sale, because these parcels do not meet the Company's future
geographic and strategic objectives. The Company

29

recorded a $0.4 million gain on sale on the disposition of surplus real estate
for the 12 weeks ended June 19, 2004. During the 12 weeks ended June 19, 2004,
the Company removed certain locations from discontinued operations because they
were no longer going to be sold, or were going to be sold for higher proceeds as
real estate. As a result, the Company reversed $2.0 million of long-lived asset
impairment provision previously recognized in discontinued operations.

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.

During the 12 weeks ended June 19, 2004, the continuation of the sales
process for the funeral and cemetary locations resulted in changes to the
composition of various bid packages. Although the overall expected proceeds did
not change significantly, the changes in the various packages caused the Company
to re-evaluate the long-lived asset impairment provision on a package by package
basis. As a result, the Company was required to record a long-lived asset
impairment provision of $11.5 million within discontinued operations for the
12 weeks ended June 19, 2004, primarily because unrealized gains associated with
properties in the original packages were no longer available to offset these
impairment amounts. Provided that the properties are ultimately sold for
estimated proceeds, accumulated unrealized gains of approximately $13 million
will be included in income upon disposition.

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. Depreciation and
amortization is not recorded once an asset has been identified as held for sale.
The Company has also reclassified the prior fiscal periods to reflect any
comparative amounts on a similar basis. All discontinued operations financial
information presented under the insurance segment relate to Security Plan
Life Insurance Company.

During the 12 weeks ended June 19, 2004, the Company closed five funeral
locations and sold one funeral and eight cemetery locations for gross proceeds
of $0.9 million.

30

Other information for the 24 weeks ended June 19, 2004, and 24 weeks ended
June 14, 2003, is summarized in the following table.

Consolidated revenue of $343.2 million for the 24 weeks ended June 19, 2004,
increased by $9.3 million, or 2.8%, compared to $333.9 million for the
corresponding period in 2003, primarily as a result of the increase in insurance
revenue. Consolidated gross margin as a percentage of revenue decreased to 18.6%
for the 24 weeks ended June 19, 2004, from 19.4% for the corresponding period in
2003.

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Funeral revenue of $232.1 million for the 24 weeks ended June 19, 2004,
decreased by $0.6 million, compared to $232.7 million for the corresponding
period in 2003, primarily as a result of a decrease of 1,580, or 2.7%, in the
number of funeral services performed, partially offset by an increase of $95, or
2.4%, in average revenue per funeral service performed. The increase in average
revenue per funeral service performed was achieved through adjusting the pricing
and mix of merchandise and services offered to customer families that were
designed both to meet customer family needs and to increase revenues.

The number of cremation services performed as a percentage of total services
performed increased to 35% for the 24 weeks ended June 19, 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 family preference for cremation services, as well as the
Company's efforts to offer customer families 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 decreased slightly to 22.4%
for the 24 weeks ended June 19, 2004, compared to 22.7% for the corresponding
period in 2003. The decrease in gross margin was primarily due to the decrease
in funeral revenue and increases in cost of goods sold, wages, and facilities
costs, partially offset by decreases in benefits, and selling expenses. Due to
the fixed nature of funeral costs over the short term, the Company believes that
decreases in funeral revenue will not result in a corresponding decrease in
funeral costs, which negatively impacts funeral gross margins.

Pre-need funeral contracts written for the 24 weeks ended June 19, 2004,
were $85.7 million, compared to $75.4 million for the corresponding period in
2003. The Company is continuing its program to increase pre-need sales. For the
24 weeks ended June 19, 2004, 26% of funeral volume was derived from backlog,
compared to 25% 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. The Company believes that pre-need funeral sales are
important, because generally over time, they build the foundation for future
funeral revenue and are expected to generate positive cash flow when the funeral
service is performed.

Cemetery revenue of $75.0 million for the 24 weeks ended June 19, 2004, was
$0.2 million, or 0.2%, lower than cemetery revenue for the corresponding period
in 2003. Increases in pre-need space and at-need service revenue during the
24 weeks ended June 19, 2004, compared to the corresponding period in 2003, were
more than offset by a decrease in other revenue because the Company recorded a
one-time $3.9 million reversal of accrued perpetual care liabilities during the
24 weeks ended June 14, 2003.

Cemetery gross margin as a percentage of revenue decreased to 13.8% for the
24 weeks ended June 19, 2004, compared to 14.7% for the corresponding period in
2003, primarily as a result of the slight decrease in cemetery revenue and
increase in advertising and promotion, facilities, and selling expenses,
partially offset by decreases in cost of goods sold and wages.

Pre-need cemetery contracts written for the 24 weeks ended June 19, 2004,
were $39.3 million, $1.5 million higher than for the corresponding period in
2003. For the 24 weeks ended June 19, 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. The Company believes that pre-need cemetery sales are
important, because generally over time, they generate positive cash flow and
build the foundation for future cemetery revenue.

Insurance revenue for the 24 weeks ended June 19, 2004, increased
$10.1 million, or 38.7%, compared to the corresponding period in 2003, primarily
due to increases in premium and investment income. Insurance premium revenue is
up in 2004 primarily due to the impact of the Company's subsidiary,

32

Rose Hills, beginning to sell the Company's insurance products. 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 24 weeks ended June 19, 2004, was
$47.7 million compared to $30.0 million for corresponding period in 2003.
Insurance gross margin as a percentage of revenue decreased to 3.8% for the
24 weeks ended June 19, 2004, compared to 4.2% for the corresponding period in
2003, primarily due to the cost increase, particularly policy reserves, being at
a rate higher than that of the revenue increase. The Company expects the
insurance gross margin percentage to grow modestly over the near term.

Interest expense on long-term debt for the 24 weeks ended June 19, 2004, was
$20.7 million, a decrease of $16.6 million compared to the corresponding period
in 2003, reflecting the effect of lower effective interest rates and debt
repayments made by the Company during 2003 and the 24 weeks ended June 19, 2004.
In addition, an unamortized premium of $7.2 million was credited to interest
expense for the 24 weeks ended June 19, 2004, as a result of the early
retirement of the 12.25% Convertible subordinated notes, due in 2012, partially
offset by a premium of $1.1 million included in interest expense, as a result of
the repurchase of the principal amount of $9.3 million of the 12.25% Senior
unsecured notes, due in 2009. 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 24 weeks ended
June 19, 2004, were $21.2 million, or 6.2% of consolidated revenue, compared to
$19.1 million, or 5.7% of consolidated revenue for the corresponding period in
2003. During the 24 weeks ended June 19, 2004, a $0.9 million legal claim
accrual was reversed, as the Company obtained approvals for insurance coverage
for these costs, and $1.2 million for corporate receivable recoveries that were
previously fully reserved against. During the 24 weeks ended June 14, 2003,
general and administrative expenses were reduced by $5.0 million, as a result of
a legal claim settlement.

Income tax expense for the 24 weeks ended June 19, 2004, was $7.8 million
compared to income tax benefit of $7.9 million for the corresponding period in
2003. The effective rate of tax was 38.5% for the 24 weeks ended June 19, 2004,
compared to the effective tax benefit rate of 158.9% for the 24 weeks ended
June 14, 2003. For the 24 weeks ended June 19, 2004, the effective tax rate
varied from the statutory tax rate, because losses incurred in certain
jurisdictions did not offset the tax expenses in profitable jurisdictions, which
were partially offset by the favorable settlement of income tax audits of
$0.6 million. For the 24 weeks ended June 14, 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 June 19, 2004. If this occurs, any resulting increase in
the valuation allowance would generally be treated as an additional income tax
expense in the period in which it arises, while any resulting decrease
reflecting realization of the benefits of tax assets that had a corresponding
valuation allowance established on January 2, 2002, would be treated as a
reduction of goodwill established on January 2, 2002, with any excess over the
value assigned to such goodwill recognized as a capital transaction.

Previously, the Company designated certain parcels of surplus real estate as
probable for sale, because these parcels do not meet the Company's geographic
and strategic objectives. The Company recorded a $1.5 million gain on sale on
the disposition of surplus real estate for the 24 weeks ended June 19, 2004.
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
their fair market value, less estimated costs to sell. During the 12 weeks ended
June 19, 2004, the Company removed certain locations from discontinued
operations because they were no longer going to be sold, or were going to be
sold for higher proceeds as real estate. As a result, the Company reversed
$2.0 million of long-lived asset impairment provision previously recognized in
discontinued operations. The Company has recorded a net long-lived asset

33

impairment provision of $0.3 million for the 24 weeks ended June 19, 2004. As of
June 19, 2004, the carrying value of real estate held in continuing operations
as probable for sale was $16.4 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 of June 19, 2004, the balance of
$12.6 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.

During the 12 weeks ended June 14, 2003, the Company identified Security
Plan Life Insurance Company as a non-strategic asset as it did not support the
Company's pre-need funeral sales efforts. On June 17, 2004, the Company
announced the signing of an agreement by its subsidiary Mayflower National Life
Insurance Company to sell all the outstanding shares of Security Plan Life
Insurance Company for $85.0 million to Citizens Insurance Company of America.
This transaction is conditional upon the parties having obtained all necessary
approvals and consents from the applicable regulatory authorities. The Company
currently expects the transaction to be concluded in October 2004. On closing,
the Company is expected to record a pre-tax gain on the sale of approximately
$17.0 million.

During the 12 weeks ended March 27, 2004, the Company reduced its estimated
proceeds on the group of assets held for sale and as a result recorded an $11.3
million long-lived asset impairment provision. During the 12 weeks ended
June 19, 2004, the continuation of the sales process for the funeral and
cemetery locations resulted in changes to the composition of various bid
packages. Although the overall expected proceeds did not change significantly,
the changes in the various packages caused the Company to re-evaluate the
long-lived asset impairment provision on a package by package basis. As a
result, the Company was required to record a long-lived asset impairment
provision of $11.5 million within discontinued operations for the 12 weeks ended
June 19, 2004, primarily because unrealized gains associated with properties in
the original packages were no longer available to offset these impairment
amounts. Provided that the properties are ultimately sold for estimated
proceeds, accumulated unrealized gains of approximately $13 million will be
included in income upon disposition. Accordingly, the Company has recorded an
aggregate $22.8 million long-lived asset impairment provision within
discontinued operations for the 24 weeks ended June 19, 2004.

As at June 19, 2004, the Company had 59 funeral, 53 cemetery and four
combination locations for disposal.

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. Depreciation and
amortization is not recorded once an asset has been identified as held for sale.
The Company has also reclassified the prior fiscal periods to reflect any
comparative amounts on a similar basis. All discontinued operations financial
information presented under the insurance segment relate to Security Plan
Life Insurance Company.

During the 24 weeks ended June 19, 2004, the Company closed eight funeral
locations and sold six funeral and 19 cemetery locations for gross proceeds of
$3.2 million.

34

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, and December 31, 2001. Prior to 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 customer families. 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:

35

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

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
Part I of this Quarterly Report on Form 10-Q.

Net cash from continuing operating activities was $31.9 million for the
12 weeks ended June 19, 2004, compared to $50.8 million for the corresponding
period in 2003. The decrease is primarily due to the decrease of $10.8 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.

Net cash from continuing operating activities was $36.0 million for the
24 weeks ended June 19, 2004, compared to $75.5 million for the corresponding
period in 2003. The decrease is primarily due to the decrease of $19.0 million
in withdrawals of excess funds from funeral and cemetery trusts. In addition,
for the 24 weeks ended June 19, 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 and 24 weeks ended June 19, 2004, are only
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 continuing investing activities was $8.3 million for the
12 weeks ended June 19, 2004, compared to $8.1 million for 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 $4.0 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 continuing investing activities was $10.0 million for the
24 weeks ended June 19, 2004, compared to $12.5 million for the corresponding
period in 2003, primarily due to the

36

increase of $7.1 million in proceeds on disposition of business assets,
partially offset by increases in purchase of property and equipment and net
purchase of insurance invested assets.

Net cash used by continuing financing activities was $18.2 million for the
12 weeks ended June 19, 2004, compared to $54.9 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.

Net cash used by continuing financing activities was $27.5 million for the
24 weeks ended June 19, 2004, compared to $66.4 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 increase in cash from discontinued operations was $7.3 million for
the 12 weeks ended June 19, 2004, due to cash from operations of $7.1 million
and cash from investing activities of $0.3 million, partially offset by cash
used by financing activities of $0.1 million.

The net increase in cash from discontinued operations was $8.1 million for
the 24 weeks ended June 19, 2004, due to cash from operations of $8.8 million.

The Company expects to complete the sale of Security Plan Life Insurance
Company in October 2004 for gross proceeds of $85.0 million. The Company expects
to record a pre-tax gain on the sale of approximately $17 million, and after
payment of applicable taxes and expenses, and recapitalization of Mayflower
National Life Insurance Company, realize net proceeds of approximately
$50 million which it expects will be used to further reduce long-term debt.

The Company expects to complete the sale of its funeral and cemetery
locations held for sale in 2004, with the majority of expected proceeds of
approximately $40 million used to further reduce long-term debt. As of June 19,
2004, the carrying value of the funeral and cemetery assets to be disposed of
were approximately $27 million. Actual amounts could significantly differ from
these estimates, as the assets held for sale and proceeds may change as a result
of further negotiations with potential buyers.

As of June 19, 2004, the Company's cash balance was $48.2 million and the
amount available under the Credit Agreement's $50.0 million revolving credit
facility was $50.0 million, less $11.1 million in outstanding letters of credit.
As of June 19, 2004, the Company's debt repayment obligation over the next
12 months is $31.5 million and aggregates $594.6 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 both the near and intermediate terms. Subsequent
to June 19, 2004, as described below and in Note 14 to the Company's interim
consolidated financial statements included in Item 1 of Part I of this
Quarterly Report on Form 10-Q, the Company has taken certain steps to refinance
its indebtedness.

37

LONG-TERM INDEBTEDNESS

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

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(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. 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
$9.2 million of the Term Loan B during the 24 weeks ended June 19, 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) On April 21, 2004, the Company repurchased the principal amount of
$9.3 million of the 12.25% Senior unsecured notes, due in 2009, at a premium
of $1.1 million, plus accrued interest.

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

On June 29, 2004, and July 1, 2004, the Company optionally prepaid an
aggregate principal amount of $15.0 million of the Term Loan B from cash on
hand.

On July 22, 2004, the Company commenced a cash tender offer (the "Tender
Offer") and consent solicitation for any and all of its $320.8 million
outstanding principal amount of 12.25% Senior secured notes, due in 2009 (the
"Seven-Year Unsecured Notes").

The total consideration to be paid for each $1,000 principal amount of the
Seven-Year Unsecured Notes validly tendered in the offer will be based on a
fixed spread of 50 basis points over the yield to maturity on the price
determination date of the 1.75% U.S. Treasury Note due December 31, 2004, and
accrued and unpaid interest up to, but not including, the date of payment for
the Seven-Year Unsecured Notes will also be paid. The price determination date
will be August 5, 2004, unless the Company extends the expiration time of the
Tender Offer prior to August 5, 2004, or after August 5, 2004 by more than three
business days, in which case the new price determination date will be the tenth
business day immediately preceeding the expiration time as so extended but no
earlier than the first business day after public announcement of such extension.

38

In connection with the Tender Offer, the Company is soliciting consents (the
"Consent Solicitation" and, together with the Tender Offer, the "Offer") to
certain proposed amendments to eliminate substantially all of the restrictive
covenants, as well as certain events of default, in the indenture governing the
Seven-Year Unsecured Notes. The Company is offering to make a consent payment
which is included in the total consideration described above of $30.00 per
$1,000 principal amount of Seven-Year Unsecured Notes to holders who validly
tender their Seven-Year Unsecured Notes and deliver their consents at or prior
to 5:00 p.m., New York City time, on August 4, 2004, unless extended (the
"Consent Payment Deadline"). Holders may not tender their Seven-Year Unsecured
Notes without delivering consents or deliver consents without tendering their
Seven-Year Unsecured Notes. The Tender Offer is scheduled to expire on
August 18, 2004, unless extended or earlier terminated. However, no consent
payments will be made in respect of Seven-Year Notes tendered after 5:00 p.m.,
New York City time on August 4, 2004. Tendered Seven-Year Unsecured Notes may
not be withdrawn and consents may not be revoked after the Consent Payment
Deadline.

The Offer is subject to the satisfaction of certain conditions, including
the receipt of financing and the receipt of consents of holders representing a
majority in principal amounts of the Seven-Year Unsecured Notes. Any extension,
delay, termination or amendment of the Offer will be followed as promptly as
practicable by a public announcement thereof.

The Company also announced on July 22, 2004, that it intends to offer up to
$200.0 million aggregate principal amount of new senior unsecured notes, due in
2012 in a transaction exempt from the registration requirements of the
Securities Act of 1933 and that the Company is negotiating an amendment to the
Credit Agreement. The Company expects the amendment to the Credit Agreement to
(i) increase the principal amount of term loan borrowings under the facility by
$175.0 million, (ii) extend the term loan maturity and reduce the amortization
payments, (iii) increase availability under the revolving portion of the Credit
Agreement from $50.0 million to $75.0 million and (iv) provide greater financial
flexibility. The new senior unsecured notes to be offered have not been
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from the
registration requirements. The new senior unsecured notes will rank equally with
any future unsecured indebtedness of the Company. The Company intends to use the
net proceeds of the proposed offering, together with cash on hand and additional
term loan borrowings pursuant to an amendment to the Credit Agreement, to
repurchase the Seven-Year Unsecured Notes, and to repay all amounts outstanding
under the Bridge Loan, and to pay related premiums, fees and expenses.

The Credit Agreement, the Bridge Loan, and 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 of June 19, 2004, the Company met all
of the financial covenants required by the Credit Agreement.

39

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table details the Company's contractual obligations of
continuing and discontinued operations as of June 19, 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 Part I 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
June 19, 2004, the Company leased approximately 1,270 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 of June 19, 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
June 19, 2004.

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(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 Part I of this Quarterly Report on Form 10-Q. The expiry date of
the Revolving Credit Facility is September 29, 2008.

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

40

At June 19, 2004, the aggregate fair value of the Company's forward foreign
currency exchange contracts and foreign currency option contracts was a
liability of $0.4 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 June 19, 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 (loss) from continuing operations. EBITDA
is presented because the Company considers it an important supplemental measure
of its performance. It is also one basis, subject to certain modifications, on
which compliance with certain of the financial covenants under the amended
credit agreement is determined and some payments under certain of the Company's
compensation plans are calculated. EBITDA is not a term that has specific
meaning in accordance with GAAP and may be calculated differently by other
companies. EBITDA is not a measurement of the Company's financial performance
under GAAP and should not be considered in isolation, as an alternative to net
income, operating income or any other performance measures derived in accordance
with GAAP, or otherwise as a measure of a company's profitability, or as an
alternative to cash flows from operating activities or otherwise as a measure of
liquidity.

RESTRICTIONS

The Credit Agreement, agreement governing the Bridge Loan and the indenture
governing the Seven-Year Unsecured Notes restrict the Company's ability to
engage in asset sales. The Credit Agreement and the agreement governing the
Bridge Loan prohibit dispositions of assets unless the assets disposed of
fulfill the requirements of specified exceptions. One such specified exception
is dispositions of any of a group of identified "discontinued assets;" another
is dispositions of assets not exceeding $35.0 million book value in the
aggregate over the life of the Credit Agreement, provided that (i) the
consideration received is at least equal to fair market value and (ii) not less
than 75% of the consideration 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

41

(or enter into agreements for such investment which agreements are consummated
within 360 days of such receipt of asset sale proceeds). In addition, up to
$10.0 million of such net proceeds in any fiscal year (but not in excess of
$35.0 million in the aggregate over the term of the Credit Agreement) may be
applied to make capital expenditures. To the extent the Company receives net
proceeds in excess of additional specified thresholds and such excess is not
applied to invest in operating assets or make capital expenditures as described
in the two immediately preceding sentences, the Company must make mandatory
repayments under the Credit Agreement.

Covenants in the Credit Agreement and the agreement governing 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 and 24 weeks ended June 19,
2004, was approximately $6.0 million and $17.4 million, respectively, all of
which has been reinvested in the insurance business.

42

CONTINUING AND DISCONTINUED LOCATIONS

The Company's number of continuing and discontinued locations by country,
state and province as of June 19, 2004, is summarized in the table below.

43

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 June 19, 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 June 19, 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 in this Quarterly Report on Form 10-Q, 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, although not all forward-looking statements contain such identifying
words. 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, without limitation, 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 information appearing in this Quarterly Report on Form 10-Q is accurate
only as of the date hereof, as the Company's business, financial condition,
results of operations or prospects may have changed since that date. Except as
required by law, 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. All
subsequent written and oral forward-looking statements attributable to the
Company and persons acting on its behalf are qualified in their entirety by the
cautionary statements contained in this section and elsewhere in this Quarterly
report on Form 10-Q.

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.

44

RISKS RELATED TO THE COMPANY'S DEBT

THE COMPANY'S SIGNIFICANT LEVEL OF DEBT AND INTEREST PAYMENT OBLIGATIONS MAY
RESTRICT FUTURE OPERATIONS AND IMPAIR THE COMPANY'S ABILITY TO MEET DEBT
OBLIGATIONS.

The significant level of debt and demands on the Company's cash resources
could have material consequences to the Company's business, including, but not
limited to:

- making it more difficult for the Company to satisfy its financial
obligations;

- reducing the availability of the Company's cash flows to fund its working
capital requirements, capital expenditures, acquisitions, investments and
other business activities because the Company will be required to use a
substantial portion of its cash flows to service its debt obligations;

- increasing the Company's vulnerability to adverse economic and industry
conditions;

- increasing the Company's exposure to interest rate increases because a
portion of the Company's borrowings is at variable interest rates;

- restricting the Company from making strategic acquisitions or taking
advantage of favorable business opportunities;

- limiting the Company's flexibility in planning for, or reacting to,
changes in its business and industry; and

- placing the Company at a competitive disadvantage when compared to
competitors with less relative amounts of debt.

DESPITE THE COMPANY'S SIGNIFICANT LEVEL OF DEBT, THE COMPANY MAY STILL BE ABLE
TO INCUR MORE DEBT, WHICH COULD INTENSIFY THE RISKS DESCRIBED ABOVE.

The Company may be able to incur significant amounts of debt in the future,
subject to compliance with its existing financing arrangements. Although the
Company's Credit Agreement, the agreement governing the Bridge Loan, and the
indenture governing the Seven-Year Unsecured Notes contain restrictions on the
incurrence of additional debt, debt incurred in compliance with these
restrictions could be significant. If new debt is added to the Company's and its
subsidiaries' current debt level, the related risks that the Company faces would
be magnified.

THE COMPANY MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH TO SERVICE ALL OF ITS
DEBT.

The Company's ability to make payments on and to refinance its debt depends
on its ability to generate cash in the future, which will be affected by the
death rate and general economic, financial, competitive, legislative, regulatory
and other factors beyond the Company's control. The Company cannot assure that
its business will generate sufficient cash flows from operations or that future
borrowings will be available to it under its Credit Agreement in amounts
sufficient to enable it to service its debt at maturity or otherwise, or to fund
its other liquidity needs.

If the Company is unable to meet its debt obligations or to fund its other
liquidity needs, the Company may need to restructure or refinance its debt. The
Company's ability to refinance its debt or obtain additional financing will
depend on:

- its financial condition at the time;

- restrictions in agreements governing its debt, and

- other factors, including financial market or industry conditions.

As a result, it may be difficult for the Company to obtain financing on
terms that are acceptable to it, or at all. Without this financing, the Company
could be forced to sell assets under unfavorable circumstances to make up for
any shortfall in its payment obligations. The terms of the Company's Credit
Agreement, the agreement governing the Bridge Loan, and the indenture governing
the Seven-Year

45

Unsecured Notes limit the Company's ability to sell assets and also restrict the
use of proceeds from such a sale. Moreover, substantially all of the Company's
assets have been pledged to secure repayment of its debt under the Credit
Agreement. In addition, the Company may not be able to sell assets quickly
enough or for sufficient amounts to enable it to meet its obligations.

RESTRICTIVE COVENANTS IN THE COMPANY'S CREDIT AGREEMENT, THE AGREEMENT GOVERNING
THE BRIDGE LOAN, AND THE INDENTURE GOVERNING THE SEVEN-YEAR UNSECURED NOTES MAY
PREVENT IT FROM PURSUING BUSINESS ACTIVITIES THAT COULD OTHERWISE IMPROVE ITS
RESULTS OF OPERATIONS.

The terms of the Company's Credit Agreement, the agreement governing the
Bridge Loan, and the indenture governing the Seven-Year Unsecured Notes limit
its ability and the ability of its subsidiaries to, among other things:

- incur additional debt;

- pay dividends or make distributions or redeem or repurchase stock;

- make investments;

- grant liens;

- make capital expenditures;

- enter into transactions with affiliates;

- sell assets; and

- acquire the assets of, or merge or consolidate with, other companies.

The Company's Credit Agreement and agreement governing the Bridge Loan also
require it to maintain financial ratios. Complying with these restrictive
covenants and financial ratios, as well as those that may be contained in any
future debt agreements, may impair the Company's ability to finance its future
operations or capital needs or to take advantage of other favorable business
opportunities. The Company's ability to comply with these restrictive covenants
and financial ratios will depend on its future performance, which may be
affected by events beyond its control. The Company's failure to comply with any
of these covenants or restrictions when they apply will result in a default
under the particular debt instrument, which could permit acceleration of the
debt under that instrument and, in some cases, the acceleration of debt under
other instruments that contain cross-default or cross-acceleration provisions.
In an event of default, or in the event of a cross-default or
cross-acceleration, the Company may not have sufficient funds available to make
the required payments under its debt. If the Company is unable to repay amounts
owed under the terms of the Credit Agreement, the lenders thereunder may be
entitled to sell most or substantially all of the Company's assets and the
assets of many of its subsidiaries to satisfy its obligations under the Credit
Agreement.

RISKS RELATED TO THE COMPANY

THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY.

The North American funeral and cemetery industry primarily consists of small
family-owned businesses. The death care industry in the United States is made up
of approximately 22,000 funeral homes and 10,500 cemeteries. The Company
believes the four largest public operators of funeral homes and cemeteries in
the United States are Service Corporation, Alderwoods Group, Stewart Enterprises
and Carriage Services. The Company believes the four largest public death care
companies collectively operate approximately 12% of funeral and 9% of cemetery
locations in the United States and generate approximately 20% of death care
revenues in the United States. The Company's competition in the markets in which
it operates generally arise from one or more of the above public operators in
addition to independent operators of funeral homes and cemeteries for at-need
and pre-need business. The market share of a single funeral home or cemetery in
any community is a function of the name, reputation and location of that funeral
home or cemetery although competitive pricing, professional service and

46

well-maintained locations are also important. Gains in market share within a
community are usually realized over a number of years, although losses in market
share may appear in a shorter time frame.

To compete successfully, the Company's funeral services and cemeteries must
maintain good reputations and high professional standards in the industry, as
well as offer attractive products and services at competitive prices. In
addition, the Company must market itself in such a manner as to distinguish it
from its competitors. The Company has historically experienced price competition
from independent funeral home and cemetery operators, and from monument dealers,
casket retailers, low-cost funeral providers and other non-traditional providers
of services or products. The intense competition the Company faces may force it
to reduce prices and thereby its profit margins to retain or recapture its
market share. If the Company is unable to successfully compete, its financial
condition, results of operations and cash flows could be materially and
adversely affected.

THE COMPANY'S INVESTMENTS HELD IN TRUSTS ARE INVESTED IN SECURITIES, THE VALUE
OF WHICH IS AFFECTED BY FINANCIAL MARKET CONDITIONS THAT ARE BEYOND ITS CONTROL.

Cemetery revenue is impacted by perpetual care trust net realized investment
income, which the Company recognizes to the extent of allowed reimbursement from
the trust when it performs cemetery maintenance services. The Company recognizes
trust income on funeral and cemetery merchandise and service trust investments
when the underlying pre-need funeral and cemetery contract obligations are
fulfilled. The level of trust income is largely dependent on yields on the
investments made with trust funds, which are subject to financial market
conditions and other factors that are beyond the Company's control. Trust income
is also affected by the mix of fixed income and equity securities the Company
chooses to maintain in the funds, and the Company may not choose the optimal mix
for any particular market condition. If earnings from trust funds decline, the
Company would likely experience a decline in future revenue and cash flow. In
addition, if the trust funds experienced significant investment losses, there
would likely be insufficient funds in the trusts to cover the costs of
delivering services and merchandise or to maintain cemeteries in the future. The
Company would have to cover any such shortfalls with cash flows from operations,
which could adversely affect its ability to service debt.

THE LEVEL OF PRE-NEED SALES AND THE TERMS OF THE COMPANY'S PRE-NEED CONTRACTS
MAY ADVERSELY IMPACT ITS RESULTS OF OPERATIONS AND CASH FLOWS.

The Company recently made significant changes to its pre-need sales force
and the terms of the commissions paid to its sales force. The Company cannot
assure that the changes it has made will not result in a decline in its pre-need
sales or that the Company will continue to be successful in recruiting and
retaining qualified sales people. In addition, depending on the terms of the
contract, pre-need sales have the potential to have an initial negative impact
on cash flows because of the commission paid on the sale and the portion of
sales proceeds required to be placed into trust or escrow. The Company's
commission structure emphasizes contracts with positive cash flows; however, the
Company cannot assure that in the future it will not enter into pre-need sales
that have a negative impact on cash flows, which could impair its ability to
service debt. A weakening economy that causes customer families to have less
discretionary income could cause a decline in pre-need sales. Declines in
pre-need cemetery property sales would reduce current revenue, and declines in
other pre-need sales would reduce the Company's pre-need backlog and future
revenue and could reduce future market share.

THE COMPANY'S ABILITY TO DISPOSE OF CERTAIN IDENTIFIED PROPERTIES AND OPERATIONS
AT PRICES CONSISTENT WITH ITS EXPECTATIONS DEPENDS ON SEVERAL FACTORS, MANY OF
WHICH ARE BEYOND ITS CONTROL. ANY CHANGES IN EXPECTED SALES PRICES OR BASIS OF
THESE PROPERTIES AND OPERATIONS COULD RESULT IN IMPAIRMENT CHARGES OR COULD
ADVERSELY AFFECT THE COMPANY'S ABILITY TO SELL THESE BUSINESSES AT PRICES IT IS
WILLING TO ACCEPT.

The Company is currently pursuing the sale of funeral homes and cemeteries
designated as held for sale in North America, as well as its subsidiary,
Security Plan Life Insurance Company, because these properties and operations
are either marginal or do not fit within its long-term strategic growth plans.
The Company believes that the closing or sale of those businesses will enable
its management to focus on its

47

most productive operations where its operating initiatives may bring about the
greatest benefits. The Company cannot assure that it will be able to dispose of
these properties and operations or that buyers will accept its terms, nor can
the Company give any assurance that the selling prices of these properties and
operations will not be materially different from its expectations. Any variance
between the anticipated and actual sale prices or changes in the basis of these
businesses could result in the Company taking an impairment charge or loss or
gain on actual sale.

INCREASING INSURANCE BENEFITS RELATED TO PRE-NEED SERVICES FUNDED THROUGH LIFE
INSURANCE OR ANNUITY CONTRACTS MAY NOT COVER FUTURE INCREASES IN THE COST OF
PROVIDING A PRICE GUARANTEED FUNERAL SERVICE.

The Company sells price guaranteed pre-need funeral services at prices
prevailing when the agreements are signed. There is no guarantee that the
insurance payout or the annuity contract payout will cover future increases in
the cost of providing a price guaranteed funeral service, which could have an
effect on the Company's profit margins.

FLUCTUATIONS IN THE VALUE OF THE CANADIAN DOLLAR COULD RESULT IN CURRENCY
EXCHANGE LOSSES.

A significant portion of the Company's corporate and administrative expenses
are payable in Canadian dollars, while most of the Company's revenue is
generated in U.S. dollars and the Company reports its financial statements in
U.S. dollars. Therefore, a strengthening of the Canadian dollar relative to the
U.S. dollar will adversely affect the Company's results of operations. Any
hedging activities the Company undertakes may not be successful in mitigating
all of this risk.

THE COMPANY'S EFFECTIVE INCOME TAX RATE MAY VARY.

The Company expects that its effective income tax rate for 2004 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, which audits may result in additional taxes payable.

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.

DIVIDENDS ARE NOT ANTICIPATED; PAYMENT OF DIVIDENDS IS SUBJECT TO RESTRICTION.

The Company is not expecting to pay any dividends on its Common stock in the
foreseeable future. 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 Company's Common stock. 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 the Company. In addition, covenants
in the indenture governing the Seven-Year Unsecured Notes restrict, and under
certain circumstances prohibit, the payment of dividends by the Company.

CERTAIN PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS HAVE ANTI-TAKEOVER
EFFECTS.

Certain provisions of the certificate of incorporation and bylaws of the
Company, as well as the General Corporation Law of the State of Delaware, may
have the effect of delaying, deferring or

48

preventing a change in control of the Company. Such provisions, including those
providing for the possible issuance of preferred stock of the Company 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 Company's board of directors, to make a
tender offer or otherwise acquire substantial amounts of the Company's Common
stock or to launch other takeover attempts that a stockholder might consider to
be in such stockholder's best interest.

RISKS RELATED TO THE COMPANY'S INDUSTRY

DECLINES IN THE NUMBER OF DEATHS IN THE COMPANY'S MARKETS CAN CAUSE A DECREASE
IN REVENUES. CHANGES IN THE NUMBER OF DEATHS ARE NOT PREDICTABLE FROM MARKET TO
MARKET OR OVER THE SHORT TERM.

Declines in the number of deaths could cause at-need sales of funeral and
cemetery services, property and merchandise to decline, which could decrease
revenues. Although the United States Bureau of the Census estimates that the
number of deaths in the United States will increase through 2010, longer
lifespans could reduce the rate of deaths. Changes in the number of deaths can
vary among local markets and from quarter to quarter, and variations in the
number of deaths in the Company's markets or from quarter to quarter are not
predictable.

THE GROWTH IN THE RATE OF CREMATIONS IN NORTH AMERICA MAY RESULT IN DECREASED
REVENUE AND GROSS MARGIN.

There is an increasing trend in North America toward cremation. According to
the Cremation Association of North America's preliminary estimates for 2002,
approximately 28% of all deaths that year in the United States were followed by
cremation. This figure has grown at approximately 1% annually since 1997 and is
projected to continue to grow at a comparable rate over the next three to five
years. 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 its financial condition, results of operations
and cash flows.

THE FUNERAL HOME AND CEMETERY INDUSTRY IS HIGHLY REGULATED.

The Company's operations are subject to regulation, supervision and
licensing under numerous federal, state, provincial 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.
Violations of applicable laws could result in fines or other sanctions to the
Company.

From time to time, federal, state, provincial and local regulatory agencies
have considered and may enact additional legislation or regulations that could
affect the Company by increasing costs and decreasing cash flows. 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 customer families could
adversely impact sales, resulting in lower revenue. 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 or provinces in which the Company
operates, additional legislation or regulations such as these could have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.

FUNERAL AND CEMETERY BUSINESSES HAVE HIGH FIXED COSTS.

The Company incurs many of the costs of operating and maintaining
facilities, land and equipment regardless of the number of funeral services or
internments performed. Because the Company cannot necessarily decrease these
costs when it experiences lower sales volumes, a decline in sales may cause
margins, profits and cash flows to decline at a greater rate than a decline in
revenue.

49

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.

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

The 2004 Annual Meeting of stockholders was held on May 4, 2004. The
following items of business, as proposed in the Proxy Statement dated as of
March 25, 2004, were presented to the stockholders.

ELECTION OF DIRECTORS

The nine director nominees, information with respect to which was set forth
in the Proxy Statement under the caption "Proposal No. 1--Election of
Directors," were elected. The vote with respect to the election of these
directors was as follows (there were no abstentions or broker non-votes with
respect to this proposal):

50

RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR

The proposal to ratify the selection of KPMG LLP as the Company's
independent auditor was approved. The vote with respect to such proposal was as
follows:

51

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

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

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.

54

(B) REPORTS ON FORM 8-K

The following Current Reports on Form 8-K were furnished or filed by
Alderwoods Group during the second quarter of fiscal 2004:

55

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: July 26, 2004 PRINCIPAL ACCOUNTING OFFICER)

56

INDEX TO EXHIBITS

59

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: July 26, 2004 /s/ PAUL A. HOUSTON
-----------------------------------------
Paul A. Houston
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)

60

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: July 26, 2004 /s/ KENNETH A. SLOAN
-----------------------------------------
Kenneth A. Sloan
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)

61

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Alderwoods Group, Inc. (the
"Company") on Form 10-Q for the twelve weeks ended June 19, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned officers of the Company certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to such officer's knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
as of the dates and for the periods expressed in the Report.

Dated: July 26, 2004.

/s/ PAUL A. HOUSTON
--------------------------------------------
Paul A. Houston
Chief Executive Officer and Director
(Principal Executive Officer)

/s/ KENNETH A. SLOAN
--------------------------------------------
Kenneth A. Sloan
Executive Vice President, Chief Financial
Officer
(Principal Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.