8-K/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report: February 12, 2007
(Date of earliest event reported: November 28, 2006):

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in its charter)

Texas	1-6402-1	74-1488375
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
1929 Allen Parkway, Houston, TX (Address of principal executive offices)		77019 (Zip Code)

Registrant’s telephone number, including area code: (713) 522-5141

Not Applicable
(Former name or former address, if changed since
last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13.e-4(c))

On November 28, 2006, Service Corporation International (“SCI”) completed its acquisition of Alderwoods Group, Inc. (“Alderwoods”). At the effective time of the acquisition, all of the outstanding shares of Alderwoods common stock and restricted stock units were converted into the right to receive $20.00 per share in cash, without interest. Each outstanding option or warrant to purchase Alderwoods’ common stock was converted into the right to receive, for each share of common stock issuable upon exercise of such option or warrant, cash in the amount of the excess, if any, of $20.00 over the exercise price per share of such option or warrant. The aggregate cash consideration paid as a result of the acquisition was approximately $880.7 million.

On November 29, 2006, SCI filed a Current Report on Form 8-K (the “Report”) stating that the required historical financial statements and other financial information with respect to Alderwoods and the required pro forma financial information with respect to the acquisition would be filed by an amendment to that Report. This Report replaces Item 9.01 of that filing:

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(a)	Financial Statements of Business Acquired.
	The following information is included as an exhibit to this report as noted in (c) below:

1. Alderwoods’s interim unaudited consolidated financial statements as of October 7, 2006 and for the forty and sixteen week periods ended October 7, 2006 and October 8, 2005 (see Exhibit 99.A); and

2. Alderwoods’s audited consolidated financial statements as of and for the 52 weeks ended December 31, 2005 and January 1, 2005, and the 53 weeks ended January 3, 2004 and related notes to the financial statements (see Exhibit 99.B).

(b)	Pro Forma Financial Information.
	The following unaudited pro forma combined condensed financial statements reflect the combination of the historical consolidated balance sheet and income statements of SCI and Alderwoods, adjusted for certain effects of the acquisition, the related financings, and the planned divestitures.

Unaudited Pro Forma Condensed Combined Balance Sheet	A-3
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet	A-4
Unaudited Pro Forma Condensed Combined Statements of Operations	A-7
Notes to the Unaudited Pro Forma Condensed Combined Statements of Operations	A-9

(c) Exhibits.

EXHIBIT NO.	DESCRIPTION OF EXHIBIT
99.A	Alderwoods Group, Inc. Interim Unaudited Consolidated Financial Statements as of October 7, 2006.
99.B	Alderwoods Group, Inc. Audited Consolidated Financial Statements as of December 31, 2005.

SIGNATURES

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

	SERVICE CORPORATION INTERNATIONAL
Date: February 12, 2007
	By:	/s/ Jeffrey I. Beason
		Name:	Jeffrey I. Beason
		Title:	Vice President and Corporate Controller

Service Corporation International
Unaudited pro forma combined financial information

On November 28, 2006, Service Corporation International (“SCI”) acquired Alderwoods Group, Inc. (“Alderwoods”) for $20.00 per share in cash, resulting in a total purchase price of $1.2 billion, which includes Alderwoods’ debt, of which $357.7 million was refinanced and $2.2 million was assumed. The acquisition was financed from:

• $888.4 million of cash on hand, including $490 million in proceeds, net of issuance costs, from the issuance of senior notes in October 2006;

• borrowings under a new $450 million senior credit facility, consisting of a $150 million 3-year term loan, all of which was borrowed in connection with the acquisition, and a $300 million 5-year revolving credit facility, none of which was drawn in connection with the acquisition; and

• the issuance of $200 million of debt securities in a private placement.

In connection with the acquisition, SCI and Alderwoods commenced tender offers to purchase certain outstanding notes. These offers expired on November 28, 2006 and SCI and Alderwoods purchased the notes that had been validly tendered.

SCI has executed a consent order with the staff of the FTC in connection with the acquisition, which identifies certain properties the FTC has required us to divest as a result of the acquisition. We have entered into or are currently negotiating agreements to sell these properties. These agreements are subject to review and approval by the FTC. We believe that divestiture of the assets, together with the divestiture of other assets that we have identified for sale, will generate proceeds of approximately $230 million in the near future, which we expect to use to repay debt. There can be no assurance that the divestitures described above will be consummated, or if consummated will generate the proceeds described above.

The unaudited pro forma combined financial information reflects the combination of the historical consolidated balance sheet and statements of operations for SCI and Alderwoods, adjusted for certain effects of the acquisition, the related financings, and the planned divestitures.

The unaudited pro forma combined balance sheet gives effect to the transactions as if they had occurred on September 30, 2006. The unaudited pro forma combined statements of operations for the year ended December 31, 2005 and for the nine months ended September 30, 2006 give effect to the transactions as if they had occurred on January 1, 2005.

For purposes of the pro forma information, the asset groups to be sold pursuant to the divestitures have been reclassified on the pro forma balance sheet as assets held for sale and the results of operations of these asset groups have been eliminated from the pro forma statements of operations. No pro forma adjustments have been made to reflect any anticipated gain or loss from the divestitures and no adjustment has been made to reflect any earnings benefit from the reinvestment of any proceeds from the divestiture or any reduction of debt from the application of sale proceeds.

The unaudited pro forma adjustments are based upon currently available information and certain assumptions that we believe to be reasonable under the circumstances. The acquisition will be accounted for, and the pro forma combined financial information has been prepared, using the purchase method of accounting. The pro forma adjustments reflect our preliminary estimates of the purchase price allocation, which are subject to revision as more detailed analysis is completed and additional information on the fair value of Alderwoods’ assets and liabilities becomes available. Additionally, the pro forma adjustments reflect the actual financing transactions that occurred and the impact of those transactions based on estimated interest rates for floating rate financing.

A-1

These pro forma results should not be construed to be indicative of future results or results that actually would have occurred had the transactions occurred at the dates presented. In addition, we have not assumed any cost savings or synergies that might occur related to these transactions.

A-2

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of September 30, 2006
(dollars in thousands)

					Adjustments			Adjustments			Adjustments
	SCI		Alderwoods		for the			for the			for the
	historical		historical(a)		acquisition			divestitures(l)			financing			Pro forma
Assets
Current assets:
Cash and cash equivalents	$	636,633	$	8,616	$	(880,698	)(b)	$	(408	)	$	306,966	(m)	$	71,109
Receivables, net		59,114		56,796		—			(5,753	)		—			110,157
Inventories		47,747		14,583		—			(541	)		—			61,789
Current assets held for sale		3,657		—		—			6,763			—			10,420
Other		29,664		7,631		—			(61	)		—			37,234
Total current assets		776,815		87,626		(880,698	)		—			306,966			290,709
Preneed funeral receivables and trust investments		1,198,324		329,462		—			(46,838	)		—			1,480,948
Preneed cemetery receivables and trust investments		1,245,726		322,200		—			(39,481	)		—			1,528,445
Cemetery property, at cost		1,316,934		117,193		90,807	(c)		(11,616	)		—			1,513,318
Property and equipment, at cost, net		1,014,161		544,343		169,823	(d)		(45,858	)		—			1,682,469
Insurance invested assets		—		322,154		—			(322,154	)		—			—
Non-current assets held for sale		68,188		—		—			520,695			—			588,883
Deferred charges and other assets		258,203		38,216		2,243	(e)		(73	)		11,330	(n)		309,919
Identifiable intangible assets		—		20,856		154,681	(f)		(23,714	)		—			151,823
Goodwill		1,083,563		296,211		(94,878	)(g)		—						1,284,896
Cemetery perpetual care trust investments		681,924		248,919		—			(30,961	)		—			899,882
Total	$	7,643,838	$	2,327,180	$	(558,022	)	$	—		$	318,296		$	9,731,292
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	241,853	$	118,012	$	22,264	(g)(1)	$	(2,706	)	$	(2,773	)(o)	$	376,650
Current maturities of long-term debt		30,629		2,185		—			(8	)		—			32,806
Current liabilities held for sale		336		—		—			2,714			—			3,050
Income taxes		22,491		—		—			—			—			22,491
Total current liabilities		295,309		120,197		22,264			—			(2,773	)		434,997
Long-term debt		1,265,213		362,282		—			(165	)		360,842	(p)		1,988,172
Deferred preneed funeral revenues		517,341		58,694		(9,640	)(g)(1)		(8,112	)		—			558,283
Deferred preneed cemetery revenues		726,125		12,036		34,142	(h)		(6,240	)		—			766,063
Insurance policy liabilities		—		302,298		—			(302,298	)					—
Deferred income taxes		167,497		12,436		6,011	(i)					(14,686	)(q)		171,258
Non-current liabilities held for sale		43,523		—		—			426,692			—			470,215
Other liabilities		319,155		29,232		(5,408	)(j)		(772	)		—			342,207
Non-controlling interest in funeral and cemetery trusts		2,026,258		575,634		—			(78,144	)		—			2,523,748
Non-controlling interest in cemetery perpetual care trust investments		676,832		248,980		—			(30,961	)		—			894,851
Total stockholders’ equity		1,606,585		605,391		(605,391	)(k)		—			(25,087	)(r)		1,581,498
Total	$	7,643,838	$	2,327,180	$	(558,022	)	$	—		$	318,296		$	9,731,292

See notes to unaudited pro forma condensed combined balance sheet.

A-3

Notes to the unaudited pro forma condensed combined balance sheet
(dollars in thousands)

(a)	Reflects the unaudited consolidated balance sheet of Alderwoods as of October 7, 2006. Certain line items have been reclassified to conform to SCI’s presentation.
(b)	Represents the cash purchase price plus SCI acquisition costs.
(c)	Represents an adjustment to report Alderwoods cemetery property at fair value as part of purchase accounting. The fair value of Alderwoods cemetery property was $208,000 at November 28, 2006, calculated using discounted future cash flows. The carrying value of Alderwoods cemetery property was $117,193 at October 7, 2006, resulting in a total increase to cemetery property of $90,807.
(d)	Represents an adjustment to report Alderwoods property and equipment at fair value as part of purchase accounting. The estimated fair value of Alderwoods property and equipment was $714,166 at November 28, 2006, calculated using discounted future cash flows. The carrying value of Alderwoods property and equipment was $544,343 at October 7, 2006, resulting in a total increase to property and equipment of $169,823.
(e)	Represents an adjustment to conform Alderwoods accounting for the recognition of sales of undeveloped cemetery property with SCI’s historical accounting policy. Deferred cemetery revenue was increased by $12,777 and deferred charges and other assets were increased by $2,243. See note (g)(2) and (h).
(f)	Represents the additional intangible assets or adjustments to intangible assets to be recorded as a result of the acquisition, consisting of the following:

Trademarks and tradenames(1)	$	40,000
Cemetery customer relationships (2)		12,600
Funeral trust preneed deferred revenue and insurance funded preneed revenue (3)		51,255
Cemetery preneed deferred revenue (4)		46,282
Water rights		6,800
Licenses & permits		2,600
Adjustment to fair value of insurance subsidiary’s in force insurance policies		(4,856	)
	$	154,681

	(1)	Represents the value of various local trademarks and tradenames associated with funeral and cemetery locations.
	(2)	Represents the value of future funeral services and cemetery services derived from existing cemetery customers.
	(3)	Represents the amount necessary to adjust preneed funeral trust deferred revenue for certain existing preneed funeral contracts, and insurance funded contracts to their estimated fair value.
	(4)	Represents the amount necessary to adjust preneed cemetery deferred revenue for certain existing preneed cemetery contracts to their estimated fair value.
(g)	Represents the elimination of previously recorded goodwill and the addition of goodwill arising from the transaction. Goodwill was determined as follows:

Equity purchase price	$	861,235
SCI acquisition costs		19,463
Aggregate purchase price		880,698
Fair value of liabilities assumed(1)		1,769,158
Fair value of assets acquired(2)		(2,448,523	)

A-4

Goodwill arising from the transaction		201,333
Alderwoods historical goodwill		(296,211	)
Adjustment to goodwill	$	(94,878	)

(1)  Represents the estimated fair value of liabilities assumed as follows:

Historical total liabilities	$	1,721,789
Adjustment to fair value preneed funeral deferred revenue		(9,640	)
Adjustment to fair value preneed cemetery deferred revenue (See note (h))		34,142
Adjustment to deferred income taxes (See note (i))		6,011
Adjustment to record certain severance obligations triggered by change of control provisions		22,264
Adjustment to other liabilities (See note (j))		(5,408	)
Fair value of liabilities assumed	$	1,769,158

(2)  Represents the fair value of assets acquired as follows:

Historical total assets	$	2,327,180
Eliminate historical goodwill		(296,211	)
Adjustment to conform recognition of sales of undeveloped cemetery property (See note (e))		2,243
Adjustment to fair value cemetery property (See note (c))		90,807
Adjustment to fair value property and equipment (See note (d))		169,823
Adjustment to fair value identifiable intangible assets (See note (f))		154,681
Fair value of assets assumed	$	2,448,523

(h) The following represents adjustments to preneed cemetery deferred revenue arising as part of purchase accounting:

Adjustment to fair value preneed cemetery deferred revenue	$	21,365
Adjustment to conform recognition of sales of undeveloped cemetery property (See note (e))		12,777
Adjustment to preneed cemetery deferred revenue	$	34,142

(i) Represents an adjustment to deferred income tax liabilities as part of purchase accounting as follows:

Deferred taxes related to adjustments to the fair market value of assets acquired and liabilities assumed (See notes (c), (d), (e), (f), (g), (h) and (j))	$	162,490
Elimination of valuation allowances on certain federal and state deferred tax assets based on the expected combined operations of Alderwoods and SCI		(125,767	)
Elimination of deferred taxes related to previously recorded goodwill (See note (g))		(30,712	)
	$	6,011

(j) The following represents adjustments to other liabilities arising as part of purchase accounting:

Adjustment to reclassify certain severance obligations previously accrued	$	(7,313	)
Adjustment to fair value pension liability		1,905
Adjustment to other liabilities	$	(5,408	)

(k)

Represents the elimination of Alderwoods historical equity balances.

(l)

For purposes of the pro forma information, the assets to be sold pursuant to the divestitures have been reclassified on the pro forma balance sheet as assets held for sale and the results of operations of these assets have been eliminated from the pro forma statement of operations. No pro forma adjustments have been made to reflect any anticipated gain or loss from the divestitures and no adjustment has been made to reflect any earnings benefit from the reinvestment of any proceeds from the divestitures or any reduction of debt from the application of sale proceeds.

A-5

(m) Represents net cash provided as a result of the financing transactions, offset by the use of cash to extinguish debt and pay financing costs.

Amounts extinguished:
Repayment of existing Alderwoods indebtedness(1)	$	358,683
Repayment of SCI Senior Notes due 2009		139,047
Total amounts extinguished		497,730
Financing costs		18,342
Payment of accrued interest (see note (o))		2,773
Tender premiums		24,189
Total amounts paid	$	543,034
Debt issuance:
Senior notes	$	500,000
Credit facility		150,000
Privately placed debt securities		200,000
Total sources of cash		850,000
Total cash provided	$	306,966

	(1)  Excludes $5,784 of existing Alderwoods debt assumed by SCI.
(n)	Represents the adjustment to deferred charges and other assets as set forth in the table below:

Write-off of Alderwoods deferred financing costs for extinguished debt	$	(6,525	)
Write-off of SCI’s deferred financing costs for extinguished debt		(487	)
Financing costs		18,342
Total adjustment to deferred charges and other assets	$	11,330

(o) Represents the decrease in accounts payable and accrued liabilities as set forth in the table below:

Payment of Alderwoods accrued interest on extinguished debt	$	(1,494	)
Payment of SCI’s accrued interest on extinguished debt		(1,279	)
Total adjustment to accounts payable and accrued liabilities		(2,773	)

(p) Represents the increase in long-term debt as set forth in the table below:

Amounts extinguished:
Existing Alderwoods debt	$	358,683
Existing SCI debt		130,475
Total amounts extinguished		489,158
Debt issuance:
Senior Notes		500,000
Credit facility		150,000
Privately placed notes		200,000
Total debt issuance		850,000
Total adjustment to long-term debt	$	360,842

(q)	Represents the tax benefit related to the adjustments to stockholders’ equity for non-recurring charges directly attributable to the financing transactions (see note (r)).
(r)	The following are the adjustments to stockholders’ equity related to non-recurring charges directly attributable to the financing transactions:

Tender premiums	$	24,189
Write-off of SCI’s original issuance discount for extinguished debt		8,572
Write-off of Alderwoods’ deferred financing fees for extinguished debt		6,525
Write-off of SCI’s deferred financing fees for extinguished debt		487
Tax benefit		(14,686	)
Total adjustments to stockholders’ equity	$	25,087

A-6

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2005
(Dollars in thousands, except per share data)

							Adjustments			Adjustments			Adjustments
	SCI			Alderwoods			for the			for the			for the
	historical			historical(a)			acquisition			divestitures(g)			financing			Pro forma
Revenues	$	1,715,737		$	748,914		$	(892	)(b)	$	(159,601	)	$	—		$	2,304,158
Costs and expenses		(1,417,592	)		(634,395	)		(10,417	)(c)		141,610			—			(1,920,794	)
Gross profit		298,145			114,519			(11,309	)		(17,991	)		—			383,364
General and administrative expenses		(84,834	)		(42,815	)		7,751	(d)		—			—			(119,898	)
Gains (loss) on dispositions and impairment charges, net		(26,093	)		1,379			4,964	(e)		404			—			(19,346	)
Operating income		187,218			73,083			1,406			(17,587	)		—			244,120
Interest expense		(103,733	)		(30,069	)		—			174			(23,021	)(i)		(156,649	)
Loss on early extinguishment of debt		(14,258	)		—			—			—			—			(14,258	)
Interest income		16,706			—			—			—			—			16,706
Other income (expense), net		2,774			4,662			(4,964	)(e)		—			—			2,472
Income from continuing operations before income taxes		88,707			47,676			(3,558	)		(17,413	)		(23,021	)		92,391
(Provision) benefit for income taxes		(33,233	)		(4,815	)		(12,801	)(f)		6,778	(h)		8,434	(j)		(35,637	)
Income from continuing operations	$	55,474		$	42,861		$	(16,359	)	$	(10,635	)	$	(14,587	)	$	56,754
Income from continuing operations per share:
Basic	$	0.19														$	0.19
Diluted	$	0.18														$	0.19
Average common shares outstanding:
Basic		302,213															302,213
Diluted		306,745															306,745

See notes to unaudited pro forma condensed combined statement of operations.

A-7

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the nine months ended September 30, 2006
(Dollars in thousands, except per share data)

							Adjustments			Adjustments			Adjustments
	SCI			Alderwoods			for the			for the			for the
	historical			historical(a)			acquisition			divestitures(g)			financing			Pro forma
Revenues	$	1,273,477		$	581,684		$	2,344	(b)	$	(134,612	)	$	—		$	1,722,893
Costs and expenses		(1,030,707	)		(487,920	)		(8,119	)(c)		120,610			—			(1,406,136	)
Gross profit		242,770			93,764			(5,775	)		(14,002	)		—			316,757
General and administrative expenses		(63,885	)		(57,388	)		5,813	(d)		—			—			(115,460	)
Gain (loss) on dispositions and impairment charges, net		(38,141	)		(588	)		379	(e)		(12,411	)		—			(50,761	)
Operating income		140,744			35,788			417			(26,413	)		—			150,536
Interest expense		(86,667	)		(21,503	)		—			(4	)		(17,305	)(i)		(125,479	)
Interest income		21,022			—			—			—			—			21,022
Other income (expense), net		16,822			221			(379	)(e)		—			—			16,664
Income from continuing operations before income taxes		91,921			14,506			38			(26,417	)		(17,305	)		62,743
(Provision) benefit for income taxes		(35,910	)		(7,804	)		1,690	(f)		10,073	(h)		6,340	(j)		(25,611	)
Income from continuing operations	$	56,011		$	6,702		$	1,728		$	(16,344	)	$	(10,965	)	$	37,132
Income from continuing operations per share:
Basic	$	0.19														$	0.13
Diluted	$	0.19														$	0.12
Average Common Shares outstanding:
Basic		293,117															293,117
Diluted		297,353															297,353

See notes to unaudited pro forma condensed combined statement of operations.

A-8

Notes to unaudited pro forma condensed combined statement of operations
(dollars in thousands)

(a)	Alderwoods historical information is derived from: (1) the audited consolidated statement of operations for the fifty-two weeks ended December 31, 2005 and (2) the unaudited consolidated statement of operations for the forty weeks ended October 7, 2006. Certain of Alderwoods’ line items have been reclassified to conform to SCI’s presentation.
(b)	The table below sets forth adjustments to revenue arising from the acquisition:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Preneed funeral contracts (1)		(2,000	)		(1,500	)
Preneed cemetery contracts (2)		1,900			1,425
Cemetery revenue from the sale of unconstructed property (3)		(792	)		2,419
Adjustment to revenue	$	(892	)	$	2,344

	(1)	Represents a net adjustment for the amortization of the fair value adjustment to funeral trust funded preneed deferred revenue.
	(2)	Represents a net adjustment for the amortization of the fair value adjustment to cemetery preneed deferred revenue.
	(3)	Represents an adjustment to conform Alderwoods accounting for the recognition of sales of undeveloped cemetery property with SCI’s historical accounting policy.
(c)	The table below sets forth adjustments to costs and expenses arising from the acquisition:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Intangible amortization expense (1)		(2,565	)		(1,924	)
Pension expense (2)		(415	)		71
Cemetery costs from the sale of unconstructed property (3)		(67	)		(738	)
Cemetery property cost of sales (4)		(1,470	)		(1,103	)
Preneed funeral contracts (5)		(2,000	)		(1,500	)
Preneed cemetery contracts (6)		(3,900	)		(2,925	)
Adjustment to costs and expenses	$	(10,417	)	$	(8,119	)

(1)	Represents an adjustment to record the amortization of intangible assets recorded as a result of the acquisition. The cemetery customer relationships and the funeral insurance funded preneed revenue are being amortized over an estimated useful life of ten years. The trademark, tradename, water rights, and permits and licenses, are considered to have an indefinite life and are not subject to amortization; rather, such assets would be subject to annual tests for impairment. The intangible assets associated with funeral trust funded preneed deferred revenue and cemetery preneed deferred revenue are amortized relative to the recognition of preneed revenue and included in note (b(1)) and (b(2)).
(2)	Represents a net adjustment to conform Alderwoods’ accounting policy for gains and losses on its pension plan assets and obligations to SCI’s historical accounting policy.
(3)	Represents an adjustment to conform Alderwoods’ accounting for the recognition of sales of undeveloped cemetery property with SCI’s historical accounting policy.

A-9

	(4)	Represents a net adjustment to record cemetery property cost of sales at the adjusted fair value of Alderwoods cemetery property.
	(5)	Represents a net adjustment for the amortization of the intangible asset associated with the fair value adjustment to funeral trust funded preneed deferred revenue.
	(6)	Represents a net adjustment for the amortization of intangible asset associated with the fair value adjustment to cemetery preneed deferred revenue.
(d)	Represents an adjustment to eliminate compensation expense for certain officers who were terminated and will not be replaced and for whom severance costs have been recorded as a liability on the pro forma balance sheet.
(e)	Represents the reclassification of gains and losses from dispositions to conform to SCI’s historical presentation.
(f)	The pro forma adjustments to income tax reflect the statutory federal, state and foreign income tax impact of the pro forma adjustments related to the Alderwoods acquisition (see notes (b), (c), (d) and (e)) and the effects of purchase accounting.
(g)	For purposes of the pro forma information, the asset groups to be sold pursuant to the divestitures have been reclassified on the pro forma balance sheet as assets held for sale and the results of operations of these asset groups have been eliminated from the pro forma statement of operations. This elimination includes an asset group that was acquired in the Alderwoods acquisition and qualifies as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets. No pro forma adjustments have been made to reflect any anticipated gain or loss from the divestitures and no adjustment has been made to reflect any earnings benefit from the reinvestment of any proceeds from the divestitures or any reduction of debt from the application of sale proceeds.
(h)	Represents the statutory federal, and state income tax impact attributable to the operations to be divested.
(i)	The table below sets forth adjustments to interest expense resulting from the extinguishment of debt and issuance of new debt:

			Nine months
	Year ended		ended
	December 31,		September 30,
	2005		2006
Interest expense on new borrowings:
Senior notes due 2014 (1)	$	18,438	$	13,828
Senior notes due 2018 (2)		19,063		14,297
Senior credit facility term loan (3)		11,100		8,325
Private placement debt securities (4)		14,800		11,100
Amortization of deferred financing costs (5)	$	1,843	$	1,422
Total interest expense on new borrowings	$	65,244	$	48,972
Less: historical interest expense and related amortization of deferred financing costs on extinguished borrowings:
Alderwoods	$	29,221	$	21,915
SCI		13,002		9,752
Total historical interest expense and related amortization of deferred financing costs on extinguished borrowings	$	42,223	$	31,667
Adjustment to interest expense	$	23,021	$	17,305

A-10

(1)  Represents interest on our senior notes due 2014, which is calculated as follows:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Outstanding balance	$	250,000		$	250,000
Interest rate		7.375	%		7.375	%
Portion of year outstanding		100	%		75	%
Calculated interest	$	18,438		$	13,828

(2)  Represents interest on our senior notes due 2018, which is calculated as follows:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Outstanding balance	$	250,000		$	250,000
Interest rate		7.625	%		7.625	%
Portion of year outstanding		100	%		75	%
Calculated interest	$	19,063		$	14,297

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(3)  Represents interest on our new term loan, which is calculated as follows:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Outstanding balance	$	150,000		$	150,000
Assumed interest rate-3 month LIBOR (5.40% plus 2.00%)		7.40	%		7.40	%
Portion of year outstanding		100	%		75	%
Calculated interest	$	11,100		$	8,325
An increase or decrease of 25 basis points in interest rate would result in an interest expense increase or decrease of	$	375		$	281

(4)  Represents interest on our private placement debt securities, which is calculated as follows:

				Nine months
	Year ended			ended
	December 31,			September 30,
	2005			2006
Outstanding balance	$	200,000		$	200,000
Assumed interest rate-3 month LIBOR (5.40% plus 2.00%)		7.40	%		7.40	%
Portion of year outstanding		100	%		75	%
Calculated interest	$	14,800		$	11,100
An increase or decrease of 25 basis points in interest rate would result in an interest expense increase or decrease of	$	500		$	375

	(5)  Represents amortization of deferred financing costs over the term of the new financing arrangements.
(j)	Represents the statutory federal, and state income tax impact of the adjustment to interest expense (see note (h)).

A-12

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION OF EXHIBIT
99.A	Alderwoods Group, Inc. Interim Unaudited Consolidated Financial Statements as of October 7, 2006.
99.B	Alderwoods Group, Inc. Audited Consolidated Financial Statements as of December 31, 2005.

EX-99.A

Exhibit 99.A

ALDERWOODS GROUP, INC. INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF OCTOBER 7, 2006.

ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

Expressed in thousands of dollars
except number of shares

	October 7,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	8,616		$	7,455
Receivables, net of allowances		56,796			52,862
Inventories		14,583			15,784
Other		7,631			6,885
		87,626			82,986
Pre-need funeral receivables and trust investments		329,462			334,427
Pre-need cemetery receivables and trust investments		322,200			307,322
Cemetery property		117,193			116,467
Property and equipment		544,343			542,901
Insurance invested assets		322,154			294,598
Deferred income tax assets		16,563			13,057
Goodwill		296,211			295,890
Cemetery perpetual care trust investments		248,919			243,805
Other assets		42,509			42,850
	$	2,327,180		$	2,274,303
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	118,012		$	119,734
Current maturities of long-term debt		2,185			2,435
		120,197			122,169
Long-term debt		362,282			371,040
Deferred pre-need funeral and cemetery contract revenue		70,730			91,618
Non-controlling interest in funeral and cemetery trusts		575,634			548,497
Insurance policy liabilities		302,298			266,729
Deferred income tax liabilities		12,436			10,552
Other liabilities		29,232			21,983
		1,472,809			1,432,588
Non-controlling interest in perpetual care trusts		248,980			243,962
Stockholders’ equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 40,678,098 issued and outstanding (December 31, 2005—40,458,864)		407			405
Capital in excess of par value		746,799			743,126
Accumulated deficit		(166,945	)		(172,405	)
Accumulated other comprehensive income		25,130			26,627
		605,391			597,753
	$	2,327,180		$	2,274,303

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

	16 Weeks Ended						40 Weeks Ended
	October 7,			October 8,			October 7,			October 8,
	2006			2005			2006			2005
Revenue
Funeral	$	139,367		$	133,158		$	368,020		$	367,672
Cemetery		55,769			52,519			135,105			134,737
Insurance		32,287			29,105			78,559			73,036
		227,423			214,782			581,684			575,445
Costs and expenses
Funeral		113,854			116,927			296,637			301,457
Cemetery		48,226			47,202			116,665			117,026
Insurance		30,428			27,752			74,618			69,570
		192,508			191,881			487,920			488,053
		34,915			22,901			93,764			87,392
General and administrative expenses		24,831			19,192			57,388			31,539
Provision for asset impairment		588			254			588			(1,373	)
		25,419			19,446			57,976			30,166
Income from operations		9,496			3,455			35,788			57,226
Interest on long-term debt (Note 3)		8,554			8,967			21,503			23,495
Other expense (income), net		(347	)		(68	)		(221	)		(5,910	)
Income (loss) before income taxes		1,289			(5,444	)		14,506			39,641
Income tax expense (recovery)		486			(12,349	)		7,804			5,844
Income from continuing operations		803			6,905			6,702			33,797
Loss from discontinued operations (Note 10)		—			—			—			(1,678	)
Income before cumulative effect of change in accounting principle		803			6,905			6,702			32,119
Cumulative effect of change in accounting principle		—			—			(1,242	)		—
Net income	$	803		$	6,905		$	5,460		$	32,119
Basic earnings per Common share:
Income from continuing operations	$	0.02		$	0.17		$	0.16		$	0.83
Loss from discontinued operations		—			—			—			(0.04	)
Cumulative effect of change in accounting principle		—			—			(0.03	)		—
Net income	$	0.02		$	0.17		$	0.13		$	0.79
Diluted earnings per Common share:
Income from continuing operations	$	0.02		$	0.16		$	0.16		$	0.81
Loss from discontinued operations		—			—			—			(0.04	)
Cumulative effect of change in accounting principle		—			—			(0.03	)		—
Net income	$	0.02		$	0.16		$	0.13		$	0.77
Basic weighted average number of shares outstanding (thousands)		40,678			40,456			40,606			40,456
Diluted weighted average number of shares outstanding (thousands)		42,789			42,051			42,575			41,721

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

					Capital					Accumulated
			Common		in Excess					Other
			Stock		of Par		Accumulated			Comprehensive
	Shares		Par Value		Value		Deficit			Income			Total
Balance at December 31, 2005		40,458,864	$	405	$	743,126	$	(172,405	)	$	26,627		$	597,753
Comprehensive income:
Net income								5,460						5,460
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income taxes of $nil											2,927			2,927
Unrealized loss on insurance invested assets, net of tax recovery of $2,125											(4,099	)		(4,099	)
Less: reclassification adjustments for realized gain on insurance invested assets included in net income											(21	)		(21	)
Unrealized loss on derivatives, net of income taxes of $nil											400			400
Less: reclassification adjustments for realized gains on derivatives included in net income, net of income taxes of $nil											(704	)		(704	)
Comprehensive income														3,963
Stock-based compensation						2,664								2,664
Common stock issued:
Stock issued as compensation in lieu of cash		11,734				213								213
Stock issued under equity incentive plan		207,500		2		796								798
Balance at October 7, 2006		40,678,098	$	407	$	746,799	$	(166,945	)	$	25,130		$	605,391

See accompanying notes to the interim consolidated financial statements

3

ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Expressed in thousands of dollars

	16 Weeks Ended						40 Weeks Ended
	October 7,			October 8,			October 7,			October 8,
	2006			2005			2006			2005
CASH PROVIDED BY (APPLIED TO)
Operations
Net income	$	803		$	6,905		$	5,460		$	32,119
Loss from discontinued operations, net of tax		—			—			—			1,678
Cumulative effect of change in accounting principle		—			—			1,242			—
Items not affecting cash
Depreciation and amortization		13,956			13,778			33,221			34,873
Amortization of debt issue costs		518			915			1,426			2,565
Stock-based compensation		1,068			—			2,664			—
Insurance policy benefit reserves		16,850			15,957			36,850			38,609
Provision for asset impairment		588			254			588			(1,373	)
Gain on disposal of business assets		(448	)		(165	)		(1,406	)		(6,068	)
Deferred income taxes		(511	)		(1,699	)		(767	)		11,050
Premium on long-term debt repurchase		—			—			—			282
Other, including net changes in other non-cash balances		(10,690	)		9,903			(16,822	)		3,054
Net cash provided by continuing operations		22,134			45,848			62,456			116,789
Net cash used in discontinued operations		—			—			—			(601	)
		22,134			45,848			62,456			116,188
Investing
Proceeds on disposition of business assets		841			3,757			3,748			14,916
Purchase of property and equipment		(14,363	)		(15,507	)		(23,835	)		(31,823	)
Purchase of insurance invested assets		(25,059	)		(24,794	)		(68,694	)		(90,025	)
Proceeds on disposition and maturities of insurance invested assets		10,421			6,702			35,697			54,193
Net cash used in continuing operations		(28,160	)		(29,842	)		(53,084	)		(52,739	)
Net cash provided by discontinued operations		—			—			—			7,906
		(28,160	)		(29,842	)		(53,084	)		(44,833	)
Financing
Increase in long-term debt		20,900			47			20,900			5,199
Repayment of long-term debt		(14,662	)		(23,111	)		(29,909	)		(82,320	)
Issuance of Common stock		4			1,401			798			2,777
Net cash provided by (used in) continuing operations		6,242			(21,663	)		(8,211	)		(74,344	)
Net cash used in discontinued operations		—			—			—			(57	)
		6,242			(21,663	)		(8,211	)		(74,401	)
Increase (decrease) in cash and cash equivalents		216			(5,657	)		1,161			(3,046	)
Cash and cash equivalents, beginning of period		8,400			11,990			7,455			9,379
Cash and cash equivalents, end of period	$	8,616		$	6,333		$	8,616		$	6,333

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 of October 7, 2006, the Company operated 578 funeral homes, 70 cemeteries and 63 combination funeral homes and cemeteries throughout North America.

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

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

     The Company’s insurance operations sell a variety of insurance products, primarily to fund pre-need funeral services.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

     The interim 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, and several pooled investment funds created for such trusts in which the Company has a variable interest and is the primary beneficiary.

     All significant inter-entity balances and transactions have been eliminated in the interim consolidated financial statements. The interim consolidated financial statements have been prepared using the United States 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 October 7, 2006, and for the 16 and 40 weeks ended October 7, 2006, and October 8, 2005. Except as indicated below with respect to the adoption of SFAS 123R, Stock-based payment, 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 52 weeks ended December 31, 2005, 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

Use of estimates

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

Stock-based compensation plans

Director Compensation Plan

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

Employee Stock Purchase Plan

     In 2005, the Company’s shareholders approved the adoption of a compensatory employee stock purchase plan to provide for the purchase on the open market of up to a maximum of 1,100,000 shares of Common Stock of the Company. Eligible employees may authorize payroll deductions of up to 5% of their regular base salary to purchase shares of Common Stock of the Company on the open market on a monthly basis. The Company will make a cash contribution to purchase shares of Common Stock of the Company as additional compensation to each participant equal to 50% of the employee’s contribution for that month. For the 16 weeks ended October 7, 2006, a total of 26,946 shares were purchased and distributed to employees at an average price of $19.69 per share and compensation expense of $177,000 was incurred. For the 40 weeks ended October 7, 2006, a total of 74,042 shares were purchased and distributed to employees at an average price of $18.39 per share and compensation expense of $454,000 was incurred.

2005-2007 Executive Strategic Incentive Plan

     The 2005-2007 Executive Strategic Incentive Plan, approved by the Board of Directors on July 21, 2005, is a performance based compensation plan designed to motivate and reward the senior management team for achieving shareholder value objectives. The plan provides cash awards to the senior executives based on the Company’s Common Stock reaching the threshold of an average price of $17.00 for the period from December 1, 2007 to December 31, 2007. The amount of the cash award increases the more the stock price exceeds the $17.00 threshold target price. Each participant will be assigned a percentage share of an aggregate cash award incentive pool. Achieving an average stock price of $17.00 results in an aggregate cash award of $5,600,000. Achieving an average stock price of $18.00 results in an aggregate cash

6

award of $8,000,000. The aggregate cash award increases by $1.6 million for every $1.00 in appreciation of the average stock price beyond $18.00. In the event of a change in control of the Company, the cash awards would be calculated based upon the stock price on the date of the change in control and become payable within 30 days of the change in control.

2005 Equity Incentive Plan

     In April of 2005, the Company’s shareholders approved the 2005 Equity Incentive Plan that permits the grant of (i) options to the employees and members of the Company’s Board of Directors, with or without tandem appreciation rights, and (ii) restricted Common Stock units. A total of 1,800,000 shares of Common Stock are reserved for grant under the plan. Stock options are granted with an exercise price equal to the Common Stock’s fair market value on the date of the grant. Stock options granted to date have a 3-year vesting period and vest at a rate of 25% on the first, 25% on the second and 50% on the third anniversaries of the date of grant.

     The tandem appreciation rights entitle the employee to exchange the employee’s option right for a number of shares equal in value to the appreciated value of the options. The exchange of the option for the tandem appreciation right requires an immediate exercise of the tandem appreciation right and will cause the immediate termination of the related option right. An exchange of an option right for a tandem appreciation right may only be made when the relevant option is otherwise exercisable. Although the options granted had an exercise price equal to or greater than the market value of the underlying Common Stock on the grant date, the number of shares to be issued upon exercise is not determinable as it is dependent upon the exchange of the option for a tandem appreciation right.

     The restricted Common Stock units granted to date do not vest for the first three years following the date of grant. Thereafter, the restricted Common Stock units vest during years 3 to 10 based upon the share price of the Company’s Common Stock. After three years of service, the restricted Common Stock units vest 70% at a $17 share price, and an additional 15% at a $17.50 share price and the final 15% at an $18 share price. Once granted, the restricted Common Stock units are not included in total shares outstanding and are not included in the weighted average number of common shares outstanding in each period used to calculate basic earnings per share until vested.

2002 Equity Incentive Plan

     On January 2, 2002 the Company implemented the 2002 Equity Incentive Plan that permits the grants of stock options to the employees and members of the Company’s Board of Directors. A total of 4,500,000 shares of Common Stock are reserved for grant under the plan. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. Except in certain cases, stock options have a 3-year vesting period and vest at a rate of 25% on the first, 25% on the second and 50% on the third anniversaries of the date of grant.

Equity incentive plans and change in accounting policy

     Prior to January 1, 2006, the Company accounted for employee stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2006, the

7

Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires measurement of compensation cost for employee stock-based awards based upon fair value over the requisite service period for awards expected to vest. Furthermore, under SFAS 123R, liability based awards are recorded at fair value through to their settlement date.

     Pursuant to the provisions of SFAS 123R, the Company applied the modified-prospective transition method. Under this method, the fair value provisions of SFAS 123R are applied to new employee share-based payment awards granted or awards modified, repurchased or cancelled after December 31, 2005. Measurement and attribution of compensation cost for unvested awards at December 31, 2005, granted prior to the adoption of SFAS 123R, are recognized based upon the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), after adjustment for estimated forfeitures. Accordingly, SFAS 123R no longer permits pro-forma disclosure for income statement periods after December 31, 2005 and compensation expense will be recognized for all share-based payments earned after December 31, 2005 based on grant-date fair value.

     The fair value of restricted stock units and the fair value of stock options are determined using the Black-Scholes valuation model, which is consistent with the valuation techniques previously utilized for options in the footnote disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. The Company recorded stock-based compensation expense for equity incentive plans of $1,068,000 and $2,664,000 for the 16 and 40 weeks ended October 7, 2006, respectively. This resulted in an adjustment to operating cash flows of $1,068,000 and $2,664,000 in the 16 and 40 weeks ended October 7, 2006, respectively. The tax benefit associated with compensation expense for the 12 weeks and 40 weeks ended October 7, 2006 is not significant and no option value has been capitalized.

Executive strategic incentive plan

     Prior to the implementation of SFAS 123R, no compensation expense was recorded in the 52 weeks ended December 31, 2005 as the stock price at December 31, 2005 was less than the threshold target price for the Executive Strategic Incentive Plan.

     With the adoption of SFAS 123R, this incentive plan is classified as a liability based award resulting in the measurement of the estimated fair value at each reporting date, until December 31, 2007 when the actual liability is determined and the award is settled. The Company records an expense equal to the portion of the fair value relative to the vesting term of the plan. The Company determines the fair value using a Monte Carlo model. This model uses term-to-expiry and stock price assumptions as at the measurement date, together with expected volatility, risk-free interest rate and dividend yield assumptions consistent with the valuation of the Company’s stock options. The adoption of SFAS 123R resulted in a cumulative effect of change in accounting principle of $1,242,000, which reflects the estimated accrued liability as of January 1, 2006 (fair value of $6,624,000, based on a stock price of $15.87), the adoption date of SFAS 123R. Compensation expense of $1,394,000 and $4,358,000 in the 16 weeks and 40 weeks ended October 7, 2006, respectively, reflects the estimated accrued liability as of October 7, 2006 of $5,600,000 (fair value of $11,200,000, based on a stock price of $19.91).

8

Pro-forma disclosure

     As a result of the adoption of SFAS 123R, for the 16 weeks ended October 7, 2006, income from continuing operations before income taxes was reduced by $2,462,000, income from continuing operations was reduced by $2,245,000, and net income was reduced by $2,245,000. For the 40 weeks ended October 7, 2006, income from continuing operations before income tax was reduced by $7,022,000, income from continuing operations was reduced by $6,781,000, and net income was reduced by $8,023,000. Basic and diluted earnings per share were reduced by $0.06 and $0.19 for both the 16 and 40 weeks ended October 7, 2006, respectively.

     As the Company adopted the modified prospective-transition method of SFAS 123R, results for the 16 and 40 weeks ended October 8, 2005 have not been restated. If prior to December 31, 2005, the Company had elected to recognize compensation expense for its stock option plans, based on the fair value of the awards at the grant dates in accordance with SFAS 123, net income and basic and diluted earnings per share would have changed for the 16 and 40 weeks ended October 8, 2005 to the following pro-forma amounts:

	16 weeks ended			40 weeks ended
	October 8,			October 8,
	2005			2005
Net income, as reported	$	6,905		$	32,119
Total stock-based employee compensation expense determined under fair value-based method, net of tax		(873	)		(1,821	)
Pro forma net income	$	6,032		$	30,298
Net income per Common share:
Basic, as reported	$	0.17		$	0.79
Basic, pro forma		0.15			0.75
Diluted, as reported		0.16			0.77
Diluted, pro forma		0.14			0.73

     The following is a summary of the total number of outstanding stock options and restricted Common Stock units under both plans:

						Outstanding Non vested
	Outstanding			Weighted Average		Restricted Common			Weighted Average
	Options			Exercise Price		Stock Units			Exercise Price
				(dollars per					(dollars per
	(thousands)			Common share)		(thousands)			Common share)
Balance at December 31, 2005		5,031		$	10.75		237		$	15.99
Granted		—			—		—			—
Exercised		(207	)		3.81		—			—
Cancelled		(19	)		13.36		(5	)		15.99
Balance at October 7, 2006		4,805		$	11.03		232		$	15.99

9

     The following table summarizes information about stock options outstanding at October 7, 2006:

			Weighted-Average
Range of Exercise	Number		Remaining		Weighted-Average				Weighted-Average
Prices	Outstanding		Contractual Life		Exercise Price		Number Exercisable		Exercise Price
(dollars per Common					(dollars per				(dollars per
share)	(thousands)		(in years)		Common share)		(thousands)		Common share)
$3.65 – $5.96		719		6.47	$	3.65		719	$	3.65
$5.97 – $7.59		1,030		5.72		7.47		1,030		7.47
$7.60 – $13.23		2,035		5.80		12.95		1,826		13.12
$13.24 – $15.99		1,021		8.81		15.99		255		15.99
		4,805		6.52		11.03		3,830		10.01

     As of October 7, 2006, the aggregate intrinsic value for stock options outstanding and exercisable was $42,650,000 and $37,899,000, respectively.

     For the 40 weeks ended October 7, 2006, cash received from the exercise of stock options was $790,000. As of October 7, 2006, the unrecognized compensation expense related to stock options totaling $7,753,000 is expected to be recognized over a weighted average period of 1.1 years.

     Other information pertaining to option activity is as follows:

	16 weeks ended				40 weeks ended
	October 7,		October 8,		October 7,		October 8,
	2006		2005		2006		2005
Total fair value of stock options vested	$	1,088	$	974	$	2,865	$	2,183
Total intrinsic value of stock options exercised		—		2,919		3,202		3,627

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

	16 weeks ended					40 weeks ended
	October 7,		October 8,			October 7,		October 8,
Weighted-average assumptions	2006		2005			2006		2005
Dividend yield		n/a		0.0	%		n/a		0.0	%
Expected volatility		n/a		45.0	%		n/a		45.0	%
Risk-free interest rate		n/a		3.64	%		n/a		3.64	%
Expected option life in years		n/a		5.0			n/a		5.0
Weighted average grant date fair value		n/a	$	6.70			n/a	$	6.70

     During the 40 weeks ended October 7, 2006, the Company did not issue stock options.

     The Company uses the Black-Scholes option-pricing model for estimating the fair value of its stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of

10

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

Comparability

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

NOTE 3. LONG-TERM DEBT

     Long-term debt consists of the following:

	October 7,		December 31,
	2006		2005
Revolving credit facility (a)	$	7,000	$	4,000
Senior secured term loan B due in 2009 (a)(b)		151,683		161,683
7.75% Senior unsecured notes due in 2012 (c)		200,000		200,000
Promissory notes and capitalized obligations, certain of which are secured by assets of certain subsidiaries		5,784		7,792
		364,467		373,475
Less, current maturities of long-term debt		2,185		2,435
	$	362,282	$	371,040

(a)	In 2003, the Company entered into a senior secured facility (the “Credit Agreement”), which after subsequent amendments, includes a $368,000,000 Senior Secured Term Loan B due September 29, 2009 (the “Term Loan B”) and a $75,000,000 revolving credit facility (the “Revolving Credit Facility”), of which $35,000,000 is 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 requirements. 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 (8.25% at October 7, 2006), plus 1.75% (based upon the Company’s consolidated leverage ratio at October 7, 2006), or (ii) LIBOR (5.37% for the three-month LIBOR at October 7, 2006), plus 2.75% (based upon the Company’s consolidated leverage ratio at October 7, 2006). An annual fee of 0.50% is charged on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on September 29, 2008.
	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

11

	ratio, an annual maximum on capital expenditures and cemetery development, and specified maximum amounts for capital lease obligations, indebtedness, acquisitions, certain investments, and sales of accounts receivable. Outstanding principal amounts and interest accrued and unpaid may, at the election of the requisite lenders, become immediately due and payable and further commitments by the lenders to make loans may, at the election of the requisite lenders, be terminated upon the occurrence of events of default specified in the Credit Agreement. As of October 7, 2006, 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.
	As of October 7, 2006, the amount available under the Revolving Credit Facility was $75,000,000, reduced by $18,930,000 in outstanding letters of credit.
(b)	The Term Loan B provides the Company with an option to elect an interest rate equal to either (i) a base rate (8.25% at October 7, 2006), plus 1.00%, or (ii) LIBOR (5.37% for the three-month LIBOR at October 7, 2006), plus 2.00%. The weighted average rate of interest was 7.45% at October 7, 2006. The Term Loan B is repayable in quarterly principal installments from October 7, 2006, to June 13, 2009 (subject to reduction for prepayments) of 0.25% of the aggregate principal amount of the Term Loan B outstanding as of December 3, 2004, 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 third quarter of its 2007 fiscal year.
(c)	On August 19, 2004, the Company issued the 7.75% Senior Unsecured Notes, due in 2012 (the “Eight-Year Senior Unsecured Notes”). Interest accrues at an annual rate of 7.75% and is payable semi-annually on March 15 and September 15 or, if such day is not a business day, the next succeeding business day. At any time prior to September 15, 2007, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Eight-Year Senior Unsecured Notes at a redemption price of 107.75% of the stated principal amount, plus accrued and unpaid interest and Liquidated Damages (as defined in the indenture governing the Eight-Year Senior Unsecured Notes), if any, with net cash proceeds from specified equity offerings, provided at least 65% of the aggregate principal amount of the Eight-Year Senior Unsecured Notes remains outstanding and the redemption occurs within 90 days of the date of the closing of the specified equity offering. On or after September 15, 2008, the Company may, at its option, redeem all or part of the Eight-Year Senior Unsecured Notes at the redemption prices (expressed as percentages of the stated principal amount) set forth below, plus accrued and unpaid interest and Liquidated Damages, if any, if redeemed during the twelve-month period beginning on September 15 of the years indicated below:

Year	Percentage
2008		103.875
2009		101.938
2010 and thereafter		100.000

     The Credit Agreement and the Eight-Year Senior Unsecured Notes are guaranteed by substantially all of Alderwoods Group’s wholly-owned U.S. subsidiaries, other than Alderwoods Group’s insurance

12

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, Alderwoods Group may be required to make an offer to purchase the then-outstanding Eight-Year Senior Unsecured Notes at a price equal to 101% of their stated principal amount, plus accrued and unpaid interest to the applicable repurchase date and Liquidated Damages, if any.

     The Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes restrict the Company’s ability to engage in asset sales. The Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes prohibit dispositions of assets unless the assets disposed of fulfill the requirements of specified exceptions. The indenture governing the Eight-Year Senior Unsecured Notes excepts, among other exceptions, assets with a fair market value less than $5,000,000. One specified exception contained in the Credit Agreement 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 ability to apply such net proceeds at its option (or as otherwise required) to invest in non-current operating assets (or enter into agreements for such investment which agreements are consummated within 360 days of such receipt of asset sale proceeds). Up to $10,000,000 of such net proceeds in any fiscal year (but not in excess of $40,000,000 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 non-current operating assets or make capital expenditures as described in the two immediately preceding sentences, the Company must make mandatory repayments under the Credit Agreement and, after all indebtedness under the Credit Agreement has been repaid, offer to purchase the Eight-Year Senior Unsecured Notes at a purchase price equal to 100.00% of the stated principal amount, plus accrued and unpaid interest and Liquidated Damages, if any.

     Covenants in the Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes restrict, and under specified circumstances prohibit, the payment of dividends by the Company.

NOTE 4. LEGAL CONTINGENCIES

     Funeral Consumers Alliance, Inc. et al v. Alderwoods Group, Inc. et al was filed in the United States District Court for the Northern District of California in April, 2005. This case has been transferred to the United States District Court for the Southern District of Texas, Case No. CV3394. To date, six separate class action lawsuits, including Francis H. Rocha v. Alderwoods Group, Inc. et al, Marcia Berger v. Alderwoods Group, Inc. et al, Maria Magsarili and Tony Magsarili v. Alderwoods Group, Inc. et al, Caren Speizer v. Alderwoods Group, Inc. et al, and Frank Moroz v. Alderwoods Group, Inc. et al, have been consolidated into this case (“Funeral Consumer Case”). Two other cases, also transferred to the United States District Court for the Southern District of Texas, Pioneer Valley Casket Co. v. Alderwoods Group, Inc. et al (“Pioneer Valley”) and Ralph Fancher et al v. Alderwoods Group, Inc. et al (“Fancher”), were consolidated into the Funeral Consumer Case for purposes of discovery only. On June 13, 2006, the United States District Court for the Southern District of Texas granted Fancher’s Notice of Voluntary Dismissal, with permission to

13

refile its case at another time. The only two remaining cases, therefore, are the Funeral Consumer Case and Pioneer Valley.

     The Funeral Consumer Case is a purported class action on behalf of casket consumers throughout the United States. Pioneer Valley is a purported class action on behalf of independent casket distributors throughout the United States. Both class suits name as defendants the Company and three other public companies involved in the funeral or casket industry. The Funeral Consumer Case and Pioneer Valley allege that defendants violated federal and state antitrust laws by engaging in anticompetitive practices with respect to the sale and pricing of caskets. Both cases seek injunctions, unspecified amounts of monetary damages, and treble damages. Plaintiffs in these cases have yet to provide any meaningful information regarding their alleged damages. As a result, the Company cannot quantify its ultimate liability, if any, for the payment of damages. The Company believes plaintiffs’ claims are without merit and intends to vigorously defend itself in these actions.

     In addition to the funeral and casket antitrust lawsuits, the Company has received a Civil Investigative Demand, dated August 4, 2005, from the Attorney General of Maryland on behalf of itself and other undisclosed state attorneys general, who have commenced an investigation of alleged anticompetitive practices in the funeral industry. The Company has received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

     Richard Sanchez et al v. Alderwoods Group, Inc. et al was filed in February 2005 in the Superior Court of the State of California, for the County of Los Angeles, Central District; Case No.BC328962. Plaintiffs seek to certify a nationwide class on behalf of all consumers who purchased funeral goods and services from the Company. Plaintiffs allege in essence that the Federal Trade Commission’s Funeral Rule requires the Company to disclose its markups on all items obtained from third-parties in connection with funeral service contracts. Plaintiffs allege further that the Company has failed to make such disclosures. Plaintiffs seek to recover an unspecified amount of monetary damages, attorney’s fees, costs and unspecified “injunctive and declaratory relief.” The Company believes that plaintiffs’ claims are without merit and intends to vigorously defend itself in this action.

     On July 7, 2005, the Federal Trade Commission (the “FTC”) issued a letter advisory opinion regarding the lawful construction of the term “cash advance item” as used in the Funeral Rule. The FTC opined with regard to a similar lawsuit in Texas state court: “The Commission believes that the court is incorrect in ruling that all goods or services purchased from a third-party vendor are cash advance items. This interpretation sweeps far too broadly, potentially bringing within its scope every component good or service that comprises a funeral. This was not and is not the Commission’s intention in the “cash advance” provisions of the Rule. In our opinion, the term “cash advance item” in the Rule applies only to those items that the funeral provider represents expressly to be “cash advance items” or represents by implication to be procured on behalf of a particular customer and provided to that customer at the same price the funeral provider paid for them.” The FTC sets forth its analysis in the remainder of the letter. The Company has learned that a number of plaintiffs to these actions along with the Funeral Consumers Alliance have filed a petition against the FTC in the District of Columbia Circuit Court asking the Court to overturn the FTC’s July 7, 2005 Advisory Opinion.

     A motion for summary judgment against plaintiffs on behalf of a related defendant was heard on August 14, 2006. After taking the matter under submission, the court ruled in favor of the defendant in a

14

manner consistent with the Company’s historical practice and its interpretation of the Funeral Rule. Plaintiffs have until December 12, 2006 to appeal the judgement. The Court’s ruling will become the law of the case and should dictate whether identical actions against the Company are dismissed.

     Reyvis Garcia and Alicia Garcia v. Alderwoods Group, Inc., Osiris Holding of Florida, Inc, a Florida corporation, d/b/a Graceland Memorial Park South, f/k/a Paradise Memorial Gardens, Inc., was filed in December 2004, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, Case No.: 04-25646 CA 32. Plaintiffs are the son and sister of the decedent, Eloisa Garcia, who was buried at Graceland Memorial Park South in March 1986, when the cemetery was owned by Paradise Memorial Gardens, Inc. Initially, the suit sought damages on the individual claims of the Plaintiffs relating to the burial of Eloisa Garcia. Plaintiffs claimed that due to poor record keeping, spacing issues and maps, and the fact that the family could not afford to purchase a marker for the grave, the burial location of the decedent could not be located. In July, 2006, Plaintiffs amended their Complaint, seeking to certify a class of all persons buried at this cemetery whose burial sites cannot be located, claiming that this is due to poor record keeping, maps and surveys at the cemetery. The Plaintiffs are seeking unspecified monetary damages, as well as equitable and injunctive relief. The Company believes that the Plaintiffs’ individual claims are without merit. No class has been certified in this matter and the Company believes that there is no basis for a class action. The Company intends to vigorously defend itself in this action.

     The ultimate outcome of the litigation matters described above cannot be determined at this time. An adverse decision in one or more of such matters could have a material adverse effect on the Company, its financial condition, results of operation and cash flows. However, the Company intends to aggressively defend the lawsuits.

     In addition, The Company is party to other legal proceedings in the ordinary course of business, and believes it has made adequate provision for estimated potential liabilities. The Company does not expect the outcome of these proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or liquidity.

NOTE 5. SUPPLEMENTARY STATEMENTS OF CASH FLOWS DISCLOSURE

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

	16 weeks ended						40 weeks ended
	October 7,			October 8,			October 7,			October 8,
	2006			2005			2006			2005
Decrease (increase) in assets:
Receivables, net of allowances
Trade	$	915		$	5,354		$	5,489		$	16,837
Other		(6,480	)		7,768			(8,975	)		(6,618	)
Inventories		679			1,023			1,036			769
Prepaid expenses		189			(681	)		(1,098	)		16,468
Cemetery property		(4,170	)		(2,960	)		(7,604	)		(7,036	)
Other assets		(597	)		(2,552	)		(2,890	)		(6,100	)

15

	16 weeks ended						40 weeks ended
	October 7,			October 8,			October 7,			October 8,
	2006			2005			2006			2005
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		5,189			(9,064	)		1,333			(19,566	)
Net effect of pre-need receivables and deferred revenue		(7,097	)		9,377			(3,809	)		12,310
Other liabilities		797			(17	)		6,051			(2,909	)
Insurance policy liabilities		(254	)		1,077			(1,282	)		1,844
Other changes in non-cash balances		139			578			(5073	)		(2,945	)
	$	(10,690	)	$	9,903		$	(16,822	)	$	3,054
Supplemental information:
Interest paid	$	12,177		$	11,567		$	24,677		$	26,431
Income taxes paid, net of refunds		2,908			806			2,258			2,937
Bad debt expense		655			1,138			2,124			2,304
Stock issued as compensation in lieu of cash		61			42			213			106
Non-cash investing and financing activities:
Restricted cash investing and financing activities:
Purchases of funeral, cemetery, and perpetual care trust investments	$	61,951		$	145,441		$	224,552		$	501,874
Proceeds on disposition and maturities of funeral, cemetery, and perpetual care trust investments		63,116			125,693			205,452			538,809
Increase in non-controlling interests in funeral, cemetery and perpetual care trusts		17,125			15,222			65,903			38,568
Decrease in non-controlling interests in funeral, cemetery and perpetual care trusts upon fulfillment of pre-need contracts		15,956			28,760			44,539			65,171

NOTE 6. SUPPLEMENTARY FINANCIAL INFORMATION

     A summary of certain balance sheet accounts is as follows:

	October 7,			December 31,
	2006			2005
Receivables, net of allowances:
Customer receivables	$	46,592		$	50,459
Allowance for doubtful accounts		(11,948	)		(10,320	)
Other		22,152			12,723
	$	56,796		$	52,862

16

	October 7,			December 31,
	2006			2005
Pre-need funeral receivables and trust investments:
Customer receivables	$	39,764		$	38,438
Allowance for contract cancellations and refunds		(14,193	)		(15,988	)
Funeral trust investments		295,071			282,084
Amounts receivable from funeral trusts		8,820			29,893
	$	329,462		$	334,427
Pre-need cemetery receivables and trust investments:
Customer receivables	$	62,774		$	61,749
Unearned finance income		(6,394	)		(6,232	)
Allowance for contract cancellations and refunds		(16,428	)		(15,648	)
Cemetery merchandise and service trust investments		282,248			267,453
	$	322,200		$	307,322
Cemetery property:
Developed land and lawn crypts	$	40,078		$	38,368
Undeveloped land		31,448			31,243
Mausoleums		45,667			46,856
	$	117,193		$	116,467
Property and equipment:
Land	$	162,799		$	162,287
Buildings and improvements		401,173			386,068
Automobiles		9,541			10,652
Furniture, fixtures and equipment		76,835			69,570
Computer hardware and software		31,645			29,061
Accumulated depreciation and amortization		(137,650	)		(114,737	)
	$	544,343		$	542,901
Other assets:
Intangible assets	$	20,856		$	18,741
Deferred finance costs		23,294			23,359
Accumulated amortization		(16,684	)		(15,258	)
Notes receivable		2,765			3,016
Other		12,278			12,992
	$	42,509		$	42,850

17

	October 7,		December 31,
	2006		2005
Accounts payable and accrued liabilities:
Bank overdraft	$	4,977	$	7,191
Trade payables		25,454		13,634
Interest		1,494		5,169
Accrued liabilities		14,099		21,629
Accrued insurance		21,382		21,261
Accrued taxes		38,353		32,199
Other		12,253		18,651
	$	118,012	$	119,734
Deferred pre-need contract revenue:
Funeral	$	58,694	$	72,087
Cemetery		12,036		19,531
	$	70,730	$	91,618
Other liabilities:
Perpetual care liability	$	8,539	$	7,860
Deferred compensation		15,787		9,929
Other		4,906		4,194
	$	29,232	$	21,983

NOTE 7. 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 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 52 weeks ended December 31, 2005, as filed with the SEC.

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

	Funeral		Cemetery		Insurance		Other			Consolidated
For the 16 weeks ended:
Revenue earned from external sales:
October 7, 2006	$	139,367	$	55,769	$	32,287	$	—		$	227,423
October 8, 2005	$	133,158	$	52,519	$	29,105	$	—		$	214,782
Income from operations:
October 7, 2006	$	24,947	$	7,521	$	1,859	$	(24,831	)	$	9,496
October 8, 2005	$	15,980	$	5,314	$	1,353	$	(19,192	)	$	3,455

18

	Funeral		Cemetery		Insurance		Other			Consolidated
Depreciation and amortization:
October 7, 2006	$	7,844	$	4,568	$	37	$	1,507		$	13,956
October 8, 2005	$	7,718	$	4,597	$	54	$	1,409		$	13,778
Purchase of property and equipment:
October 7, 2006	$	13,809	$	921	$	14	$	(381	)	$	14,363
October 8, 2005	$	11,012	$	1,603	$	12	$	2,880		$	15,507
Development of cemetery property:
October 7, 2006	$	—	$	2,483	$	—	$	—		$	2,483
October 8, 2005	$	—	$	568	$	—	$	—		$	568
For the 40 weeks ended:
Revenue earned from external sales:
October 7, 2006	$	368,020	$	135,105	$	78,559	$	—		$	581,684
October 8, 2005	$	367,672	$	134,737	$	73,036	$	—		$	575,445
Income from operations:
October 7, 2006	$	70,816	$	18,419	$	3,941	$	(57,388	)	$	35,788
October 8, 2005	$	66,233	$	19,066	$	3,466	$	(31,539	)	$	57,226
Depreciation and amortization:
October 7, 2006	$	19,545	$	10,521	$	88	$	3,067		$	33,221
October 8, 2005	$	19,154	$	11,852	$	120	$	3,747		$	34,873
Purchase of property and equipment:
October 7, 2006	$	17,358	$	4,956	$	53	$	1,468		$	23,835
October 8, 2005	$	18,333	$	3,546	$	86	$	9,858		$	31,823
Development of cemetery property:
October 7, 2006	$	—	$	5,517	$	—	$	—		$	5,517
October 8, 2005	$	—	$	2,250	$	—	$	—		$	2,250
Total assets at:
October 7, 2006	$	1,111,360	$	825,114	$	359,824	$	30,882		$	2,327,180
December 31, 2005	$	1,107,916	$	807,673	$	326,160	$	32,554		$	2,274,303
Goodwill at:
October 7, 2006	$	296,211	$	—	$	—	$	—		$	296,211
December 31, 2005	$	295,890	$	—	$	—	$	—		$	295,890

19

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

	16 weeks ended						40 weeks ended
	October 7,			October 8,			October 7,			October 8,
	2006			2005			2006			2005
Earnings from operations of funeral, cemetery and insurance segments	$	34,327		$	22,647		$	93,176		$	88,765
Other expenses of operations:
General and administrative expenses		(24,831	)		(19,192	)		(57,388	)		(31,539	)
Income from operations	$	9,496		$	3,455		$	35,788		$	57,226

20

NOTE 8. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL INFORMATION

     The following presents the condensed consolidating guarantor financial information as of October 7, 2006 and December 31, 2005 and for the 16 and 40 weeks ended October 7, 2006 and October 8, 2005 for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the 7.75% Senior Unsecured Notes due in 2012, and the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Canadian and Puerto Rican subsidiaries, insurance subsidiaries and certain domestic subsidiaries that are prohibited by law from guaranteeing the 7.75% Senior Unsecured Notes due in 2012.

Condensed Consolidating Balance Sheets (unaudited)

	October 7, 2006
	Parent							Consolidating			Consolidated
	Company		Guarantors			Non-Guarantors		Adjustments			Totals
ASSETS
Cash and cash equivalents	$	—	$	5,924		$	2,682	$	—		$	8,616
Other current assets		—		65,812			13,198		—			79,010
Pre-need funeral receivables and trust investments		—		251,387			298,708		(220,633	)		329,462
Pre-need cemetery receivables and trust investments		—		298,949			288,679		(265,428	)		322,200
Cemetery property and property and equipment		—		552,086			109,450		—			661,536
Insurance invested assets		—		—			322,154		—			322,154
Goodwill		—		240,526			55,685		—			296,211
Investment in subsidiaries		1,122,014		(93,281	)		—		(1,028,733	)		—
Cemetery perpetual care trust investment		—		—			248,919		—			248,919
Other assets		6,609		16,171			36,292		—			59,072
Total assets	$	1,128,623	$	1,337,574		$	1,375,777	$	(1,514,794	)	$	2,327,180
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current liabilities	$	38,713	$	68,936		$	10,363	$	—		$	118,012
Current maturities of long-term debt		—		2,162			23		—			2,185
Inter-company, net of investments in and advances to affiliates		125,867		(309,094	)		183,226		—			—
Long-term debt		358,683		3,599			—		—			362,282
Deferred pre-need funeral and cemetery contract revenue and non-controlling interest in funeral and cemetery trusts		—		532,720			599,704		(486,060	)		646,364
Insurance policy liabilities		—		—			302,298		—			302,298
Other liabilities		19		21,940			19,709		—			41,668
Non-controlling interest in perpetual care trusts		—		—			248,980		—			248,980
Stockholders’ equity		605,341		1,017,311			11,474		(1,028,734	)		605,391
Total liabilities and stockholders’ equity	$	1,128,623	$	1,337,574		$	1,375,777	$	(1,514,794	)	$	2,327,180

21

Condensed Consolidating Balance Sheets

	December 31, 2005
	Parent							Consolidating			Consolidated
	Company		Guarantors			Non-Guarantors		Adjustments			Totals
ASSETS
Cash and cash equivalents	$	—	$	4,034		$	3,421	$	—		$	7,455
Other current assets		1,964		60,070			13,497		—			75,531
Pre-need funeral receivables and trust investments		—		260,915			285,617		(212,105	)		334,427
Pre-need cemetery receivables and trust investments		—		287,522			273,732		(253,932	)		307,322
Cemetery property and property and equipment		—		549,860			109,508		—			659,368
Insurance invested assets		—		—			294,598		—			294,598
Goodwill		—		247,160			48,730		—			295,890
Investment in subsidiaries		1,075,366		(91,898	)		—		(983,468	)		—
Cemetery perpetual care trust investment		—		464			243,341		—			243,805
Other assets		8,101		17,367			30,439		—			55,907
Total assets	$	1,085,431	$	1,335,494		$	1,302,883	$	(1,449,505	)	$	2,274,303
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current liabilities	$	39,333	$	73,597		$	6,804	$	—		$	119,734
Current maturities of long-term debt		—		2,412			23		—			2,435
Intercompany, net of investments in and advances to affiliates		82,643		(260,549	)		177,906		—			—
Long-term debt		365,683		5,357			—		—			371,040
Deferred pre-need funeral and cemetery contract revenue and non-controlling interest in funeral and cemetery trusts		—		533,061			573,091		(466,037	)		640,115
Insurance policy liabilities		—		—			266,729		—			266,729
Other liabilities		19		20,040			12,476		—			32,535
Non-controlling interest in perpetual care trusts		—		—			243,962		—			243,962
Stockholders’ equity		597,753		961,576			21,892		(983,468	)		597,753
Total liabilities and stockholders’ equity	$	1,085,431	$	1,335,494		$	1,302,883	$	(1,449,505	)	$	2,274,303

22

Condensed Consolidating Statement of Operations (unaudited)

	16 weeks ended October 7, 2006
	Parent									Consolidating			Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments			Totals
Revenues	$	—		$	166,497		$	60,926		$	—		$	227,423
Costs and expenses		—			138,262			54,246			—			192,508
General and administrative expenses		3,878			2,544			18,409			—			24,831
Provision for asset impairment		—			573			15			—			588
Income (loss) from operations		(3,878	)		25,118			(11,744	)		—			9,496
Interest on long-term debt		8,779			(183	)		(42	)		—			8,554
Intercompany charges		6,206			6,979			(13,185	)		—			—
Other expense (income), net		—			(611	)		264			—			(347	)
Income (loss) before income taxes		(18,863	)		18,933			1,219			—			1,289
Income taxes		—			677			(191	)		—			486
Income (loss) from continuing operations		(18,863	)		18,256			1,410			—			803
Equity in subsidiaries		48,189			(1,705	)		—			(46,484	)		—
Income before cumulative effect of change in accounting principle		29,326			16,551			1,410			(46,484	)		803
Net income	$	29,326		$	16,551		$	1,410		$	(46,484	)	$	803

23

Condensed Consolidating Statement of Operations (unaudited)

	16 weeks ended October 8, 2005
	Parent									Consolidating			Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments			Totals
Revenues	$	—		$	160,248		$	54,534		$	—		$	214,782
Costs and expenses		—			142,139			49,742			—			191,881
General and administrative expenses		—			530			18,662			—			19,192
Provision for asset impairment		—			556			(302	)		—			254
Income (loss) from operations		—			17,023			(13,568	)		—			3,455
Interest on long-term debt		8,841			197			(71	)		—			8,967
Intercompany charges		6,803			14,551			(21,354	)		—			—
Other expense (income), net		—			(227	)		159			—			(68	)
Income (loss) before income taxes		(15,644	)		2,502			7,698			—			(5,444	)
Income taxes		663			4,212			(10,921	)		(6,303	)		(12,349	)
Income (loss) from continuing operations		(16,307	)		(1,710	)		18,619			6,303			6,905
Equity in subsidiaries		23,212			(425	)		—			(22,787	)		—
Income (loss) before cumulative effect of change in accounting principle		6,905			(2,135	)		18,619			(16,484	)		6,905
Net income (loss)	$	6,905		$	(2,135	)	$	18,619		$	(16,484	)	$	6,905

24

Condensed Consolidating Statement of Operations (unaudited)

	40 weeks ended October 7, 2006
	Parent									Consolidating			Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments			Totals
Revenues	$	—		$	430,495		$	151,189		$	—		$	581,684
Costs and expenses		—			353,175			134,745			—			487,920
General and administrative expenses		6,515			4,817			46,056			—			57,388
Provision for asset impairment		—			573			15			—			588
Income (loss) from operations		(6,515	)		71,930			(29,627	)		—			35,788
Interest on long-term debt		21,736			(68	)		(165	)		—			21,503
Intercompany charges		14,485			19,933			(34,418	)		—			—
Other expense (income), net		—			(701	)		480			—			(221	)
Income (loss) before income taxes		(42,736	)		52,766			4,476			—			14,506
Income taxes		(7	)		5,941			1,870			—			7,804
Income (loss) from continuing operations		(42,729	)		46,825			2,606			—			6,702
Equity in subsidiaries		48,139			(1,744	)		—			(46,395	)		—
Income before cumulative effect of change in accounting principle		5,410			45,081			2,606			(46,395	)		6,702
Cumulative effect of change in accounting principle		—			—			(1,242	)		—			(1,242	)
Net income	$	5,410		$	45,081		$	1,364		$	(46,395	)	$	5,460

25

Condensed Consolidating Statement of Operations (unaudited)

	40 weeks ended October 8, 2005
	Parent									Consolidating			Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments			Totals
Revenues	$	—		$	434,774		$	140,671		$	—		$	575,445
Costs and expenses		—			361,680			126,373			—			488,053
General and administrative expenses		(262	)		(13,591	)		45,392			—			31,539
Provision for asset impairment		—			(1,050	)		(323	)		—			(1,373	)
Income (loss) from operations		262			87,735			(30,771	)		—			57,226
Interest on long-term debt		22,948			600			(53	)		—			23,495
Inter company charges		11,952			25,304			(37,256	)		—			—
Other expense (income), net		—			(6,350	)		440			—			(5,910	)
Income (loss) before income taxes		(34,638	)		68,181			6,098			—			39,641
Income taxes		—			50,850			(9,409	)		(35,597	)		5,844
Income (loss) from continuing operations		(34,638	)		17,331			15,507			35,597			33,797
Equity in subsidiaries		66,757			(1,234	)		—			(65,523	)		—
Loss from discontinued operations		—			(1,245	)		(433	)		—			(1,678	)
Income before cumulative effect of change in accounting principle		32,119			14,852			15,074			(29,926	)		32,119
Cumulative effect of change in accounting principle		—			—			—			—			—
Net income	$	32,119		$	14,852		$	15,074		$	(29,926	)	$	32,119

26

Condensed Consolidating Statement of Cash Flows (unaudited)

	16 weeks ended October 7, 2006
	Parent									Consolidating		Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments		Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	(7,028	)	$	14,696		$	14,466		$	—	$	22,134
Cash flows from investing activities of continuing operations		—			(12,875	)		(15,284	)		—		(28,159	)
Cash flows from financing activities of continuing operations		7,000			(762	)		4			—		6,242
Increase (decrease) in cash and cash equivalents		(28	)		1,058			(814	)		—		216
Cash and cash equivalents, beginning of period		28			4,866			3,506			—		8,400
Cash and cash equivalents, end of period	$	—		$	5,924		$	2,692		$	—	$	8,616

	16 weeks ended October 8, 2005
	Parent									Consolidating		Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments		Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	20,783		$	2,524		$	22,541		$	—	$	45,848
Cash flows from investing activities of continuing operations		—			(6,416	)		(23,426	)		—		(29,842	)
Cash flows from financing activities of continuing operations		(20,783	)		(861	)		(19	)		—		(21,663	)
Decrease in cash and cash equivalents		—			(4,753	)		(904	)		—		(5,657	)
Cash and cash equivalents, beginning of period		—			8,729			3,261			—		11,990
Cash and cash equivalents, end of period	$	—		$	3,976		$	2,357		$	—	$	6,333

27

Condensed Consolidating Statement of Cash Flows (unaudited)

	40 weeks ended October 7, 2006
	Parent									Consolidating		Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments		Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	6,204		$	20,499		$	35,753		$	—	$	62,456
Cash flows from investing activities of continuing operations		—			(16,554	)		(36,530	)		—		(53,084	)
Cash flows from financing activities of continuing operations		(6,202	)		(2,009	)		—			—		(8,211	)
Increase (decrease) in cash and cash equivalents		2			1,936			(777	)		—		1,161
Cash and cash equivalents, beginning of period		(2	)		3,988			3,469			—		7,455
Cash and cash equivalents, end of period	$	—		$	5,924		$	2,692		$	—	$	8,616

	40 weeks ended October 8, 2005
	Parent									Consolidating		Consolidated
	Company			Guarantors			Non-Guarantors			Adjustments		Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	70,317		$	(3,266	)	$	49,738		$	—	$	116,789
Cash flows from operating activities of discontinued operations		—			661			(1,262	)		—		(601	)
Cash flows from investing activities of continuing operations		—			(3,547	)		(49,192	)		—		(52,739	)
Cash flows from investing activities of discontinued operations		—			6,129			1,777			—		7,906
Cash flows from financing activities of continuing operations		(70,317	)		(2,376	)		(1,651	)		—		(74,344	)
Cash flows from financing activities of discontinued operations		—			(9	)		(48	)		—		(57	)
Decrease in cash and cash equivalents		—			(2,408	)		(638	)		—		(3,046	)
Cash and cash equivalents, beginning of period		—			6,385			2,994			—		9,379
Cash and cash equivalents, end of period	$	—		$	3,977		$	2,356		$	—	$	6,333

28

NOTE 9. PROVISION FOR ASSET IMPAIRMENT

     In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 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. SFAS 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 costs to sell. Accordingly, the Company recorded a long-lived asset impairment of $588,000 for the 16 weeks ended October 7, 2006.

     As part of the Company’s ongoing assessment to ensure that each of the Company’s properties fit into the Company’s strategy, as at October 7, 2006 the Company had available for sale two funeral homes and one cemetery property business. These properties remain unsold as of October 7, 2006. The carrying amount of these locations was $818,000 which was less than estimated aggregate fair market value. The fair market values were determined by specific offers or bids, or estimates based on comparable recent sales transactions. For the 40 weeks ended October 7, 2006, these properties had revenues and costs of $752,000 and $1,212,000 (October 8, 2005—$741,000 and $386,000), respectively.

     The assets of $4,537,000 (December 31, 2005—$5,077,000) and liabilities of $3,719,000 (December 31, 2005—$3,734,000) of these locations have not been separately disclosed as to assets held for sale and liabilities associated with assets held for sale in the balance sheet.

     In addition, for the 40 weeks ended October 7, 2006, the Company disposed of 7 funeral home businesses which had not been reclassified to discontinued operations. Revenues and costs of these disposed of locations were $312,000 and $414,000 (October 8, 2005—$1,404,000 and $1,480,000) for the 40 weeks ended October 7, 2006, respectively.

     In addition to those funeral home and cemetery businesses held for sale or disposed of as identified above, the Company closed 9 funeral home locations during the 40 weeks ended October 7, 2006. The criteria for identifying a location to be closed includes among other items, synergies from transferring the ongoing business to an adjacent location and the valuation of the real estate assets compared to sale as a business.

     The asset impairment provisions include management estimates. As a result, actual results could differ significantly from these estimates.

NOTE 10. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE

     Over the previous four 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 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.

     As of January 1, 2005, the Company had 18 funeral, six cemetery and four combination locations which had not been sold within one year of being added to the disposal list. The Company completed the sale of all these locations during 2005, except for one cemetery which was reclassified back to continuing operations.

29

     The revenues and costs and impairment provisions for the locations identified as discontinued operations are presented in the following table:

	16 weeks		40 weeks
	ended		ended
	October 8, 2005		October 8, 2005
Revenue
Funeral		—	$	1,853
Cemetery		—		598
	$	—	$	2,451
Gross margin
Funeral	$	—	$	(152	)
Cemetery		—		(237	)
		—		(389	)
Provision for asset impairment		—		568
Other expense (income), net		—		455
Loss from discontinued operations, before tax		—		(1,412	)
Income tax provision for discontinued operations		—		266
Loss from discontinued operations	$	—	$	(1,678	)
Depreciation included in gross margin of discontinued operations	$	—	$	20

NOTE 11. INCOME PER SHARE

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

	16 weeks ended				40 weeks ended
	October 7,		October 8,		October 7,		October 8,
	2006		2005		2006		2005
Income (numerator):
Net income attributable to Common stockholders	$	803	$	6,905	$	5,460	$	32,119
Shares (denominator):
Basic weighted average number of shares of Common stock outstanding (thousands)		40,678		40,456		40,606		40,456
Effect of stock options assumed exercised (thousands)		2,111		1,595		1,969		1,265
Diluted weighted average number of shares of Common stock outstanding (thousands)		42,789		42,051		42,575		41,721

     For the 16 and 40 weeks ended October 7, 2006, 4,804,750 employee and director stock options were dilutive to earnings and are included in the computation of diluted earnings per share. Warrants to purchase 2,992,000 shares of Common stock were not included in the computation of diluted earnings per share, because they were anti-dilutive.

30

NOTE 12. EFFECT OF HURRICANE KATRINA

     The Company operated 30 funeral homes, four cemeteries and a limousine company in those areas of Louisiana and Mississippi that were affected by the hurricane on August 29, 2005. The Company experienced some damage at all of these locations. Of the 30 funeral homes, seven experienced significant damage, were not in operation at the end of the 2005 fiscal year and will not reopen. All four cemeteries are in operation. The New Orleans limousine company that had provided services both to the Company’s funeral operations and other third-parties experienced significant damage to its fleet of vehicles and did not resume operations.

     The Company is using its existing operating facilities to provide services to customers normally served by the Company’s closed locations.

Financial results

     The Company’s financial results include the results from operations for those locations affected by Hurricane Katrina as outlined in the following table:

	16 weeks ended						40 weeks ended
	October 7,			October 8,			October 7,		October 8,
	2006			2005			2006		2005
Funeral Homes
Revenue	$	8,603		$	7,301		$	21,065	$	21,656
Number of funeral services performed		1,478			1,570			4,168		4,649
Number of same-site funeral services performed		1,476			1,368			4,164		3,942
Costs and expenses	$	4,704		$	7,622		$	13,617	$	19,204
Gross margin	$	3,899		$	(321	)	$	7,448	$	2,632
Pre-need funeral contracts written	$	2,832		$	3,174		$	5,669	$	8,956
Cemeteries
Revenue	$	822		$	787		$	2,295	$	2,211
Number of cemetery interments		230			233			653		760
Costs and expenses	$	845		$	900		$	2,107	$	2,228
Gross margin	$	(23	)	$	(113	)	$	188	$	(17	)
Pre-need cemetery contracts written	$	366		$	356		$	938	$	1,047

Insurance coverage and long-term asset gain or loss

     The Company purchases insurance coverage for property damage, including damage from wind and flood, subject to separate limits, sub-limits and deductible amounts. The Company, along with its insurance providers, is substantially complete in assessing and estimating the extent of damages and have agreed upon insurance proceeds of $12.7 million. The Company has recorded in funeral costs and expenses, gains of $1.0 million in the 16 weeks ended October 7, 2006 and $1.0 million in the 12 weeks ended June 17, 2006 from the write-off of identified partially, and fully damaged or abandonded buildings and contents.

     The Company has initiated or completed much of the damage repairs. During the 16 weeks ended October 7, 2006, the Company recorded an additional expense of $0.6 million reflecting a higher deductible under its insurance policy and higher other expenses not reimbursed under the insurance policy.

31

     The Company has business interruption insurance that allows the recovery of operating costs and lost profits. During the 16 weeks ended October 7, 2006, the Company recorded as funeral revenue $1.6 million from settlement of the Hurricane Katrina business interruption insurance claim.

NOTE 13. PROPOSED MERGER AGREEMENT

     On April 3, 2006, Service Corporation International (“SCI”) and the Company announced that they have entered into a merger agreement. Pursuant to the agreement, each share of the Company will be converted into the right to receive $20.00 per share in cash. In addition, SCI will assume approximately $358 million of the Company’s debt. The Company’s stockholders voted on May 31, 2006 to approve this agreement.

     The transaction is in the final stages of regulatory approval and is expected to close before year end.

Tender Offer for Eight Year Senior Unsecured Notes

     On September 7, 2006, the Company commenced a cash tender offer to purchase any and all of its outstanding $200,000,000 aggregate principal amount of Eight Year Senior Unsecured Notes, pursuant to an Offer to Purchase and Consent Solicitation Statement dated September 7, 2006. Currently, 100% of the outstanding principal amount of the Eight Year Senior Unsecured Notes has been validly tendered and not withdrawn. The tender offer for the Eight Year Senior Unsecured Notes is set to expire in coordination with SCI’s acquisition of the Company. If any of the Eight Year Senior Unsecured Notes are withdrawn prior to the expiration of the tender offer, the Company has also received the requisite consents to adopt the proposed amendments to the indenture governing the Eight Year Senior Unsecured Notes to eliminate substantially all of the restrictive covenants contained in the indenture and the Eight Year Senior Unsecured Notes (other than, among other covenants, the covenants to pay interest on, and principal of, the Eight Year Senior Unsecured Notes when due) as well as certain events of default.

32

EX-99.B

EXHIBIT 99.B

ALDERWOODS GROUP, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005.

INDEX TO FINANCIAL STATEMENTS

	Page
Alderwoods Group, Inc., Consolidated Financial Statements	1
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets as of December 31, 2005 and January 1, 2005	3
Consolidated Statements of Operations for the 52 Weeks Ended December 31, 2005, 52 Weeks Ended January 1, 2005, and 53 Weeks Ended January 3, 2004	4
Consolidated Statements of Stockholders’ Equity for the 52 Weeks Ended December 31, 2005, 52 Weeks Ended January 1, 2005, and 53 Weeks Ended January 3, 2004	6
Consolidated Statements of Cash Flows for the 52 Weeks Ended December 31, 2005, 52 Weeks Ended January 1, 2005, and 53 Weeks Ended January 3, 2004	9
Notes to the Consolidated Financial Statements	10

1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Alderwoods Group, Inc.

     We have audited the accompanying consolidated balance sheets of Alderwoods Group, Inc. as at December 31, 2005 and January 1, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fifty-two weeks ended December 31, 2005, the fifty-two weeks ended January 1, 2005 and the fifty-three weeks ended January 3, 2004. In connection with our audits of the consolidated financial statements, we also have audited the information with respect to the Company in financial statement Schedule II included in Item 15 of the Company’s annual report on Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alderwoods Group, Inc. as at December 31, 2005 and January 1, 2005, and the results of its operations and its cash flows for the fifty-two weeks ended December 31, 2005, the fifty-two weeks ended January 1, 2005 and the fifty-three weeks ended January 3, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Alderwoods Group, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada

March 10, 2006

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ALDERWOODS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

Expressed in thousands of dollars
except number of shares

	December 31,			January 1,
	2005			2005
ASSETS
Current assets
Cash and cash equivalents	$	7,455		$	9,379
Receivables, net of allowances		52,862			66,445
Inventories		15,784			16,730
Other		6,885			27,622
Assets held for sale		—			82,056
		82,986			202,232
Pre-need funeral receivables and trust investments		334,427			336,030
Pre-need cemetery receivables and trust investments		307,322			311,654
Cemetery property		116,467			119,042
Property and equipment		542,901			540,255
Insurance invested assets		294,598			250,785
Deferred income tax assets		13,057			8,161
Goodwill		295,890			321,134
Cemetery perpetual care trust investments		243,805			246,052
Other assets		42,850			37,082
	$	2,274,303		$	2,372,427
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	119,734		$	140,662
Current maturities of long-term debt		2,435			9,083
Liabilities associated with assets held for sale		—			61,428
		122,169			211,173
Long-term debt		371,040			454,557
Deferred pre-need funeral and cemetery contract revenue		91,618			82,971
Non-controlling interest in funeral and cemetery trusts		548,497			553,617
Insurance policy liabilities		266,729			214,745
Deferred income tax liabilities		10,552			20,357
Other liabilities		21,983			21,954
		1,432,588			1,559,374
Non-controlling interest in perpetual care trusts		243,962			257,141
Stockholders’ equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 40,458,864 issued and outstanding (2004 — 40,017,454)		405			400
Capital in excess of par value		743,126			740,210
Accumulated deficit		(172,405	)		(213,588	)
Accumulated other comprehensive income		26,627			28,890
		597,753			555,912
	$	2,274,303		$	2,372,427

See accompanying notes to the consolidated financial statements

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ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Expressed in thousands of dollars
except per share amounts and number of shares

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31,			January 1,			January 3,
	2005			2005			2004
Revenue
Funeral	$	479,799		$	472,935		$	491,611
Cemetery		174,110			164,052			168,024
Insurance		95,005			80,124			61,127
		748,914			717,111			720,762
Costs and expenses
Funeral		392,544			376,646			378,195
Cemetery		151,914			140,145			139,299
Insurance		89,937			75,415			59,375
		634,395			592,206			576,869
		114,519			124,905			143,893
General and administrative expenses		42,815			51,218			56,281
Provision for asset impairment		(1,379	)		1,787			5,229
Income from operations		73,083			71,900			82,383
Interest on long-term debt and refinancing costs (Note 6)		30,069			78,079			76,453
Other expense (income), net		(4,662	)		(1,162	)		4,056
Income (loss) before income taxes		47,676			(5,017	)		1,874
Income taxes		4,815			(1,453	)		(6,485	)
Net income (loss) from continuing operations		42,861			(3,564	)		8,359
Discontinued operations (Note 19)
Income (loss) from discontinued operations		(1,412	)		19,400			6,870
Income taxes		266			6,487			4,422
Net income (loss) from discontinued operations		(1,678	)		12,913			2,448
Net income	$	41,183		$	9,349		$	10,807
Basic earnings per Common share:
Net income (loss) from continuing operations	$	1.06		$	(0.09	)	$	0.21
Net income (loss) from discontinued operations		(0.04	)		0.32			0.06
Net income	$	1.02		$	0.23		$	0.27
Diluted earnings per Common share:

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	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31,			January 1,			January 3,
	2005			2005			2004
Net income (loss) from continuing operations	$	1.03		$	(0.09	)	$	0.21
Net income (loss) from discontinued operations		(0.04	)		0.32			0.06
Net income	$	0.99		$	0.23		$	0.27
Basic weighted average number of shares outstanding (thousands)		40,245			40,001			39,971
Diluted weighted average number of shares outstanding (thousands)		41,602			41,132			40,465

See accompanying notes to the consolidated financial statements

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ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Expressed in thousands of dollars
except number of shares

					Capital in					Accumulated Other
			Common Stock		Excess of		Accumulated			Comprehensive
	Shares		Par Value		Par Value		Deficit			Income			Total
Balance at December 28, 2002		39,941,271	$	399	$	739,711	$	(233,744	)	$	17,036		$	523,402
Comprehensive income:
Net income								10,807						10,807
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income taxes of $nil											15,187			15,187
Unrealized loss on insurance invested assets, net of income tax recovery of $2,925											(4,790	)		(4,790	)
Less: reclassification adjustments for realized gain on insurance invested assets included in net income, net of income taxes of $345											(642	)		(642	)
Unrealized gain on derivatives, net of income taxes of $nil											689			689
Comprehensive income														21,251
Common stock issued:
Stock issued in connection with the settlement of certain unsecured claims		21,140		1		106								107
Stock issued as compensation in lieu of cash		18,818				105								105
Stock issued under equity incentive plan		3,750				28								28
Balance at January 3, 2004		39,984,979		400		739,950		(222,937	)		27,480			544,893
Comprehensive income:
Net income								9,349						9,349

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					Capital in					Accumulated Other
			Common Stock		Excess of		Accumulated			Comprehensive
	Shares		Par Value		Par Value		Deficit			Income			Total
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income taxes of $nil											5,324			5,324
Unrealized loss on insurance invested assets, net of income tax recovery of $2,770											(2,890	)		(2,890	)
Less: reclassification adjustments for realized gain on insurance invested assets included in net income, net of income taxes of $1,214											(2,254	)		(2,254	)
Unrealized gain on derivatives, net of income taxes of $nil											1,571			1,571
Less: reclassification adjustments for realized gain on derivatives included in net income, net of income taxes of $nil											(341	)		(341	)
Comprehensive income														10,759
Common stock issued:
Stock issued in connection with the settlement of certain unsecured claims		5,977				31								31
Stock issued as compensation in lieu of cash		16,498				173								173
Stock issued under equity incentive plan		10,000				56								56
Balance at January 1, 2005		40,017,454	$	400	$	740,210	$	(213,588	)	$	28,890		$	555,912

See accompanying notes to the consolidated financial statements

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					Capital in					Accumulated Other
			Common Stock		Excess of		Accumulated			Comprehensive
	Shares		Par Value		Par Value		Deficit			Income			Total
Balance at January 1, 2005		40,017,454	$	400	$	740,210	$	(213,588	)	$	28,890		$	555,912
Comprehensive income:
Net income								41,183						41,183
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income taxes of $nil											3,138			3,138
Unrealized loss on insurance invested assets, net of income tax recovery of $2,331											(4,328	)		(4,328	)
Less: reclassification adjustments for realized gain on insurance invested assets included in net income, net of income taxes of $9											(17	)		(17	)
Unrealized loss on derivatives, net of income taxes of $nil											(480	)		(480	)
Less: reclassification adjustments for realized gain on derivatives included in net income, net of income taxes of $nil											(576	)		(576	)
Comprehensive income														38,920
Common stock issued:
Stock issued as compensation in lieu of cash		10,160				144								144
Stock issued under equity incentive plan		431,250		5		2,772								2,777
Balance at December 31, 2005		40,458,864	$	405	$	743,126	$	(172,405	)	$	26,627		$	597,753

See accompanying notes to the consolidated financial statements

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ALDERWOODS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Expressed in thousands of dollars

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31,			January 1,			January 3,
	2005			2005			2004
CASH PROVIDED BY (APPLIED TO)
Operations
Net income	$	41,183		$	9,349		$	10,807
(Income) loss from discontinued operations, net of tax		1,678			(12,913	)		(2,448	)
Items not affecting cash
Depreciation and amortization		44,598			42,093			40,222
Amortization of debt issue costs		3,186			10,118			3,220
Insurance policy benefit reserves		49,532			40,705			28,772
Provision for asset impairment		(1,379	)		1,787			5,229
Loss (gain) on disposal of assets		(4,966	)		(3,530	)		1,056
Deferred income taxes		13,860			(5,126	)		(1,950	)
Premium on long-term debt repurchase		282			32,450			1,266
Other, including net changes in other non-cash balances		(540	)		(10,653	)		51,022
Net cash provided by continuing operations		147,434			104,280			137,196
Net cash provided by (used in) discontinued operations		(601	)		15,309			18,579
		146,833			119,589			155,775
Investing
Proceeds on disposition of business assets		20,721			20,917			11,409
Purchase of property and equipment		(42,510	)		(37,183	)		(25,202	)
Purchase of insurance invested assets		(126,811	)		(138,346	)		(117,689	)
Proceeds on disposition and maturities of insurance invested assets		79,647			86,763			78,059
Net cash used in continuing operations		(68,953	)		(67,849	)		(53,423	)
Net cash provided by discontinued operations		7,908			108,975			23,710
		(61,045	)		41,126			(29,713	)
Financing
Increase in long-term debt		11,198			390,044			330,455
Repayment of long-term debt		(101,630	)		(582,608	)		(458,868	)
Issuance of Common Stock		2,777			56			28
Net cash used in continuing operations		(87,655	)		(192,508	)		(128,385	)
Net cash used in discontinued operations		(57	)		(440	)		(2,177	)
		(87,712	)		(192,948	)		(130,562	)
Decrease in cash and cash equivalents		(1,924	)		(32,233	)		(4,500	)
Cash and cash equivalents, beginning of year		9,379			41,612			46,112
Cash and cash equivalents, end of year	$	7,455		$	9,379		$	41,612

See accompanying notes to the consolidated financial statements

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ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts expressed in thousands of dollars except per share amounts)

NOTE 1. NATURE OF OPERATIONS

     Alderwoods Group, Inc., a Delaware corporation (“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 of December 31, 2005, the Company operated 594 funeral homes and 72 cemeteries and 60 combination funeral homes and cemeteries throughout North America.

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

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

     The Company’s insurance operations sell a variety of insurance products, primarily to fund pre-need funeral services.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal year

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

     The first and second fiscal quarters each consist of 12 weeks and the third fiscal quarter consists of 16 weeks. In order to cause the fourth fiscal quarter to end on the same day as the fiscal year, the fourth fiscal quarter will consist of 13 weeks rather than 12 weeks in certain years.

Basis of Presentation

     The Company is the successor to The Loewen Group Inc. (the “Predecessor”) and its subsidiaries, including Loewen Group International, Inc., a Delaware corporation (“Loewen International”). On June 1, 1999, the Predecessor filed a petition for creditor protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and voluntarily filed an application for creditor protection under the Companies’ Creditors Arrangement Act (“Creditors Arrangement Act”) with the Ontario Superior Court of Justice, Toronto, Ontario, Canada (the “Canadian Court”). The Bankruptcy Court confirmed, and the Canadian Court recognized, the plan of reorganization (the “Plan”) in December 2001 and on January 2, 2002 (the “Effective Date”), the Company emerged from reorganization proceedings.

     At December 31, 2001, the Company adopted fresh start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” As a result of the application of fresh start reporting, significant adjustments were made to the Company’s historical assets and liabilities, as the fair values varied significantly from the amounts recorded by the Predecessor as of December 31, 2001.

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     The consolidated financial statements include the accounts of the Company, its subsidiary companies and operations controlled by the Company through sales and management agreements. All subsidiaries are wholly owned, except for a few companies with small minority interests. The consolidated financial statements also include the accounts of the funeral trusts, cemetery merchandise and service trusts and perpetual care trusts, and several pooled investment funds created for such trusts in which the Company has a variable interest and is the primary beneficiary.

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

Use of estimates

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

Funeral operations

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

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

     The Company records amounts in funeral trusts in which the Company is not the primary beneficiary as amounts receivable from funeral trusts. Earnings in these trusts are deferred until the service is performed. The Company does not record on the consolidated balance sheet amounts associated with insurance funded pre-need contracts for which the Company has not serviced the contract.

     The Company records the assets in the funeral 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 these trusts that are consolidated 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.

     Realized earnings from funeral trust investments and related expenses of the trusts are recognized in other expense (income). Typically, an offsetting accretion for the non-controlling interest in the trusts is included as interest expense in other expense (income). Unrealized gains and losses of funeral trust investments are recorded in both trust investments and, net of tax, in non-controlling interest in funeral trusts in the Company’s consolidated balance sheet.

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

Cemetery operations

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

     Sales of pre-need cemetery interment rights are recognized in accordance with the retail land sales provisions of Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“FAS No. 66”) and EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Accordingly, provided certain collectibility

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criteria are met, pre-need cemetery interment rights sales of developed cemetery property are deferred until a minimum of 10 percent of the sales price has been collected, while pre-need cemetery interment right sales of undeveloped cemetery property are deferred and revenue is recognized on a percentage of completion basis as the cemetery property is developed. Multiple element cemetery contract arrangements are allocated based on objective evidence of fair value, and revenue is recorded when the criteria for revenue recognition has been met for each element. For pre-need sales of cemetery merchandise and services, revenue is deferred until the delivery of such merchandise or performance of such services occurs.

     Pursuant to various state and provincial laws, a portion of the proceeds from the sale of pre-need merchandise and services may also be required to be paid into trusts. The Company records the assets in the cemetery merchandise and service trusts in which the Company is the primary beneficiary as trust investments at their fair value in accordance with FAS No. 115.

     The liabilities of the trusts 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.

     Realized earnings from cemetery merchandise and service trust investments and related expenses of the trusts are recognized in other expense (income). Typically, an offsetting accretion expense for the non-controlling interest in the trusts is included as interest expense in other expense (income). The net amount of realized earnings on merchandise and service trust funds are recorded as cemetery revenue when the merchandise is delivered and service performed. Unrealized gains and losses of cemetery merchandise and service trust investments are recorded in both trust investments and, net of tax, in non-controlling interest in cemetery merchandise and service trusts in the Company’s consolidated balance sheet.

     All direct and indirect selling costs associated with the sale of cemetery products are expensed in the period incurred. The costs associated with fulfilling pre-need cemetery contracts are expensed at the same time as the related revenue is recognized. All costs associated with cemetery interment rights are expensed at the time of sale, due to the revenues being recognized pursuant to FAS No. 66. All costs associated with cemetery merchandise are expensed at the time the pre-need contract is serviced. All costs associated with cemetery services are expensed as incurred. These costs are generally not incurred until the contract is serviced, due to these costs primarily being labor costs.

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

Perpetual care trusts

     A portion of the proceeds from cemetery sales for interment rights is generally required by law to be paid into perpetual or endowment care trusts. The Company records the assets in the perpetual care trusts as trust investments at their fair value in accordance with FAS No. 115.

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

     Realized earnings from cemetery perpetual care trust investments are recognized in other expense (income) in accordance with FAS No. 115. Typically, an offsetting accretion expense for the non-controlling interest in perpetual care trusts is also recorded in other expense (income). Distributable earnings from the perpetual care trusts are recognized in cemetery revenue to the extent of qualifying cemetery maintenance costs. Historically, qualifying cemetery maintenance costs have exceeded distributable earnings at individual cemeteries. 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.

Insurance operations

     Insurance invested assets include fixed-maturity investments, cash and short-term investments held by the Company’s wholly-owned insurance company. The Company classifies all of its fixed-maturity investments held by the

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Company’s insurance company as available-for-sale. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Short-term investments include fixed maturities which mature within one year from the date of purchase, money market mutual funds and repurchase agreements.

     Insurance invested liabilities include liabilities for future policy benefits, policy claims and other benefits payable, and premiums collected in advance. The Company establishes a liability for future policy benefits related to its traditional whole life and limited-payment life insurance products using the net level premium method based on estimated investment yields and discretionary policy growth rates, mortality, persistency and other assumptions which were considered appropriate at the time the policies were issued. Benefit reserves for annuity contracts represent policy account balances before applicable surrender charges. Additionally, the Company establishes a liability for the impact of known policy benefits payable and estimated claims that have been incurred but not yet reported to the Company. The estimate of unreported claims is based on prior experience.

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

     Revenues from annuity contracts represent principally surrender charges. Expenses from annuity contracts represent principally accumulated interest. Policy account balances for annuities represent the deposits received plus accumulated interest.

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

     Insurance costs and expenses include policy benefits and claims, changes in policy benefit reserves, amortization of deferred acquisition costs, commissions, salaries, employee benefits, and other operating expenses. Policy benefits and expenses are recognized in income over the life of the policy contracts.

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

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

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

Cash and cash equivalents

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

Inventories

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

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Consolidation of trusts

     Beginning January 4, 2004, the Company accounts for its variable interest in the approximately 600 funeral, cemetery merchandise and service, and perpetual care trusts, and several pooled investment funds created for such trusts, in accordance with FASB interpretation No. 46 (FIN No. 46R). The consolidation of the Company’s interests did not change the legal relationships among these trusts, pooled investment funds, 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, as it is not considered the primary beneficiary of these funeral trusts under FIN No. 46R.

     Under FIN No. 46R, the Company records the assets in the funeral, cemetery merchandise and service, and perpetual care trusts, and several pooled investment funds created for such trusts, in which the Company is the primary beneficiary as trust investments at their fair value in accordance with FAS No. 115.

     The liabilities of the funeral and cemetery merchandise and service trusts, and several pooled investment funds 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. The equity interest in the perpetual care trusts presented as a non-controlling interest in perpetual care trusts between liabilities and stockholders’ equity in the Company’s consolidated balance sheet as the principal in perpetual care trust is required to be held in perpetuity and is not redeemable by the Company or the customer.

     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 trust in the Company’s consolidated balance sheet.

     Beginning January 4, 2004, realized earnings from cemetery perpetual care trust investments are recognized in other expense (income). 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 trust 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.

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

Cemetery property

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

Property and equipment

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

Buildings and improvements	10 to 20 years for buildings and the shorter of 10 years or the lease term for leasehold improvements
Automobiles	2 to 5 years
Furniture, fixtures and equipment	5 to 10 years
Computer hardware and software	3 to 6 years

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Goodwill and intangible assets

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

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

Financial instruments

     Financial instruments that potentially subject the Company to concentrations of credit or collection risk principally consist of cash and cash equivalents, customer receivables, receivables from trusts, and trust investments.

     The Company maintains its cash and cash equivalents in bank deposit accounts with various major financial institutions which, at times may exceed federally insured limits. The Company has not experienced any losses in such deposit accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

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

     Funeral and cemetery merchandise and service trust investments represent customer payments on pre-need funeral contracts and pre-need cemetery contracts that are placed into state regulated trusts, and generally do not subject the Company to significant collection risk. Funds placed into certain state regulated trusts are limited to federally insured deposits and or U.S. Government bonds. The Company’s policies with respect to trust fund investments are specifically designed such that investments are diversified primarily in cash, fixed income and equity securities and are maintained with various high quality and reputable counterparties, as well as to minimize concentrations of credit risk by not maintaining disproportionately large balances in any one financial counterparty. As of December 31, 2005, the Company had a significant concentration of small restricted cash trust accounts in the aggregate amount of $53,177,000 (2004 — $63,175,000) with one financial institution.

     A summary of the cost and fair values of financial instruments is as follows:

	December 31, 2005				January 1, 2005
	Carrying Value		Fair Value		Carrying Value		Fair Value
Amounts receivable from funeral trusts (see Note 3)	$	29,893	$	29,893	$	27,243	$	27,243
Long-term debt (see Note 6)		373,475		380,475		463,640		480,682
Derivative instruments (see Note 21)		941		941		2,087		2,087
	$	404,309	$	411,309	$	492,970	$	510,012

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

     The carrying amount of funeral, cemetery and perpetual care trust investment and insurance investments are classified as available for sale securities and recorded at fair value based on quoted market prices.

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Derivative Financial Instruments

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

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

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

Stock based compensation plans

     The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as interpreted by Financial Accounting Standards Board (“FASB”) Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB 25” and Emerging Issues Task Force No. 00-23 (“EITF 00-23”), “Issues related to the Accounting for Stock Compensation under APB 25 and FIN 44,” and FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123.”

     Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price. Compensation expense is also recorded when the number of shares to be issued upon exercise is not determinable, as with the tandem appreciation right where the number of shares issued is dependent upon the exchange of the option for the tandem appreciation right. SFAS No. 123 as amended by SFAS No. 148 requires a fair-value based method of accounting for an employee stock option or similar equity instrument.

     Had compensation cost for the Company’s stock-based plan, including options grants and restricted stock issuances been determined using the Black-Scholes option pricing model at the grant date for awards granted in accordance with the provisions of SFAS No. 123, the Company’s net income would have been the amounts indicated below:

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	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31, 2005			January 1, 2005			January 3, 2004
Net income, as reported	$	41,183		$	9,349		$	10,807
Total stock-based employee compensation expense determined under fair value-based method, net of tax		(2,805	)		(2,584	)		(2,479	)
Pro forma net income	$	38,378		$	6,765		$	8,328
Net income per common share:
Basic, as reported	$	1.02		$	0.23		$	0.27
Basic, pro forma		0.95			0.17			0.21
Diluted, as reported		0.99			0.23			0.27
Diluted, pro forma		0.92			0.16			0.21

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ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts expressed in thousands of dollars except per share amounts)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income taxes

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

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

Foreign currency translation

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

Comparability

     Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year, due to, among other things, the reclassification of assets held for sale as discontinued operations.

Accounting changes and recent accounting standards

Recent accounting standards

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“FAS No. 123R”). FAS No. 123R requires companies to recognize compensation expense in an amount equal to the fair value of the share-based payment (including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans) issued to employees. FAS No. 123R applies to all transactions involving issuance of equity by a Company in exchange for goods and services, including employee services. FAS No. 123R is effective in the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. The Company will adopt FAS No. 123R in the first fiscal quarter of its 2006 fiscal year and expects to use the modified prospective application method, which results in no restatement of the Company’s previously issued annual consolidated financial statements. The adoption of FAS No. 123R is expected to result in additional compensation expense of approximately $3.7 million for the 2006 fiscal year.

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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:

	December 31, 2005			January 1, 2005
Customer receivables	$	38,438		$	37,146
Allowance for contract cancellations and refunds		(15,988	)		(17,287	)
Funeral trust investments		282,084			288,928
Amounts receivable from funeral trusts		29,893			27,243
Pre-need funeral receivables and trust investments	$	334,427		$	336,030

     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.

     As of December 31, 2005, 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 cash 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.

     It is not practical to estimate the fair value of amounts receivable from funeral trusts, because they are commingled with other third party funds in various trusts.

     The table below shows funeral trust investments at their fair values.

	December 31, 2005		January 1, 2005
Available-for-sale
Fixed income securities:
U.S. Treasury and other Government obligations	$	22,724	$	18,425
U.S. Government agencies		13,145		11,683
Corporate		12,318		10,325
Total bonds		48,187		40,433
Mortgaged-backed		20,357		17,288
Asset-backed		2,920		1,500
Total fixed income securities		71,464		59,221
Equity securities		79,645		63,177
Total available-for-sale		151,109		122,398
Restricted cash and cash equivalents		101,598		131,105
Other		29,377		35,425

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	December 31, 2005			January 1, 2005
Funeral trust investments	$	282,084		$	288,928
Unrealized gains	$	11,709		$	9,124
Unrealized losses		(4,758	)		(2,007	)

     Realized investment income from the funeral trust investments, including realized gains and losses are recorded in other expense (income).

     During the 52 weeks ended December 31, 2005, funeral trust available-for-sale securities with a cost of $177,151,000 were sold for proceeds of $178,995,000, resulting in $5,368,000 and $3,524,000 of realized gains and losses, respectively. The first in, first out method was used to determine the cost of funeral trust available-for-sale securities disposed of. 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 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.

     Maturities of fixed income securities are estimated as follows:

	December 31, 2005
Due in one year or less	$	769
Due in one to five years		26,858
Due in five to ten years		13,936
Thereafter		29,901
	$	71,464

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:

	December 31, 2005			January 1, 2005
Customer receivables	$	61,749		$	64,130
Unearned finance income		(6,232	)		(5,759	)
Allowance for contract cancellations and refunds		(15,648	)		(17,538	)
Cemetery merchandise and service trust investments		267,453			270,821
	$	307,322		$	311,654

     Cemetery merchandise and service trust investments 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 of December 31, 2005. The Company will recognize and generally receive these amounts when the merchandise is delivered or service is performed.

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     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.

     As of December 31, 2005, 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 cash 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.

     The fair value of customer receivables is not materially different from book value, because of the large number of individual contracts, which generally have terms of one to seven years and contractual or imputed interest rates ranging from 8.00% to 9.75% per annum.

     The table below shows cemetery merchandise and service trust investments at their fair values.

	December 31, 2005			January 1, 2005
Available-for-sale
Fixed income securities:
U.S. Treasury and other Government obligations	$	44,647		$	49,773
U.S. Government agencies		20,130			24,729
Corporate		21,081			19,990
Total bonds		85,858			94,492
Mortgaged-backed		36,826			34,792
Asset-backed		5,883			3,146
Total fixed income securities		128,567			132,430
Equity securities		100,069			99,845
Total available-for-sale		228,636			232,275
Restricted cash and cash equivalents		30,257			37,120
Other		8,560			1,426
Cemetery trust investments	$	267,453		$	270,821
Unrealized gains	$	13,709		$	16,194
Unrealized losses		(6,341	)		(3,083	)

     Realized investment income from the cemetery merchandise and service trust investments, including realized gains and losses are recorded in other expense (income).

     During the 52 weeks ended December 31, 2005, cemetery merchandise and service trust available-for-sale securities with a cost of $160,541,000 were sold for proceeds of $162,212,000, resulting in $4,865,000 and $3,194,000 of realized gains and losses, respectively. The first in, first out method was used to determine the cost of cemetery trust available-for-sale securities disposed of. The Company has determined that unrealized losses in the cemetery merchandise and service trust investments are not other-than-temporary, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices.

     The Company recommends to the trustee the mix of equities and fixed income securities in accordance with policies set by an investment committee comprised of members of senior management. The investment committee sets the mix of investments within the investment parameters set by various state and provincial regulators and with the assistance of

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independent professional financial advisors. The policy set by the investment committee emphasizes, through an investment grade focus, a capital preservation approach while maintaining acceptable levels of income and capital appreciation.

     Maturities of fixed income securities are estimated as follows:

	December 31, 2005
Due in one year or less	$	1,099
Due in one to five years		48,327
Due in five to ten years		24,512
Thereafter		54,629
	$	128,567

     The customer receivables as of December 31, 2005, are expected to mature as follows:

	End of
	Fiscal Year
2006	$	32,416
2007		15,070
2008		7,382
2009		3,778
2010		1,521
Thereafter		1,582
	$	61,749

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.

     As of December 31, 2005, 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 cash 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 table below shows perpetual care trust investments at their fair values.

	December 31, 2005		January 1, 2005
Available-for-sale
Fixed income securities:
U.S. Treasury and other Government obligations	$	52,918	$	36,871
U.S. Government agencies		28,043		34,664
Corporate		35,346		38,433
Total bonds		116,307		109,968

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	December 31, 2005			January 1, 2005
Mortgaged-backed		63,548			74,707
Asset-backed		12,089			11,319
Total fixed income securities		191,944			195,994
Equity securities		28,158			27,673
Total available-for-sale		220,102			223,667
Restricted cash and cash equivalents		23,263			21,611
Other		440			774
Cemetery perpetual care trust investments	$	243,805		$	246,052
Unrealized gains	$	4,084		$	5,271
Unrealized losses		(5,535	)		(2,344	)

     During the 52 weeks ended December 31, 2005, perpetual care trust available-for-sale securities with a cost of $147,912,000 were sold for proceeds of $149,451,000, resulting in $4,482,000 and $2,943,000 of realized gains and losses, respectively. The first in, first out method was used to determine the cost of perpetual care trust available-for-sale securities disposed of. The Company has determined that unrealized losses in the perpetual care trust investments are not other-than-temporary, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices.

     The Company recommends to the trustee the mix of equities and fixed income securities in accordance with policies set by an investment committee comprised of members of senior management. The investment committee sets 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 set by the investment committee emphasizes, through an investment grade focus, a capital preservation approach while maintaining acceptable levels of income and capital appreciation.

     Maturities of fixed income securities are estimated as follows:

	December 31, 2005
Due in one year or less	$	1,196
Due in one to five years		65,463
Due in five to ten years		35,456
Thereafter		89,829
	$	191,944

NOTE 6. LONG-TERM DEBT

     Long-term debt consists of the following:

	December 31, 2005				January 1, 2005
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
Revolving credit facility (a)	$	4,000	$	4,000	$	—	$	—
Senior secured term loan B due in 2009 (a)(b)		161,683		161,683		246,826		246,826
7.75% Senior unsecured notes due in 2012 (c)		200,000		207,000		200,000		216,760
12.25% Senior unsecured notes due in 2009 (d)		—		—		4,509		4,791
Promissory notes and capitalized obligations, certain of which are secured by assets of certain subsidiaries		7,792		7,792		12,305		12,305

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	December 31, 2005				January 1, 2005
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
		373,475		380,475		463,640		480,682
Less, current maturities of long-term debt		2,435		2,435		9,083		9,365
	$	371,040	$	378,040	$	454,557	$	471,317

(a)	In 2003, the Company entered into a senior secured facility (the “Credit Agreement”), which after subsequent amendments, includes a $368,000,000 Senior Secured Term Loan B due September 29, 2009 (the “Term Loan B”) and a $75,000,000 revolving credit facility (the “Revolving Credit Facility”), of which $35,000,000 is 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 requirements. 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 (7.25% at December 31, 2005), plus 1.75% (based upon the Company’s consolidated leverage ratio at December 31, 2005), or (ii) LIBOR (4.54% for the three-month LIBOR at December 31, 2005), plus 2.75% (based upon the Company’s consolidated leverage ratio at December 31, 2005). An annual fee of 0.50% is charged on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility matures on September 29, 2008.
	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, an annual maximum on capital expenditures and cemetery development, and specified maximum amounts for capital lease obligations, indebtedness, acquisitions, certain investments, and sales of accounts receivable. Outstanding principal amounts and interest accrued and unpaid may, at the election of the requisite lenders, become immediately due and payable and further commitments by the lenders to make loans may, at the election of the requisite lenders, be terminated upon the occurrence of events of default specified in the Credit Agreement. As of December 31, 2005, 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.
	On March 18, 2005, Alderwoods Group, Inc. entered into an amendment to the Credit Agreement. The amendment modifies the Credit Agreement to provide Alderwoods Group, Inc. additional flexibility to introduce an employee stock purchase plan and other long-term incentive plans, increase the letter of credit sub-limit under the Revolving Credit Facility to $35,000,000 from $25,000,000, and make certain other agreed upon changes.
	As of December 31, 2005, the amount available under the Revolving Credit Facility was $75,000,000, less $17,644,000 in outstanding letters of credit and a revolving credit facility balance of $4,000,000.
(b)	The Term Loan B provides the Company with an option to elect an interest rate equal to either (i) a base rate (7.25% at December 31, 2005), plus 1.00%, or (ii) LIBOR (4.54% for the three-month LIBOR at December 31, 2005), plus 2.00%. The weighted average rate of interest was 6.31% at December 31, 2005. The Term Loan B is repayable in quarterly principal installments from December 31, 2005, to June 13, 2009 (subject to reduction for prepayments) of 0.25% of the aggregate principal amount of the Term Loan B outstanding as of December 3, 2004, 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 first quarter of its 2007 fiscal year.
	As a result of the amendment to the Credit Agreement on August 19, 2004, the Company expensed $1,164,000 of unamortized deferred finance costs, which is included in interest expense for the 52 weeks ended January 1, 2005. In addition, $3,280,000 of refinancing fees and costs incurred in connection with the Credit Agreement amendments on August 19, 2004, and December 3, 2004, is also included in interest expense for the 52 weeks ended January 1, 2005.
(c)	On August 19, 2004, the Company issued the 7.75% Senior Unsecured Notes, due in 2012 (the “Eight-Year Senior Unsecured Notes”). Interest accrues at an annual rate of 7.75% and is payable semi-annually on March 15 and September 15 or, if such day is not a business day, the next succeeding business day. At any time prior to

24

September 15, 2007, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Eight-Year Senior Unsecured Notes at a redemption price of 107.75% of the stated principal amount, plus accrued and unpaid interest and Liquidated Damages (as defined in the indenture governing the Eight-Year Senior Unsecured Notes), if any, with net cash proceeds from specified equity offerings, provided at least 65% of the aggregate principal amount of the Eight-Year Senior Unsecured Notes remains outstanding and the redemption occurs within 90 days of the date of the closing of the specified equity offering. On or after September 15, 2008, the Company may, at its option, redeem all or part of the Eight-Year Senior Unsecured Notes at the redemption prices (expressed as percentages of the stated principal amount) set forth below, plus accrued and unpaid interest and Liquidated Damages, if any, if redeemed during the twelve-month period beginning on September 15 of the years indicated below:

Year	Percentage
2008		103.875
2009		101.938
2010 and thereafter		100.000

(d)	On January 2, 2002, the Company issued the 12.25% Senior Unsecured Notes, due 2009. 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 52 weeks ended January 1, 2005.
	On August 19, 2004, the Company repurchased the principal amount of $316,243,000 at a premium of $31,340,000, plus accrued interest pursuant to an offer to purchase and consent solicitation. The premium is included in interest expense for the 52 weeks ended January 1, 2005.
	On January 3, 2005, the Company repurchased the remaining principal amount of $4,509,000 at a premium of $282,000, plus accrued interest. The premium is included in interest expense for the 52 weeks ended December 31, 2005.

     The Credit Agreement and the Eight-Year Senior 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, Alderwoods Group is required to make an offer to purchase the then-outstanding Eight-Year Senior Unsecured Notes at a price equal to 101% of their stated principal amount, plus accrued and unpaid interest to the applicable repurchase date and Liquidated Damages, if any.

     The Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes restrict the Company’s ability to engage in asset sales. The Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes prohibit dispositions of assets unless the assets disposed of fulfill the requirements of specified exceptions. The indenture governing the Eight-Year Senior Unsecured Notes excepts, among other exceptions, assets with a fair market value less than $5,000,000. One specified exception contained in the Credit Agreement 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 ability to apply such net proceeds at its option (or as otherwise required) to invest in non-current operating assets (or enter into agreements for such investment which agreements are consummated within 360 days of such receipt of asset sale proceeds). Up to $10,000,000 of such net proceeds in any fiscal year (but not in excess of $40,000,000 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 non-current operating assets or make capital expenditures as described in the two immediately preceding sentences, the Company must make mandatory repayments under the Credit Agreement and, after all indebtedness under the Credit Agreement has been repaid, offer to purchase the Eight-Year Senior Unsecured Notes at a purchase price equal to 100.00% of the stated principal amount, plus accrued and unpaid interest and Liquidated Damages, if any.

25

     Covenants in the Credit Agreement and the indenture governing the Eight-Year Senior Unsecured Notes restrict, and under specified circumstances prohibit, the payment of dividends by the Company.

     In connection with the issuance of the Eight-Year Senior Unsecured Notes, the Company entered into a registration rights agreement, pursuant to which the Company was required, on or prior to May 16, 2005, to file an exchange offer registration statement on an appropriate form under the Securities Act of 1933 with the SEC. On May 12, 2005, the Company filed the exchange offer registration statement with the SEC. The registration statement was subsequently declared effective by the SEC on June 7, 2005. On June 8, 2005, the Company commenced an exchange offer (the “Exchange Offer”) pursuant to which holders of the Eight-Year Senior Unsecured Notes were given the opportunity to exchange their outstanding notes for new notes with substantially identical terms covered by the exchange offer registration statement. The Company consummated the Exchange Offer on July 18, 2005.

     Maturities of long-term debt principal are as follows:

	End of Fiscal
	Year
2006	$	2,435
2007		4,055
2008		7,618
2009		157,570
2010		184
Thereafter		201,613
	$	373,475

NOTE 7. INSURANCE ACTIVITIES

     Revenue from insurance operations is comprised of the following:

	52 Weeks Ended		52 Weeks Ended		53 Weeks Ended
	December 31, 2005		January 1, 2005		January 3, 2004
Premiums	$	81,943	$	67,833	$	52,251
Interest, dividend and other investment income		13,036		10,560		8,753
Realized investment gains		26		1,731		123
	$	95,005	$	80,124	$	61,127

     As of December 31, 2005 and January 1, 2005, the fair values of insurance operation investments classified as available-for-sale were based on quoted market prices. The carrying values of cash and short-term investments and other investments approximate their fair values, due to their short-term to maturity. Fixed maturity securities are classified as available-for-sale and carried at fair value. Investments in debt securities are evaluated for other than temporary impairment. Other temporary impairment is reflected in current period income as a realized loss. It is possible that a significant change in economic conditions in the near term could result in losses that could be significant to the Company. Insurance invested assets carrying and fair values consist of the following:

26

	December 31, 2005			January 1, 2005
Available-for-sale
Fixed income securities:
U.S. Treasury and other Government obligations	$	37,378		$	36,405
U.S. state and political subdivisions		1,235			1,201
Corporate		114,715			107,981
Total bonds		153,328			145,587
Collaterized mortgages		66,455			47,490
Mortgaged-backed		56,028			45,385
Asset-backed		15,773			10,227
Total available-for-sale		291,584			248,689
Cash and short-term investments		2,917			2,004
Other		97			92
Insurance invested assets	$	294,598		$	250,785
Unrealized gains	$	6,435		$	7,666
Unrealized losses		(3,239	)		714

     During the 52 weeks ended December 31, 2005, insurance investments classified as available-for-sale with a cost of $37,357,000 (2004 — $40,021,000), were sold for proceeds of $37,382,000 (2004 — $41,752,000), resulting in $565,000 (2004 — $1,976,000) and $540,000 (2004 — $245,000) of realized gains and losses, respectively. The specific cost method was used to determine the cost of available-for-sale securities disposed of. The Company has determined that unrealized losses in insurance invested assets are not other-than-temporary, as the unrealized losses were due to temporary fluctuations in interest rates.

     Insurance invested assets are predominantly in fixed income securities. The Company manages the mix of fixed income securities in accordance with policies set by an investment committee comprised of members of senior management. The investment committee sets and modifies the mix of investments with the assistance of independent professional financial advisors. The policy emphasizes a conservative approach while maintaining acceptable levels of income and capital appreciation.

     Maturities of fixed income securities are estimated as follows:

	December 31, 2005		January 1, 2005
Due in one year or less	$	10,502	$	1,904
Due in one to five years		35,212		43,760
Due in five to ten years		29,951		21,125
Thereafter		77,663		78,798
	$	153,328	$	145,587

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NOTE 8. STOCKHOLDERS’ EQUITY

Capital stock

     The Company is authorized to issue 10,000,000 shares of Preferred Stock, with a par value of $0.01 per share, of which none have been issued.

     The Company is authorized to issue 100,000,000 shares of Common Stock, with a par value of $0.01 per share.

     In addition, warrants to purchase 2,992,000 shares of Common Stock were issued on the Effective Date, January 2, 2002. The warrants entitle the holders to purchase, at any time up to January 2, 2007, shares of Common Stock at an exercise price of $25.76 per share. The exercise price of the warrants exceeded the fair value of the Company’s Common Stock on the date of issuance and throughout the 52 weeks ended December 31, 2005, 53 weeks ended January 1, 2005, and 53 weeks ended January 3, 2004. None of the warrants have been exercised.

Stock Based Compensation Plans

Director Compensation Plan

     Pursuant to the Company’s Director Compensation Plan (the “Director Compensation Plan”), each director of the Company who is not an employee of the Company or any of its subsidiaries has the option of receiving his or her annual base retainer and attendance fees in cash, Common Stock or a combination thereof. Further, each participant may elect to have Common Stock paid in the form of deferred Common stock (“Deferred Stock”), which will be credited to a booking account in the name of the participant. The Deferred Stock is subject to a deferral period during which the participant has no right to transfer any rights under his or her Deferred Stock and has no other rights of ownership therein. The Company has reserved 100,000 shares of Common Stock for issuance as compensation in lieu of cash under the Director Compensation Plan, of which 53,674 shares have been issued as of December 31, 2005.

Employee Stock Purchase Plan

     In 2005, the Company’s shareholders approved the adoption of a compensatory employee stock purchase plan to provide for the purchase on the open market, to a maximum of 1,100,000 shares of Common Stock of the Company. Eligible employees may authorize payroll deductions of up to 5% of their regular base salary to purchase shares of Common Stock of the Company on the open market on a monthly basis. The Company will make a cash contribution to purchase shares of Common Stock of the Company as additional compensation to each participant equal to 50% of the employee’s contribution for that month. During the 52 weeks ended December 31, 2005, a total of 46,653 shares were purchased and distributed to employees at an average price of $16.10 per share and compensation expense of $250,000 was incurred.

2005-2007 Executive Strategic Incentive Plan

     The 2005-2007 Executive Strategic Incentive Plan, approved by the Board of Directors on July 21, 2005, is a performance based compensation plan designed to motivate and reward the senior management team for achieving shareholder value objectives. The plan provides cash awards to the senior executives based on the Company’s Common Stock reaching a threshold target price of $17.00 in December 2007. The amount of the cash award increases the more the stock price exceeds the $17.00 threshold target price. Achieving a stock price of $17.00 results in an aggregate cash award of $5.6 million. Achieving a stock price of $18.00 results in an aggregate cash award of $8.0 million. The aggregate cash award increases by $1.6 million for every $1.00 in stock appreciation beyond $18.00. No compensation expense was recorded in the 52 weeks ended December 31, 2005 as market value at December 31, 2005 was less than the threshold target price for the Executive Strategic Incentive Plan.

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2005 Equity Incentive Plan

     In April of 2005, the Company’s shareholders approved the 2005 Equity Incentive Plan that permits the grant of (i) options to the employees and members of the Company’s Board of Directors, with or without tandem appreciation rights, and (ii) restricted Common Stock units. A total of 1,800,000 shares are reserved for grant under the plan. Stock options have 3-year terms and vest at a rate of 25% on the first, 25% on the second and 50% on the third anniversaries of the date of grant.

     The tandem appreciation rights entitle the employee to exchange the employee’s option right for a number of shares equal in value to the appreciated value of the options. The exchange of the option for the tandem appreciation right requires an immediate exercise of the tandem appreciation right and will cause the immediate termination of the related option right. An exchange of an option right for a tandem appreciation right may only be made when the relevant option is otherwise exercisable. Although the options granted had an exercise price equal to or greater than the market value of the underlying Common Stock on the grant date, the number of shares to be issued upon exercise is not determinable as it is dependent upon the exchange of the option for a tandem appreciation right. In applying the intrinsic value-based method, the Company did not record a stock-based compensation expense for the 52 weeks ended December 31, 2005 as the market value at December 31, 2005 was less than the exercise price.

     As of December 31, 2005, the Company had granted 242,200 shares of restricted Common Stock units to employees. The restricted Common Stock units do not vest for the first three years after the date grant. Thereafter, the restricted Common Stock units vest in years 3 to 10 based upon the share price of the Company’s Common Stock. After three years of service, the restricted Common Stock units vest 70% at a $17 share price, and an additional 15% at a $17.50 share price and the final 15% at an $18 share price. Once granted, the restricted Common Stock units are not included in total shares outstanding and are not included in the weighted average number of common shares outstanding in each period used to calculate basic earnings per share until vested. No compensation expense was recorded in the 52 weeks ended December 31, 2005 as market value at December 31, 2005 was less than the vesting price for the restricted Common Stock units.

2002 Equity Incentive Plan

     On January 2, 2002 the Company implemented the 2002 Equity Incentive Plan that permits the grants of stock options to the employees and members of the Company’s Board of Directors. A total of 4,500,000 shares are reserved for grant under the plan. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. Except in certain cases, stock options have 3-year terms and vest at a rate of 25% on the first, 25% on the second and 50% on the third anniversaries of the date of grant. For option grants under the 2002 Equity Plan, no stock-based compensation expense was recorded in the 52 weeks ended December 31, 2005, 52 weeks ended January 1, 2005 and 53 weeks ended January 3, 2004, as all options granted under this plan had an exercise price equal to or greater than the market value of the underlying Common Stock on the grant date.

     The following is a summary of the total number of outstanding stock options and restricted Common Stock units under both plans:

	Outstanding			Weighted Average		Outstanding Restricted		Weighted Average
	Options			Exercise Price		Common Stock Units		Exercise Price
				(dollars per				(dollars per
	(thousands)			Common share)		(thousands)		Common share)
Balance at December 28, 2002		3,470		$	11.07		—	$	—
Granted		1,220			3.65		—		—
Exercised		(4	)		7.59		—		—
Cancelled		(501	)		11.39		—		—
Balance at January 3, 2004		4,185			8.87		—		—
Granted		70			9.43		—		—
Exercised		(10	)		5.62		—		—
Cancelled		—			—		—		—

29

	Outstanding			Weighted Average		Outstanding Restricted			Weighted Average
	Options			Exercise Price		Common Stock Units			Exercise Price
				(dollars per					(dollars per
	(thousands)			Common share)		(thousands)			Common share)
Balance at January 1, 2005		4,245			8.89		—			—
Granted		1,308			15.09		248			15.99
Exercised		(431	)		6.44		—			—
Cancelled		(91	)		8.25		(11	)		15.99
Balance at December 31, 2005		5,031		$	10.75		237		$	15.99

     The following table summarizes information about stock options outstanding at December 31, 2005:

	Number		Weighted- Average Remaining Contractual		Weighted- Average		Number		Weighted- Average
Range of Exercise Prices	Outstanding		Life		Exercise Price		Exercisable		Exercise Price
					(dollars per				(dollars per
(dollars per Common share)	(thousands)		(in years)		Common share)		(thousands)		Common share)
$3.65 – $5.96		919		7.24	$	3.65		459	$	3.65
$5.97 – $7.59		1,035		6.48		7.47		1,035		7.47
$7.60 – $13.23		2,049		6.59		12.95		1,750		13.19
$13.24 – $15.99		1,028		9.57		15.99		—		—
		5,031						3,244

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

Weighted-average assumptions	December 31, 2005			January 1, 2005			January 3, 2004
Dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		45.0	%		41.5	%		32.9	%
Risk-free interest rate		3.64	%		1.93	%		3.1	%
Expected option life in years		5			3			3

     The weighted average fair value of the Company’s stock options issued under the 2002 Equity Incentive Plan and the 2005 Equity Incentive Plan, calculated using the Black-Scholes option-pricing model, granted during the 52 weeks ended December 31, 2005, was $6.70 (2004 — $2.84, 2003 — $0.96) per option.

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

NOTE 9. LEGAL CONTINGENCIES

     The Company is a party to legal proceedings in the ordinary course of its business, and believes it has made adequate provision for any potential estimated liabilities.

     Funeral Consumers Alliance, Inc. et al v. Alderwoods Group, Inc. et al was filed in the United States District Court for the Northern District of California in April, 2005. This case has been transferred to the United States District Court for the Southern District of Texas, Case No. CV3394. To date, six separate class action lawsuits, including, Francis H. Rocha v. Alderwoods Group, Inc. et al, Marcia Berger v. Alderwoods Group, Inc. et al, Maria Magsarili and Tony Magsarili v. Alderwoods Group, Inc. et al, Caren Speizer v. Alderwoods Group, Inc. et al, and Frank Moroz v. Alderwoods Group, Inc.

30 

et al (“Funeral Consumer Cases”) have been consolidated into this case. Two other cases, also transferred to the United States District Court for the Southern District of Texas, Pioneer Valley Casket Co. v. Alderwoods Group, Inc. et al (“Pioneer Valley”) and Ralph Fancher et al v. Alderwoods Group, Inc. et al (“Fancher”), have been consolidated into this case for purposes of discovery only.

     All of these cases, including Pioneer Valley and Fancher are purported class actions on behalf of casket consumers throughout the United States. The suits name as defendants the Company and four other public companies involved in the funeral or casket industry. Except for Fancher, which alleges violations of State of Tennessee antitrust laws only, all of the Funeral Consumer Cases and Pioneer Valley allege that defendants violated federal and state antitrust laws by engaging in anticompetitive practices with respect to the sale and pricing of caskets. All of the cases, including Fancher, seek injunctions, unspecified amounts of monetary damages, and treble damages. Motions to Dismiss filed by the Company and all other defendants are pending in the Funeral Consumer Cases and Pioneer Valley. The Company intends to file a Motion to Dismiss in the Fancher case as well. Plaintiffs in all these cases have yet to provide any meaningful information regarding their alleged damages. As a result, the Company cannot quantify its ultimate liability, if any, for the payment of damages. The Company believes plaintiffs’ claims are without merit and intends to vigorously defend itself in these actions.

     Richard Sanchez et al v. Alderwoods Group, Inc. et al was filed in February 2005 in the Superior Court of the State of California, for the County of Los Angeles, Central District; Case No.BC328962. Plaintiffs seek to certify a nationwide class on behalf of all consumers who purchased funeral goods and services from the Company. Plaintiffs allege in essence that the Federal Trade Commission’s Funeral Rule requires the Company to disclose its markups on all items obtained from third-parties in connection with funeral service contracts. Plaintiffs’ allege further that the Company has failed to make such disclosures. Plaintiffs seek to recover an unspecified amount of monetary damages, attorney’s fees, costs and unspecified “injunctive and declaratory relief.” The Company believes that plaintiffs’ claims are without merit and intends to vigorously defend itself in this action.

     On July 7, 2005, the Federal Trade Commission (the “FTC”) issued a letter advisory opinion regarding the lawful construction of the term “cash advance item” as used in the Funeral Rule. The FTC opined with regard to a similar lawsuit in Texas state court: “The Commission believes that the court is incorrect in ruling that all goods or services purchased from a third-party vendor are cash advance items. This interpretation sweeps far too broadly, potentially bringing within its scope every component good or service that comprises a funeral. This was not and is not the Commission’s intention in the “cash advance’ provisions of the Rule. In our opinion, the term “cash advance item’ in the Rule applies only to those items that the funeral provider represents expressly to be “cash advance items’ or represents by implication to be procured on behalf of a particular customer and provided to that customer at the same price the funeral provider paid for them.” The FTC sets forth its analysis in the remainder of the letter.

     The Company has learned that a number of plaintiffs to these actions along with the Funeral Consumers Alliance have filed a petition against the FTC in the District of Columbia Circuit Court asking the Court to overturn the FTC’s July 7, 2005 Advisory Opinion.

     In addition to the funeral and casket antitrust lawsuits, the Company has received a Civil Investigative Demand, dated August 4, 2005, from the Attorney General of Maryland on behalf of itself and other undisclosed state attorneys general, who have commenced an investigation of alleged anticompetitive practices in the funeral industry. The Company has received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

     The ultimate outcome of the litigation matters described above cannot be determined at this time. An adverse decision in one or more of such matters could have a material adverse effect on the Company, its financial condition, results of operation and cash flows. However, the Company intends to aggressively defend the lawsuits.

     In addition, the Company is party to other legal proceedings in the ordinary course of business, and believes it has made adequate provision for any potential estimated liabilities. The Company does not expect the outcome of these proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or liquidity.

31 

NOTE 10. COMMITMENTS AND CONTINGENCIES

Leases

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

	Premises		Automobiles		Other		Total
2006	$	6,608	$	789	$	432	$	7,829
2007		5,054		385		264		5,703
2008		4,131		99		108		4,338
2009		3,611		24		2		3,637
2010		3,036		13		—		3,049
Thereafter		15,026		—		—		15,026

     In addition to the automobile leases noted in the table above, as at December 31, 2005, the Company leased approximately 1,233 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 $7,310,000 in 2006.

     Total expense incurred under all operating leases for the 52 weeks ended December 31, 2005, was $19,717,000 (2004 — $21,739,000, 2003 — $23,181,000).

Environmental contingencies and liabilities

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

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

NOTE 11. INCOME TAXES

     The provision (recovery) for income taxes on income (loss) from continuing operations consists of the following:

	52 Weeks Ended			52 Weeks Ended			53 Weeks Ended
	December 31, 2005			January 1, 2005			January 3, 2004
Current:
United States	$	(11,011	)	$	(3,243	)	$	(5,575	)
Foreign		(117	)		319			386
State and local		2,083			6,597			654
		(9,045	)		3,673			(4,535	)
Deferred:
United States		7,535			(1,380	)		(1,950	)
Foreign		2,393			(31	)		—
State and local		3,932			(3,715	)		—
		13,860			(5,126	)		(1,950	)
Total provision	$	4,815		$	(1,453	)	$	(6,485	)

32 

     The components of income (loss) before income taxes consist of the following:

	52 Weeks		52 Weeks		53 Weeks
	Ended		Ended		Ended
	December 31, 2005		January 1, 2005		January 3, 2004
United States	$	38,839	$	7,372	$	632
Foreign		7,425		7,011		8,112
	$	46,264	$	14,383	$	8,744

     The reconciliation of the statutory federal income tax rate related to the Company’s effective tax rate is as follows:

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31, 2005			January 1, 2005			January 3, 2004
U.S. Federal statutory tax rate		35.0	%		35.0	%		35.0	%
State and local taxes		4.9			(54.9	)		23.7
Non-deductible or non-taxable amounts, change in valuation allowance and other		2.9			(73.2	)		(0.5	)
Favourable resolution of tax uncertainties		(31.8	)		120.8			(293.2	)
Effective income tax rate		11.0	%		27.7	%		(235.0	)%

     The Company made income tax payments of $5,431,000 (2004 — $8,160,000, 2003 — $9,920,000), excluding income tax refunds received of $1,516,000 (2004 — $1,323,000, 2003 — $17,029,000), during the 52 weeks ended December 31, 2005.

33 

     The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities are as follows:

	December 31,			January 1,
	2005			2005
Deferred tax assets
Receivables	$	6,817		$	11,297
Cemetery property		55,163			57,195
Accounts payable and accrued liabilities		13,577			14,239
Pre-need funeral and cemetery obligations		180,801			195,749
Insurance policy liabilities		15,172			11,828
Covenants not to compete		8,057			9,814
Deferred agency costs		11,665			15,349
Operating loss carryforwards		90,686			91,855
Capital loss carryforwards		235,911			234,281
Other		621			4,896
Total deferred tax assets before valuation allowance		618,470			646,503
Valuation allowance		(401,350	)		(427,364	)
Total deferred tax assets after valuation allowance		217,120			219,139
Deferred tax liabilities
Property and equipment		28,115			33,374
Pre-need funeral receivables and trust investments		103,548			113,534
Pre-need cemetery receivables and trust investments		51,250			55,104
Insurance invested assets		1,304			2,433
Goodwill		25,771			20,203
Other		4,627			6,687
Total deferred tax liabilities		214,615			231,335
Net deferred tax assets (liabilities) of continuing operations	$	2,505		$	(12,196	)

     Although realization of the Company’s net deferred tax assets is not assured, management believes that it is more likely than not that reversals of deferred tax liabilities and the expected profitability of the Company will provide sufficient taxable income to realize the deferred tax assets after consideration of the valuation allowance. It is possible that the estimated valuation allowance could change in the near term due to matters such as the timing and manner of reversals of deferred tax liabilities, sales of operations and future actual income or losses. If this occurs, any resulting increase in the valuation allowance would generally be treated as an additional income tax expense in the period in which it arises, while any resulting decrease reflecting realization of the benefits of tax assets that had a corresponding valuation allowance established on the Effective Date would be treated as a reduction of goodwill established on the Effective Date, with any excess over the value assigned to such goodwill recognized as a capital transaction.

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

	End of
	Fiscal Year
2006	$	5,359
2007		4,198
2008		4,907

34 

	End of
	Fiscal Year
2009		20,194
2010		4,348
Thereafter		628,316
	$	667,322

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

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

     Goodwill that is expected to be deductible for tax purposes at December 31, 2005 is $73,459,000 (2004 — $89,122,000, 2003 — $105,561,000).

35 

ALDERWOODS GROUP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts expressed in thousands of dollars except per share amounts)

NOTE 12. RETIREMENT PLANS

     The Company has a 401(K) Retirement Savings Plan for United States employees who may defer between 1% and 75% of their eligible compensation. The Company will match between 50% and 100% of employee contributions to a maximum of either 2% of employees’ eligible compensation for certain employees or $2,000 for others. There are no required future contributions under this plan in respect of past service.

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

     The Company’s total expense for these retirement plans for the 52 weeks ended December 31, 2005, was approximately $2,663,000 (2004 — $2,675,000, 2003 — $2,650,000).

     The Company has defined benefit plans for certain employees of its Rose Hills subsidiary. The plans are frozen, and as such the Company does not incur new service costs. The present value of these benefits has been funded or accrued in the condensed consolidated financial statements of the Company. At December 31, 2005, the Company recorded total plan assets of $11,234,200 (2004 — $12,816,100) and corresponding benefit obligation of $19,951,500 (2004 — $19,709,900).

NOTE 13. SUPPLEMENTARY STATEMENTS OF CASH FLOWS DISCLOSURE

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

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended January
	December 31, 2005			January 1, 2005			3, 2004
Decrease (increase) in assets:
Receivables, net of allowances
Trade	$	19,783		$	(2,387	)	$	(6,775	)
Other		(4,766	)		(5,823	)		18,325
Inventories		937			837			1,515
Prepaid expenses		19,630			(657	)		(2,283	)
Cemetery property		(9,614	)		(10,241	)		(3,276	)
Other assets		(5,650	)		(18,932	)		(12,535	)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		(25,845	)		(14,146	)		(7,296	)
Net effect of pre-need receivables and deferred revenue		8,820			35,528			52,425
Other liabilities		(2,131	)		6,494			(2,760	)
Insurance policy liabilities		2,452			1,831			5,811
Other changes in non-cash balances		(4,156	)		(3,157	)		7,871
	$	(540	)	$	(10,653	)	$	51,022
Supplemental information:

36

	52 Weeks		52 Weeks		53 Weeks
	Ended		Ended		Ended January
	December 31, 2005		January 1, 2005		3, 2004
Interest paid	$	29,443	$	53,918	$	77,290
Income taxes paid, net of refunds		3,915		6,837		(7,109	)
Long-term debt issue costs paid		965		12,094		10,908
Bad debt expense		3,211		3,722		3,661
Non-cash investing and financing activities:
Stock issued in connection with the settlement of certain unsecured claims		—		31		107
Stock issued as compensation in lieu of cash		144		173		105
Capital leases entered into		—		—		160
Restricted cash investing and financing activities:
Purchases of funeral, cemetery, and perpetual care trust investments	$	539,161	$	356,254	$	—
Proceeds on disposition and maturities of funeral, and cemetery, and perpetual care trust investments		490,658		375,191		—
Increase in non-controlling interests in funeral, cemetery and perpetual care trusts		59,763		50,602		—
Decrease in non-controlling interests in funeral, cemetery and perpetual care trusts		110,782		81,575		—

NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION

     A summary of certain balance sheet accounts is as follows:

	December 31, 2005			January 1, 2005
Receivables, net of allowances:
Customer receivables	$	50,459		$	68,721
Allowance for doubtful accounts		(10,320	)		(12,029	)
Other		12,723			9,753
	$	52,862		$	66,445
Cemetery property:
Developed land and lawn crypts	$	38,368		$	37,623
Undeveloped land		31,243			30,685
Mausoleums		46,856			50,734
	$	116,467		$	119,042
Property and equipment:
Land	$	162,287		$	166,252
Buildings and improvements		386,068			368,501
Automobiles		10,652			13,013
Furniture, fixtures and equipment		69,570			54,432
Computer hardware and software		29,061			23,311
Accumulated depreciation		(114,737	)		(85,254	)
	$	542,901		$	540,255
Other assets:
Intangible assets	$	18,741		$	15,060
Deferred finance costs		23,359			22,411

37

	December 31, 2005			January 1, 2005
Accumulated amortization		(15,258	)		(12,222	)
Notes receivable		3,016			2,696
Other		12,992			9,137
	$	42,850		$	37,082
Accounts payable and accrued liabilities:
Bank overdraft	$	7,191		$	7,209
Trade payables		13,634			19,847
Interest		5,169			7,210
Accrued liabilities		21,629			32,423
Accrued insurance		21,261			18,058
Accrued taxes		32,199			44,785
Other		18,651			11,130
	$	119,734		$	140,662
Deferred pre-need contract revenue:
Funeral	$	72,087		$	69,098
Cemetery		19,531			13,873
	$	91,618		$	82,971
Other liabilities:
Perpetual care liability	$	7,860		$	7,490
Notes payable		12,104			12,667
Other		2,019			1,797
	$	21,983		$	21,954

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31, 2005			January 1, 2005			January 3, 2004
Other expense (income), net:
For funeral, cemetery and perpetual care trust investments:
Realized gains	$	(14,715	)	$	(15,748	)	$	—
Realized losses		9,660			10,009			—
Interest and dividend income		(26,707	)		(24,915	)		—
Trust investment expenses and income taxes		5,036			5,169			—
Interest expense related to non-controlling interest in funeral and cemetery trusts		15,803			18,335			—
Non-controlling interest in perpetual care trusts		10,923			7,150			—
(Gain) loss on disposal of business and other assets		(4,964	)		(3,529	)		1,056
Other		302			2,367			3,000
	$	(4,662	)	$	(1,162	)	$	4,056

     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.

38

NOTE 15. GOODWILL

     FAS No. 142 requires that goodwill be reviewed for impairment annually, as well as upon the occurrence of certain events that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under FAS No. 142, goodwill impairment is deemed to exist, and must then be further assessed, if a reporting unit’s carrying amount exceeds its estimated fair value. The Company’s reporting units are funeral, cemetery and insurance, which are consistent with the Company’s operating segments. All of the Company’s goodwill is recorded in the funeral reporting unit. In accordance with FAS No. 142, the Company undertook its annual goodwill impairment review during the third fiscal quarters of 2005, 2004 and 2003, and, as a result, there was no indication of goodwill impairment as at October 8, 2005, October 9, 2004 or October 4, 2003, as the estimated fair value of the funeral reporting unit exceeded its carrying amount. The fair value of the funeral reporting unit was determined by using a discounted cash flow valuation methodology consistent with that applied at the Effective Date, with a discount rate comparable with other enterprises in the death care industry, adjusted for risks associated with differences in company size, certain characteristics specific to the Company and cash flow projection risk.

     The changes in the carrying amount of goodwill for the funeral reporting unit are as follows:

	52 Weeks			52 Weeks
	Ended			Ended
	December 31, 2005			January 1, 2005
Balance, beginning of year	$	321,134		$	320,640
Reduction in valuation allowance against deferred tax assets established at time of emergence from reorganization proceedings		(19,535	)		—
Reduction in deferred tax liability established at time of emergence from reorganization proceedings		(5,683	)		—
Effect of foreign currency and other		(26	)		494
Balance, end of year	$	295,890		$	321,134

     During the year, the Company recorded a reduction of $33.9 million in the valuation allowance on the Company’s deferred tax assets established at time of emergence from reorganization proceedings, as it was determined that it is more likely than not that a portion of the deferred tax assets will be realized. In accordance with SFAS No. 109 “Accounting for Income Taxes” and SOP 90-7 “Financial Reporting by Entities in Reorganization under Bankruptcy Code,” $19.5 million of the reversal was applied against goodwill recorded at the time of Company’s emergence from reorganization proceedings (see Note 2). The remaining $14.4 million of the reversal was recorded as a tax benefit during the year.

     At emergence from reorganization proceedings, the Company recorded deferred income tax liabilities based on estimating temporary differences from differing treatment of items for tax and accounting purposes. During the 52 weeks ended December 31, 2005, the Company reduced this estimate by $5.7 million and recorded an offsetting reduction to goodwill.

NOTE 16. SEGMENT REPORTING

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

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

39

	Funeral		Cemetery		Insurance		Other			Consolidated
Revenue earned from external sales:
52 weeks ended December 31, 2005	$	479,799	$	174,110	$	95,005	$	—		$	748,914
52 weeks ended January 1, 2005	$	472,935	$	164,052	$	80,124	$	—		$	717,111
53 weeks ended January 3, 2004	$	491,611	$	168,024	$	61,127	$	—		$	720,762
Income from operations:
52 weeks ended December 31, 2005	$	87,280	$	23,550	$	5,068	$	(42,815	)	$	73,083
52 weeks ended January 1, 2005	$	94,640	$	23,768	$	4,710	$	(51,218	)	$	71,900
53 weeks ended January 3, 2004	$	110,529	$	26,383	$	1,752	$	(56,281	)	$	82,383
Depreciation:
52 weeks ended December 31, 2005	$	24,864	$	14,827	$	148	$	4,759		$	44,598
52 weeks ended January 1, 2005	$	24,283	$	14,062	$	166	$	3,582		$	42,093
53 weeks ended January 3, 2004	$	24,194	$	13,364	$	139	$	2,525		$	40,222
Total assets:
December 31, 2005	$	1,107,916	$	807,673	$	326,160	$	32,554		$	2,274,303
January 1, 2005	$	1,154,019	$	878,350	$	272,823	$	67,235		$	2,372,427
January 3, 2004	$	1,218,974	$	668,357	$	481,622	$	84,050		$	2,453,003
Goodwill:
December 31, 2005	$	295,890	$	—	$	—	$	—		$	295,890
January 1, 2005	$	321,134	$	—	$	—	$	—		$	321,134
Purchase of property and equipment:
52 weeks ended December 31, 2005	$	25,715	$	5,477	$	105	$	11,213		$	42,510
52 weeks ended January 1, 2005	$	23,273	$	3,362	$	74	$	10,474		$	37,183
53 weeks ended January 3, 2004	$	18,640	$	2,292	$	183	$	4,087		$	25,202
Development of cemetery property:
52 weeks ended December 31, 2005	$	—	$	3,178	$	—	$	—		$	3,178
52 weeks ended January 1, 2005	$	—	$	3,100	$	—	$	—		$	3,100
53 weeks ended January 3, 2004	$	—	$	2,122	$	—	$	—		$	2,122

40

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

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31, 2005			January 1, 2005			January 3, 2004
Earnings from operations of funeral, cemetery and insurance segments	$	115,898		$	123,118		$	138,664
Other expenses of operations:
General and administrative expenses		(42,815	)		(51,218	)		(56,281	)
Income from operations	$	73,083		$	71,900		$	82,383

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

	December 31, 2005			January 1, 2005		January 3, 2004
Total assets of funeral, cemetery and insurance segments	$	2,241,749		$	2,305,191	$	2,368,953
“Other” assets includes:
Cash		757			2,039		30,911
Receivables		7,188			5,294		5,116
Prepaid expenses		5,604			24,572		23,736
Property and equipment		23,345			16,494		9,186
Other		(4,340	)		18,837		15,101
	$	2,274,303		$	2,372,427	$	2,453,003

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

	52 Weeks		52 Weeks		53 Weeks
	Ended		Ended		Ended
	December 31, 2005		January 1, 2005		January 3, 2004
Revenue:
United States	$	685,429	$	660,470	$	665,488
Canada		63,485		56,641		55,274
	$	748,914	$	717,111	$	720,762

	December 31, 2005		January 1, 2005		January 3, 2004
Property and equipment and cemetery property:
United States	$	564,303	$	573,280	$	592,057
Canada		95,065		86,017		74,625
	$	659,368	$	659,297	$	666,682

41

NOTE 17. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL INFORMATION

     The following presents the condensed consolidating guarantor financial information as of the 52 weeks ended December 31, 2005 and the 52 weeks ended January 1, 2005 and for the 52 weeks ended December 31, 2005, the 52 weeks ended January 1, 2005 and the 53 weeks ended January 3, 2004 for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the 7.75% senior unsecured notes due in 2012, and the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Canadian and Puerto Rican subsidiaries, insurance subsidiary and certain domestic subsidiaries that are prohibited by law from guaranteeing the 7.75% senior unsecured notes due in 2012.

Condensed Consolidating Balance Sheets

	December 31, 2005
	Parent					Non-		Consolidating			Consolidated
	Company		Guarantors			Guarantors		Adjustments			Totals
ASSETS
Cash and cash equivalents	$	—	$	4,034		$	3,421	$	—		$	7,455
Other current assets		1,964		60,070			13,497		—			75,531
Pre-need funeral receivables and trust investments		—		260,915			285,617		(212,105	)		334,427
Pre-need cemetery receivables and trust investments		—		287,522			273,732		(253,932	)		307,322
Cemetery property and property and equipment		—		549,860			109,508		—			659,368
Insurance invested assets		—		—			294,598		—			294,598
Goodwill		—		247,160			48,730		—			295,890
Investment in subsidiaries		1,075,366		(91,898	)		—		(983,468	)		—
Cemetery perpetual care trust investment		—		464			243,341		—			243,805
Other assets		8,101		17,367			30,439		—			55,907
Total assets	$	1,085,431	$	1,335,494		$	1,302,883	$	(1,449,505	)	$	2,274,303
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current liabilities	$	39,333	$	73,597		$	6,804	$	—		$	119,734
Current maturities of long-term debt		—		2,412			23		—			2,435
Intercompany, net of investments in and advances to affiliates		82,643		(260,549	)		177,906		—			—
Long-term debt		365,683		5,357			—		—			371,040
Deferred pre-need funeral and cemetery contract revenue and non-controlling interest in funeral and cemetery trusts		—		533,061			573,091		(466,037	)		640,115
Insurance policy liabilities		—		—			266,729		—			266,729
Other liabilities		19		20,040			12,476		—			32,535
Non-controlling interest in perpetual care trusts		—		—			243,962		—			243,962
Stockholders’ equity		597,753		961,576			21,892		(983,468	)		597,753
Total liabilities and stockholders’ equity	$	1,085,431	$	1,335,494		$	1,302,883	$	(1,449,505	)	$	2,274,303

42

Condensed Consolidating Balance Sheets

	January 1, 2005
	Parent						Non-		Consolidating			Consolidated
	Company			Guarantors			Guarantors		Adjustments			Totals
ASSETS
Cash and cash equivalents	$	—		$	6,385		$	2,994	$	—		$	9,379
Other current assets		—			98,759			12,038		—			110,797
Assets held for sale		—			31,695			72,649		(22,288	)		82,056
Pre-need funeral receivables and trust investments		—			261,568			292,069		(217,607	)		336,030
Pre-need cemetery receivables and trust investments		—			283,435			271,003		(242,784	)		311,654
Cemetery property and property and equipment		—			557,671			101,626		—			659,297
Insurance invested assets		—			—			250,785		—			250,785
Goodwill		—			274,691			46,443		—			321,134
Investment in subsidiaries		995,959			(93,014	)		—		(902,945	)		—
Cemetery perpetual care trust investment		—			827			245,225		—			246,052
Other assets		10,339			15,926			18,978		—			45,243
Total assets	$	1,006,298		$	1,437,943		$	1,313,810	$	(1,385,624	)	$	2,372,427
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current liabilities	$	42,827		$	84,062		$	13,773	$	—		$	140,662
Current maturities of long-term debt		4,509			2,838			1,736		—			9,083
Intercompany, net of investments in and advances to affiliates		(43,792	)		(131,602	)		175,394		—			—
Liabilities associated with assets held for sale		—			24,515			59,201		(22,288	)		61,428
Long-term debt		446,826			7,708			23		—			454,557
Deferred pre-need funeral and cemetery contract revenue and non-controlling interest in funeral and cemetery trusts		—			521,111			575,868		(460,391	)		636,588
Insurance policy liabilities		—			—			214,745		—			214,745
Other liabilities		16			29,410			12,885		—			42,311
Non-controlling interest in perpetual care trusts		—			—			257,141		—			257,141
Stockholders’ equity		555,912			899,901			3,044		(902,945	)		555,912
Total liabilities and stockholders’ equity	$	1,006,298		$	1,437,943		$	1,313,810	$	(1,385,624	)	$	2,372,427

43

Condensed Consolidating Statement of Operations

	52 Weeks Ended December 31, 2005
	Parent						Non-			Consolidating			Consolidated
	Company			Guarantors			Guarantors			Adjustments			Totals
Revenues	$	—		$	565,211		$	183,703		$	—		$	748,914
Costs and expenses		—			470,250			164,145			—			634,395
General and administrative expenses		(1,996	)		(13,985	)		58,796			—			42,815
Provision for asset impairment		—			(1,008	)		(371	)		—			(1,379	)
Income (loss) from operations		1,996			109,954			(38,867	)		—			73,083
Interest on long-term debt		29,510			688			(129	)		—			30,069
Intercompany charges		16,286			32,039			(48,325	)		—			—
Other expense (income), net		—			(5,480	)		818			—			(4,662	)
Income (loss) before income taxes		(43,800	)		82,707			8,769			—			47,676
Income taxes		(3,246	)		16,088			(8,027	)		—			4,815
Net income (loss) from continuing operations		(40,554	)		66,619			16,796			—			42,861
Equity in subsidiaries		81,737			(2,210	)		—			(79,527	)		—
Discontinued operations
Loss from discontinued operations		—			(1,247	)		(165	)		—			(1,412	)
Income taxes		—			(2	)		268			—			266
Net loss from discontinued operations		—			(1,245	)		(433	)		—			(1,678	)
Net income	$	41,183		$	63,164		$	16,363		$	(79,527	)	$	41,183

44

Condensed Consolidating Statement of Operations

	52 Weeks Ended January 1, 2005
	Parent						Non-			Consolidating			Consolidated
	Company			Guarantors			Guarantors			Adjustments			Totals
Revenues	$	—		$	554,520		$	162,591		$	—		$	717,111
Costs and expenses		—			449,833			142,373			—			592,206
General and administrative expenses		(362	)		2,592			48,988			—			51,218
Provision for asset impairment		—			1,283			504			—			1,787
Income (loss) from operations		362			100,812			(29,274	)		—			71,900
Interest on long-term debt		80,264			1,222			223			(3,630	)		78,079
Intercompany charges		11,321			22,909			(34,230	)		—			—
Other expense (income), net		—			(1,565	)		403			—			(1,162	)
Income (loss) before income taxes		(91,223	)		78,246			4,330			3,630			(5,017	)
Income taxes		(5,848	)		2,345			2,050			—			(1,453	)
Net income (loss) from continuing operations		(85,375	)		75,901			2,280			3,630			(3,564	)
Equity in subsidiaries		94,724			(4,116	)		—			(90,608	)		—
Discontinued operations
Income from discontinued operations		—			341			22,689			(3,630	)		19,400
Income taxes		—			—			6,487			—			6,487
Net income from discontinued operations		—			341			16,202			(3,630	)		12,913
Net income	$	9,349		$	72,126		$	18,482		$	(90,608	)	$	9,349

45

Condensed Consolidating Statement of Operations

	53 Weeks Ended January 3, 2004
	Parent						Non-			Consolidating			Consolidated
	Company			Guarantors			Guarantors			Adjustments			Totals
Revenues	$	—		$	575,817		$	144,945		$	—			720,762
Costs and expenses		—			450,859			126,010			—			576,869
General and administrative expenses		(2,789	)		12,180			46,890			—			56,281
Provision for asset impairment		—			5,383			(154	)		—			5,229
Income (loss) from operations		2,789			107,395			(27,801	)					82,383
Interest on long-term debt		65,051			11,499			1,281			(1,378	)		76,453
Intercompany charges		20,308			(71,062	)		50,754			—			—
Other expense (income), net		—			1,995			2,061			—			4,056
Income (loss) before income taxes		(82,570	)		164,963			(81,897	)		1,378			1,874
Income taxes		(8,162	)		179			1,498			—			(6,485	)
Net income (loss) from continuing operations		(74,408	)		164,784			(83,395	)		1,378			8,359
Equity in subsidiaries		85,215			905			—			(86,120	)		—
Discontinued operations
Income (loss) from discontinued operations		—			(11,300	)		19,548			(1,378	)		6,870
Income taxes		—			—			4,422			—			4,422
Net income (loss) from discontinued operations		—			(11,300	)		15,126			(1,378	)		2,448
Net income (loss)	$	10,807		$	154,389		$	(68,269	)	$	(86,120	)	$	10,807

46

Condensed Consolidating Statement of Cash Flows

	52 Weeks Ended December 31, 2005
	Parent						Non-			Consolidating		Consolidated
	Company			Guarantors			Guarantors			Adjustments		Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	83,157		$	148		$	64,129		$	—	$	147,434
Cash flows from operating activities of discontinued operations		—			795			(1,396	)		—		(601	)
Cash flows from investing activities of continuing operations		—			(6,587	)		(62,366	)		—		(68,953	)
Cash flows from investing activities of discontinued operations		—			6,128			1,780			—		7,908
Cash flows from financing activities of continuing operations		(83,157	)		(2,826	)		(1,672	)		—		(87,655	)
Cash flows from financing activities of discontinued operations		—			(9	)		(48	)		—		(57	)
Increase (decrease) in cash and cash equivalents		—			(2,351	)		427			—		(1,924	)
Cash and cash equivalents, beginning of period		—			6,385			2,994			—		9,379
Cash and cash equivalents, end of period	$	—		$	4,034		$	3,421		$	—	$	7,455

Condensed Consolidating Statement of Cash Flows

	52 Weeks Ended January 1, 2005
	Parent						Non-			Consolidating			Consolidated
	Company			Guarantors			Guarantors			Adjustments			Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	116,629		$	(57,133	)	$	41,154		$	3,630		$	104,280
Cash flows from operating activities of discontinued operations		—			16,975			5,943			(7,609	)		15,309
Cash flows from investing activities of continuing operations		65,000			(4,088	)		(63,761	)		(65,000	)		(67,849	)
Cash flows from investing activities of discontinued operations		—			29,070			79,905			—			108,975
Cash flows from financing activities of continuing operations		(181,629	)		(14,355	)		(65,503	)		68,979			(192,508	)
Cash flows from financing activities of discontinued operations		—			(351	)		(89	)		—			(440	)

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	52 Weeks Ended January 1, 2005
	Parent					Non-			Consolidating		Consolidated
	Company		Guarantors			Guarantors			Adjustments		Totals
Decrease in cash and cash equivalents		—		(29,882	)		(2,351	)		—		(32,233	)
Cash and cash equivalents, beginning of period		—		36,267			5,345			—		41,612
Cash and cash equivalents, end of period	$	—	$	6,385		$	2,994		$	—	$	9,379

Condensed Consolidating Statement of Cash Flows

	53 Weeks Ended January 3, 2004
	Parent						Non-			Consolidating			Consolidated
	Company			Guarantors			Guarantors			Adjustments			Totals
CASH PROVIDED BY (APPLIED TO)
Cash flows from operating activities of continuing operations	$	(19,653	)	$	142,116		$	13,355		$	1,378		$	137,196
Cash flows from operating activities of discontinued operations		—			9,354			10,910			(1,685	)		18,579
Cash flows from investing activities of continuing operations		10,000			(11,428	)		(41,995	)		(10,000	)		(53,423	)
Cash flows from investing activities of discontinued operations		—			8,255			15,455			—			23,710
Cash flows from financing activities of continuing operations		9,653			(147,911	)		(434	)		10,307			(128,385	)
Cash flows from financing activities of discontinued operations		—			(205	)		(1,972	)		—			(2,177	)
Increase (decrease) in cash and cash equivalents		—			181			(4,681	)		—			(4,500	)
Cash and cash equivalents, beginning of period		—			36,089			10,023			—			46,112
Cash and cash equivalents, end of period	$	—		$	36,270		$	5,342		$	—		$	41,612

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NOTE 18. 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 52 weeks ended December 31, 2005, the Company determined that the carrying amounts of certain parcels of the surplus real estate now exceeded the fair market value, less estimated cost to sell. Accordingly, the Company has recorded a long-lived asset impairment recovery of $1,379,000 for the 52 weeks ended December 31, 2005 (2004 charge of $1,922,000, 2003 charge of $4,395,000).

     As of December 31, 2005, in conjunction with the Company’s ongoing assessment to ensure that each of the Company’s properties fit into the Company’s strategy, the Company held two funeral home operations and one cemetery operation for sale. The carrying amount of these locations was $341,000. The fair market values were determined by specific offers or bids, or estimates based on comparable recent sales transactions. As the fair value exceeded the carrying value of these locations no long-lived asset impairment was recorded in 2005. For the 52 weeks ended December 31, 2005, these properties had funeral home revenues and costs of $392,000 and $533,000 (2004 — $563,000 and $410,000; 2003 — $779,000 and $800,000), respectively.

     The assets of $3,121,200 (January 1, 2005 — $3,275,700) and liabilities of $1,857,700 (January 1, 2005 — $1,953,500) of these locations are classified according to their nature in the consolidated balance sheets and, on the basis of immateriality have not been identified separately as to assets held for sale and liabilities associated with assets held for sale in the balance sheet.

     In addition, for the 52 weeks ended December 31, 2005, the total revenues and costs of disposed funeral home locations which were not reclassified to discontinued operations were $3,274,000 and $3,120,300 (2004 — $5,341,700 and $4,740,300; 2003 — $6,209,500 and $4,865,300), respectively.

     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 19. DISCONTINUED OPERATIONS OF ASSETS HELD FOR SALE

     Over the previous three 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 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 complete the sale within one year. As of January 1, 2005, the Company had 18 funeral, six cemetery and four combination locations which have not been sold within one year of being added to the disposal list. The Company completed the sale of all these locations during 2005, except for one cemetery which was reclassified back to continuing operations. As a result the Company has reclassified the prior fiscal years to reflect any comparative amounts on a similar basis.

     During 2003, the Company identified Security Plan Life Insurance Company, its wholly-owned home service insurance company, as a non-strategic asset, because it was not part of the Company’s pre-need funeral sales efforts. The Company’s continuing wholly-owned pre-need life insurance company is Mayflower National Life Insurance Company. 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. The sale concluded on

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October 1, 2004. After payment of applicable taxes and expenses, and the recapitalization of Mayflower National Life Insurance Company, the Company utilized $65,000,000 of the proceeds to reduce long-term debt. The Company recorded a pre-tax gain on the sale of $16,011,000.

     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 years 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 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 Company’s debt agreements require sale proceeds (above specified limits) from assets held for sale to be applied towards the repayment of debt. During 2004 and 2003, the Company used such proceeds to pay down the Term Loan B. Accordingly, interest expense for discontinued operations was calculated by applying the applicable interest rates during the periods in which the repayment conditions were in effect to both the amounts of principal repaid and to the expected proceeds of assets remaining to be sold as of December 31, 2005. Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year.

     The carrying amount, the fair market value, less estimated costs to sell, revenues and costs and impairment provisions for the locations identified as held for sale are presented in the following tables.

	52 Weeks			52 Weeks			53 Weeks
	Ended			Ended			Ended
	December 31, 2005			January 1, 2005			January 3, 2004
Revenue
Funeral	$	1,853		$	19,829		$	43,917
Cemetery		598			14,303			26,579
Insurance		—			41,720			54,956
	$	2,451		$	75,852			125,452
Gross margin
Funeral	$	(152	)	$	874		$	4,512
Cemetery		(237	)		672			1,815
Insurance		—			9,382			12,207
		(389	)		10,928			18,534
Long-lived asset impairment on assets identified as held for sale		568			15,361			20,179
Other expense (income), net		455			(27,505	)		(10,050	)
Income (loss) from discontinued operations		(1,412	)		23,072			8,405
Interest on long-term debt		—			3,672			1,535
Income (loss) from discontinued operations, before tax		(1,412	)		19,400			6,870
Income tax provision for discontinued operations:

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	52 Weeks			52 Weeks		53 Weeks
	Ended			Ended		Ended
	December 31, 2005			January 1, 2005		January 3, 2004
Current		266			4,730		1,322
Deferred		—			1,757		3,100
		266			6,487		4,422
Net income (loss) from discontinued operations	$	(1,678	)	$	12,913	$	2,448
Depreciation included in gross margin of discontinued operations	$	20		$	626	$	2,609

     Details of assets held for sale at January 1, 2005, are as follows:

	Funeral		Cemetery		Total
Assets held for sale
Current assets	$	2,141	$	215	$	2,356
Pre-need receivables and investments		21,818		33,790		55,608
Property and equipment		11,110		—		11,110
Other assets		209		12,773		12,982
	$	35,278	$	46,778	$	82,056
Liabilities associated with assets held for sale
Current liabilities	$	67	$	260	$	327
Deferred pre-need contract revenue		1,971		3,691		5,662
Non-controlling interest in funeral and cemetery trusts		20,034		34,306		54,340
Other liabilities		412		687		1,099
	$	22,484	$	38,944	$	61,428
Non-controlling interest in perpetual care trusts	$	—	$	11,819	$	11,819

NOTE 20. INCOME PER SHARE

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

	52 Weeks		52 Weeks		53 Weeks
	Ended		Ended		Ended
	December 31, 2005		January 1, 2005		January 3, 2004
Income (numerator):
Net income attributable to Common stockholders	$	41,183	$	9,349	$	10,807
Shares (denominator):
Basic weighted average number of shares of Common stock outstanding (thousands)		40,245		40,001		39,971
Effect of stock options assumed exercised		1,357		1,131		494
Diluted weighted average number of shares of Common stock outstanding (thousands)		41,602		41,132		40,465

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     For the 52 weeks ended December 31, 2005, 1,357,000 employee and director stock options were dilutive to earnings and are included in the calculation of diluted income per share. Employee and director stock options to purchase 1,028,000 shares of Common Stock, warrants to purchase 2,992,000 shares of Common Stock and 236,800 shares of restricted Common Stock units were not included in the computation of diluted loss per share, because they were anti-dilutive.

NOTE 21. DERIVATIVE FINANCIAL INSTRUMENTS

     As of December 31, 2005, the fair value of all of the Company’s derivatives under the Foreign Currency Hedge Program was an unrealized gain of $941,000 (2004 — $2,087,000), which is included in other current assets in the Company’s consolidated balance sheet. The Effective Portion is $863,000 (2004 — $1,919,000) and is included in accumulated other comprehensive income in the Company’s consolidated balance sheet. The Ineffective Portion is $89,900 and is included in general and administrative expenses for the 52 weeks ended December 31, 2005 (2004 — $168,000, 2003 — $48,000). Included in general and administrative expenses for the 52 weeks ended December 31, 2005, was a net gain of $1,816,000 (2004 — $639,000, 2003 — $nil) of which $1,749,000 (2004 — $341,000, 2003 — $nil) was the Effective Portion and $67,000 (2004 — $298,000, 2003 — $nil) was the Ineffective Portion. The Company uses the cumulative dollar offset method to measure hedge effectiveness. As of December 31, 2005, a portion of the Company’s Foreign Currency Expenditure from the period January 2, 2005, to March 2007, was hedged. As of December 31, 2005, the Company estimates that based on current exchange rates and maturity dates of the Company’s derivatives, $836,800 would be expected to be reclassified from accumulated other comprehensive income to current earnings and included in general and administrative expenses over the next 12 months.

NOTE 22. EFFECT OF HURRICANE KATRINA

     During the 52 weeks ended December 31, 2005, some of the Company’s operations were affected by Hurricane Katrina. The Company operated 30 funeral homes, four cemeteries and a limousine company in these areas of Louisiana and Mississippi that were affected by the hurricane on August 29, 2005. The Company has experienced some damage at all of these locations. Repair work has begun at many of the locations. Of the 30 funeral homes, seven experienced significant damage, were not in operation at the end of the 2005 fiscal year and are not expected to reopen. All four cemeteries are in operation. The New Orleans limousine company that had provided services both to the Company’s funeral operations and other third-parties experienced significant damage to its fleet of vehicles and will not be resuming operations.

     The Company is making every effort to use its existing operating facilities to provide services to customers normally served by one of the Company’s closed locations.

     The Company’s insurance subsidiary is also headquartered in New Orleans and although forced to relocate temporarily to Cincinnati, has resumed operations from New Orleans. The temporary relocation did not significantly affect the Company’s operating results.

Financial results

     The Company’s financial results include the results from operations for those locations affected by Hurricane Katrina as outlined in the following table:

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	52 Weeks Ended		52 Weeks Ended		53 Weeks Ended
	December 31, 2005		January 1, 2005		January 3, 2004
Funeral Homes
Revenue	$	29,460	$	29,728	$	29,813
Costs and expenses		24,175		24,530		24,962
Gross Margin	$	5,285	$	5,198	$	4,851
Number of funeral services performed		6,389		6,371		6,687
Number of same-site funeral services performed		5,665		5,110		5,405
Pre-need funeral contracts written	$	9,871	$	11,982	$	12,081
Cemeteries
Revenue	$	2,953	$	3,275	$	4,134
Costs and expenses		2,835		2,869		2,625
Gross Margin	$	118	$	406	$	1,509
Number of cemetery interments		1,041		892		931
Pre-need cemetery contracts written	$	1,262	$	1,300	$	1,455

Insurance coverage and long-term asset gain or loss

     The Company purchases insurance coverage for property damage, including damage from wind and flood, subject to separate limits, sub-limits and deductible amounts. The Company, along with its insurance companies, is continuing to assess and estimate the extent of damages. Based on a review of the Company’s insurance policy, the Company expects to recover a substantial portion of the costs associated with the storm damage through insurance, including the capital costs of rebuilding. For those properties not in operation and requiring significant repair or rebuilding, insurance proceeds have not yet been fully estimated and as a result, any estimated loss or gain for these properties cannot be determined. The net book value of buildings and contents for those locations not in operation aggregates approximately $4.3 million at December 31, 2005.

     The Company has recorded an expense of $1.8 million in the 52 weeks ended December 31, 2005, representing its expected deductible under its insurance policies and other expenses not expected to be reimbursed under the insurance policy. Under its internal risk sharing practice, the Company’s aggregate deductible costs are charged to all its operations, not just the locations affected by Hurricane Katrina. The effect on funeral and cemetery costs for the 52 weeks ended December 31, 2005 was $1.3 million and $0.5 million respectively.

     The Company received in 2005, $4.1 million as an advance payment from its insurance companies for claims submitted. This has not been recorded as income but as insurance proceeds to be applied against incurred and anticipated repair and rebuilding costs.

     The Company is self-insured for physical damage to its owned and leased automobiles and charges the aggregate resulting costs to all of its operations. Hurricane Katrina resulted in estimated damages across our vehicles aggregating $0.6 million. The effect of Hurricane Katrina vehicle damage on funeral and cemetery costs for the 52 weeks ended December 31, 2005 was $0.5 million and $0.1 million respectively.

     The Company has business interruption insurance that allows the recovery of operating costs and lost profits. The Company is preparing its analysis in support of a claim. Potential proceeds from this claim cannot currently be reasonably estimated and therefore no receivable or recovery has been recorded as of December 31, 2005.

NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED)

     Certain of the Company’s quarterly financial data in the table below have been adjusted from the Company’s 2005 and 2004 quarterly reports on Form 10-Q, due to the reclassification of assets held for sale as discontinued operations.

     The 2004 adjustments below represent the incremental adjustments as previously reported on the Company’s Annual Report on Form 10-K (Item 8 Note 22) for the 52 weeks ended January 1, 2005.

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	Fourth		Third			Second			First
	Quarter		Quarter			Quarter			Quarter
52 Weeks Ended December 31, 2005:
Revenue, previously stated	$	173,468	$	214,782		$	176,778		$	183,796
Adjustment to reclassify for discontinued operations		—		—			—			90
Revenue, adjusted	$	173,468	$	214,782		$	176,778		$	183,886
Gross profit, previously stated	$	27,126	$	22,901		$	28,190		$	36,301
Adjustment to reclassify for discontinued operations		—		—			—			1
Gross profit, adjusted	$	27,126	$	22,901		$	28,190		$	36,302
Net income	$	9,061	$	6,905		$	12,081		$	13,136
Basic income per Common share	$	0.22	$	0.17		$	0.30		$	0.33
Diluted income per Common share	$	0.21	$	0.16		$	0.29		$	0.32
52 Weeks Ended January 1, 2005:
Revenue, previously stated	$	167,103	$	210,665		$	162,188		$	176,834
Adjustment to reclassify for discontinued operations		54		105			93			69
Revenue, adjusted	$	167,157	$	210,770		$	162,281		$	176,903
Gross profit, previously stated	$	28,498	$	32,735		$	28,770		$	34,808
Adjustment to reclassify for discontinued operations		93		1			15			(15	)
Gross profit, adjusted	$	28,591	$	32,736		$	28,785		$	34,793
Net income (loss)	$	24,365	$	(13,379	)	$	(6,476	)	$	4,839
Basic income (loss) per Common share	$	0.61	$	(0.33	)	$	(0.16	)	$	0.12
Diluted income (loss) per Common share	$	0.60	$	(0.33	)	$	(0.16	)	$	0.12

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