Post on 27-Nov-2021
corporate profile Arbor Memorial Services Inc. (“Arbor” or the “Company”) is a
Canadian market leader in providing interment rights, cremations, funerals and associated
merchandise and services to customers across Canada. At October 3 1 , 2007, Arbor owned 4 1
cemeteries, 27 crematoria, 3 reception centres and 9 1 funeral homes in communities in eight
provinces of Canada. The Company’s cemeteries and funeral homes have been successful in
developing and providing customized products and services to many ethnic and religious groups
in Canada.
Cover: Funerary model of boat with 1 2 rowers and coxswain, 2055-2004 BC, Middle Kingdom, 1 1th Dynasty; Mentuhotepll, Deir el-Bahri, Egypt
This wooden model of a boat was excavated from the tomb of King Mentuhotep II at Deir el-Bahri, near modern Luxor. This model was
The model depicts a galley with twelve rowers and a coxswain, who steers the boat and has charge of the crew. Such a galley might have been
used to haul barges of produce or manufactured items. Models were placed in tombs to ensure the deceased everlasting prosperity, for it was
thought that both would magically come to life and work for the tomb owner in the afterlife.
reconstructed using the material from several other models strewn across the tomb floor and using other Middle Kingdom boat models as a guide.
.
Mark Agate,
Regional Director, South Eastern Ontario
Leonard Marceau,
Regional Director, South Western Ontario
Peter Bancroft,
Regional Director, Atlantic Canada
CEMETERY OPERATIONS
REGIONAL MANAGEMENT
James Risbey,
Regional Property Manager,
Alberta and British Columbia
Terry Bokshowan,
Regional Property Manager,
Manitoba and Saskatchewan
Rodger W. Halden,
Regional Property Manager,
Western Ontario
Donn Bailey,
Regional Property Manager,
Central/Western Ontario
Kenneth Gurney,
Regional Property Manager,
Niagara and Thunder Bay
P. Bradley Hunter,
Regional Property Manager,
Eastern Ontario
William E. Grady,
Regional Property Manager,
Eastern Canada
CEMETERY ADMINISTRATION
REGIONAL MANAGEMENT
Diane E. Vinje,
Regional Manager, Calgary, British
Columbia and Saskatchewan
Teresa M. Bastin,
Regional Manager, Edmonton, Manitoba
and Thunder Bay
Mary A. Brandoline,
Regional Manager, Western Ontario
and Toronto
Liane Coviensky,
Regional Manager, Toronto West and
South Western Ontario
Barbara E. Weatherdon,
Regional Manager, Quebec, Eastern
Ontario and Atlantic
FUNERAL OPERATIONS
REGIONAL MANAGEMENT
James M. Fletcher,
Regional Director, Western Canada
Alenka Manners,
Regional Director, South Western Ontario
Terry A. Eccles,
Regional Director, Central Ontario
Denis Marcoux,
Regional Director, Quebec and
Northern New Brunswick
David McEachnie,
Regional Director, Atlantic Canada
Valerie Scott,
Manager, Funeral Planning Services,
Ontario and New Brunswick
HEAD OFFICE
2 Jane Street, Toronto, Ontario
M6S 4W8
Telephone: (416) 763-4531
WEB SITE
www.arbormemorial.com
AUDITORS
Deloitte & Touche LLP
PRINCIPAL BANKERS
TD Bank Financial Group
Bank of Montreal
TRANSFER AGENT AND
REGISTRAR
Computershare Investor Services Inc.
Phone: 514-982-7555 or 1-800-564-6253
Fax: 416-263-9524 or 1-866-249-7775
service@computershare.com
PRINCIPAL TRUSTEES OF FUNDS
TD Canada Trust Company
The Bank of Nova Scotia Trust Company
ANNUAL MEETING
The annual meeting of Arbor
Memorial Services Inc. will be held
in the Brulé Room,
The Old Mill, 21 Old Mill Road,
Toronto, Ontario,
on Thursday, February 28th, 2008
at 10:00 a.m. (Toronto time).
Global Reports LLC
1A r b o r M e m o r i a l S e r v i c e s I n c .
2007highlights
Company Highlights 2
Report to Shareholders 3
Management’s Discussion and Analysis 8
Management’s Report 38
Auditors’ Report 39
Consolidated Financial Statements 40
Notes to Consolidated Financial Statements 44
Company Information 66
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COMPANY HIGHLIGHTS
Years Ended October 31 2007 2006
RESULTS OF OPERATIONS
Revenue ($000)(2) 229,327 213,490
Earnings before other income (expenses), interest expense and income taxes ($000)(2) 36,322 33,818
Net earnings from continuing operations ($000)(2) 20,627 19,332
Net earnings ($000)(1) 19,346 19,166
Basic and diluted earnings per share from continuing operations ($)(2) (5) 1 .94 1 .82
Basic and diluted earnings per share ($)(1) (5) 1 .82 1 .81
FINANCIAL CONDITION
Assets ($000) 1 ,1 14,223 1 ,070,212
Long-term debt ($000) 75,229 92,414
Debt to equity ratio 0.35:1 0.48:1
Long-term debt to EBITDA(3) 1 .62:1 2.12:1
LOCATIONS
Cemeteries 41 41
Crematoria 27 27
Reception centres(4) 3 3
Funeral homes 91 93
(1) Net earnings excluding unusual items for 2007 were $21.3 million or $2.01 per share (2006 – $19.7 million or $1.86 per share). Unusual items included the impact of other income
(expenses) and provisions for asset impairment of discontinued operations. Net earnings in 2007 were also affected by an increase in after-tax termination expenses of $1.7 million.
(2) Revenue, earnings before other income (expenses), interest expense and income taxes, net earnings from continuing operations and basic and diluted earnings per share from continuing
operations for 2006 were reclassified to conform with current year’s presentation – see note 20 to the consolidated financial statements.
(3) EBITDA is defined as earnings before other income (expenses, interest expense, income taxes, depreciation and amortization. 2006 was restated to conform with current year’s
presentation – see note 20 to the consolidated financial statements.
(4) In addition, the Company opened a new reception centre in Windsor, Ontario in November 2007.
(5) For Class A Voting and Class B Non-Voting shares.
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2007report to shareholders
2007 PERFORMANCE
By any measure, 2007 was a very successful year. The Company’s revenue was $229.3 million and net earnings were $19.3 million or
$1 .82 per share. Revenue grew 7.4% during 2007 as our dedicated employees continued to meet the needs of our customers in record
numbers. The Company performed 21 ,777 funeral services in 2007, which represented an increase of 5.9% over 2006. Arbor’s revenue
growth was also driven by a 4.1% increase in interments and a 1 .1% increase in cremations performed over 2006. In addition to growth
in the base business, the Company benefited from the opening of a new reception centre at our Mount Lawn cemetery in Whitby, Ontario.
Statistics Canada annually provides information regarding the number of deaths for the 12-month period ended June 30. During the
period ended June 30, 2007, the number of deaths increased by 3.1% nationally. The Company benefited both from the increase in the
number of deaths as well as growth in market share.
Earnings per share increased to $1 .82 from $1 .81 in 2006. This was achieved despite termination costs of $3.0 million in the year, with
an after-tax impact on earnings of $2.0 million. The personnel changes that gave rise to these costs will help position Arbor to achieve its
full potential. Unusual items in 2007 included $2.3 million in after-tax provisions for asset impairment, of which $1 .5 million was included
in discontinued operations, which were offset by a $0.3 million after-tax net gain on disposal of assets. This resulted in a loss from unusual
items of $0.19 per share. Unusual items in 2006 included $0.6 million in after-tax provisions for asset impairment, offset by a $0.1 million
after-tax net gain on disposal of assets. This resulted in a loss from unusual items of $0.05 per share. Unusual items in 2002 through
2005 included similar items.
Excluding unusual items, earnings per share increased 8.1% to $2.01 from $1 .86 in 2006. Over the last 5 years earnings per share
excluding unusual items has increased by 66.1%.
Years Ended October 31 2007 2006 2005 2004 2003 2002
Earnings per share
excluding unusual items $2.01 $1.86 $1.71 $1 .65 $1 .31 $1 .21
During the year, the Company reduced its long-term debt by $17.2 million due to surplus cash on hand. The surplus cash was the result
of strong financial performance and a $6.8 million payment received against a mortgage receivable. The Company’s debt to equity ratio
at the end of the year was 0.35:1 .
As at October 31 2007 2006 2005 2004 2003 2002
Long-term debt ($000) 75,229 92,414 76,163 77,471 83,164 96,767
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Shareholders’ equity increased 10.9% over 2006 to $212.3 million in 2007. Over the past 5 years, shareholders’ equity has increased
by 87.9%. Return on average shareholders’ equity was 9.6% versus 10.5% last year. The termination costs and provisions for asset
impairment had a significant downward impact on 2007’s profitability.
As at October 31 2007 2006 2005 2004 2003 2002
Shareholders’ equity ($000) 212,296 191 ,385 172,961 156,178 137,636 1 13,010
Share prices continued to increase in 2007. Over the latest 5-year period, the price of Class A shares has increased by 162.5% while
Class B shares have advanced by 147.9%. Total return (share price appreciation plus dividends reinvested) in 2007 on Class B shares
was 26.5% and the 5-year compounded annual return on investment was 20.4%.
As at October 31 2007 2006 2005 2004 2003 2002
Market price
Class A Voting $32.8 1 $24.10 $20.1 1 $17.95 $14.50 $12.50
Class B Non-Voting $30.99 $24.50 $20.20 $16.50 $13.50 $12.50
We continued to add to our base of pre-need customers by entering into pre-need cemetery and funeral contracts during the year. While
pre-need merchandise and services sales, including funerals, and certain interment right sales that do not meet minimum deposit
requirements, are not included immediately in the Company’s reported sales until delivery, installation or performance, they do contribute
to building future market share and future reported sales.
Pre-need cemetery contracts written during the year achieved a new record of $73.1 million, up 5.7% from 2006. The total undelivered
pre-need cemetery contracts and associated investment income accumulated at the end of 2007 was $332 million, the equivalent of
3.3 years of 2007 cemetery sales.
Pre-need funeral contracts written during the year achieved a new record of $55.2 million, up 6.6% from 2006. The total undelivered pre-
need funeral contracts and associated investment income accumulated at the end of 2007, including the off-balance sheet annuity funds,
was $377 million, the equivalent of 3.3 years of 2007 funeral sales.
INVESTING FOR THE FUTURE
While we are very proud of our strong and consistent financial performance, our primary focus is on strengthening our competitive
position and investing in projects for which the return exceeds our cost of capital. This should allow us to capitalize on the projected
market growth for our services and enhance long-term shareholder value.
In 2007, the Company continued to make capital investments to ensure that our business will continue to grow and prosper in the future.
• In November 2007, the Company completed construction of the Victoria Greenlawn Memorial Chapel and Reception Centre in
Windsor, Ontario and officially opened its doors to the public. This facility is expected to give Arbor a high-profile presence in the
Windsor market and increase our market share.
• The Company continued with its strategic initiative of building chapels and reception centres on its cemetery properties in Ontario. We
are currently working on plans and building permits for seven such buildings with construction expected to start in fiscal 2008 at four
cemeteries. The budgeted capital spending in 2008 on these buildings is $24.0 million.
• The Company prepared for construction to commence on mausolea at Glendale Memorial Gardens in Toronto, Ontario and Glen Oaks
Memorial Gardens in Oakville, Ontario. The estimated cost of construction for these two buildings is $22.7 million and they will add
approximately 6,200 crypts to our burial space inventory.
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• Construction of a new sales office at Rideau Memorial Gardens in Dollard des Ormeaux, Quebec, renovation of the Chapel Lawn
Memorial Gardens sales office in Winnipeg, Manitoba and major renovations and expansions were completed at the Kelly Funeral
Home in Kanata, Ontario, Jenkens Funeral Home in Thunder Bay, Ontario and McDougall & Brown Funeral Home (Eglinton Chapel) in
Toronto, Ontario.
In addition to the above, the Company committed capital to the development of computerized sales presentation programs for at-need
and pre-need cemetery sales and pre-need funeral sales. The programs are expected to improve the “look and feel” of our sales
presentations and assist our sales counsellors through a combination of improved customer service, reduced administration and
improved productivity. Several years ago, the Company introduced a similar sales support tool for at-need funeral sales, which was well
received by the public and provided financial and other benefits as expected. The sales programs are expected to be completed and
implemented in phases over the next three years.
In an effort to reduce energy consumption and costs, the Company teamed up with an energy consulting firm during 2007. A three-
pronged strategy was adopted:
1 . reduce the cost of energy by purchasing electricity and natural gas at wholesale rates where energy markets had deregulated;
2. improve energy efficiency of buildings and mechanical systems for new construction and retrofits where there is an adequate
return; and
3. improve energy awareness in an effort to reduce consumption.
The benefits of the program have yet to be realized as the energy procurement agreements were effective for fiscal 2008 and the
Company will be launching an employee-awareness campaign, the Green Arbor Project, effective January 1 , 2008.
PERSONNEL
The 2007 year was marked by a number of management changes as noted below.
Effective October 31 , 2007, Richard Innes retired from the Company as its President and Chief Executive Officer, and resigned from the
Board of Directors. We are thankful to Mr. Innes for his 1 1 years of service and would like to recognize the financial success of the company
under his leadership.
Brian Snowdon was appointed President and Chief Executive Officer, and a member of the Board of Directors, effective November 1 ,
2007. Previously Mr. Snowdon was Vice-President and Chief Financial Officer.
In May 2007, David Scanlan was appointed Vice-President, Sales. Previously he was Assistant Senior Vice-President, Sales and Regional
Director, Ontario. Effective November 1 , 2007, Mr. Scanlan was promoted to Senior Vice-President, Sales.
Effective November 1 , 2007, Michael Scanlan was appointed Senior-Vice President, Marketing, Property and Construction and
Development. Previously, Mr. Scanlan was Vice-President, Marketing.
Also effective November 1 , 2007, Jeff Scott was appointed Senior Vice-President, Funeral Service. Previously Mr. Scott was Vice-
President, Funeral Service.
Effective November 1 , 2007, Laurel Ancheta was promoted to Vice-President and Chief Financial Officer. Previously Ms. Ancheta was
Senior Director of Finance.
We recognize that employee training is important and as a result created and developed an in-house management training program in
2007. The program is geared towards selected funeral directors who have shown management potential. The training includes rotational
work periods at several different funeral homes across the country, cross-training within certain areas of the company, experience with
pre-need funeral sales, and information sessions in areas such as finance, human resources, and leadership.
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OUTLOOK
We continue to believe that the outlook for our business is positive. In 2005, Statistics Canada released a projection of the Canadian
population from 2006 to 2031 . The study reported that in 2006, there were 4.3 million people over the age of 65, which is our primary
customer group. The study also reported that those over 65 would more than double to 9.1 million people by 2031 . Therefore, our
business should benefit from significant and consistent growth in the market for our services.
2006 201 1 2016 2031
65+ (000) 4,306 4,883 5,799 9,136
% Increase over 2006 - 13.4% 34.7% 1 12.2%
65+ as % of total population 13.2% 14.4% 16.4% 23.4%
Source: Statistics Canada – December 2005
Arbor is very well positioned to capitalize on the total market growth in a number of different ways.
• In Canada, Arbor is the only company with a significant presence in both the cemetery and funeral sectors of the industry, which we
believe results in considerable synergy that is not available to other industry participants.
• Over the years, Arbor has placed major emphasis on pre-need sales for future delivery, and has made significant investments in its
cemeteries and funeral homes to appeal to a changing marketplace.
• We are very proud of the diversity of our employees, which reflects our changing customer demographics. From 2001 to 2017, visible
minorities will account for over three-quarters of Canada’s population growth. By 2017, one in every five people will be a member of a
visible minority. Together, our sales counsellors and funeral directors help foster new customer relationships while at the same time
maintaining existing relationships that have become our heritage.
• The Company has strategically catered its cemetery garden design to the respective cultural and religious demographics of the
communities it serves.
Canada’s Population (000)
2001 2017 % Growth
Visible Minorities 4,038 7,121 76.3%
Others 26,579 27,462 3.3%
Total 30,617 34,583 13.0%
% Visible Minorities 13.2% 20.6% 56.1%
Source: Statistics Canada Study of Canada – Visible Minority Population, March 2005.
Arbor is in sound financial condition, has a strong and experienced management team, and is well positioned for continued growth in
revenue, earnings and shareholder returns.
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ACKNOWLEDGEMENTS
For the third consecutive year, Arbor’s marketing department won two Ginny Awards at the 89th annual convention of the Cremation
Association of North America. Arbor won first place in the Public Relations category for the creation of the “Veterans’ Wall of
Remembrance”. This award-winning project involved the production of eleven granite walls with over 13,000 inscriptions at cemetery
locations across Canada. In addition, Arbor received an honourable mention in the Advertising category for its “Ching Ming” celebration
work. Ching Ming is known as “Remembrance of Ancestors Day” to the Chinese community.
The success achieved by the Company in 2007 was due to the skill and commitment of our employees. The Directors extend a sincere
thank you to all.
On behalf of the Board of Directors,
Brian D. SnowdonPresident and Chief Executive Officer
This Report to Shareholders contains forward-looking statements about Arbor Memorial Services Inc.’s outlook. Reference should be made to “Information
Regarding Forward-Looking Statements” on page 8 of this Annual Report. For a description of material factors and assumptions see page 8 of this Annual
Report and for a description of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements in this
Report to Shareholders, please see the Company’s 2007 Management’s Discussion and Analysis, particularly under “Risks, Events and Uncertainties” on
page 35, and the Company’s 2007 Annual Information Form under “Description of the Business – Risk Factors”.
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2007management’s discussion and analysis
Management’s Discussion and Analysis for Arbor Memorial
Services Inc. (“Arbor” or the “Company”) has been prepared for
the fiscal year ended October 31 , 2007 and includes material
information available up to December 7, 2007. The financial
data provided has been prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”) and all
figures provided are in Canadian dollars. Management’s
Discussion and Analysis herewith provided is the responsibility
of the Company’s management. The Board of Directors is
responsible for reviewing and approving Management’s
Discussion and Analysis. Additional information relating to
Arbor, including the Company’s Annual Information Form, can
be found on SEDAR at www.sedar.com.
Information Regarding Forward-Looking Statements
Certain statements contained in this Management’s Discussion
and Analysis including, but not limited to, information regarding
the status and progress of the Company’s operating and capital
activities, the plans and objectives of the Company and
assumptions regarding the Company’s future performance are
forward-looking statements. Forward-looking statements may
include words such as “believes”, “may”, “should”, “estimates”,
“continues”, “indicates”, “suggests”, “anticipates”, “intends”,
“plans”, “expects” and similar expressions. These forward-looking
statements are based on current expectations and various factors
and assumptions. Accordingly, these forward-looking statements
are subject to certain risks and uncertainties. The material factors
and assumptions that were applied in making the forward-looking
statements in this Management’s Discussion and Analysis
include, but are not limited to: reliance on third-party reports from
government bodies and industry associations, the use of
economic forecasts prepared by various financial institutions,
historical experience, and financial reporting of competitors and
suppliers. Risks and uncertainties that could cause or contribute to
actual results differing from such statements include, but are not
limited to, those discussed elsewhere in this Management’s
Discussion and Analysis, particularly under “Events and
Uncertainties”, and in the Company’s 2007 Annual Information
Form under “Description of the Business – Risk Factors” and 2007
Annual Report under “Risks, Events and Uncertainties”. The
Company cannot provide any assurance that forward-looking
statements will materialize. The Company assumes no obligation
to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Non-GAAP Financial Measures
In addition to the GAAP results provided in this Management’s
Discussion and Analysis, some of the discussion of operating
performance is based on earnings before other income
(expenses), interest expense and income taxes (“EBOIT”) and
earnings before interest expense and income taxes (“EBIT”). In
addition, management uses net earnings excluding unusual items
(“NEEUI”) to assess its total financial results. EBOIT, EBIT and
NEEUI are non-GAAP financial measures. EBOIT excludes the
impact of other income (expenses), interest expense and income
taxes as disclosed in the statement of earnings, EBIT excludes the
impact of interest expense and income taxes as disclosed in the
statements of earnings and NEEUI excludes the after-tax impact
of other income (expenses) and provisions for asset impairment
of discontinued operations. EBOIT, EBIT and NEEUI are non-
GAAP financial measures that do not have any standardized
meaning prescribed by GAAP and are therefore unlikely to be
comparable to similar measures presented by other companies.
These non-GAAP financial measures are provided as a
supplement, and should not be considered an alternative to
measurements required by GAAP. Management uses both EBOIT
and EBIT to assess its operating results, as it believes it is
important to assess the cemetery, funeral, and corporate activities
without these non-operating components. Management uses
NEEUI to analyze sustainable net earnings. Management believes
that these measures provides useful additional information to
management and investors regarding the Company’s
performance as it provides a basis for analyzing the ongoing
operating results, which may vary due to different market and
economic factors than those that affect interest expense and
income taxes.
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COMPANY AND CORE BUSINESSES
Arbor Memorial Services Inc. is a Canadian company
incorporated in Ontario which, through wholly owned
subsidiaries, is a market leader in providing interment rights,
cremations, funerals and associated merchandise and services to
customers across Canada. At October 31 , 2007, the Company
owned 41 cemeteries, 27 crematoria, 3 reception centres and
91 funeral homes in communities in eight provinces of Canada. In
addition, the Company opened a new reception centre in Windsor,
Ontario in November 2007.
Arbor is the successor to a business formed in 1947 to establish a
national system of garden cemeteries in which memorials were
set flush with the ground. In the 1980’s, Arbor began to provide
funeral services. The Company’s cemeteries and funeral homes
have developed and provided customized products and services
for many ethnic and religious groups in Canada.
The Company sells all of its products and services on a “pre-need”
basis, or prior to death, in addition to selling on an “at-need” basis.
Pre-need sales allow customers to make their cemetery and/or
funeral arrangements in advance, thereby avoiding additional
emotional and financial stress during a time of bereavement. The
Company believes that it is one of the industry leaders in
marketing pre-need cemetery and funeral arrangements, which is
an integral part of Arbor’s long-term business strategy.
Cemetery Operations
Cemetery operations offer interment rights (traditional ground
burial, cremation ground burial, mausolea, columbaria and other
cremation products including benches and pedestals), bronze
memorials, upright monuments, vaults, urns, interment services,
cremation services and other related merchandise and services.
The Company offers a complete range of options for personalized
memorialization and provides the highest quality products and
services to its customers. In fiscal 2007, cemetery sales
accounted for 43% of the Company’s total revenues and
cemetery investment and other income accounted for an
additional 4% of total revenues.
The cemetery properties range in size from 19 to over 200 acres
and are staffed by permanent maintenance, administrative and
sales personnel. At October 31 , 2007, the Company’s developed
and undeveloped cemetery land totalled approximately
2,862 acres, of which 43% was available for future development.
Of the Company’s 41 cemeteries at October 31 , 2007, 24
had a crematorium on site, 13 had a funeral home on site and
3 had a reception centre on site. The Company’s growth in
the cemetery segment is focused on development of new
cemeteries and reception centres, and expansion of existing
locations where warranted.
Funeral Operations
Funeral homes provide a range of services that includes
embalming, registration of death, the use of funeral home facilities
for visitation, memorial services and funeral receptions,
transportation services, cremation and the sale of caskets, urns,
flowers, custom books and cards and other related merchandise
and services. Many Arbor funeral homes have reception lounges
with fully equipped kitchens and extensive seating. In fiscal 2007,
funeral operations sales accounted for 49% of the Company’s
total revenues and funeral investment and other income
accounted for an additional 2% of total revenues.
The Company’s growth in the funeral segment is focused on
construction of new funeral homes and expansion or replacement
of existing facilities where warranted. The Company owns 96% of
its funeral facilities and leases 4%.
Pre-Need Trust Funds, Cemetery Care Funds and
Referral and Annuity Fees
The Company is required by provincial regulation to deposit
specific amounts, received in respect of pre-need merchandise
and services contracts, into trust or with third-party insurers
under group annuity programs, pending the delivery of the
products and services. Upon delivery of the products and services,
the Company is entitled to receive related amounts placed into
trust and accumulated investment income earned thereon. The
Company also recognizes revenue from these products and
services upon delivery.
In respect of interment rights, the Company is required to deposit
into cemetery care funds amounts specified by provincial
regulation. The investment income from the cemetery care funds
is available to the Company to defray the costs of ongoing care
and maintenance of cemeteries, mausolea and columbaria.
The Company receives fees on the balance of pre-need cemetery
and funeral funds under the trust program (“referral fees”) and
receives fees on the deposit of funeral funds under the group
annuity program (“annuity fees”). These fees are recognized as
received, net of an allowance for those fees subject to refund.
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DEATH CARE INDUSTRY AND COMPETITION
The following contains forward-looking statements regarding the
Company’s and its industry’s outlook. Reference should be made to
“Information Regarding Forward-Looking Statements” on page 8.
For a description of material factors and assumptions see page 8
and for a description of risks and uncertainties that could cause
actual results to differ materially from forward-looking statements
see “Risks, Events and Uncertainties” on page 35, and the
Company’s 2007 Annual Information Form under “Description of
the Business – Risk Factors”.
Cemetery Operations
In Canada, cemetery operations are owned by a large number of
religious, municipal governments and other “not-for-profit”
organizations in addition to commercial owners. One large multi-
national firm owns a small number of cemeteries in Canada;
however, its presence in the cemetery business is significantly less
than in the funeral business. In addition, the Company competes
with monument dealers and other providers of cemetery products
and services in certain of its markets. Based on the number of deaths
in Canada as reported by Statistics Canada, the Company has
calculated that it performed interment services for 7.5% of all
deaths in Canada for the period from July 1 , 2006 to June 30, 2007.
Only a small number of organizations have developed large
modern cemeteries and even fewer provide a full range of services
due to the significant barriers to entry. Specifically, entry into the
cemetery industry can be difficult due to:
• complex cemetery regulations and zoning restrictions;
• the significant capital investment required and high land values,
particularly in metropolitan areas;
• land for new cemetery development being difficult to locate; and
• the desire for families to return to the same cemetery for
generations.
Arbor competes in the cemetery segment by presenting well-
maintained premises and a wide variety of burial space selection.
In addition, the Company provides products and services that
appeal to the different cultural backgrounds of its customers.
There is active competition in every major community in which
Arbor’s cemeteries are located.
Funeral Operations
Although Arbor competes with one large multi-national firm that
operates funeral homes in Canada, small independently owned
firms, controlling one or two funeral homes, account for the
largest number of funeral home operators in Canada. The
Company also competes with casket retailers, discount funeral
providers and other providers of funerary products and services in
certain of its markets. Based on the number of deaths in Canada
as reported by Statistics Canada, the Company has calculated
that it performed services for 9.1% of all deaths in Canada for the
period from July 1 , 2006 to June 30, 2007. Barriers to entry are
high due to the significant capital investment required, increasing
regulatory complexity and the importance of an established
reputation in competing for market share.
Operations by Province
The following table provides the number of funeral homes, cemeteries, reception centres and crematoria by province at October 31 , 2007:
Funeral ReceptionHomes Cemeteries Centres(1) Crematoria
British Columbia 8 3 - 3
Alberta 8 5 - 4
Saskatchewan 4 3 - 3
Manitoba 4 3 - 1
Ontario 45 21 3 12
Quebec 7 2 - 2
New Brunswick 8 1 - 1
Nova Scotia 7 3 - 1
91 41 3 27
(1) In addition, the Company opened a new reception centre in Windsor, Ontario in November 2007.
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Throughout most of the 1980’s and 1990’s, the Company and its
competitors engaged in the acquisition of independently owned
funeral homes. However, this trend slowed in early 1999 when the
Company and its competitors generally applied lower valuation
criteria and many potential sellers withdrew their businesses from
the market rather than pursuing transactions at lower prices.
Arbor competes in the funeral segment by providing unique,
personalized funeral services and by offering well-maintained,
attractive facilities that cater to its customers’ requirements.
Industry Trends
Establishment of new cemeteries is declining: The establishment of
individual cemeteries by religious, municipal governments and
other “not-for-profit” organizations has declined. Many existing
religious cemeteries are nearing full capacity and few religious
organizations have the funds to acquire new cemetery facilities.
Additionally, the interest of municipal governments in fulfilling the
requirement for cemetery facilities has been declining.
Cremation is increasing: There has been a growing acceptance of
cremation as an alternative to traditional burial in Canada and
internationally. In 2006, the Cremation Association of North
America (“CANA”) reported that the number of cremations in 1996
represented 40% of total Canadian deaths and that this percentage
grew to 56% in 2004. The CANA projections that were provided for
five of the provinces also indicated that the percentages for three of
these five provinces would grow further by 2010.
While cremation was originally seen as a less costly alternative to
traditional burial, it is increasingly accompanied by traditional
funeral services and memorialization. Cremation also provides the
Company with an opportunity to better serve its families by
offering unique products and services. Arbor has been developing
cremation gardens in a number of its cemeteries. These gardens
are landscaped with flowers, trees, shrubs, walkways, waterfalls
and ponds and provide the Company’s customers with
alternatives for burial or scattering, which can be accompanied by
various other memorial products such as benches, pedestals,
rocks, trees and memorial walls.
Need for products and services is increasing: There is an inevitable
need for the products and services the industry offers. In addition,
the number of deaths in Canada is expected to increase at a
steady, moderate pace. Annual population estimates by Statistics
Canada in December 2005 indicated that Canada’s population
would grow by 0.8% annually from 2005 to 2031 . In addition, the
estimates from Statistics Canada indicated that the Company’s
primary customer group, those aged 65 and older, is expected to
grow by 4.5% annually over the same period.
ARBOR’S STRATEGY
Key Objectives
Arbor has four key objectives:
• to generate a return to shareholders that exceeds the Company’s
cost of capital;
• to maintain Arbor’s Canadian market position in combined
cemetery/funeral revenue;
• to generate consistent growth in earnings per share with a
limited risk profile; and
• to achieve operational excellence.
Competitive Strengths
Industry leader: Arbor is one of the leading providers of combined
funeral and cemetery products and services in Canada and has
been in business for close to 60 years.
Experienced senior management team: Arbor’s senior management
team has been with the Company for an average of 20 years
and has a wealth of knowledge and history with the Company and
the industry.
Focus on high quality customer service and facilities: Arbor has been
providing its customers with high quality service for many years.
The Company believes that it operates one of the premier death
care facilities in most of its principal markets and that it generally
provides superior funeral and cemetery services that meet or
exceed customer expectations.
Funeral homes and reception centres located on cemetery properties:
Locating funeral homes and reception centres on cemetery
properties allows the Company to provide superior customer
service. On-site funeral and reception operations provide families
with the convenience of complete death care services at a single
location and provide the Company with the ability to share
certain costs and resources. At October 31 , 2007, the Company
had 13 funeral homes and 3 reception centres located on
cemetery properties.
National presence in both the cemetery and funeral sectors of the
death care industry: The Company’s national presence in both the
cemetery and funeral sectors allows for sharing of certain costs and
resources and referral opportunities between sectors.
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Established base of pre-arranged services: Arbor has a significant
history in pre-arrangement of products and services. Pre-need
planning enables families to specify their preferred cemetery and
funeral products and services in advance and to pre-pay for these
products and services. Arbor’s focus on pre-need business is also
important to the Company’s results since these sales generate
future revenues.
Competitive Challenges
Ontario cemetery and funeral regulations: Existing cemetery and
funeral regulations in Ontario do not allow the Company to
operate funeral homes on cemetery properties. While legislation
has been passed that will ultimately allow this to occur, based on
the Company’s experience, it is uncertain when the regulations
will be finalized so that the legislation can be proclaimed.
Competition: In Canada, the funeral and cemetery industry is
characterized by a large number of locally owned, independent
operations. To compete successfully, our funeral service locations
and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive
products and services at competitive prices. In addition, we must
market our Company in such a manner as to distinguish us from
our competitors. We have historically experienced price
competition from independent funeral home and cemetery
operators, monument dealers, casket retailers, low-cost funeral
providers and other non-traditional providers of services and
merchandise. If we are unable to successfully compete, the
Company’s financial condition, results of operations and cash
flows could be adversely affected.
Price competition, increased advertising, better marketing or
improvements in products and services offered by competitors in
any market in which Arbor competes could reduce the Company’s
market share or cause the Company to reduce prices or incur
increased costs in order to retain or recapture market share, either
of which would reduce revenues and/or margins. If the Company is
not able to respond effectively to changing consumer preferences,
its market share, sales and profitability could decrease.
Environmental legislation: Over the last several years, various
federal, provincial and municipal government agencies have
released environmental legislation that has caused the Company
to incur extra costs in order to comply with the legislation. The
Company believes that this trend will continue.
Business Strategies
Customer service: One of the Company’s most important strategies
is to meet or exceed customer expectations with respect to the
delivery of cemetery and funeral products and services, thereby
meeting or exceeding the standards set by the competition.
Products and services: The Company strives to provide the entire
spectrum of cemetery, funeral and related products and services
on a pre-need and an at-need basis and continues to develop new
products and services to meet the unique needs of the many
cultures the Company serves.
Pricing: The Company largely sets its prices in line with its
premium-priced, value-added competitors. However, it also
manages a few smaller operations that compete in lower-priced
market segments.
Pre-need sales: The Company intends to continue to emphasize pre-
need cemetery and funeral arrangements in order to better serve its
customers and to secure future revenues.
Cemetery/funeral synergy: The Company strives to maximize
the benefit of having a national presence in both the cemetery
and funeral sectors of the death care industry by encouraging
cross-referrals and combining cemetery and funeral operations
where possible.
Properties/facilities: Another of Arbor’s market strategies is to
meet or exceed the major competition in terms of the quality of
each cemetery and funeral home it owns and operates. One
exception to this basic strategy is where a facility has been
specifically designed to service the lower-priced market segment.
The Company currently operates a few facilities in the lower-
priced market segment.
Future investments: The Company’s present priorities for future
investment are:
• to establish funeral homes and reception centres within its
cemeteries or as stand-alone facilities in communities where
there is market justification and where the operation will achieve
the goal of complete service to customers;
• to acquire property to expand existing cemeteries or develop
new cemeteries;
• to continue to develop new products and services that meet the
unique needs of the many cultures the Company serves; and
• to establish or expand facilities to service the growing cremation
market.
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Asset management: Arbor’s asset management strategy is to
achieve a return that exceeds the Company’s cost of capital both
on a consolidated basis and a location-by-location basis.
Individual branch operations that are achieving only marginal
returns are addressed either through return improvement
programs or divestiture.
NEW ACCOUNTING POLICIES
Financial Instruments
The Canadian Institute of Chartered Accountants (“CICA”) issued
the following new accounting standards, which were effective for
the Company’s first quarter of fiscal 2007: Financial Instruments –
Recognition and Measurement (“Section 3855”); Hedges
(“Section 3865”); Comprehensive Income (“Section 1530”),
Equity (“Section 3251”) and Disclosure and Presentation (“Section
3861”). Each of the standards requires prospective application.
Section 1530 introduces the concept of comprehensive income,
which consists of net income and other comprehensive income
(“OCI”), and represents changes in shareholders’ equity during a
period arising from transactions with non-owners. OCI includes
among its components, unrealized gains and losses on financial
assets classified as “available for sale” and changes in the fair value
of the effective portion of cash flow hedging instruments together
with income tax expenses or benefits associated with each
component. As a result of the implementation of this section, our
Consolidated Financial Statements include a Consolidated
Statement of Comprehensive Income and a Consolidated
Statement of Accumulated Other Comprehensive Income. In
addition, the cumulative amount of OCI, which is termed
“accumulated other comprehensive income” or “AOCI”, is
presented as a new category of shareholders’ equity in the
Consolidated Balance Sheets.
Section 3861 establishes standards for presentation of financial
instruments and identifies the information that should be
disclosed about them. This section deals with disclosure of
information about the nature and extent of an entity’s use of
financial instruments, the business purpose they serve, the risks
associated with them and management’s policies for controlling
those risks. The Company has expanded its discussion of financial
instruments and the related objectives, risks and risk
management policies throughout the notes to the consolidated
financial statements.
Section 3855 establishes standards for recognizing and measuring
financial instruments and non-financial derivatives. On application
of Section 3855, the Company classified the investments in the
pre-need cemetery and funeral trust funds and the investments in
the cemetery care funds as “available for sale” and changed the
basis of measurement for these assets from cost to fair value in the
Consolidated Balance Sheets. Unrealized gains and losses on these
“available for sale” financial assets are excluded from net earnings
and recorded, net of income taxes, as a component of OCI in the
Consolidated Statement of Comprehensive Income. Unrealized
gains and losses are then offset by the amounts attributable to non-
controlling interests in pre-need funds, non-controlling interests in
cemetery care funds or deferred revenue, as appropriate, as such
unrealized earnings have not been earned by the Company through
the performance of services or delivery of merchandise. The
Company continues to recognize as sales, amounts removed from
the pre-need funds upon the performance of services and delivery
of merchandise, including realized earnings accumulated in the
funds and the Company’s AOCI is ultimately not affected by the
revaluation of the pre-need cemetery and funeral trust funds and
the cemetery care funds.
The cemetery and funeral trust funds were measured at fair value
at November 1 , 2006, and the resulting unrealized net gain of
$9.5 million was recorded to OCI, net of income taxes of
$3.3 million. The subsequent changes in the fair value, totalling
$1 .8 million, were also recorded to OCI, net of income taxes of
$0.6 million. Both the initial unrealized net gain in the funds and
the subsequent changes therein have been offset by the amounts
attributable to “non-controlling interests in pre-need funds” or
“deferred revenue” as appropriate
In accordance with the Section, however, the prior period
comparative figures at October 31 , 2006, were not restated to fair
value and are therefore presented at cost.
Similarly, the cemetery care funds were measured at fair value at
November 1 , 2006, and the resulting unrealized net gain of
$6.1 million was recorded to OCI, net of income taxes of
$2.2 million. The subsequent changes in the fair value, totalling
$4.4 million, were also recorded to OCI, net of income taxes of
$1 .6 million. Both the initial unrealized net gain in the funds and
the subsequent changes therein have been offset by the amounts
attributable to “non-controlling interests in cemetery care funds”.
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Section 3865 establishes standards for when and how hedge
accounting may be applied. The Company’s derivative financial
instruments, which consist of interest rate swap agreements that
have been designated as cash flow hedges, have also been
reported at fair value as a result of the implementation of Section
3855 and Section 3865. The unrealized gains and losses that
arise as a result of remeasuring the swap agreements at their fair
value at the end of each period are recognized, net of income
taxes, in OCI. To date there has not been any ineffectiveness in
these cash flow hedges. The accumulated loss at November 1 ,
2006, of $0.9 million was recorded, net of income taxes of
$0.3 million, as a transition adjustment to opening AOCI. The
estimated fair value of the interest rate swaps at October 31 ,
2007 was a gain of $0.1 million, which was recorded in “Other
liabilities”. The change in the loss in the period ended October 31 ,
2007 was recorded, net of income taxes, in OCI.
Section 3855 requires that interest income and expense be
allocated over the relevant period using the effective interest
method (EIM). Under the EIM, interest income and expense is
calculated and recorded using an effective interest rate, which is
the rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial instrument
or, when appropriate, a shorter period, to the initial net carrying
amount of the financial asset or liability. Transaction costs that
are directly attributable to the acquisition or issue of financial
instruments classified as other than “held for trading” are
included in the initial carrying value of such instruments and
amortized using the EIM. As a result of implementing this
Section, the Company has recorded the interest income and
expense related to all financials assets and liabilities using the
EIM. The change to the EIM did not result in any significant
differences to the Company’s current calculation of interest
income and expense.
In accordance with Section 3855 the Company conducted a
search for embedded derivatives in all contractual arrangements
dated subsequent to October 31 , 2002 and did not identify any
imbedded features that required separate presentation from the
related host contract.
Section 3251 establishes standards for the presentation of equity
and changes in equity during the reporting period. As a result of
the implementation of this section, the Company has presented a
sub-total of retained earnings and AOCI on the face of the
Consolidated Balance Sheets.
FUTURE ACCOUNTING POLICY CHANGE
International Financial Reporting Standards
The Canadian Institute of Chartered Accountants has determined
that publicly accountable enterprises will transition from
Canadian generally accepted accounting principles (GAAP) to
international financial reporting standards (IFRS) and it is
expected that this transition will be effective for periods beginning
on or after January 1 , 201 1 . The Company will evaluate the
impact, if any, of the new standards on current financial reporting
practices and will implement these changes accordingly in order
to be compliant with IFRS.
RESULTS OF OPERATIONS
The data set forth herein should be read in conjunction with the
Company’s consolidated financial statements and accompanying
notes included in the Company’s 2007 Annual Report. Historical
information provided is not necessarily indicative of the results to be
expected in the future.
The Company operates on a weekly basis. The 2007, 2006 and
2005 fiscal years each comprised a 52-week period.
All other financial assets and financial liabilities are classified and measured as follows:
Asset/Liability Classification Measurement
Accounts receivable Loans and receivables Amortized cost
Instalment accounts receivable Loans and receivables Amortized cost
Mortgage receivable Loans and receivables Amortized cost
Accounts payable and accrued liabilities Other liabilities Amortized cost
Long-term debt Other liabilities Amortized cost
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Revenue
Revenue increased by $15.8 million or 7.4% from 2006 to 2007
and by $16.9 million or 8.6% from 2005 to 2006.
In 2007, sales in the cemetery division increased by $4.3 million
or 4.6%, sales in the funeral division increased by $10.4 million or
10.1% and investment and other income increased by $1 .1 million
or 7.1%. The cemetery division’s sales included $1 .6 million in
group burial space sales compared to $0.4 million in 2006 and
$1 .6 million in upright monument and bronze memorial
(“marker”) sales that resulted from a project undertaken to
contact customers and secure approval for manufacture of
markers that became fully-paid in prior years. Of the $10.4 million
increase in funeral sales in 2007, $2.0 million was related to new
operations. Excluding new operations, funeral sales increased by
$8.4 million or 8.8%, due to an increase in the number of services
of 6.1% and an increase in the average sale per funeral service of
2.5%. The increase in the number of services was partially due to
an increase in the number of deaths across Canada. In October
2007, Statistics Canada reported that the number of deaths in
Canada increased by 3.1% for the 12 months ended June 30,
2007. In addition, the Company believes that the increase was
related to its ongoing efforts to capture market share and
increasing synergy with the cemetery division.
SELECTED ANNUAL INFORMATION
Years Ended October 31 2007 2006 2005
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenue ($000)(1) 229,327 213,490 196,545
Net earnings from continuing operations ($000)(1) 20,627 19,332 17,350
Net earnings ($000) 19,346 19,1 66 17,525
Cash flow from operating activities of continuing operations ($000)(1) 37,134 26,063 22,084
Cash flow from operating activities ($000)(1) 37,700 26,649 22,460
Basic and diluted earnings per share from continuing operations –
Class A Voting and Class B Non-Voting ($)(1) 1 .94 1 .82 1 .64
Basic and diluted earnings per share – Class A Voting and
Class B Non-Voting ($) 1 .82 1 .81 1 .65
Assets ($000)(1) 1 ,1 14,223 1 ,070,21 2 991,658
Long-term debt ($000) 75,229 92,41 4 76,163
Cash dividend per each Class A Voting and Class B Non-Voting share ($) 0.07 0.07 0.07
Outstanding Class A Voting and Class B Non-Voting Shares (000) 10,690 10,595 10,595
Prepared in accordance with GAAP. All amounts are in Canadian dollars.
(1) Revenue, net earnings from continuing operations and basic and diluted earnings per share from continuing operations for 2005 and 2006 and cash flow from operating activities of continuing
operations, cash flow from operating activities and assets for 2006 were reclassified to conform with current year’s presentation (see note 20 to the financial statements).
In 2006, sales in the cemetery division increased by $3.7 million or
4.1%, sales in the funeral division increased by $12.6 million or
14.0% and investment and other income increased by $0.5 million
or 3.5%. The cemetery division included $0.6 million in sales
recognized as a result of administrative projects that identified
merchandise and services delivered in prior years. Of the
$12.6 million increase in funeral sales in 2006, $9.1 million was
related to new operations.
Investment and other income in 2007 increased by $1 .1 million
or 7.1% over 2006 due to an increase of $0.5 million in care fund
income, $0.1 million in cemetery referral and annuity fees,
$0.2 million in funeral referral and annuity fees and $0.4 million in
mortgage and other interest income in the corporate division.
Investment and other income in 2006 increased by $0.5 million
or 3.5% over 2005 due to an increase of $0.5 million in funeral
annuity fees, an increase of $0.3 million in care fund income and a
$0.2 million increase in mortgage and other interest income in the
corporate division, offset by decreases in cemetery and funeral
referral fees. Of the $0.5 million increase in funeral annuity fees,
$0.4 million was related to new operations. Cemetery and funeral
referral fees decreased by $0.5 million due to a non-recurring
accrual adjustment in 2005 of $0.3 million and a lower annualized
rate of return due to reinvestment of a portion of the funds at
lower rates.
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Net Earnings From Continuing Operations and Earnings Per
Share From Continuing Operations
Net earnings from continuing operations and basic and diluted
earnings per share from continuing operations were $20.6 million
and $1 .94 in 2007 compared to $19.3 million and $1 .82 per share
in 2006. This represented an increase in net earnings from
continuing operations of $1 .3 million or 6.7% and an increase in
earnings per share from continuing operations of $0.1 2.
Comparatively, net earnings from continuing operations and basic
and diluted earnings per share from continuing operations
increased in 2006 from 2005 by $2.0 million or $0.18 per share.
This represented an increase in earnings from continuing
operations of 1 1 .4%.
Net earnings from continuing operations in 2007 were affected
by an increase in termination expenses and asset impairment
charges of $2.4 million. Excluding the affect of these items from
both years, net earnings from continuing operations increased by
$3.7 million or 19.0%.
Net earnings and earnings per share
Net earnings and basic and diluted earnings per share were
$19.3 million and $1 .82 in 2007 compared to $19.2 million and
$1 .81 per share in 2006. This represented an increase in net
earnings of $0.2 million or 0.9% and an increase in earnings
per share of $0.01 . Comparatively, net earnings and basic and
diluted earnings per share increased in 2006 from 2005 by
$1 .6 million or $0.16 per share. This represented an increase in
earnings of 9.7%.
Net earnings in 2007 were affected by an increase in termination
expenses and asset impairment charges of $3.4 million. Excluding
the affect of these items from both years, net earnings increased
by $3.6 million or 18.0%.
All years included a number of unusual items. The following
is a reconciliation of net earnings to net earnings excluding
unusual items.
Unusual items from 2005 to 2007 included the following
significant items:
• The 2007 provision for asset impairment – continuing operations
related to three existing funeral reporting units and the asset
impairment of discontinued operations related to two funeral
reporting units. The loss in value of the reporting units included in
continuing operations resulted from the continued under-
performance of the operations and increased competition in the
marketplace. The loss in value of the reporting units included in
discontinued operations occurred when the Company recognized
that the previous carrying amount of these operations was higher
than the fair market value based on discussions with potential
buyers. The asset impairment of discontinued operations in 2006
related to two funeral reporting units.
• The 2005 and 2006 provisions for settlement of pre-need
obligations of sold cemeteries related to an estimated settlement
with the Nova Scotia and Prince Edward Island provincial
authorities in respect of the pre-need obligations of three
previously sold cemeteries (see note 23 to the consolidated
financial statements).
Net earnings excluding unusual items grew by $1 .6 million or
8.1% from 2006 to 2007 and by $1 .6 million or 8.5% from 2005
to 2006.
Cash flow from operating activities of continuing operations
improved by $1 1 .1 million or 42.5% from 2006 due to higher net
earnings from continuing operations of $4.6 million after
adjusting for non-cash items and a positive net change in other
operating balance sheet items of $6.4 million compared to a
Reconciliation of Net Earnings to Net Earnings Excluding Unusual Items
Years Ended October 31 ($000) 2007 2006 2005
Net Earnings 19,346 19,166 17,525
Add (deduct) after-tax impact of unusual items
Gain on disposal of assets (336) (140) (133)
Provision for asset impairment – continuing operations 857 1 14 227
Asset impairment of discontinued operations 1 ,413 500 -
Provision for settlement of pre-need obligations of
sold cemeteries - 43 514
1 ,934 517 608
Net earnings excluding unusual items 21,280 19,683 18,133
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• Mortgage receivable decreased by $6.8 million due to a
payment received in 2007.
• Deferred obtaining costs and stored merchandise increased by
$4.0 million or 5.8% as a result of more pre-need contracts being
written than were delivered in the year.
Assets at the end of 2006 increased by $73.6 million or 7.4%
compared to 2005. Discussion of the main contributors to the
increase follows.
• Pre-need receivables and funds, including the current portion,
increased by $29.6 million or 6.6%, of which $18.0 million was
acquired from a group of 7 funeral homes that was purchased by
the Company in the first quarter of 2006. The remaining
increase of $1 1 .6 million was the result of growth in deposits to
the funds and realized earnings occurring at a higher rate than
deliveries of amounts out of trust.
• Fixed assets increased by $17.8 million or 10.9%, of which
$14.5 million was due to the acquisition of 7 funeral homes in
the year.
• Cemetery care funds increased by $1 1 .2 million or 7.7% due to
deposits made to the funds as a result of at-need and pre-need
cemetery interment right sales.
• Goodwill increased by $10.8 million, which was related to the
acquisition of 7 funeral homes in the year
• Cemetery land increased by $4.2 million due to the purchase of
two parcels of cemetery land for future development for
$4.9 million, which was partially offset by a reduction for lots
sold in the year.
Long-term debt decreased by $17.2 million from 2006 to 2007
due to principal repayments on the bank term loans. Long-term
debt increased by $16.3 million from 2005 to 2006 due to the
net impact of $19.9 million in new debt established on the
acquisition of 7 funeral homes in the year and $3.7 million in
principal repayments on the bank term loans.
negative net change in 2006 of $0.1 million. The adjustments
to net earnings for non-cash items included depreciation and
amortization, gain on disposal of assets, provision for asset
impairment, provision for settlement of pre-need obligations of
sold cemeteries and future income taxes.
Cash flow from operating activities of continuing operations
increased from 2005 to 2006 due to higher net cash collected in
2006 for at-need funerals and lower income taxes paid. Cash
attributed to at-need funerals was higher in 2006 due to new
operations. Income taxes paid in 2005 included $2.4 million paid
on behalf of a new subsidiary established in 2004 for which tax
instalments were not required during its first year. The positive
impact of these items was partially offset by higher additions to
developed land, crypts and niches of $2.0 million, due mainly to
$2.4 million spent on two mausoleum additions in 2006.
Cash flow from operating activities did not differ significantly from
cash flow from operating activities of continuing operations.
Assets at the end of 2007 increased by $44.0 million or 4.1%
compared to 2006. Discussion of the main contributors to the
increase follows.
• Cash increased by $12.6 million due to $37.7 million in cash
provided by operating activities and $7.2 million in cash
provided by financing activities, which were offset by
$32.3 million used for investing activities.
• Pre-need receivables and funds, including the current portion,
increased by $21 .4 million or 4.5%, of which $7.7 million was
due to a fair value adjustment recorded as a result of the
implementation of new accounting standards for financial
instruments in 2007. Excluding the fair value adjustment, pre-
need receivables and funds increased by $13.7 million or 2.9%
as a result of growth in deposits to the funds and realized
earnings occurring at a higher rate than deliveries of amounts
out of trust.
• Fixed assets increased by $6.6 million due to additions of
$16.6 million, which were offset by depreciation of $10.0 million.
Additions included $6.0 million for the development of new
reception centres.
• Cemetery care funds increased by $14.0 million, of which
$1 .7 million was due to a fair value adjustment as a result of the
implementation of new accounting standards for financial
instruments. Excluding the fair value adjustment, cemetery care
funds increased by $12.3 million or 7.9% due to deposits made
to the funds as a result of at-need and pre-need cemetery
interment right sales.
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Sales increased by $14.7 million or 7.4% in 2007 compared to
2006. Sales in the cemetery division increased by $4.3 million or
4.6% and sales in the funeral division increased by $10.4 million or
10.1%. Of the $10.4 million increase in the funeral division,
$2.0 million was related to new operations. Sales from existing
operations in the funeral division increased by $8.4 million or 8.8%.
Investment and other income increased by $1 .1 million or 7.1% over
2006 as follows (in $millions):
Cemetery care fund interest and dividends 0.5
Funeral and cemetery annuity and referral fees 0.2
Corporate interest 0.4
1 .1
Operating expenses increased by $12.7 million or 7.7% over 2006.
Cemetery division expenses increased by $7.9 million or 8.9%, due
mainly to increases in cost of sales, termination and care and
maintenance expenses. Funeral division expenses increased by
$4.8 million or 6.2%, due mainly to increases in cost of sales,
services and termination expenses. Of the $4.8 million increase in
the funeral division, $4.3 million was related to existing operations,
which represented an increase of 6.1%.
Corporate expenses increased by $0.6 million or 4.4% over 2006,
due mainly to increased employee costs and legal fees.
Earnings before other income (expenses), interest expense and
income taxes (“EBOIT”) were $36.3 million, which represented an
increase of $2.5 million or 7.4% over 2006. The increase was
driven by the funeral division, which improved by $5.7 million or
19.1%. Of the $5.7 million increase, new operations contributed
$1 .5 million. Partially offsetting the increase in the funeral division
was a decrease in the earnings of the cemetery division of
$3.0 million or 19.0% as a result of an increase of $2.2 million in
termination costs, an increase of $0.7 million in the cost of sales
expense due to changes in miscellaneous cost of sales provisions
and balances and a $0.6 million favourable adjustment to the
cancellation allowance in 2006 that related to prior years.
Other income (expenses) was a net expense of $0.4 million in 2007
compared to $nil in 2006. The main reason for the net other
expenses in 2007 was a provision for asset impairment of
$0.9 million, which related to the goodwill of three funeral reporting
units. The loss in value of the goodwill of these reporting units
resulted from the continued under performance of the operations
and increased competition in the marketplace. The impairment
expense was partially offset by $0.5 million in net gains on the
disposal of assets, of which $0.2 million was realized on the sale of
a parcel of surplus cemetery land in Whitby, Ontario.
In addition to the provision for impairment included in other
income (expenses), the Company recorded a provision for
impairment in 2007 of $1 .7 million related to two discontinued
reporting units, which consisted of three funeral branches. A similar
charge was recorded in 2006 for $0.6 million. Both of these
provisions are included in net loss from discontinued operations in
the consolidated statements of earnings. The loss in value of these
operations occurred when the Company recognized that the
previous carrying amount of these operations was higher than the
fair market value based on discussions with potential buyers.
Earnings before interest expense and income taxes (“EBIT”) were
$35.9 million, which represented an increase of $2.1 million or
6.1% over 2006. The increase was driven by the funeral division,
which improved by $4.9 million or 16.3% over 2006 due mainly
to higher sales. Partially offsetting the increase in the funeral
division was a decrease in the earnings of the cemetery division of
$2.7 million or 17.0% as a result of increased termination
expenses in the period of $2.2 million, an increase of $0.7 million
RESULTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 3 1 , 2007
TOTAL COMPANY RESULTS
Revenue for the year ended October 31 , 2007 was $229.3 million compared to $213.5 million for the year ended October 31 , 2006. This
represented an increase of $15.8 million or 7.4%. Following is a breakdown of total revenue:
2007 2006
$Millions % of Total $Millions % of Total
Sales
Cemetery 99.1 43.2 94.7 44.4
Funeral 1 13.3 49.4 103.0 48.2
212.4 92.6 197.7 92.6
Investment and other income 16.9 7.4 15.8 7.4
229.3 100.0 213.5 100.0
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in the cost of sales expense due to changes in miscellaneous cost
of sales provisions, and a $0.6 million favourable adjustment to
the cancellation allowance in 2006 that related to prior years.
Interest expense included interest on floating-rate bank term debt,
a capital lease and the cost of the Company’s interest rate swap
contracts. Interest expense decreased by $0.4 million or 8.2% to
$4.6 million in 2007 due to a lower weighted-average balance of
long-term debt outstanding of $9.4 million or 9.8% and lower
swap costs of $0.5 million. The decrease occurred despite a
higher average floating rate of interest of 5.2% compared to 4.6%
in 2006. The overall weighted-average rate of interest on long-
term debt for the period was 5.4% compared to 5.3% in 2006.
The weighted-average long-term debt balance decreased due to
repayments on the bank term loans in the fourth quarter of 2006
and the third and fourth quarters of 2007. The proportion of fixed-
rate debt at October 31 , 2007 was 47% compared to 49% at
October 31 , 2006.
Income taxes for 2007 resulted in an effective tax rate of 34.0%
compared to 32.8% in 2006. The increase in the effective rate of
1 .2 percentage points was mainly due to the non-deductible
portion of goodwill impairment charges, which increased the
effective rate by 0.9 of a percentage point.
Net earnings from continuing operations increased by $1.3 million or
6.7% to $20.6 million compared to 2006, despite an after-tax
increase in termination expenses of $1 .7 million and an after-tax
increase in asset impairment charges of $0.7 million. Excluding the
increase in termination expenses and asset impairment charges
from both years, net earning from continuing operations increased
by $3.7 million or 19.0%. The increase was mainly attributable to
improved earnings in the funeral division as a result of higher sales.
Net loss from discontinued operations increased by $1.1 million due
to an increase in after-tax impairment charges of $1.0 million.
The impairment provisions for both continuing and discontinued
operations resulted from continued under performance, despite
measures undertaken to improve the performance, increased
competition in the marketplace and in the case of two of the
discontinued reporting units, the recognition that the previous
carrying amount of these operations was higher than the fair
market value based on discussions with potential buyers.
Net earnings increased by 0.9% to $19.3 million. Net earnings
were affected by an increase in after-tax impairment provisions
of $1 .7 million and an increase in after-tax termination expenses
of $1 .7 million. Excluding the increase in termination expenses
and impairment charges from both years, net earnings increased
by $3.6 million or 18.0%.
Basic and diluted earnings per share from continuing operations
increased by $0.12 to $1 .94 per share in 2007, basic and diluted
loss per share from discontinued operations increased from $0.01
in 2006 to $0.12 in 2007 and basic and diluted earnings per
share increased by $0.01 to $1 .82 per share in 2007.
CEMETERY DIVISION
Cemetery sales in 2007 increased by $4.3 million or 4.6% over
2006 to $99.1 million. Sales in the year, including finance charges
and net of cancellation allowances, consisted of:
• $37.0 million (2006 – $36.3 million) of at-need sales of
interment rights and deliveries of at-need merchandise and
services
• $32.9 million (2006 – $32.0 million) of pre-need sales of
interment rights; and
• $29.1 million (2006 – $26.4 million) of pre-need sales of
merchandise and services, recognized when merchandise was
delivered or services were performed, including income earned
on related pre-need trust funds.
The following is a breakdown of the $4.3 million increase in
cemetery sales (in $millions):
At-Need
Interment rights 0.5
Merchandise (0.2)
Services 0.4
0.7
Pre-Need
Interment rights 0.9
Merchandise 2.2
Services 0.5
3.6
4.3
The increase in sales of at-need interment rights of $0.5 million or
6.1% was mainly due to a higher average selling price per
traditional burial lot and a higher number of sales of niches and
other cremation products. The higher average selling price for
burial lots was due to mix of sales by product line, product type
and branch location as well as an increase in the selling price of
individual products. The $0.2 million or 0.9% decrease in the
delivery of at-need merchandise resulted from an administrative
project undertaken in 2006 and lower sales of at-need
monuments in 2006 compared to 2005 of 8.1%. At-need
deliveries of services increased by $0.4 million or 4.3% due to an
increase in the average selling price.
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The increase in sales of pre-need interment rights of $0.9 million or
2.9% was due to a $1 .9 million or 13.6% increase in traditional
burial lots and a $0.8 million or 13.2% increase in niches, partially
offset by a decrease in crypt sales of $1 .8 million or 15.5%. Sales of
traditional burial lots were higher mainly as a result of group sales
of $1 .6 million in 2007 compared to $0.4 million in 2006 and an
increase of 7.4% in average selling prices. The increase in niche
sales was due to a higher number of units sold and a higher average
selling price of 4.3%. The higher average selling price of lots and
niches was due to mix of sales by product line, product type and
branch location as well as an increase in the selling price of
individual products.
The increase in the delivery of pre-need merchandise of
$2.2 million or 10.1% occurred as follows (in $millions):
Bronze memorials 1 .1
Upright monuments 0.2
Vaults and liners 0.3
Urns 0.3
Other 0.3
2.2
Deliveries of bronze memorials were higher in 2007 mainly due to
a project undertaken to contact customers and secure approval
for manufacture of memorials that became fully-paid in prior
years as well as increases in the average selling price of memorials
over the last few years to cover cost increases passed on by a
supplier. The project contributed $0.9 million to 2007 sales. This
same project contributed $0.7 million to upright monument sales.
Deliveries of upright monuments and bronze memorials
(“markers”) can vary significantly from year to year since delivery
is dependent on many factors, including, but not limited to:
• the timing of full payment by the customer;
• the amount of time it takes for customers to approve the
manufacture and delivery of their marker;
• the amount of time it takes for orders to be submitted to the
manufacturers; and
• the amount of time it takes to manufacture the markers.
Deliveries of markers can also be affected by projects undertaken
to contact customers and get markers manufactured and stored
or installed.
The following table provides a percentage breakdown of total cemetery sales:
% 2007 2006
Interment rights:
Traditional burial lots 21 19
Crypts 12 14
Niches 10 10
43 43
Merchandise:
Bronze memorials and bases 24 24
Upright monuments 10 10
Other 9 9
43 43
Services 14 14
Total 100 100
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In 2007, the number of interments performed by the Company
increased by 4.1% to 17,889 and the number of cremations
increased by 1 .1% to 14,415 compared to 2006. For comparative
purposes, interments decreased by 0.2% and cremations
increased by 1 .4% in fiscal 2006 as compared to fiscal 2005.
Cemetery investment income increased by $0.5 million or 5.6%
over 2006 to $10.1 million due to an increase in care fund income
of $0.5 million or 5.7% and an increase in referral and annuity fees
of 5.2%. The increase in care fund income was due to a higher
average balance in the funds of $1 1 .7 million or 7.8% and
occurred despite a decrease in the annualized rate of return on the
funds from 5.3% in 2006 to 5.2% in 2007. Interest and dividend
income on the care funds is recognized as earned in order to
defray cemetery care and maintenance costs.
Interest and dividend income earned on pre-need cemetery
merchandise and services trust funds increased by $0.4 million or
6.7% due to a higher average balance in the funds of $1 1 .5 million
or 6.4%. The average rate of return remained consistent at 3.3%.
Interest and dividend income earned on the pre-need trust funds
is deferred and recognized as sales revenue when the underlying
merchandise is delivered or the service is performed.
Cemetery expenses for 2007 increased by $7.9 million or 8.9%
over 2006 as follows (in $millions):
Cost of sales 2.9
Selling 0.6
Care and maintenance 1 .1
Administrative 2.2
Other 1 .1
7.9
Of the $2.9 million or 6.6% increase in the cost of sales expense:
• $2.0 million was due to the improvement in sales;
• $0.7 million was due to changes in miscellaneous cost of sales
provisions, including a $0.3 million increase in the provision for
deferred losses on bronze memorials and vaults in 2007 and a
$0.3 million reduction in the estimated cost of providing
monument death date inscriptions to pre-need customers in
2006; and
• $0.2 million was due to an increase of 0.2 of a percentage point
in the base cost of products and services.
The cost of sales percentage for 2007 was 46.7%, which was 0.9
of a percentage point higher than the cost of sales percentage for
2006, due mainly to the changes in cost of sales provisions in
both years.
Care and maintenance expenses increased by $1 .1 million or
6.0% due to:
• higher employee costs of $0.5 million or 3.8% as a result of
regular annual increases;
• higher property taxes of $0.2 million or 26.1%, mainly as a result
of increased assessments at two branch locations;
• higher crematorium equipment repair costs of $0.2 million or
53.1% due to a higher number of scheduled replacements of stack
linings; and
• an increase of $0.2 million in other expenses.
Administrative expenses increased by $2.2 million due to higher
termination expenses incurred in the year. In 2007, termination
costs totalled $2.4 million compared to $0.2 million in 2006. Of
the $2.4 million incurred in 2007, $1 .1 million was recorded in the
third quarter in consideration of the termination of a senior officer.
Other expenses increased by $1 .1 million due to an increase of
$0.3 million in reception centre expenses, an increase of
$0.2 million in depreciation and a favourable adjustment to the
burial space cancellation allowance in 2006 of $0.6 million that
related to prior years.
EBIT in the cemetery division decreased by $2.7 million or 17.0%,
due mainly to the increase in termination costs in the year of
$2.2 million, the increase of $0.7 million in the cost of sales
expense due to changes in miscellaneous cost of sales provisions
and balances and the $0.6 million favourable adjustment to the
cancellation allowance in 2006 that related to prior years.
FUNERAL DIVISION
As at October 31 , 2007, the Company wholly owned 91 funeral
homes, four of which were classified as discontinued operations.
In 2007, the Company sold one funeral home in Ontario and
closed a second funeral home in Quebec.
Funeral sales in 2007 increased by $10.4 million or 10.1% over
2006 to $1 13.3 million. The improvement was attributable to an
$8.4 million or 8.8% increase in sales from existing funeral home
operations, a $2.0 million increase in sales from new operations
and a small increase from flower shop sales. New operations in
the period included seven funeral homes in the Ottawa, Ontario
area that were acquired in 2006 and additional calls received at a
funeral home in Ajax, Ontario as a result of the availability of a
reception centre completed at a nearby cemetery in March 2006.
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The increase in sales from existing funeral home operations was
due to an increase in the number of services of 6.1% and an
improvement in the average sale per funeral service of 2.5%. The
6.1% increase in the number of services was partially due to an
increase in the number of deaths across the country during the
year. Statistics Canada reported in October 2007 that the
number of deaths in Canada had increased by 3.1% for the
12 months ended June 30, 2007. In addition, the Company
believes that the increase was related to its ongoing efforts to
capture market share and increasing synergy with the cemetery
division. For comparative purposes, the average annual increase
in existing funeral home services from 2002 to fiscal 2006 was
0.8%. The increase in the average sale per funeral service was
the result of the Company’s continued efforts to provide
customers with value-added merchandise and services such as
receptions, catering, custom printing and ancillary merchandise,
as well as regular price increases.
Sales in the period consisted of:
• $76.0 million (2006 – $69.5 million) of at-need sales of funeral
merchandise and services;
• $37.0 million (2006 – $33.1 million) from the fulfilment of
funeral merchandise and services sales that were arranged on a
pre-need basis; and
• $0.3 million (2006 – $0.3 million) of flower shop sales.
Pre-need funeral contracts written in 2007 increased by
$3.4 million or 6.6%. Of the $3.4 million increase, $0.4 million
was related to the new funeral homes acquired in the Ottawa,
Ontario area in 2006. Excluding these contracts, pre-need funeral
contracts written increased by 6.4%. Pre-need funeral contracts
written under the trust program represented 43.1% (2006 –
39.3%) of total contracts written, while contracts written under
the group annuity program represented 56.9% (2006 – 60.7%).
Investment and other income in the funeral division increased by
$0.2 million or 3.9% to $5.0 million in 2007 due to higher annuity
fees. The higher annuity fees resulted from lower than anticipated
chargebacks for prior years and a lower percentage used for future
chargebacks based on the improved experience in 2007.
Interest and dividend income earned on the pre-need funeral
due to a higher average balance in the funds of $8.7 million or
4.0% and a higher annualized rate of return on the funds of 3.4%
compared to 3.3% in 2006. Interest and dividend income on the
pre-need funeral funds is deferred and recognized as sales
revenue when the underlying merchandise is delivered or the
service is performed.
Funeral expenses in 2007 increased by $4.8 million or 6.2% over
2006. Excluding the impact of new operations, expenses
increased by $4.3 million or 6.1%. A breakdown of the
$4.8 million increase in expenses by type of expenditure follows
(in $millions):
Cost of sales 1 .9
Services 2.7
Administrative 1 .0
Pre-need expenses (1 .1)
Other 0.3
4.8
The $1 .9 million increase in cost of sales was mainly due to the
increase in sales. The cost of sales percentage for the period was
higher than 2006 by 0.2 of a percentage point at 16.2%.
The increase in services expenses of $2.7 million or 7.7% was
mainly due to higher employee salaries, wages and bonuses.
Salaries were higher in 2007 due to regular annual increases,
while the increase in temporary and part-time wages was mainly
related to the higher sales. The increase in bonuses was due to the
improved results of the division.
The $1 .0 million increase in administrative expenses included
$0.4 million in termination expenses and higher bonuses of
$0.2 million due to the improved results of the funeral division.
Pre-need expenses decreased by $1 .1 million due to a reduction in
net provisions for cancellation of pre-need funeral contracts from
$1.3 million in 2006 to less than $0.1 million in 2007. The
$1 .3 million in 2006 represented a provision against deferred
obtaining costs of $1 .5 million, net of the portion of deferred
revenue that represented the amount the Company is allowed to
retain based on provincial regulation of $0.2 million. These
provisions for cancellation of pre-need funeral contracts recorded
in 2006 were mainly related to contracts that were written prior
to 2006.
EBOIT in the funeral division increased by $5.7 million or 19.1% to
$35.7 million in 2007. The $5.7 million increase was comprised of
an increase in earnings of new operations of $1 .5 million and an
increase in earnings of existing operations of $4.2 million or 14.9%.
The increase in earnings of existing operations was mainly related
to the improvement in sales of $8.4 million. However, the decrease
in the provision for cancellation of pre-need funeral contracts of
$1.2 million also had a positive impact.
EBIT in the funeral division increased by $4.9 million or 16.3% to
$35.0 million. The increase in EBIT was lower than the increase in
EBOIT due to other income (expenses), which included
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23A r b o r M e m o r i a l S e r v i c e s I n c .
$0.9 million in goodwill impairment charges and $0.1 million in
net gains on the sale of assets. The loss in value of the goodwill
resulted from continued under performance, despite measures
undertaken to improve the performance, and increased
competition in the marketplace.
CORPORATE DIVISION
Corporate revenue, consisting of rental income from leasing a
portion of the Company’s head office building and interest on the
Company’s bank accounts, short-term investments and a
mortgage receivable, increased by $0.4 million or 26.5% to
$1 .9 million in 2007. The increase was mainly due to higher
interest income on the Company’s bank accounts.
Corporate expenses increased by $0.6 million or 4.4% in 2007
compared to 2006 to $14.2 million. The main contributors to the
$0.6 million increase were higher salaries, wages and benefits of
$0.3 million or 4.4% as result of annual increases and higher legal
fees of $0.2 million as a result of the terminations in the year.
As a percentage of total Company revenue, corporate expenses
decreased to 6.2% in 2007 from 6.4% in 2006. This was
attributable to an increase in revenue of 7.4% while corporate
costs grew only 4.4%. For comparative purposes, corporate
expenses as a percentage of revenue were 6.7% in 2005 and
2004 and 6.8% in 2003.
Working capital increased by $7.6 million from 2006 to 2007.
The improvement was due mainly to an increase in cash of
$12.6 million but offset by an increase in accounts payable and
accrued liabilities of $6.9 million.
The decreases of 0.13 in the debt to equity ratio and 0.50 in the
long-term debt to EBITDA ratio were due to repayments on the
bank term loans in 2007.
Working capital requirements: The Company maintains significant
inventory of upright monuments, caskets and cremation urns in
order to meet customers’ requirements. At the end of the fiscal
year, the Company had the following inventory available to meet
these requirements (in $millions):
CONSOLIDATED BALANCE SHEETS
Key financial indicators for the balance sheets as at October 31 , 2007, and October 31 , 2006, were as follows:
2007 2006
Current ratio(1) 2.53:1 2.54:1
Working capital (in $millions)(1) 61.61 54.06
Debt to equity ratio 0.35:1 0.48:1
Long-term debt to EBITDA(1) (2) 1 .62:1 2.12:1
Interest coverage ratio(2) 5.88:1 5.36:1
(1) October 31, 2006 indicator reclassified based on current year’s presentation.
(2) Bank covenant: long-term debt to EBITDA must be less than or equal to 3.5 and interest coverage ratio must equal or exceed 3.25.
2007 2006
Upright monuments 2.6 2.6
Cremation urns 2.5 2.4
Caskets 2.0 2.0
Granite bases 1 .3 1 .2
Other inventory 1 .3 1 .4
9.7 9.6
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The Company offers its customers extended payment terms on
pre-need contracts and for certain merchandise purchases
included on at-need contracts. Company policy is that payments
terms can be extended up to 48 months, however, some contract
terms are extended up to 72 months where warranted.
Accounts receivable decreased by $1 .1 million or 5.7% to
$18.7 million due to recovery of commodity taxes from prior
period over-remittances.
Accounts receivable arising from at-need cemetery sales were
paid on average within 39 days at October 31 , 2007 compared to
41 days at October 31 , 2006. Accounts receivable arising from
at-need funeral sales were paid on average within 27 days at
October 31 , 2007 compared to 28 days at October 31 , 2006.
Pre-need receivables and funds, including the current portion
thereof, increased by $21 .4 million or 4.5% to $498.6 million at
October 31 , 2007 compared to October 31 , 2006. Of the
$21 .4 million increase, $7.7 million was due to a fair value
adjustment recorded as a result of the implementation of new
accounting standards for financial instruments in 2007.
Excluding the fair value adjustment, pre-need receivables and
funds increased by $13.7 million or 2.9%. This compared to an
increase of $12.4 million or 2.7%, excluding new operations, in
2006. The following is a breakdown of the pre-need receivables
and funds as well as the off-balance sheet group annuity funds at
October 31 (in $millions):
Increase (Decrease)
2007 2006 $Millions %
Cemetery trust funds 200.7 184.3 16.4 8.9
Funeral trust funds 202.3 198.4 3.9 2.0
Group annuity funds 25.2 26.4 (1 .2) (4.5)
Instalment accounts receivable 70.4 68.1 2.3 3.3
498.6 477.2 21 .4 4.5
Off-balance sheet group annuity funds 108.8 86.0 22.8 26.5
607.4 563.2 44.2 7.8
Total funeral trust and group annuity funds 336.3 310.8 25.5 8.2
Of the $1 6.4 million increase in cemetery trust funds,
$4.8 million was due to a fair value adjustment recorded as a
result of the implementation of new accounting standards for
financial instruments in 2007. The remaining increase of
$1 1 .6 million or 6.3% was due to contributions to the funds plus
realized investment income at a higher rate than deliveries of
contracts out of the funds in the year. Of the $3.9 million
increase in funeral trust funds, $2.9 million was due to a fair
value adjustment recorded as a result of the implementation of
new accounting standards for financial instruments in 2007.
The remaining increase of $1 .0 million or 0.5% was due to
contributions to the funds plus realized investment income at a
higher rate than deliveries of contracts out of the funds in the
year. In 2007, 43% of all new pre-need funeral contracts were
written under trust agreements while 57% were written under
off-balance sheet group annuity agreements.
The decrease of $1.2 million or 4.5% in the group annuity funds that
are consolidated on the balance sheet occurred since no new group
annuity contracts are being written under annuity policies where the
Company is the policyholder. All new group annuity contracts are
written under annuity policies where the Company is not the
policyholder and the contracts are, therefore, excluded from the
balance sheet. In 2007, the off-balance sheet group annuity funds
increased by $22.8 million or 26.5%, which was related to the fact
that 57% of all new pre-need funeral contracts were written under
off-balance sheet group annuity policies. Total funeral trust and
group annuity funds increased by $25.5 million or 8.2%.
Instalment accounts receivable increased by $2.3 million or 3.3%.
The increase was due to higher instalment accounts written
compared to amounts paid in the year. At October 31 , 2007,
$44.0 million (2006 – $39.6 million) of deferred revenue related to
instalment accounts receivable that will be deposited to legislated
trust funds upon collection, representing 62.6% (2006 – 58%) of
the total outstanding instalment accounts receivable.
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Cemetery care funds increased by $14.0 million or 9.0% in 2007,
of which $1 .7 million was due to a fair value adjustment as a result
of the implementation of new accounting standards for financial
instruments. Excluding the fair value adjustment, cemetery care
funds increased by $12.3 million or 7.9% due to deposits made to
the funds as a result of at-need and pre-need cemetery interment
right sales. This compared to an increase of $1 1 .2 million or 7.7%
in 2006.
Crypts and niches decreased by $1 .9 million or 8.0% to
$22.2 million due to inventory sold of $7.2 million, which was
partially offset by additions of $5.2 million and a reduction of
$0.1 million in the reserve for slow-moving crypts and niches. The
$5.2 million (2006 – $5.2 million) spent on crypt and niche
inventory in 2007 included:
• $2.1 million for a new mausoleum at Glendale Memorial
Gardens (Toronto, Ontario);
• $0.4 million for a mausoleum addition at Rideau Memorial
Gardens (Montreal, Québec);
• $0.4 million for an exterior columbarium at Dartmouth
Memorial Gardens (Dartmouth, Nova Scotia);
• $0.3 million for a combination mausoleum and columbarium at
Sunset Memorial Gardens (Thunder Bay, Ontario);
• $0.3 million for a mausoleum addition at Glen Oaks (Oakville,
Ontario)
• $0.2 million for exterior niches at Mount Lawn Memorial
Gardens (Whitby, Ontario); and
• $1 .5 million for other crypt and niche projects.
Fixed assets increased by $6.6 million or 3.6% in 2007 to
$187.5 million. In the year, the Company recorded depreciation of
$10.0 million (2006 – $9.7 million) and additions of $16.6 million
(2006 – $27.1 million, including $14.5 million in assets acquired in
connection with the purchase of seven funeral homes). Of the
$16.6 million in additions, $10.6 million was spent on maintenance
capital and $6.0 million was spent on new initiatives. The significant
projects in the period included $0.9 million for construction of a new
cemetery sales office at Rideau Memorial Gardens (Montreal,
Québec) and $5.1 million for the Victoria Greenlawn Memorial
Chapel and Reception Centre (Windsor, Ontario).
Details of fixed asset additions by segment follow (in $millions).
2007 2006
Cemetery 10.6 7.3
Funeral 4.9 19.4
Corporate 1 .1 0.4
16.6 27.1
Cemetery division expenditures in 2007 included:
• $5.2 million (2006 – $0.3 million) for development of the Victoria
Greenlawn Memorial Chapel and Reception Centre in Windsor,
Ontario;
• $0.8 million (2006 – $0.9 million) for preliminary development
of other on-site reception centres;
• $1.8 million (2006 – $2.0 million) for expansion, upgrade or
development of branch sales offices and service buildings;
• $1 .1 million (2006 – $1 .4 million) for the development or
replacement of roads and drainage;
• $1 .2 million (2006 – $1 .2 million) for furniture, fixtures and
equipment; and
• $0.5 million (2006 – $0.4 million) for other capital expenditures.
Funeral division expenditures in 2007 included:
• $1 .5 million (2006 – $1 .8 million) for professional vehicles;
• $1 .2 million (2006 – $1 .4 million) for furniture, fixtures and
equipment;
• $0.7 million (2006 – $nil) for two building renovations in
Victoria, British Columbia and Ottawa, Ontario;
• $1 .2 million (2006 – $0.8 million) for other building renovations;
and
• $0.3 million (2006 – $0.3 million) for other capital expenditures.
Corporate division expenditures included $0.4 million for a roof
replacement at the corporate offices, $0.5 million for computer
hardware and software purchases and $0.2 million for other
additions.
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A provision for impairment of fixed assets of a funeral home
identified as a discontinued operation at October 31 , 2007 of
$0.2 million was recorded in the fourth quarter of 2007 against
“assets related to discontinued operations” on the balance sheet.
Similarly, an impairment provision of $0.1 million was recorded for
one of the funeral homes identified as discontinued operations at
October 31 , 2006.
Goodwill decreased by $0.9 million or 1 .7% due to impairment
charges (2006 – $nil) related to three existing funeral reporting
units. The loss in value of the goodwill of the reporting units
resulted from the continued under performance of the operations
and increased competition in the marketplace.
As part of the Company’s 2007 goodwill review, the Company
identified eight under performing reporting units, including the
reporting units where impairment was identified. The amount of
goodwill associated with these reporting units was $8.1 million.
The Company will continue to monitor these units for impairment,
which could result in impairment charges in future years.
In assessing the cash flows of reporting units and, therefore,
whether goodwill of individual reporting units is impaired, the
Company considers the length of time that the condition of under
performance has existed, whether the under performance can
potentially be rectified with a change in unit management or other
measures, and whether the competitive environment could
change. This assessment involves management judgement.
Mortgage receivable, including both the current and long-term
portions, decreased by $6.8 million due to half of the principal
balance being repaid in the year in accordance with the terms of
the agreement.
Deferred obtaining costs and stored merchandise increased by $4.0 million or 5.8% as follows (in $millions):
Increase (Decrease)
2007 2006 $Millions %
Deferred obtaining costs 60.4 56.8 3.6 6.2
Stored merchandise 13.3 12.9 0.4 3.8
73.7 69.7 4.0 5.8
The increase in deferred obtaining costs of 6.2% in 2007
(2006 – 0.5%) was a result of more pre-need contracts being
written than being delivered in the year. The increase of 0.5% in
2006 was lower than historical increases due to an additional
provision for cancellation of pre-need funeral and cemetery
contracts of $3.0 million. Excluding this provision, deferred
obtaining costs would have increased by 5.8%. The provision for
cancellation in 2006 was mainly related to contracts that were in
place prior to 2006.
Assets related to discontinued operations, including the current
portion, decreased by $2.7 million due mainly to the sale, in the
fourth quarter of 2007, of a funeral home identified as a
discontinued operation at October 31 , 2006, which reduced the
balance by $0.8 million and $1 .7 million in asset impairment
charges, including goodwill impairment of $1 .5 million and fixed
asset impairment of $0.2 million.
Accounts payable and accrued liabilities increased by $6.9 million
or 26.5% as follows (in $millions):
Trade accounts payables 3.5
Accrued liabilities 2.6
Other accounts payable 0.8
6.9
The increase in trade accounts payable was mainly due to higher
payables and accruals related to construction and development
vendors of $1 .5 million; higher accrued payments for pre-need
cemetery merchandise and services funds and cemetery care
funds of $0.6 million; a higher purchase card balance owing of
$0.5 million; and higher amounts payable and accrued for
memorial and monument purchases of $0.3 million. Accrued
liabilities increased by $2.6 million from 2006 primarily due to
higher accrued bonuses and commissions of $1 .0 million and
higher accrued termination settlements of $1 .7 million. The
increase in other accounts payable of $0.8 million was mainly due
to higher commissions payable of $0.3 million and higher GST
payable of $0.2 million.
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Income taxes payable decreased by $2.6 million or 70.7%. The
income taxes payable at October 31 , 2006 were primarily related
to a parcel of land sold in 2003 subject to a mortgage receivable,
which was paid in the first quarter of 2007. The income taxes
payable at October 31 , 2007 of $1 .1 million represented the
difference between accrued taxes for 2007 and tax instalments
paid in the year, which were based on 2006 earnings.
Long-term debt, including the current portion, decreased by
$17.2 million due to repayments made on the floating-rate bank
term debt in the third and fourth quarters of 2007.
Deferred revenue increased by $5.1 million or 2.9% from 2006 to
$180.8 million. Of the $5.1 million increase, $2.3 million was due
to a fair value adjustment recorded as a result of the
implementation of new accounting standards for financial
instruments in 2007.
Deferred revenue at October 31 , 2007 plus the non-controlling
interests in pre-need funds, plus the accumulated benefit of the
pre-need funeral group annuity funds excluded from the balance
sheet was $706.7 million compared to $662.7 at October 31 ,
2006, an increase of $44.0 million or 6.6%. Of the $44.0 million
increase, $7.7 million was a fair value adjustment to pre-need
trust funds that was recorded as a result of the implementation of
new accounting standards for financial instruments. The
remaining increase was $36.3 million or 5.5% (2006 –
$29.8 million or 4.8%, excluding the increase related to the 7 new
funeral homes acquired in 2006) and represented deferral of
revenue in the period in excess of amounts recognized upon
delivery of merchandise and services.
This accumulation of $706.7 million is equivalent to 3.3 years of
2007 annual cemetery and funeral sales (2006 – 3.4 years).
Accumulated deferred cemetery revenue plus the non-controlling
interests in pre-need cemetery trust funds was the equivalent of
3.3 years (2006 – 3.3 years) of annual cemetery sales.
Accumulated deferred funeral revenue, plus the non-controlling
interests in pre-need trust and annuity funds plus the
accumulated benefit of the pre-need funeral group annuity funds
excluded from the balance sheet, was the equivalent of 3.3 years
(2006 – 3.4 years).
Non-controlling interests in pre-need funds increased by $16.1 million
or 4.0% to $417.1 million. Of the $16.1 million increase, $5.4 million
was due to a fair value adjustment recorded as a result of the
implementation of new accounting standards for financial
instruments in 2007. The remaining increase of $10.7 million or
2.7% was due to higher deferred merchandise and services
contracts written compared to the amount of merchandise and
services delivered to customers in the period.
Other liabilities increased by $1 .6 million or 1 5.3%. The
$1 .6 million increase was due to higher GST and HST payable of
$2.2 million, which was partially offset by a number of other
smaller items.
Non-controlling interests in cemetery care funds increased by
$14.0 million or 9.0% in 2007, of which $1 .7 million was due to a
fair value adjustment as a result of the implementation of new
accounting standards for financial instruments in 2007. Excluding
the fair value adjustment, non-controlling interests in cemetery
care funds increased by $12.3 million or 7.9% due to deposits
made to the care funds as a result of at-need and pre-need
cemetery interment right sales. This compared to an increase of
$1 1 .2 million or 7.7% in 2006.
Contractual obligations ($millions):
Payments Due by Period
Total < 1 Year 1-3 Years 4-5 Years > 5 Years
Bank debt 73.3 2.2 13.9 47.7 9.5
Capital lease obligation 1 .9 1 .9 - - -
Operating leases 3.2 1 .9 1 .2 0.1 -
Purchase obligations 13.7 13.7 - - -
Total contractual obligations 92.1 19.7 15.1 47.8 9.5
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Purchase obligations included $4.7 million for casket inventory,
$7.7 million for cemetery burial space inventory projects and
$1.3 million for capital expenditures. The $7.7 million for cemetery
burial space inventory was primarily related to two mausoleums
that began construction in the first quarter of 2008.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash provided by operating activities of continuing operations
improved by $1 1 .1 million or 42.5% from 2006 due to higher net
earnings of $4.6 million excluding discontinued operations and
after adjusting for non-cash items, and a positive net change in
other operating balance sheet items (“net change”) of
$6.5 million. The adjustments to net earnings for non-cash items
included depreciation and amortization, gain on disposal of
assets, provision for asset impairment, provision for settlement of
pre-need obligations of sold cemeteries and future income taxes.
The most significant items in the net change of $6.5 million included:
• an increase in accounts payable and accrued liabilities of
$6.9 million in 2007 compared to a reduction of $2.4 million in
2006, which increased the net change by 9.3 million;
• a decrease in income taxes payable of $2.6 million in 2007
compared to an increase in 2006 of $3.3 million, which reduced
the net change by $5.8 million;
• a higher increase in deferred obtaining costs in 2007, which
reduced the net change by $3.0 million;
• a decrease in accounts receivable of $1 .1 million in 2007
compared to an increase in 2006 of $1 .5 million, which
increased the net change by $2.7 million; and
• a higher increase in deferred revenue of $2.4 million.
The increase in accounts payable and accrued liabilities of
$6.9 million in 2007 compared to 2006 was mainly due to higher
accrued termination settlements of $1 .7 million; a higher level of
construction and development activity in the fall of 2007
compared to 2006, resulting in higher accounts payable and
accrued liabilities of $1 .5 million; higher accrued bonuses and
commissions of $1 .0 million; and higher accrued trust payments
Of the change in income taxes payable of $5.8 million, $3.8 million
was due to taxes payable in 2006 related to a parcel of land sold
in 2003 subject to a mortgage receivable, which were paid in the
first quarter of 2007.
Net cash used for investing activities of continuing operations
decreased by $30.2 million or 47.6% in 2007 due to:
• the acquisition of seven funeral homes in 2006 for $24.0 million;
• $6.8 million in proceeds received on repayment of a portion of
the mortgage receivable in 2007; and
• lower additions to cemetery land held for future development of
$4.9 million due to the purchase of two parcels of cemetery land
for future development for $5.0 million in 2006.
These items were partially offset by higher additions to fixed
assets in 2007 of $4.1 million and other items totalling
$1 .4 million.
Net cash provided by financing activities of continuing operations
decreased by $29.5 million or 80.3% compared to 2006 due to
debt proceeds of $19.9 million borrowed in 2006 to partially
finance an acquisition of seven funeral homes and $17.2 million in
repayments on the long-term floating rate bank debt in 2007
compared to $3.7 million in 2006, an increase of $13.5 million.
These items were partially offset by proceeds received on exercise
of stock options of $2.2 million and higher increases in non-
controlling interests in pre-need funds and cemetery care funds,
which represented an increase in cash of $1 .7 million.
LIQUIDITY
Based on historical cash inflows and outflows, management
believes that cash on hand and future cash flow from operating
activities are sufficient to sustain ongoing operations as well as the
routine maintenance and orderly replacement of the Company’s
fixed assets.
The Company also has revolving term loans with two financial
institutions under similar terms and conditions. The total credit limit
under the two facilities is $125 million. In addition, the Company has
access to operating lines of credit of $14 million. At October 31,
2007, the Company had access to unused operating lines of credit
of $13.2 million (2006 – $13.2 million) and unused floating rate
debt facilities of $51.7 million (2006 – $34.5 million). Total unused
credit facilities as of October 31, 2007 were $64.9 million (2006 –
$47.7 million). The Company’s debt to equity ratio at October 31,
2007 was 0.35:1 (2006 – 0.48:1).
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of $0.6 million.
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29A r b o r M e m o r i a l S e r v i c e s I n c .
CAPITAL EXPENDITURES AND CEMETERY BURIAL
SPACE INVENTORY
The following are projects on which the Company had expended
significant funds prior to October 31 , 2007 but that had not yet
generated operating revenue as of October 31 , 2007.
Victoria Greenlawn Memorial Chapel and Reception Centre: As at
October 31 , 2007, the Company had spent $5.8 million on this
project. The Company estimates that an additional $0.9 million will
be spent to complete this project early in fiscal 2008.
Glendale Memorial Gardens Mausoleum: As at October 31 , 2007,
the Company had spent $2.1 million on this project. The Company
estimates that an additional $17.7 million will be spent to
complete this project and anticipates completing the project early
in fiscal 2009.
The Company had committed to the following expenditures for
capital, cemetery burial space inventory and funeral casket
inventory at October 31 , 2007 (in $millions):
Reception centres 0.4
Cemetery burial space inventory 7.7
Cemetery maintenance capital expenditures 0.6
Funeral maintenance capital expenditures 0.3
Funeral casket inventory 4.7
13.7
The Company anticipates funding these expenditures from
existing cash and cash from operations generated in 2008.
Following is the Company’s planned capital and cemetery burial
space inventory spending for fiscal 2008 (in $millions):
Maintenance capital expenditures 13.1
New initiatives 27.9
Cemetery burial space inventory 27.5
68.5
Estimates of future capital and cemetery burial space spending
may change positively or negatively depending on factors
including, but not limited to, the availability of labour and
materials, delays in the construction planning and approval
process and future changes in the nature of the projects.
UNAUDITED QUARTERLY RESULTS
2007Fiscal Quarters Ended Year Ended
Jan-31 Apr-30 Jul-31 Oct-31 Oct-31
Revenue ($millions)(1) 54.8 59.3 57.1 58.1 229.3
Net earnings from continuing operations ($millions)(1) 5.4 6.9 4.1 4.2 20.6
Net earnings ($millions) 5.4 7.0 4.2 2.7 19.3
Basic and diluted earnings per share from
continuing operations ($)(1) (2) 0.51 0.65 0.39 0.39 1.94
Basic and diluted earnings per share ($)(2) 0.51 0.66 0.40 0.25 1 .82
2006Fiscal Quarters Ended Year Ended
Jan-31 Apr-30 Jul-31 Oct-31 Oct-31
Revenue ($millions)(1) 50.3 55.1 52.9 55.2 213.5
Net earnings from continuing operations ($millions)(1) 4.3 6.2 4.2 4.6 19.3
Net earnings ($millions) 4.4 6.4 4.2 4.2 19.2
Basic and diluted earnings per share from
continuing operations ($)(1) (2) 0.41 0.59 0.39 0.43 1 .82
Basic and diluted earnings per share ($)(2) 0.42 0.61 0.39 0.39 1 .81
Prepared in accordance with GAAP. All amounts are in Canadian dollars.
(1) Revenue, net earnings from continuing operations and basic and diluted earnings per share from continuing operations for all quarters of 2006 and the first three quarters of 2007 were
reclassified to conform with the presentation at October 31, 2007 (see note 20 to the financial statements).
(2) All earnings per share figures presented are applicable to both Class A and Class B shares.
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Revenue
Seasonality was a factor contributing to an increase in revenue in
the second quarter compared to the first quarter and a decrease
in revenue in the third quarter compared to the second quarter
both in 2007 and 2006. Seasonality also contributed to fourth
quarter revenues, which were higher in both years compared to
the other quarters.
Revenue in the second quarter of 2007 was affected by a 12.4%
increase in funeral division sales compared to the second quarter
of 2006, which was driven by an improvement in the number of
services provided of 9.7%.
Revenue in the second quarter of 2006 was affected by an
increase in the delivery of at-need cemetery merchandise and
services of $1 .2 million, of which $0.5 million was related to an
administrative project.
Net Earnings From Continuing Operations and Earnings Per
Share From Continuing Operations
Net earnings from continuing operations and earnings per share from
continuing operations in the fourth quarter of 2007 were affected by
an asset impairment provision of $0.9 million. Net earnings from
continuing operations and earnings per share from continuing
operations in the third quarter of 2007 were affected by $2.0 million
in after-tax termination expenses that occurred in the cemetery,
funeral and corporate divisions.
Net earnings from continuing operations and earnings per share from
continuing operations in the second quarter of 2007 were positively
affected by the improvement in sales in the funeral division.
Net earnings from continuing operations and earnings per share
from continuing operations in the fourth quarter of 2006 were
negatively affected by an increase in provisions for cancellation
of pre-need merchandise and services of $0.9 million after
income taxes.
Net earnings from continuing operations and earnings per share
from continuing operations in the second quarter of 2006 were
higher due to the improvement in sales in both the cemetery and
funeral divisions and positive adjustments to cost of sales in the
cemetery division.
Net Earnings and Earnings Per Share
Net earnings and earnings per share did not vary significantly from
net earnings from continuing operations and earnings per share
from continuing operations in most of the reporting periods with
the exception of the fourth quarters of 2007 and 2006, which
were lower as a result of impairment provisions for discontinued
operations of $1 .5 million and $0.5 million respectively.
OUTSTANDING SHARES
The Company has an unlimited number of Preferred Shares,
Class A Voting Shares and Class B Non-Voting Shares authorized
for issue. The Class A and Class B shares have identical rights
and privileges, except that the Class A shares are voting. In
certain circumstances, if an offer is made by the Company or a
third party to purchase Class A shares from each holder in
Ontario, each Class B share is convertible into one Class A share.
At October 31 , 2007, the Company had issued 2,525,497 Class
A shares and 8,164,246 Class B shares for $1 .7 million and
$73.0 million respectively.
STOCK INFORMATION
The Company’s shares have been listed on the Toronto Stock Exchange since 1973. Information concerning its shares follows:
Class of Shares A (Voting) B (Non-Voting)Stock Symbol ABO.A ABO.BCusip# 038916-10-2 038916-20-1
Market price (at October 31):
2007 $32.8 1 $30.99
2006 $24.10 $24.50
2005 $20. 1 1 $20.20
2004 $17.95 $16.50
2003 $14.50 $13.50
2002 $12.50 $12.50
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FINANCIAL INSTRUMENTS
The following contains forward-looking statements. Reference
should be made to “Information Regarding Forward-Looking
Statements” on page 8. For a description of material factors and
assumptions see page 8 and for a description of risks and
uncertainties that could cause actual results to differ materially from
forward-looking statements see “Risks, Events and Uncertainties”
on page 35 and the Company’s 2007 Annual Information Form
under “Description of the Business – Risk Factors”.
Pre-need receivables and funds
Pre-need receivables and funds represent instalment accounts
receivable due from customers related to pre-need cemetery and
funeral contracts, pre-need cemetery and funeral trust funds and
certain of the Company’s funeral group annuity funds.
Instalment accounts receivable are recorded net of unearned finance
charges, a provision for cancellations and amounts payable in
respect of cemetery care funds. As instalment accounts receivable
are collected, they are placed in trust, remitted to government
authorities for commodity taxes or retained by the Company in
accordance with provincial and federal regulation. Instalment
accounts receivable at October 31 , 2007 were $70.4 million
(2006 – $68.1 million). The risk associated with instalment
accounts receivable is that amounts may never be collected from
customers. The Company has estimated a provision for
cancellations of a portion of the instalment accounts receivable
that represents sales of interment rights based on historical
experience. The fair value of instalment accounts receivable is
calculated using a discounted cash flow methodology using
conventional mortgage rates.
Trust funds were recorded at fair value at October 31 , 2007 and at
historical cost at October 31 , 2006. The trust funds are invested
in accordance with the Company’s investment guidelines, which
are established to comply with legislative requirements for such
funds. The Investment Committee of the Board of Directors
monitors both the compliance against these guidelines and the
performance of individual investments. At October 31 , 2007,
13% (2006 – 8%) of the trust funds recorded on the balance
sheet were in equities and an equity fund.
The trust investments are expected to generate earnings sufficient
to offset the inflationary costs of providing the pre-need
merchandise and services in the future for the prices that were
guaranteed at the time of sale. Management believes that the
market value of all the amounts due from trust at October 31 ,
2007 exceeded the expected cost of meeting the obligations to
provide merchandise and services for the unperformed contracts.
Where the Company has identified individual sales of
merchandise for which the amount set aside in trust, together
with the earned investment income in the funds, is less than the
current cost to purchase the related pre-need merchandise, a
liability is recorded under “Other liabilities” in the balance sheet
and a corresponding loss is recorded in the statement of earnings.
Investment earnings on funds placed into trust accounts are
generally accumulated and deferred until each pre-need contract
is either utilized upon the death of, or cancelled by, the customer.
Until the pre-need contract is utilized or cancelled, any investment
earnings are attributed to the individual pre-need contract. These
attributed investment earnings (whether distributed or
undistributed) are recognized in the consolidated statement of
earnings when the merchandise is delivered or the services are
performed, or when the contract is cancelled and the Company is
entitled to retain these earnings. Recognition of the investment
earnings is independent of the timing of the receipt of the related
cash flows.
If a customer cancels the trust funded pre-need contract,
provincial cemetery or funeral law determines the amount of the
refund owed to the customer, including, in certain situations, the
amount of the attributed investment earnings. Upon cancellation,
the Company receives the amount of principal deposited to trust
and previously undistributed net investment earnings and pays
the customer the required refund. The Company retains any
excess funds and recognizes the attributed investment earnings
(net of any investment earnings payable to the customer) in the
consolidated statement of earnings. The fair value of the trust
funds is calculated using a discounted cash flow methodology for
term deposits, utilizing Guaranteed Investment Certificate
(“GIC”) rates for the discount rates and using market rates
provided by the trustees for bonds, equities and the equity fund.
The Company has no interest rate cash flow risk as all interest-
bearing investments are invested in fixed-rate funds. The
Company has minimal investments that would be exposed to
foreign exchange risk.
Based on a review of its trust funds, the Company confirmed that it
does not hold any 30, 60 or 90-day commercial paper. Within the
asset backed securities held by the Company, there is no Asset
Backed Commercial Paper (“ABCP”) issued by any of the twenty-two
third-party sponsored ABCP conduits subject to the Montreal
Accord that are known to be illiquid.
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Funeral group annuity funds represent the value that would be
received from the third-party insurer if the merchandise or
services in the underlying contracts were delivered or performed
at the date of the balance sheet. Only those group annuity funds
for which the Company is the policyholder are recorded as assets
of the Company. Group annuity funds for which the Company is
not the policyholder are not recorded as assets of the Company,
but are disclosed in note 5 to the financial statements. The policy
amount of the group annuity contract equals the amount of the
pre-need funeral contract. The customer assigns the policy
benefits to the Company’s funeral homes to pay for the pre-need
funeral contract at the time of need.
The group annuity contracts include increasing death benefit
provisions, which are expected to offset the inflationary costs of
providing the pre-need funeral contract. The increase in pre-need
group annuity funeral contracts, where the Company is the
policyholder, is recorded in the consolidated balance sheet based
on reports received from the third-party insurer. Management
believes that the value of the insurance funded pre-need funeral
contracts at October 31 , 2007 exceeds the expected cost of
meeting the obligations to provide funeral merchandise and
services for the unperformed contracts. If a customer cancels the
group annuity contract prior to death maturity, the third-party
insurer pays the cash surrender value under the policy directly to
the customer. The third-party insurer informs the Company of the
cancellation and the amount of funeral contracts on the balance
sheet is reduced accordingly.
The carrying value of amounts due from third-party insurers
approximates its fair value since the amounts due are recorded
using the value that would be received if the merchandise or
services in the underlying contracts were delivered or performed
at the date of the balance sheet.
Cemetery care funds
In respect of interment rights, the Company is required to deposit
into cemetery care funds amounts specified by provincial
regulation. The investment income from the cemetery care funds
is available to the Company to defray the costs of ongoing care
and maintenance of cemeteries, mausolea and columbaria.
Although the Company is entitled to the investment income
earned on the funds, the Company cannot access the cemetery
care funds themselves. As a result, the Company recognizes non-
controlling interests in the cemetery care funds on the balance
sheet. The fair value of the funds is calculated using a discounted
cash flow methodology for term deposits, utilizing bank GIC rates
for the discount rates, and using market rates provided by the
Company’s trustees for bonds, equities and the mortgage fund.
The cemetery care funds are invested in accordance with the
Company’s investment guidelines, which are established to
comply with legislative requirements for such funds. The funds are
generally invested in medium-term government and corporate
bonds, which are held to maturity and earn income at fixed rates
of return. Losses in the cemetery care funds can occur. However,
the Company has a policy of investing in what it considers to be
high quality securities.
Credit risk The Company enters into at-need and pre-need sales
contracts with numerous consumers, including groups, but no one
consumer or group accounts for a significant concentration of
credit risk.
Amounts on deposit in pre-need trust funds, excluding bonds and
equities, are protected by the Canadian Deposit Insurance
Corporation up to $100,000 per depositor or per fund depending
on whether the funds are invested by investor or on a pooled
basis. Amounts due from third-party insurers are protected by the
Canadian Life and Health Insurance Compensation Corporation
up to $100,000 per policyholder.
Mortgage receivable
The mortgage receivable balance of $6.8 million at October 31 ,
2007 consisted of the remainder of one mortgage established on
the sale of certain land in Markham, Ontario in 2003. The
remaining balance of the mortgage receivable is due on January 30,
2008. A lump sum interest payment of $0.8 million was made
effective January 31 , 2006 and a second interest payment of
$0.5 million was made on January 31 , 2007. The payments
represent interest rates of 6.0% and 6.5% respectively calculated
on the blended principal amount of the mortgage. The fair value of
the mortgage receivable was calculated using a discounted cash
flow methodology, utilizing conventional mortgage rates for the
discount rates. The Company does not anticipate any issue with
respect to collection of the principal due to the high credit standing
of the mortgagor. In addition, the Company may reclaim the land
sold in the event of non-collection under the terms of the
Agreement of Purchase and Sale.
Long-term debt
Long-term debt at October 31 , 2007 was $75.2 million (2006 –
$92.4 million). Of the $75.2 million, $73.3 million was bank
floating rate debt and the remainder was an obligation under a
capital lease. The fair value of the Company’s bank term loans
approximates the carrying value given their floating rate nature.
The fair value of the capital lease is calculated using a discounted
cash flow methodology, utilizing conventional mortgage rates for
the discount rates, and was $1 .8 million (2006 – $1 .8 million) at
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October 31 , 2007. At October 31 , 2007, the Company had fixed
a portion of their floating rate bank debt using interest rate swaps.
With respect to the floating rate bank debt, the Company is
required to request an extension of the conversion date on an
annual basis. The renewal date is currently set at April 30, 2008.
If no extension is granted, quarterly principal payments
commence within three months under one agreement and
15 months under the second agreement. The Company has
assumed, for purposes of classifying the current portion of long-
term debt in its consolidated financial statements, that no
extension will be granted in order to present the most
conservative view.
The Company has satisfied all of the debt covenants as defined in
its bank loan agreements and is in good standing. Two such
covenants are interest coverage and debt to EBITDA defined as
earnings before interest expense, income taxes, depreciation and
amortization. There are no risks associated with the capital lease.
Derivatives
Derivative financial instruments are utilized by the Company in
the management of its interest rate exposure on long-term debt.
The Company does not enter into financial instruments for trading
or speculative purposes. Interest rate swap agreements are used
as part of the Company’s program to manage the fixed and
floating interest rate mix of the Company’s total debt portfolio and
related overall cost of borrowing. The interest rate swap
agreements involve the periodic exchange of payments without
the exchange of the notional principal amount upon which the
payments are based and are recorded as an adjustment of interest
expense on the related debt instrument. The related amount
payable to or receivable from counter-parties is included as an
adjustment to accrued interest.
As of October 31 , 2007, the Company’s use of interest rate swap
agreements was limited to six (2006 – seven) interest rate swaps
with a Canadian chartered bank, whereby the Company fixed a
portion of its term loan financing at interest rates ranging from
4.3% to 6.2% plus a bank margin. At the end of the year, these
swaps had a total notional amount of $33.3 million (2006 –
$43.8 million). Swap costs in 2007 were $0.2 million (2006 –
$0.7 million).
The fair value of the interest rate swaps is estimated as the
discounted unrealized gain or loss calculated based on the market
price at October 31, 2007, which generally reflects the estimated
amount that the Company believes it would receive or pay to
terminate the contracts at the balance sheet date. The fair value is
provided to the Company by the chartered bank that is the counter-
party to the transactions. The estimated fair value of the interest rate
swaps at October 31, 2007 was a gain of $0.1 million (2006 – loss
of $0.9 million). Losses due to non-performance by the counter-
party are not anticipated due to their high credit standing.
All of the Company’s interest rate swaps are designated as cash
flow hedges. At October 31 , 2007, the critical terms of the swaps
did not match the terms of the underlying floating rate debt.
Therefore, the hypothetical derivative method was used to
perform a quantitative, retrospective and prospective assessment
of the effectiveness of the swaps. This methodology involved
regression analysis of historical interest rates for the floating rate
portion of the swaps and historical interest rates for the underlying
debt. The result of the analysis was that the fair value of the cash
flows from the interest rates of the swaps was highly effective at
offsetting the variability in cash flows from the interest rates of the
underlying debt. Therefore, hedge accounting was used to record
the swaps and related activity for the year.
0
1
2
3
4
5
6
0706050403
Fiscal Year
INTEREST COVERAGERATIO(Ratio:1)
0
1
2
3
4
0706050403
Fiscal Year
LONG-TERM DEBT TO EBITDA(Ratio:1)
The long-term debt to EBITDA ratio must be less than or equal to
3.5:1 and the interest coverage ratio must equal or exceed 3.25:1 .
The interest coverage ratio is relative to earnings from operations
before other income (expenses). At October 31 , 2007, the
comfort margin on the long-term debt to EBITDA ratio was 47%
(2006 – 40%) and the comfort margin on the interest coverage
ratio was 36% (2006 – 41%).
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has agreements with various insurance companies,
whereby a portion of the funds collected from pre-need funeral
customers are set aside under group annuity policies
administered by the insurance companies. Pre-need funeral group
annuity funds administered by two of these insurance companies,
where the Company is not the policyholder, are not consolidated
on the Company’s balance sheet, as they are not considered
assets and liabilities of the Company. All new pre-need funeral
group annuity policies written are administrated by Assurant Life
of Canada (“Assurant”). If the arrangement with Assurant were
terminated in future, the Company believes it would be able to
negotiate a similar arrangement with another insurance company.
At October 31 , 2007, the accumulated benefit of all off-balance
sheet annuity contracts was $108.8 million (October 31, 2006 –
$86.0 million). This amount represents the value that would be
received if the merchandise or services underlying the contracts
were delivered or performed at the date of the balance sheet. The
Company receives fees from Assurant on sales of pre-need
contracts and these fees are recognized as received, net of an
allowance for those fees subject to refund.
CRITICAL ACCOUNTING ESTIMATES
Accounts Receivable Allowance for Doubtful Accounts
The Company provides for at-need accounts receivable that it
believes will ultimately not be collected in an allowance for
doubtful accounts. The allowance for funeral accounts includes all
accounts older than two years as this is consistent with the
Company’s collection history. In addition, all accounts less than
two years old are reviewed in detail to determine whether the
accounts are collectible and are provided for if necessary. The
collection of at-need accounts is dependent on many variables
including estate resolution issues. The allowance for cemetery
accounts is calculated based on historical experience using a five-
year moving average. At October 31 , 2007, the allowance for
funeral and cemetery at-need accounts was $1 .3 million (2006 –
$1.5 million).
Cemetery Interment Rights Cancellation Allowance
The customer can cancel contracts for the sale of pre-need
cemetery interment rights. Cancellation estimates have been
provided for in the Company’s consolidated financial statements
based on historical experience. The portion of the allowance that
relates to unpaid balances is netted against Instalment accounts
receivable under pre-need receivables and funds in the balance
sheet, while the portion that relates to fully paid balances is
included in other liabilities. At October 31 , 2007 the allowance
netted against instalment accounts receivable was $0.5 million
(2006 – $0.5 million) and the allowance included in other
liabilities was $3.6 million (2006 – $3.7 million).
Pre-Need Merchandise and Services
Cancellation Allowance
The customer, prior to delivery, can cancel contracts for the sale of
pre-need cemetery and funeral merchandise and services.
Cancellation estimates for the related deferred obtaining costs,
net of the portion of deferred revenue that represents the amount
the Company is allowed to retain based on provincial regulation,
have been provided for in the Company’s consolidated financial
statements based on historical experience. At October 31 , 2007
the net allowance was $1 .3 million (2006 – $1 .3 million).
Crypt and Niche Provision
The Company calculates a provision for crypt and niche burial
spaces that may never be sold. All crypt and niche structures that
are expected to take more than 9 years to sell out are considered
in detail by reviewing historical rates of sale to determine an
appropriate provision. A provision based on historical experience
is also calculated for those structures that are expected to take
less than 10 years to sell out. At October 31 , 2007, the provision
for crypt and niche burial spaces was $0.6 million (2006 –
$0.7 million).
Fixed Assets Useful Lives
Fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Estimated
useful lives are determined based on historical experience and are
disclosed in note 3 of the financial statements.
Future Estimated Cash Contribution and Capital Costs Used for
Analysis of Carrying Values of Goodwill and Long-Lived Assets
Assessments of the carrying values of goodwill and long-lived
assets involve estimating future cash contribution and future
capital costs for each cemetery and funeral branch operation.
Future cash contribution is estimated by a variety of techniques
including review of historical averages, trend forecasting and
discussion of an operation’s future prospects with senior
management. Estimated capital costs for each branch operation
are calculated based on historical capital costs incurred for the
overall cemetery and funeral divisions and business plans,
where appropriate.
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Future Tax Balances
Future tax balances require management to make assumptions
regarding the timing of the reversal of temporary differences
and the average tax rate at which they will reverse, which varies
by province.
Fair Values of Financial Instruments
Fair values of financial instruments are determined based on
estimates of current market interest rates and assumptions
regarding comparable instruments.
Fees Earned on the Sale of Pre-Need Group
Annuity Contracts
Fees earned on the sale of pre-need group annuity contracts are
subject to refund under certain conditions. The Company records
these fees as income when received and estimates a provision for
refund based on historical experience.
Legal Contingencies
The Company accrues estimated legal contingencies based on the
specific facts of each contingency.
RISKS, EVENTS AND UNCERTAINTIES
Risks Related to the Company’s Business
Interest rates: Increases in interest rates would increase the
interest cost of the Company’s variable rate long-term debt and
have an adverse effect on the Company’s net income and earnings
per share. As at October 3 1 , 2007, the Company had
$40.0 million (2006 – $47.2 million) or 53% (2006 – 51%) in
variable rate long-term debt, after deducting variable term debt
under fixed interest rate swap contracts. Therefore, a 1% increase
or decrease in the market interest rate could impact the
Company’s annual interest expense by approximately $0.4 million
(2006 – $0.5 million).
Market factors: A weakening economy could cause the Company
to experience a decline in pre-need arrangements. A decline in
pre-need cemetery arrangements would reduce the amount of
revenue and net earnings the Company recognizes each year as a
result of a decrease in interment right sales. In addition, a decrease
in pre-need arrangements of cemetery and funeral products and
services would reduce the Company’s accumulation of deferred
revenue to be recognized in future years.
Unexpected increases in the cost of raw materials, such as bronze
and granite, could also materially adversely affect our future cash
flows, revenues and operating margins as there is no guarantee
that earnings from pre-need funeral and cemetery funds or pre-
need funeral and cemetery contracts funded through third-party
annuity contracts would cover future unexpected increases in
such costs.
Competition: In Canada, the funeral and cemetery industry is
characterized by a large number of locally owned, independent
operations. To compete successfully, our funeral service locations
and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive
products and services at competitive prices. In addition, we must
market our Company in such a manner as to distinguish us from our
competitors. We have historically experienced price competition
from independent funeral home and cemetery operators,
monument dealers, casket retailers, low-cost funeral providers and
other non-traditional providers of services and merchandise. If we
are unable to successfully compete, the Company’s financial
condition, results of operations and cash flows could be materially
adversely affected.
Price competition, increased advertising, better marketing or
improvements in products and services offered by competitors in
any market in which Arbor competes could reduce the Company’s
market share or cause the Company to reduce prices or incur
increased costs in order to retain or recapture market share, either
of which would reduce revenues and margins. If the Company is
not able to respond effectively to changing consumer preferences,
its market share, sales and profitability could decrease.
Pre-need trust funds and cemetery care funds: Earnings from pre-
need funeral and cemetery funds and cemetery care funds could
be reduced by changes in stock and bond prices, and interest and
dividend rates. Investment earnings and gains/losses on pre-need
trust and cemetery care funds are affected by financial market
conditions that are not within the Company’s control. Earnings are
also affected by the mix of fixed-income and equity securities that
the Company has in the funds. A decline in earnings from pre-
need trust funds would cause a decrease in future revenues. A
decline in earnings from cemetery care funds would cause a
decrease in current revenues. In addition, for pre-need
arrangements funded through group annuity contracts, there is no
guarantee that increasing insurance benefits will cover the
increase in the cost of providing a price guaranteed funeral service,
which could affect the Company’s financial condition.
Pre-need funeral and cemetery contracts funded through third-
party annuity contracts: The Company sells price guaranteed pre-
need funeral contracts through various programs providing for
future funeral services at prices prevailing when the agreements
are signed. For pre-need funeral contracts funded through
annuity contracts, there is an increasing death benefit associated
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with the contract of approximately 2% per year to be received in
cash by us at the time the funeral is performed. There is no
guarantee that the increasing death benefit will cover future
increases in the cost of providing a price guaranteed funeral
service, which could adversely affect our future cash flows,
revenues and operating margins.
Fixed costs: Funeral homes and cemeteries are high fixed-cost
businesses, making the Company vulnerable to declines in
margins, profits and cash flows if it experiences declines in sales.
The funeral and cemetery operations have a high percentage of
fixed costs such as employee costs, motor vehicle expenses,
facilities expenses and regional management costs. The
Company must incur these costs regardless of the number of
funeral services or interment services performed. Because the
Company cannot necessarily decrease these costs when we
experience lower sales volumes, a sales decline may cause
margin percentages to decline at a greater rate than the decline
in revenues.
Environmental: Various jurisdictions develop new environmental
legislation from time to time. Compliance with such legislation
can increase the Company’s cost of operations.
Key personnel: The Company’s success and ability to manage
future growth depends in part upon the continued services of
senior management and the ability to attract and retain key
officers and other highly qualified personnel. There can be no
assurance that we will continue to be successful in attracting
and retaining qualified personnel, and the unexpected loss of
the services of any of these individuals could have an adverse
effect on the Company’s revenue, financial performance and
results of operations.
Risks Related to the Company’s Industry
Decline in number of deaths: A decline in the number of deaths in
any of the Company’s markets could cause a decrease in
revenues. Changes in the number of deaths are not predictable
over the short-term or from market to market.
Cremation: The increasing number of cremations in Canada could
cause revenues to decline since the average revenue received from
a cremation arrangement is generally lower than that received from
a traditional arrangement. A substantial increase in the rate of
cremations without services that the Company performs could have
a material adverse effect on the Company’s financial condition,
results of operations and cash flows.
Regulations: Changes in, or failure to comply with, regulations
applicable to the Company’s business could increase costs, or
require changes to business administration or operational
practices. The death care industry is subject to extensive
regulation and licensing requirements under federal, provincial
and local laws. From time to time, various governments and
agencies amend or add regulations, which could increase the
Company’s cost of operations.
For further information regarding risk factors applicable to the
Company, please see “Description of the Business – Risk Factors”
in the Company’s 2007 Annual Information Form.
Seasonality
While the death care industry is fairly stable and predictable, the
Company’s at-need business and pre-need deliveries of some
merchandise and services can be affected by seasonal
fluctuations in the death rate. Death rates are generally higher in
the winter months. The Company’s pre-need cemetery sales of
interment rights can also have seasonal fluctuations, whereby
sales are generally lower in the winter and summer months.
Regulation
In November 2002, the results of the Ontario Ministry of
Government and Consumer and Services (“MGCS”)
Bereavement Sector Advisory Committee (“BSAC”) were
presented to the Ontario legislature as Bill 209. On December 13,
2002, the Bill received Royal Assent. The Company has played an
active role on BSAC since its formation in April 2001. The
legislation provides increased consumer protection as well as
fostering a level playing field between participants and suggesting
options for a single regulatory regime. The legislation also sets out
rules for how “combinations” (funeral homes located on cemetery
properties) would be permitted. The impact of combinations for
the Company should be positive, as currently, Ontario and Prince
Edward Island are the only provinces that do not allow funeral
homes on cemetery property. When the Ontario Government
proclaims the legislation, the Company will further enhance its
ability to serve its customers, since 2 1 of the Company’s
41 cemeteries are located in that province. At October 31 , 2007,
five of the seven regulation segments had been released.
According to the MGCS timetable, they intend to circulate a
revised draft of the five regulation segments to interested
stakeholders in early calendar 2008. However, based on the
Company’s experience, it is uncertain when the regulations will be
finalized and the legislation proclaimed.
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Environmental
The Company continues to monitor changes in regulatory
standards for air emissions from crematoria. Environmental
advocates are encouraging significantly higher emission
standards. However, at this time, as defined by the National
Pollutant Release Inventory, crematoria are classified as “other”
and are not considered “large final emitters”. We do not foresee
a requirement for retrofitting of our existing equipment in any
jurisdiction in the immediate future.
DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s Chief Executive Officer and Chief Financial Officer
are responsible for establishing and maintaining disclosure
controls and procedures and internal control over financial
reporting (as defined in the Canadian Securities Administrators’
Multilateral Instrument 52-109). These responsibilities include
designing the Company’s disclosure controls and procedures and
internal control over financial reporting, or causing them to be
designed under their supervision, to provide reasonable assurance
that material information relating to the Company, including its
consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period during which
the annual filings are being prepared and to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP, respectively.
With respect to disclosure controls and procedures, the
Company’s management, including the Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures as of October 31 ,
2007. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that such disclosure controls
and procedures were effective as of October 31 , 2007 in
providing reasonable assurance that material information relating
to the Company and its consolidated subsidiaries would be made
known to them by others within those entities.
With respect to internal control over financial reporting, during the
Company’s most recent interim period, there were no changes in
the Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
December 7, 2007
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2007management’s report
The consolidated financial statements, including the notes thereto, and other financial information contained in the annual report are the
responsibility of the management of Arbor Memorial Services Inc. The financial statements have been prepared in accordance with
Canadian generally accepted accounting principles, using management’s best estimates and judgements where appropriate.
The Board of Directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control.
The Audit Committee of the Board, which is comprised of non-management directors, meets with management and the auditors to
satisfy itself that these responsibilities are properly discharged and to review the consolidated financial statements and the report of the
auditors. It reports its findings to the Board of Directors, which approves the consolidated financial statements.
Deloitte & Touche LLP, the independent auditors appointed by the shareholders of the Company, have audited the Company’s
consolidated financial statements in accordance with Canadian generally accepted auditing standards. The independent auditors have
full and unrestricted access to the Audit Committee.
Brian D. Snowdon Laurel L. AnchetaPresident and Chief Executive Officer Vice-President and Chief Financial Officer
December 7, 2007
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2007auditors’ report
To the shareholders of Arbor Memorial Services Inc.
We have audited the consolidated balance sheets of Arbor Memorial Services Inc. as at October 31 , 2007 and 2006 and the
consolidated statements of earnings, retained earnings, comprehensive income, accumulated other comprehensive income and cash
flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
October 31 , 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.
Chartered AccountantsLicensed Public AccountantsToronto, Ontario
December 7, 2007
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2007consolidated statements of earnings
Years Ended October 31 ($000) 2007 2006(1)
REVENUE
Sales 212,371 197,653
Investment and other income (note 15) 16,956 15,837
229,327 213,490
EXPENSES
Operating 178,787 166,049
Corporate 14,218 13,623
193,005 179,672
EARNINGS BEFORE OTHER INCOME (EXPENSES), INTEREST EXPENSE
AND INCOME TAXES 36,322 33,818
OTHER INCOME (EXPENSES)
Gain on disposal of assets 456 214
Provision for asset impairment (note 9) (883) (147)
Provision for settlement of pre-need obligations of sold cemeteries (note 23) - (67)
(427) -
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES 35,895 33,818
Interest expense 4,649 5,067
EARNINGS BEFORE INCOME TAXES 31,246 28,751
Income taxes (note 19) 10,619 9,419
Net earnings from continuing operations 20,627 19,332
Net loss from discontinued operations (note 20) (1 ,281) (166)
NET EARNINGS 19,346 19,166
BASIC AND DILUTED EARNINGS PER SHARE (IN $)
Basic and diluted earnings per share from continuing operations 1 .94 1 .82
Basic and diluted loss per share from discontinued operations (0.12) (0.01)
BASIC AND DILUTED EARNINGS PER SHARE (IN $) 1 .82 1 .81
(1) Certain figures provided for 2006 have been reclassified to conform with the current year's presentation - see note 20. In addition, lease income in the corporate division was reclassified
from sales to investment and other income.
consolidated statements of retained earnings
Years Ended October 31 ($000) 2007 2006
RETAINED EARNINGS, BEGINNING OF YEAR 1 18,886 100,462
Net earnings for the year 19,346 19,166
Dividends (744) (742)
RETAINED EARNINGS, END OF YEAR 137,488 1 18,886
See accompanying notes to the consolidated financial statements.
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2007consolidated statement of comprehensive income
Year Ended October 31 ($000) 2007
NET EARNINGS 19,346
OTHER COMPREHENSIVE INCOME:
NET CHANGE IN LOSSES ON DERIVATIVES DESIGNATED AS CASH FLOW HEDGES (NOTE 1 4)
Reduction in losses on effective portion of derivatives designated as cash flow hedges 1 ,006
Income taxes on reduction in losses on effective portion of derivatives designated as cash flow hedges (363)
643
NET CHANGE IN UNREALIZED GAINS ASSOCIATED WITH AVAILABLE FOR SALE SECURITIES
OF THE PRE-NEED TRUST FUNDS (NOTE 5)
Change in unrealized gains associated with available for sale securities of the
pre-need trust funds, net of income taxes of $649 (1 ,198)
Net change in unrealized gains associated with available for sale securities of the pre-need trust funds
attributable to non-controlling interests and deferred revenue, net of income taxes of $649 1 ,198
-
NET CHANGE IN UNREALIZED GAINS ASSOCIATED WITH AVAILABLE FOR SALE SECURITIES
OF THE CEMETERY CARE FUNDS (NOTE 6)
Change in unrealized gains associated with available for sale securities of the
cemetery care funds, net of income taxes of $1 ,551 (2,862)
Net change in unrealized gains associated with available for sale securities of the cemetery care funds
attributable to non-controlling interests, net of income taxes of $1 ,551 2,862
-
OTHER COMPREHENSIVE INCOME 643
COMPREHENSIVE INCOME 19,989
consolidated statement of accumulated other comprehensive income
Year Ended October 31 ($000) 2007
ACCUMULATED OTHER COMPREHENSIVE INCOME, BEGINNING OF YEAR -
Fair value transition adjustment for derivatives, net of income taxes of $314 (555)
(555)
Other comprehensive income for the year 643
ACCUMULATED OTHER COMPREHENSIVE INCOME, END OF YEAR 88
See accompanying notes to the consolidated financial statements.
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2007consolidated balance sheets
As at October 31 ($000) 2007 2006(1)
ASSETSCurrent assets
Cash 24,483 1 1 ,857 Accounts receivable 18,715 19,849 Merchandise inventories 9,670 9,589 Prepaid expenses 1 ,395 1 ,359 Mortgage receivable, current portion (note 10) 6,750 6,750 Pre-need receivables, current portion (note 5) 40,088 38,917 Future income taxes, current portion (note 19) 251 220 Assets related to discontinued operations, current portion (note 20) 631 670
101 ,983 89,21 1 Pre-need receivables and funds (note 5) 458,473 438,260 Cemetery care funds (note 6) 170,315 156,310 Crypts and niches 22,162 24,077 Cemetery land (note 7) 34,974 35,583 Fixed assets (note 8) 187,537 180,949 Goodwill (note 9) 51,168 52,051 Mortgage receivable (note 10) - 6,750 Deferred obtaining costs and stored merchandise (note 1 1) 73,666 69,650 Intangible and other assets (note 12) 2,178 2,354 Future income taxes (note 19) 4,230 4,777 Assets related to discontinued operations (note 20) 7,537 10,240
1 ,1 14,223 1 ,070,212
LIABILITIESCurrent liabilities
Accounts payable and accrued liabilities 33,187 26,242 Income taxes payable 1 ,088 3,717 Long-term debt, current portion (note 13) 4,087 2,701 Future income taxes, current portion (note 19) 2,016 2,490
40,378 35,150 Long-term debt (note 13) 71,142 89,713 Other liabilities 12,200 10,577 Deferred revenue (note 16) 180,772 175,663 Non-controlling interests in pre-need funds (note 17) 417,146 401,033 Future income taxes (note 19) 6,163 6,500 Liabilities related to discontinued operations (note 20) 3,81 1 3,881
731,612 722,517 Non-controlling interests in cemetery care funds 170,315 156,310
SHAREHOLDERS' EQUITYShare capital (note 18) 74,720 72,499 Retained earnings 137,488 1 18,886 Accumulated other comprehensive income 88 -
137,576 1 18,886 212,296 191 ,385
1 ,1 14,223 1 ,070,212
(1) Certain figures provided for 2006 have been reclassified to conform with the current year's presentation - see note 20.
On behalf of the Board,
Daniel J. Scanlan, Director Brian D. Snowdon, Director
See accompanying notes to the consolidated financial statements.
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2007consolidated statements of cash flows
Years Ended October 31 ($000) 2007 2006(1)
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Net earnings from continuing operations 20,627 19,332
Add (deduct) items not affecting cash:
Depreciation and amortization 10,082 9,728
Gain on disposal of assets (456) (214)
Provision for asset impairment (note 9) 883 147
Provision for settlement of pre-need obligations of sold cemeteries (note 23) - 67
Future income taxes (note 19) (414) (2,905)
Net change in other operating balance sheet items (note 21) 6,412 (92)
NET CASH PROVIDED BY CONTINUING OPERATIONS 37,134 26,063
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 566 586
INVESTING ACTIVITIES
Additions to fixed assets (16,622) (12,522)
Acquisition (note 4) - (23,997)
Additions to cemetery land held for future development (151) (5,021)
Proceeds on disposal of assets 601 218
Proceeds from mortgage receivable payment 6,750 -
Change in pre-need funds (1 1 ,462) (10,823)
Change in cemetery care funds (12,281) (1 1 ,205)
NET CASH USED FOR CONTINUING OPERATIONS (33,165) (63,350)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 904 1 ,083
FINANCING ACTIVITIES
Proceeds from new long-term debt - 19,942
Repayment of long-term debt (17,185) (3,691)
Dividends (744) (742)
Proceeds on exercise of stock options 2,221 -
Change in non-controlling interests in pre-need funds 10,693 10,097
Change in non-controlling interests in cemetery care funds 12,281 1 1 ,205
NET CASH PROVIDED BY CONTINUING OPERATIONS 7,266 36,81 1
NET CASH USED FOR DISCONTINUED OPERATIONS (79) (290)
INCREASE IN CASH 12,626 903
Cash, beginning of year 1 1 ,857 10,954
CASH, END OF YEAR 24,483 1 1 ,857
SUPPLEMENTARY INFORMATION
Income taxes paid 13,820 9,709
Interest paid 4,674 5,012
(1) Certain figures provided for 2006 have been reclassified to conform with the current year's presentation - see note 20.
See accompanying notes to the consolidated financial statements.
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2007notes to consolidated financial statements
Years Ended October 31, 2007 and 2006
1 . NATURE OF OPERATIONS
Arbor Memorial Services Inc. (the “Company”) is a Canadian public company that provides cemetery and funeral products andservices in the death care industry in Canada through its subsidiaries and ultimately its branch locations. At October 31 , 2007, theCompany owned and operated 41 cemeteries, 27 crematoria, 3 reception centres and 91 funeral homes in eight provinces of Canada.
The Company sells its cemetery and funeral products and services on both an at-need and a pre-need basis. The Company isrequired by provincial regulation to deposit all or a portion of the proceeds received in respect of pre-need contracts into trust or withthird-party insurers under group annuity programs, pending the delivery of products and services. Upon delivery of the products andservices, the Company is entitled to receive related amounts placed into trust and the accumulated investment income thereon. Inrespect of interment rights, the Company is required to deposit into cemetery care funds amounts prescribed by provincialregulation. The investment income from the cemetery care funds is available to the Company to the extent it has incurred costs inconnection with the ongoing care and maintenance of cemeteries, mausolea and columbaria.
While the death care industry is fairly stable and predictable, the Company’s at-need business and pre-need deliveries of somemerchandise and services can be affected by seasonal fluctuations in the death rate. Death rates are generally higher in the wintermonths. The Company’s pre-need cemetery sales of interment rights can also have seasonal fluctuations, whereby sales aregenerally lower in the winter and summer months.
2. ACCOUNTING CHANGES
The Canadian Institute of Chartered Accountants (“CICA”) issued the following new accounting standards, which were effective for theCompany’s first quarter of fiscal 2007: Comprehensive Income (“Section 1530”); Financial Instruments – Recognition and Measurement(“Section 3855”); Hedges (“Section 3865”); Equity (“Section 3251”) and Disclosure and Presentation (“Section 3861”). Each of thestandards requires prospective application.
Section 1530 introduces the concept of comprehensive income, which consists of net income and other comprehensive income(“OCI”), and represents changes in shareholders’ equity during a period arising from transactions with non-owners. OCI includesamong its components, unrealized gains and losses on financial assets classified as “available for sale” and changes in the fair valueof the effective portion of cash flow hedging instruments, together with income tax expenses or benefits associated with eachcomponent. As a result of the implementation of this section, the Consolidated Financial Statements include a ConsolidatedStatement of Comprehensive Income and a Consolidated Statement of Accumulated Other Comprehensive Income. In addition, thecumulative amount of OCI, which is termed “accumulated other comprehensive income” or “AOCI”, is presented as a new categoryof shareholders’ equity in the Consolidated Balance Sheets.
Section 3855 establishes standards for recognizing and measuring financial instruments. On application of Section 3855, theCompany classified the investments in the pre-need cemetery and funeral trust funds and the investments in the cemetery carefunds as “available for sale” and changed the basis of measurement for these assets from cost to fair value in the ConsolidatedBalance Sheets. Unrealized gains and losses on these “available for sale” financial assets are excluded from net earnings andrecorded, net of income taxes, as a component of OCI in the Consolidated Statement of Comprehensive Income. Unrealized gainsand losses are then offset by the amounts attributable to the non-controlling interests in pre-need funds, the non-controllinginterests in cemetery care funds or deferred revenue, as appropriate, as such unrealized earnings have not been earned by theCompany through the performance of services or delivery of merchandise. As such, the Company’s OCI and AOCI are ultimatelynot affected by the revaluation of the pre-need cemetery and funeral trust funds and the cemetery care funds. The Companycontinues to recognize as sales, amounts removed from the pre-need funds upon the performance of services and delivery ofmerchandise, including realized earnings accumulated in the funds.
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The Company’s remaining financial assets and financial liabilities are classified and measured as follows:
Asset/Liability Classification Measurement
Accounts receivable Loans and receivables Amortized cost
Instalment accounts receivable Loans and receivables Amortized cost
Mortgage receivable Loans and receivables Amortized cost
Accounts payable and accrued liabilities Other liabilities Amortized cost
Long-term debt Other liabilities Amortized cost
Section 3865 establishes standards for when and how hedge accounting may be applied. The Company’s derivative financial
instruments, which consist of interest rate swap agreements that have been designated as cash flow hedges, have been reported at
fair value as a result of the implementation of Section 3855 and Section 3865. The unrealized gains and losses that arise as a result
of remeasuring the swap agreements at their fair value at the end of each period are recognized, net of income taxes, in OCI. To date,
there has not been ineffectiveness in these cash flow hedges.
Section 3855 requires that interest income and expense be allocated over the relevant period using the effective interest method
(EIM). Under the EIM, interest income and expense is calculated and recorded using an effective interest rate, which is the rate that
exactly discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate,
a shorter period, to the initial net carrying amount of the financial asset or liability so as to produce a constant rate of interest over
that term. Transaction costs that are directly attributable to the acquisition or issue of financial instruments classified as other than
“held for trading” are included in the initial carrying value of such instruments and amortized using the EIM. As a result of
implementing this Section, the Company has recorded the interest income and expense related to all financials assets and liabilities
using the EIM.
In accordance with Section 3855, the Company conducted a search for embedded derivatives in all contractual arrangements dated
subsequent to October 31 , 2002, and did not identify any embedded features that required separate presentation from the related
host contract.
Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. As a result of
the implementation of this section, the Company has presented AOCI as a separate component of equity and a sub-total of retained
earnings and AOCI on the face of the Consolidated Balance Sheets. The change in equity resulting from OCI is reflected in the
Consolidated Statement of Accumulated Other Comprehensive Income.
Section 3861 establishes standards for presentation of financial instruments and identifies the information that should be disclosed
about them. This section deals with disclosure of information about the nature and extent of an entity’s use of financial instruments,
the business purpose they serve, the risks associated with them and management’s policies for controlling those risks. The Company
has expanded its discussion of financial instruments and the related objectives, risks and risk management policies throughout the
notes to the consolidated financial statements.
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and
include the accounts of the Company, all corporations that it controls and all variable interest entities for which it is the primary
beneficiary.
Recognition of revenue
Cemetery sales
i) At-need cemetery interment rights, merchandise and services
Sales of at-need cemetery interment rights are deferred and recognized as revenue when a minimum of 10% of the interment
right sales price has been collected and the interment right has been transferred to the customer. Sales of at-need cemetery
merchandise and services and related costs are recognized when the merchandise is delivered or the service is performed.
ii) Pre-need cemetery interment rights
Sales of pre-need cemetery interment rights and their related costs are deferred and recognized as revenue when a minimum
of 10% of the interment right sales price has been collected and the interment right has been transferred to the customer.
Contracts for the sale of pre-need cemetery interment rights can be cancelled by the customer prior to burial. Cancellation
estimates have been provided for based on historical experience.
iii) Pre-need cemetery merchandise and services
Sales of pre-need cemetery merchandise and services and related costs are deferred and recognized when the merchandise is
delivered or the service is performed. Investment income on trusted funds related to pre-need cemetery merchandise and
services is deferred and recognized as sales revenue when the merchandise is delivered or the service is performed. Contracts
for the sale of pre-need cemetery merchandise and services can be cancelled by the customer prior to delivery. Cancellation
estimates for the related deferred obtaining costs, net of the portion of deferred revenue that represents the amount the
Company is allowed to retain based on provincial regulation, have been provided for based on historical experience.
The Company has a merchandise storage program for pre-need cemetery sales, whereby certain merchandise is purchased, after it
has been fully paid by the customer, and stored for the customer at their request until required for use. Once the merchandise has
been purchased and stored for the customer, the Company is allowed to withdraw the related funds from trust in accordance with
provincial regulation. Certain types of merchandise are considered delivered for the purpose of revenue recognition once the
merchandise is provided by the supplier and either installed in or on the customer’s burial space or stored in appropriately segregated
facilities. The cost of the merchandise that has been purchased and stored for customers, but for which related revenue does not
qualify for recognition, is included as an asset on the balance sheet under the caption “deferred obtaining costs and stored
merchandise”. Contracts for customized merchandise cannot be cancelled once the merchandise has been manufactured or
purchased and stored.
Funeral sales
Sales of at-need funeral merchandise and services are recognized as revenue at the date of delivery of the merchandise or
performance of the service. Sales of pre-need funeral merchandise and services and their related costs are deferred and recognized
in earnings when the merchandise is delivered or the service is performed. Investment income on trusted funds related to the
merchandise and services is deferred and recognized as sales revenue when the merchandise is delivered or the service is performed.
Contracts for the sale of pre-need funeral merchandise and services can be cancelled by the customer prior to delivery. Cancellation
estimates for the related deferred obtaining costs, net of the portion of deferred revenue that represents the amount the Company
is allowed to retain based on provincial regulation, have been provided for based on historical experience.
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Investment and other income
Investment income related to the cemetery care funds is recognized by the Company in investment and other income as earned by
the funds and is used to defray cemetery maintenance costs, which are expensed as incurred.
Realized earnings on pre-need funds and group annuity funds for which the Company is the policyholder, net of amounts attributable
to non-controlling interests therein, are deferred and recognized as sales revenue when merchandise and services on the underlying
pre-need cemetery or funeral contracts are delivered or performed respectively.
The Company receives fees on the balance of pre-need cemetery and funeral funds under the trust program and receives fees on
the deposit of funeral funds under the group annuity program. These fees are recognized as received, net of an allowance for those
fees subject to refund.
Finance charges
Finance charges on the uncollected balance of instalment accounts receivable are recognized in income over the term of the sales
agreement using the effective interest method.
Obtaining costs on pre-need contracts
Costs incurred to obtain new pre-need cemetery and pre-need funeral contracts are deferred and recognized when the related sales
of interment rights, merchandise and services are recognized as revenue. Deferred obtaining costs include only those costs that vary
with and are directly related to the acquisition of new pre-need contracts. Contracts for the sale of pre-need cemetery interment rights
and cemetery and funeral merchandise and services can be cancelled by the customer prior to delivery. Cancellation estimates for the
related deferred obtaining costs, net of the portion of deferred revenue that represents the amount the Company is allowed to retain
based on provincial regulation, have been provided for based on historical experience.
Valuation and recognition of assets and liabilities
The Company’s classification and measurement of financial instruments is as follows:
Asset/Liability Classification Measurement
Pre-need trust funds Available for sale Fair value
Cemetery care funds Available for sale Fair value
Accounts receivable Loans and receivables Amortized cost
Instalment accounts receivable Loans and receivables Amortized cost
Mortgage receivable Loans and receivables Amortized cost
Accounts payable and accrued liabilities Other liabilities Amortized cost
Long-term debt Other liabilities Amortized cost
Accounts receivable
Accounts receivable represent amounts due from customers related to at-need cemetery and funeral contracts and miscellaneous
current receivables. Accounts receivable are recorded at cost less a provision for doubtful accounts.
Merchandise inventories
Merchandise inventories are carried at the lower of cost, determined on a first-in, first-out basis, and net realizable value.
Pre-need receivables and funds
Pre-need receivables represent instalment accounts receivable due from customers related to pre-need cemetery and funeral
contracts, pre-need cemetery and funeral trust funds and funeral group annuity funds for which the Company is the policyholder.
Pre-need trust funds and funeral group annuity funds for which the Company is the policyholder are considered variable interest
entities because there is insufficient equity at risk. The funds are consolidated on the Company’s balance sheet as the Company is
the primary beneficiary.
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Effective November 1 , 2006, the trust funds are recorded at fair value (see note 2). Any unrealized net gain or loss resulting fromchanges in the fair value of the cemetery care funds is recorded, net of income taxes, in other comprehensive income or loss. Theunrealized net gain or loss is then offset by amounts attributed to non-controlling interests in pre-need funds or deferred revenue asappropriate. The funeral group annuity funds for which the Company is the policyholder are recorded at the value that would bereceived if the merchandise or services underlying the contracts were delivered or performed at the date of the balance sheet.
Instalment accounts receivable are recorded at cost at the time a contract is signed, net of unearned finance charges, a provision forcancellations and amounts payable in respect of cemetery care funds.
Pre-need funeral group annuity funds, where the Company is not the policyholder, are not consolidated on the Company’s balancesheet, as they are not considered assets and liabilities of the Company. The amount of these funds is disclosed in a note to thefinancial statements at the value that would be received if the merchandise or services underlying the contracts were delivered orperformed at the date of the balance sheet.
Cemetery care funds
Cemetery care funds are considered variable interest entities because there is insufficient equity at risk. The funds are consolidatedon the Company’s balance sheet as the Company is the primary beneficiary.
Effective November 1 , 2006, the cemetery care funds are recorded at fair value (see note 2). Any unrealized net gain or loss isrecorded, net of income taxes, in other comprehensive income or loss. The unrealized net gain or loss is then offset by amountsattributed to non-controlling interests in care funds. The funds are invested in accordance with the Company’s investmentguidelines, which are established to comply with legislative requirements for such funds. The funds are generally invested in mediumterm government and corporate bonds, which are held to maturity and earn income at fixed rates of return. The capital portion ofthese funds is required to be held in trust in perpetuity to fund the cost of ongoing care and maintenance.
Crypts and niches
Crypts and niches are carried at the lower of cost and net realizable value. The cost of crypts and niches includes all costs related tothe construction of the structure including pre-construction and landscaping costs. The costs of a particular structure are allocatedto cost of sales on a unit-by-unit basis in a manner expected to reduce the carrying value to nil when all of the units are sold.Provisions for impairment are recorded when crypt and niche structures become slow-moving or difficult to sell.
Cemetery land
Cemetery land is recorded at the lower of cost, which includes original acquisition and subsequent development costs, and netrealizable value. Cemetery land costs are allocated to cost of sales on a lot-by-lot basis in a manner expected to reduce the carryingvalue to nil when all of the lots are sold.
Fixed assets
Fixed assets are recorded at cost, which includes acquisition, construction and improvement costs, and are depreciated using thestraight-line method over their estimated useful lives as follows:
Buildings 40 yearsEquipment and furniture 3 to 10 yearsAutomotive equipment 7 to 10 yearsLeasehold improvements over term of leaseOther assets 10 to 25 yearsProperty under capital lease 40 years
Software development costs 3 to 6 years
Construction in progress is not depreciated. Upon completion of these projects, the assets are reclassified to one of the abovecategories and depreciation commences.
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Goodwill
Goodwill for each reporting unit is reviewed by comparing the carrying value and the fair value on an annual basis at the end of
September, or more frequently if impairment indicators arise, to determine if an impairment loss should be recognized. An
impairment loss, equal to the excess of the carrying amount of the goodwill of a reporting unit over the fair value of the goodwill, is
recognized for any goodwill that is considered impaired.
Long-lived assets
Long-lived assets include fixed assets, cemetery land, crypts and niches, and deferred obtaining costs. For purposes of recognition
and measurement of an impairment loss, the long-lived assets of each cemetery or funeral branch are grouped with other assets and
liabilities of the branch and evaluated as an asset group. Long-lived assets for each asset group are reviewed by comparing the
carrying value and the future undiscounted cash flows whenever impairment indicators arise. If the carrying value is greater than the
undiscounted future cash flows, a fair value is calculated and any shortfall in the fair value compared to net book value is recorded
as a provision for impairment of assets.
Intangible assets
Intangible assets include a future benefit related to acquired pre-need funeral contracts and the value of an acquired trade name.
The benefit related to acquired pre-need funeral contracts is being amortized based on estimated timing of contract delivery using
the straight-line method over the estimated useful life of 16 years. The value of the trade name is not subject to amortization as the
trade name has an indefinite life.
The value of the future benefit related to acquired pre-need funeral contracts is tested for impairment by comparing the carrying
value of the benefit, and other long-lived assets of the related asset group, to the future undiscounted cash flows whenever
impairment indicators arise. If the carrying value is greater than the undiscounted future cash flows, a fair value is calculated and any
shortfall in the fair value compared to net book value is recorded as a provision for impairment of assets. The value of the trade name
is reviewed annually, or more frequently if impairment indicators arise, by comparing the carrying value and the fair value to
determine if an impairment loss should be recognized. An impairment charge will be recorded if the value of the trade name is
considered impaired.
Future income taxes
Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be reversed or settled. The effect on future income tax assets
and liabilities of a change in tax rates is included in income in the period of substantive enactment. The Company recognizes current
and long-term amounts for both assets and liabilities of individual corporate entities.
Deferred revenue
Deferred revenue represents amounts received in respect of sales of pre-need cemetery interment rights and pre-need cemetery
and funeral merchandise and services, the recognition of which is deferred until they meet the requirements of the Company’s
revenue recognition policies. Sales that have not yet been recognized in revenue, and which remain uncollected from customers, are
presented under deferred revenue. Upon collection, a portion of these instalment accounts receivable are required to be deposited
directly to legislated trust funds. Once the Company deposits these amounts to legislated trust funds, the corresponding deferred
revenue will be reclassified to non-controlling interests in pre-need funds.
Contracts for the sale of pre-need cemetery and funeral merchandise and services can be cancelled by the customer prior to delivery.
Cancellation estimates, net of the amount the Company is allowed to retain based on provincial regulation, have been provided for
based on historical experience.
Non-controlling interests in pre-need funds and cemetery care funds
The Company recognizes non-controlling financial interests of third parties in the pre-need funds and annuity funds for which the
Company is the policyholder to the extent that the Company’s customers are the legal beneficiaries of these pre-need and annuity
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funds. The Company also recognizes non-controlling interests in the cemetery care funds as the Company does not have a legal right
to access the principal amount of these funds. The Company does not recognize non-controlling interests in non-legislated pre-need
trust funds since the Company’s customers are not the legal beneficiaries of these funds, however, these amounts are included in
deferred revenue.
Stock options
The Company accounts for stock options using the fair value method. Under the fair value method, compensation expense for stock
options that are direct awards of stock is measured at fair value at the grant date using an option-pricing model and recognized over
the vesting period.
Earnings per share
The calculation of diluted earnings per share includes the potential issuance of shares under stock options that are dilutive. In
determining whether options are dilutive or anti-dilutive, each issuance of options is considered separately using the treasury stock
method.
Discontinued operations
Assets and liabilities of cemetery or funeral branches that meet the criteria of the CICA Handbook Section 3475, paragraph .08 are
classified as assets and liabilities related to discontinued operations. Any such branches are recorded at the lower of carrying amount
or fair value less estimated selling expenses and are not depreciated while classified as held for sale. The results of operations,
balance sheet items and cash flows of any branch that has been identified as held for sale are reported separately under discontinued
operations if the enterprise will not have any significant continuing involvement in the operations of the branch after the disposal
transaction.
Derivative financial instruments
Derivative financial instruments are utilized by the Company in the management of its interest rate exposure on long-term debt. The
Company does not enter into financial instruments for trading or speculative purposes. Interest rate swap agreements are used as part
of the Company’s program to manage the fixed and floating interest rate mix of the Company’s total debt portfolio and related overall
cost of borrowing. The interest rate swap agreements involve the periodic exchange of payments without the exchange of the notional
principal amount upon which the payments are based and are recorded as an adjustment of interest expense on the related debt
instrument. The related amount payable to or receivable from counter parties is included as an adjustment to accrued interest.
The Company applies Accounting Guideline 13 “Hedging Relationships” in respect of its interest rate swaps. The Guideline specifies
the amount of documentation and monitoring of hedging strategies required for the application of hedge accounting.
Transaction costs
Transaction costs that are directly attributable to the acquisition or issue of financial instruments that are classified as other than “held
for trading” are included in the initial carrying value of such instruments and amortized using the effective interest method.
Use of estimates
The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company makes estimates in
determining the useful lives of fixed assets, provisions for cancellation of cemetery interment rights and pre-need merchandise and
services, accounts receivable allowance for doubtful accounts, impairment of crypts and niches, goodwill and long-lives assets,
probable losses in respect of guarantees, future income tax liabilities, fair value of financial instruments, refund of fees earned on group
annuity contracts and legal contingencies. Actual results may differ from those estimates.
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4. ACQUISITIONS
Significant acquisition
On November 8, 2005, the Company acquired a group of 7 funeral homes for $23.5 million in cash consideration and $0.5 million
in closing costs. The Company financed the acquisition with $19.9 million in floating-rate bank debt under the Company’s existing
revolving term facilities and $4.1 million in cash. The acquisition was accounted for using the purchase method under which the
results of the operations since the date of acquisition are included in these financial statements. Details of the purchase allocation
follow (in $000):
Assets acquired:
Accounts receivable 804
Merchandise inventories 208
Other assets 69
Income taxes recoverable 257
Pre-need receivables and funds 17,979
Fixed assets 14,545
Intangible asset subject to amortization 953
Intangible asset not subject to amortization 1 ,145
35,960
Liabilities assumed:
Accounts payable and accrued liabilities 1 ,474
Deferred revenue 556
Non-controlling interests in pre-need funds 17,423
Future income taxes 3,294
22,747
Net assets acquired 13,213
Goodwill arising on acquisition 10,784
Total consideration 23,997
Other acquisitions
In 2006, the Company purchased two parcels of land for future cemetery development for $4.9 million
5. PRE-NEED RECEIVABLES AND FUNDS
($000) 2007 2006
Cemetery trust funds 200,726 184,332
Funeral trust funds 202,277 198,348
403,003 382,680
Instalment accounts receivable 70,351 68,090
Pre-need group annuity funds 25,207 26,407
498,561 477,177
Less: current portion of instalment accounts receivable 40,088 38,917
458,473 438,260
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In 2007, the Company purchased the land and building of a residential property that adjoins an existing cemetery for $0.3 million.
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The consolidated balance sheets do not include pre-need funeral and cemetery contracts that will be funded by third-party insurers
under group annuity programs, upon delivery of pre-need merchandise and services, where the Company is not the policyholder. At
October 31 , 2007, the accumulated benefit of all such contracts sold by the Company’s sales counsellors was $108.8 million
(2006 – $86.0 million). In addition, the accumulated benefit of all such contracts sold by the Company’s third-party insurer’s
licensed agents was $3.4 million (2006 – $2.1 million).
As a result of the implementation of Section 3855 of the CICA Handbook as described in note 2, the cemetery and funeral trust
funds were measured at fair value at November 1 , 2006, and the resulting unrealized net gain of $9.5 million was initially recorded
to “other comprehensive income”, net of income taxes of $3.3 million. The subsequent changes in the fair value, totalling $1 .8 million,
were also recorded to OCI, net of income taxes of $0.6 million. Both the initial unrealized net gain in the funds and the subsequent
changes therein have been offset by the amounts attributable to “non-controlling interests in pre-need funds” or “deferred revenue”
as appropriate
The trust funds consisted of investments with fixed and floating interest rates, equity securities and bond and equity funds as follows:
Fair Value Cost
($000) 2007 2006 2007 2006
Cash 9,184 2,1 13 9,184 2,1 13
Term deposits 214,105 230,703 214,569 230,699
Bonds 125,466 124,1 17 126,326 120,763
Equities 25,345 23,084 17,341 16,683
Equity fund 28,903 12,171 27,922 12,421
403,003 392,188 395,342 382,680
The term deposits had a weighted average maturity and interest rate of 32 months and 3.6% respectively (2006 – 29 months and
3.7%). The bonds had a weighted average maturity and interest rate of 6.2 years and 5.3% respectively (2006 – 5.7 years and
5.4%). Due to interest rate changes, the Company may realize gains and losses on the disposal of term deposits or bonds if sold
before their maturity.
The trust investments are expected to generate earnings sufficient to offset the inflationary costs of providing the pre-need
merchandise and services in the future for the prices that were guaranteed at the time of sale. Management believes that the market
value of all the amounts due from trust at October 31 , 2007 exceeded the expected cost of meeting the obligations to provide
merchandise and services for the underlying pre-need contracts. Where the Company has identified individual sales of merchandise
for which the amount set aside in trust, together with the accumulated investment income in the funds, is less than the current cost
to purchase the related pre-need merchandise, a liability is recorded under “other liabilities” in the balance sheet and a corresponding
loss is recorded in the statement of earnings. The fair value of the trust funds is calculated using a discounted cash flow methodology
for term deposits that utilizes bank Guaranteed Investment Certificates (GIC) rates for the discount rates, and using market values
provided by the trustees for bonds, equities and the equity fund.
The Company’s overall risk management objective for pre-need funds is to preserve capital and maximize income within the
constraints of legislated asset mix and acceptable risk tolerance levels. The key objective for the non-legislated funds is to maximize
the return on investment consistent with limited risk. Although more aggressive asset allocation is permitted with this fund, it is not
regarded as speculative. In order to manage risk, the Company has an Investment Committee comprised of four members of its
Board of directors and a selection of senior management from the Company. The Investment Committee requires a signed
Investment Policy Statement (“IPS”) from the trustees and an annual review for compliance. The IPS has set specific limits by asset
class, maturity, corporate quality and country exposure for the assets held in trust. The Investment Committee has established the
following two constraints for all trust funds.
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a) Avoid undue concentration in the debt and equities of any one corporation by limiting the exposure to not more than 10% of
the aggregate assets. Individual asset allocation limits must adhere to the following guidelines:
• bonds must be corporate, federal, provincial and municipal with a minimum rating of A or higher from a recognized rating agency;
• foreign bonds have the same rating and have a 10% limit;
• mortgage backed securities have the same rating;
• preferred shares have a limit of 10% with a minimum rating of P2;
• foreign equities not to exceed 10%;
• income trust not to exceed 5% and any new purchases must have Investment Committee approval; and
• short-term investments are to be invested in cash or money market funds.
b) A maximum term to maturity for any bond position shall not exceed 10 years.
The Company has no interest rate cash flow risk as all interest-bearing investments are invested in fixed-rate funds. The Company
has minimal investments that would be exposed to foreign exchange risk. Amounts on deposit in trust funds, excluding bonds and
equities, are protected by the Canadian Deposit Insurance Corporation up to $100,000 per depositor or per fund depending on
whether the funds are invested by investor or on a pooled basis.
Instalment accounts receivable are collectible as follows:
($000) 2007 2006
2008 40,088 38,918
2009 17,123 16,902
2010 8,146 7,937
201 1 3,680 3,574
2012 and thereafter 1 ,314 759
70,351 68,090
Instalment accounts receivable is reduced by the amounts that will be payable in respect of cemetery care funds of $5.8 million
(2006 – $5.4 million).
The risk associated with instalment accounts receivable is that amounts may never be collected from customers. The Company has
estimated a provision for cancellations of a portion of the instalment accounts receivable based on historical experience. The fair
value of instalment accounts receivable is calculated using a discounted cash flow methodology using conventional mortgage rates.
The fair value of the instalment accounts receivable at October 31 , 2007 was approximately $70.3 million (2006 – $68.2 million).
The group annuity contracts include increasing death benefit provisions, which are expected to offset the inflationary costs of
providing the pre-need funeral contract. The increase in pre-need group annuity funeral contracts, where the Company is the
policyholder, is recorded in the consolidated balance sheet based on reports received from the third-party insurer. Management
believes that the value of the insurance funded pre-need funeral contracts at October 31 , 2007 exceeds the expected cost of
meeting the obligations to provide funeral merchandise and services for the underlying pre-need contracts. If a customer cancels the
group annuity contract prior to death, the third-party insurer pays the cash surrender value under the policy directly to the customer.
The third-party insurer informs the Company of the cancellation and the amount of funeral contracts on the balance sheet is reduced
accordingly. The carrying value of amounts due from third-party insurers approximates its fair value since the amounts due are
recorded using the value that would be received if the merchandise or services in the underlying contracts were delivered or
performed at the date of the balance sheet.
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Amounts due from third party insurers, including off-balance sheet annuity funds, represent amounts due to the Company as
beneficiary under group annuity insurance contracts entered into by its customers. These amounts are almost all due under
contracts with three insurance companies and the amounts due from these insurance companies represent less than 10% of all
amounts due under pre-need receivables and funds. Amounts due from third party insurers are protected by the Canadian Life and
Health Insurance Compensation Corporation up to $100,000 per policyholder. The carrying value of amounts due from third-party
insurers approximates its fair value.
The Company enters into at-need and pre-need sales contracts with numerous consumers, including groups, but no one consumer or
group accounts for a significant concentration of credit risk. In addition, when amounts have not been collected, the Company is
allowed by provincial regulation to reduce the contract for merchandise and services that have not yet been provided. Any amounts
collected that are not allocated to products or services provided are retained as a future credit to the customer.
6. CEMETERY CARE FUNDS
As a result of the implementation of Section 3855 of the CICA Handbook as described in note 2, the cemetery care funds were
measured at fair value at November 1 , 2006, and the resulting unrealized net gain of $6.1 million was recorded to “other
comprehensive income”, net of income taxes of $2.2 million. The subsequent changes in the fair value, totalling $4.4 million, were
also recorded to OCI, net of income taxes of $1 .6 million. Both the initial unrealized net gain in the funds and the subsequent changes
therein have been offset by the amounts attributable to “non-controlling interests in cemetery care funds”.
Cemetery care funds consist of investments with fixed and floating interest rates, a mortgage fund and equity securities as follows:
Fair Value Cost
($000) 2007 2006 2007 2006
Cash and term deposits 8,430 8,953 8,430 8,953
Bonds 143,021 137,41 1 145,032 134,486
Mortgage fund - 152 - 152
Equities 18,864 15,931 15,129 12,719
170,315 162,447 168,591 156,310
The cash and term deposits had a weighted average maturity and interest rate of less than three months and 3.8% respectively
(2006 – less than three months and 3.0%). The bonds had a weighted average maturity and interest rate of 7.8 years and 5.5%
respectively (2006 – 7.9 years and 5.4%). Due to interest rate changes, the Company may realize gains and losses on the disposal
of term deposits or bonds if sold before their maturity.
The fair value of the funds is calculated using a discounted cash flow methodology for term deposits, utilising bank GIC rates for the
discount rates, and using market rates provided by the Company’s trustees for bonds, equities and the mortgage fund. The cemetery
care funds are generally invested in medium-term government and corporate bonds, which are held to maturity and earn income at
fixed rates of return. Losses in the cemetery care funds can occur. However, the Company has a policy of investing in what it
considers to be high quality securities.
The Company’s overall risk management objective for care funds is to preserve capital and maximize income within the constraints
of legislated asset mix and acceptable risk tolerance levels. The key objective for the non-legislated funds is to maximize the return
on investment consistent with limited risk. Although more aggressive asset allocation is permitted with this fund, it is not regarded
as speculative. In order to manage risk, the Company has an Investment Committee comprised of four members of its Board of
Directors and a selection of senior management from the Company. The Investment Committee requires a signed Investment Policy
Statement (“IPS”) from the trustees and an annual review for compliance. The IPS has set specific limits by asset class, maturity,
corporate quality and country exposure on the assets held in trust. The Investment Committee has established the following two
constraints for all trust funds.
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a) Avoid undue concentration in the debt and equities of any one corporation by limiting the exposure to not more than 10% of
the aggregate assets. Individual asset allocation limits must adhere to the following guidelines.
• bonds must be corporate, federal, provincial and municipal with a minimum rating of A or higher from a recognized rating
agency;
• foreign bonds have the same rating and have a 10% limit;
• mortgage backed securities have the same rating;
• preferred shares have a limit of 10% with a minimum rating of P2;
• foreign equities not to exceed 10%;
• income trust not to exceed 5% and any new purchases must have Investment Committee approval; and
• short-term investments are to be invested in cash or money market funds.
b) A maximum term to maturity for any bond position shall not exceed 10 years.
The Company has no interest rate cash flow risk as all interest-bearing investments are invested in fixed-rate funds. The Company
has minimal investments that would be exposed to foreign exchange risk.
7. CEMETERY LAND
($000) 2007 2006
Fully or partially developed 13,092 13,582
Held for future development 21,882 22,001
34,974 35,583
8. FIXED ASSETS
Accumulated DepreciationCost and Amortization Net Book Value
($000) 2007 2006 2007 2006 2007 2006
Land 38,074 37,497 - - 38,074 37,497
Buildings 140,400 136,766 45,736 42,650 94,664 94,1 16
Equipment and furniture 60,045 57,148 42,701 38,855 17,344 18,293
Automotive equipment 22,143 21,662 17,187 16,848 4,956 4,814
Leasehold improvements 5,562 5,548 5,538 5,527 24 21
Other assets 36,719 34,880 13,681 12,128 23,038 22,752
Property under capital lease 1 ,785 1 ,999 404 360 1 ,381 1 ,639
Construction in progress 8,056 1 ,817 - - 8,056 1 ,817
312,784 297,317 125,247 1 16,368 187,537 180,949
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9. GOODWILL
The changes in the carrying amount of goodwill were as follows:
($000) 2007 2006
Opening balance, beginning of year 52,051 41,267
Addition - 10,784
Impairment loss (883) -
Closing balance, end of year 51,168 52,051
All of the goodwill at October 31 , 2007 and October 31 , 2006 was related to the funeral segment.
The impairment loss in 2007 of $0.9 million (2006 – nil) was related to three reporting units. The loss in value of the goodwill of
two of these reporting units resulted from the continued under performance of the operations, despite measures undertaken to
improve performance, and the loss in value of the goodwill of one of these reporting units resulted from increased competition in the
marketplace.
The fair value of reporting units was calculated using a discounted cash flow methodology utilizing the estimated cost of capital
percentage of future purchasers as the discount rate and assuming 2% growth in cash flows. Certain assumptions were also made
with respect to future capital spending.
As part of the Company’s 2007 annual goodwill review, the Company identified eight under performing reporting units, including
the three reporting units where impairment was identified. The aggregate amount of goodwill associated with these reporting units
was $8.1 million. The Company will continue to monitor these units for impairment, which could result in impairment charges in
future years.
1 0. MORTGAGE RECEIVABLE
The mortgage receivable at October 31 , 2007 was established on the sale of land in 2003. The balance is due on January 30, 2008
and is therefore classified under current assets. A lump sum interest payment of $0.8 million was made effective January 31 , 2006
and a second interest payment of $0.5 million was made on January 31 , 2007. The payments represent interest rates of 6.0% and
6.5% respectively calculated on the blended principal amount of the mortgage. The fair value of the mortgage receivable at October
31 , 2007 was $6.3 million (2006 – $13.2 million). The fair value of the mortgage receivable was calculated using a discounted cash
flow methodology utilizing conventional mortgage rates for the discount rates.
1 1 . DEFERRED OBTAINING COSTS AND STORED MERCHANDISE
($000) 2007 2006
Deferred obtaining costs 60,353 56,819
Stored merchandise 13,313 12,831
73,666 69,650
Stored merchandise represents merchandise purchased on behalf of customers under pre-need cemetery contracts and stored by
the Company until the merchandise is delivered, and the related revenue is recognized. The merchandise is purchased when
payment in full of the sales agreement is received.
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1 2. INTANGIBLE AND OTHER ASSETS
Accumulated DepreciationCost and Amortization Net Book Value
($000) 2007 2006 2007 2006 2007 2006
Intangible asset subject to
amortization 953 953 1 19 60 834 893
Intangible asset not subject to
amortization 1 ,145 1 ,145 - - 1 ,145 1 ,145
Other assets 199 316 - - 199 316
2,297 2,414 1 19 60 2,178 2,354
The intangible asset subject to amortization represented a future benefit related to the pre-need funeral contracts acquired in the
2006 acquisition described in note 4. The intangible asset not subject to amortization represented the value of the trade name
acquired in the 2006 acquisition described in note 4. The Company amortized $0.1 million of the intangible asset subject to
amortization in 2007 (2006 – $0.1 million).
1 3. LONG-TERM DEBT
($000) 2007 2006
Bank term loans 73,342 90,512
Obligation under capital lease (matures October 2, 2008) 1 ,887 1 ,902
75,229 92,414
Less: current portion 4,087 2,701
71,142 89,713
At October 31 , 2007, the weighted average interest rate on the bank term loans was 5.4% (2006 – 5.3%). The interest rate on the
capital lease was 6.5% (2006 – 6.5%). The gross amount of assets under capital lease at October 31 , 2007 was $1 .8 million
(2006 – $2.0 million) and the accumulated depreciation on these assets was $0.4 million (2006 – $0.4 million). The lease expires
in October 2008 and the Company is required to acquire the assets under lease at that time for approximately $1 .9 million.
The Company’s credit facilities consist of revolving operating facilities and revolving term loans, both subject to annual renewal in
the amount of $14.0 million (2006 – $14.0 million) and $125.0 million (2006 – $125.0 million) respectively. The term loans are
subject to floating interest rates based on Bankers’ Acceptances.
The operating facility is due on demand. At October 31 , 2007, there was $0.8 million in letters of credit recorded against the
operating facility (2006 – $0.8 million).
The revolving term loans are automatically converted to term loans repayable in quarterly reductions equal to between 1 .875% and
3.125% of the outstanding balance of the term loan on the conversion date, starting either three months or 15 months from the date
of conversion, depending on the facility. The earliest date of conversion is assumed to be the date the facilities expire, April 30th,
2008. The Company may request annual extensions to the conversion date. The maturity date for repayment of the remaining
principal balance is on the third anniversary of the conversion date for one term loan and on the fifth anniversary for the second one.
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Security for the credit facilities consists of a demand debenture constituting a first floating charge over all the Company’s present
and future accounts receivable, inventory, property and assets as well as a general assignment of accounts receivable.
Fixed rate debt, including interest rate swaps and the obligation under capital lease, represented 47% (2006 – 49%) of the total
amount of long-term debt outstanding.
The fair value of the Company’s bank term loans approximates the carrying value given their floating rate nature. The estimated fair
value of the obligation under capital lease is $1 .8 million (2006 – $1 .8 million) and is calculated using a discounted cash flow
methodology utilizing conventional mortgage rates for the discount rates.
The amount of principal payable over each of the next five years and thereafter is as follows (in $000):
2008 4,087
2009 5,867
2010 8,067
201 1 46,197
2012 1 ,468
Thereafter 9,543
75,229
1 4. DERIVATIVE FINANCIAL INSTRUMENTS
As of October 31 , 2007, the Company’s use of interest rate swap agreements was limited to six (2006 – seven) interest rate swaps
with a Canadian chartered bank, whereby the Company fixed a portion of its term loan financing at interest rates ranging from 4.28%
to 6.2% plus a bank margin. At the end of the year, these swaps had a total notional amount of $33.3 million (2006 – $43.8 million).
Two of the swaps amortize quarterly on a straight-line basis. The swaps expire in 2008, 2009 and 2014. Swap costs in 2007 were
$0.2 million (2006 – $0.7 million) and are included in interest expense.
The fair value of the interest rate swaps is estimated as the discounted unrealized gain or loss calculated based on the market price
at October 31 , 2007, which generally reflects the estimated amount that the Company would receive or pay to terminate the
contracts at the balance sheet date. The fair value of the swaps is provided to the Company by the chartered bank that is the counter-
party to the transactions. The estimated fair value of the interest rate swaps was a gain of $0.1 million (2006 – loss of $0.9 million).
Losses due to non-performance by the counter-party are not anticipated due to their high credit standing.
All of the Company’s interest rate swaps are designated as cash flow hedges. At October 31 , 2007, the critical terms of the swaps
did not match the terms of the underlying floating rate debt. Therefore, the hypothetical derivative method was used to perform a
quantitative, retrospective and prospective assessment of the effectiveness of the swaps. This methodology involved regression
analysis of historical interest rates for the floating rate portion of the swaps and historical interest rates for the underlying debt. The
result of the analysis was that the fair value of the cash flows from the interest rates of the swaps was highly effective at offsetting
the variability in cash flows from the interest rates of the underlying debt. Therefore, hedge accounting was used to record the swaps
and related activity for the year.
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1 5. INVESTMENT AND OTHER INCOME
Pre-Need Pre-Need CemeteryCemetery Funds Funeral Funds Care Funds Other Consolidated
($000) 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
Realized earnings of funds:
Interest and dividends(1) 6,292 5,899 7,653 7,282 8,472 8,015 - - 22,417 21,196
Realized gains 212 251 176 616 1 292 - - 389 1 ,159
Realized losses (240) (79) (236) (228) - (193) - - (476) (500)
Trust expenses (159) (153) (140) (137) (291) (273) - - (590) (563)
6,105 5,918 7,453 7,533 8,182 7,841 - - 21,740 21,292
Deferred revenue (179) (205) - - - - - - (179) (205)
Trust expenses classified as
operating expenses 159 153 140 137 291 273 - - 590 563
Non-controlling interests
in funds (6,085) (5,866) (7,593) (7,670) (79) (171) - - (13,757) (13,707)
- - - - 8,394 7,943 - - 8,394 7,943
Fee income 1 ,680 1 ,597 4,973 4,788 - - - - 6,653 6,385
Other - - - - - - 1 ,909 1 ,509 1 ,909 1 ,509
1 ,680 1 ,597 4,973 4,788 8,394 7,943 1 ,909 1 ,509 16,956 15,837
(1) Includes interest income of $21.2 million (2006 - $20.2 million)
1 6. DEFERRED REVENUE
($000) 2007 2006
Pre-need cemetery 141 ,902 136,829
Pre-need funeral 38,870 38,834
180,772 175,663
At October 31 , 2007, $44.0 million (2006 – $39.6 million) of deferred revenue related to instalment accounts receivable that will
be deposited to legislated trust funds upon collection, representing 63% (2006 – 58%) of the total outstanding instalment accounts
receivable.
1 7. NON-CONTROLLING INTERESTS IN PRE-NEED FUNDS
($000) 2007 2006
Cemetery trust funds 189,662 176,278
Funeral trust funds 202,277 198,348
Funeral group annuity funds 25,207 26,407
417,146 401,033
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1 8. SHARE CAPITAL
Authorized:
Unlimited number of Preferred Shares
Unlimited number of Class A Voting Shares
Unlimited number of Class B Non-Voting Shares
Issued and outstanding:
Number of Shares Amount
($000) 2007 2006 2007 2006
Class A Voting shares 2,525,497 2,525,497 1 ,734 1 ,734
Class B Non-Voting shares 8,164,246 8,069,746 72,986 70,765
10,689,743 10,595,243 74,720 72,499
The Class A and Class B shares have identical rights and privileges, except that the Class A shares are voting. In certain
circumstances, if an offer is made by the Company or a third party to purchase Class A shares from each holder in Ontario, each
Class B share is convertible into one Class A share.
At October 31 , 2007, there were 28,500 options outstanding. The weighted-average exercise price of share purchase options that
were issued, outstanding and exercisable at October 31 , 2007 was $23.50 (October 31 , 2006 – $25.07) and the weighted-average
remaining contractual life was 0.1 years (October 31 , 2006 – 0.9 years). During fiscal 2007, 45,000 options, having a weighted
average exercise price of $29.36, expired and 94,500 options, having a weighted average exercise price of $23.50, were exercised
resulting in 94,500 Class B Non-Voting Shares being issued for cash proceeds of $2.2 million, which was credited to share capital
(2006 – nil options expired and 1 ,500 options were cancelled). No shares were issued during 2006.
Weighted-average shares outstanding:
2007 2006
Weighted-average shares outstanding – basic 10,603,761 10,595,243
Effect of dilutive options 3,768 -
Weighted-average shares outstanding – diluted 10,607,529 10,595,243
There were no options excluded from the calculation of diluted weighted-average shares outstanding for 2007 and 2006.
Under the provisions of the Company’s 1994 amended and restated stock option plan, directors, officers, full-time employees and
part-time employees are eligible to receive options to purchase Class B Non-Voting shares. According to the plan, the option price
cannot be lower than the closing price per share on the Toronto Stock Exchange on the last day on which Class B Non-voting shares
were traded immediately preceding the granting of the options. The period during which an Option is exercisable may not, subject
to the provisions of the Option Plan, extend beyond ten years, provided that the term of an Option shall automatically extent beyond
ten years, up to a maximum of ten (10) business days after a black-out period, in circumstances where the expiration date falls within
a black-out period or immediately thereafter. The Board of Directors determines vesting requirements at the time of the grant. The
aggregate number of Class B Non-Voting shares for which options may be granted cannot exceed 878,789 Class B Non-Voting
shares and the aggregate number of shares reserved for issuance to any one person cannot exceed 5% of the aggregate of the issued
Class A Voting shares and the issued Class B Non-Voting shares outstanding from time to time. Under the plan, the Company is
authorized to issue 878,789 options and, of that number, 413,089 options are available to be granted.
The Company will account for any new stock option grants using the fair value method. Under the fair value method, compensation
expense for stock options that are direct awards of stock is measured at fair value at the grant date using an option-pricing model
and recognized over the vesting period.
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1 9. INCOME TAXES
Income tax expense:
Income tax expense for the years ended October 31 consisted of the following:
($000) 2007 2006
Current tax expense 1 1 ,033 12,306
Future income tax benefit relating to the origination and reversal of temporary differences (308) (2,732)
Future income tax benefit resulting from change in tax rates (106) (155)
10,619 9,419
Effective income tax rate:
The reconciliation of the Company’s effective income tax rate is as follows:
(%) 2007 2006
Combined basic federal and provincial income tax rate 34.2 33.9
Change in the basic tax rate resulting from:
Dividends/RDTOH(1) (0.9) (0.9)
Impact of future tax changes (0.4) (0.5)
Non-taxable portion of capital gains (0.1) (0.3)
Meals and entertainment 0.4 0.3
Asset impairment provisions 0.9 -
Other items (0.1) 0.3
Effective income tax rate 34.0 32.8
(1) Refundable dividend tax on hand.
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Net future income tax liability
The net future income tax liability is comprised of (in $000):
2007 2006
Temporary Tax Temporary TaxDifference Effect Difference Effect
Future income tax assets:
Deferred revenue 57,151 19,357 56,516 19,724
Cancellation/chargeback provisions 4,812 1 ,630 4,871 1 ,700
Contingency provisions 3,788 1,283 2,769 966
Deferred losses on pre-need contracts 1 ,375 466 1 ,100 384
Other 2,178 738 2,501 873
69,304 23,474 67,757 23,647
Future income tax liabilities:
Reserves claimed for future delivery of cemetery
land and merchandise (38,837) (13,154) (38,231) (13,343)
Excess share acquisition costs over book value (18,495) (6,264) (18,945) (6,612)
Deferred expenses (1 1 ,528) (3,905) (1 1 ,1 16) (3,879)
Excess of net book value over tax value of
capital assets (7,154) (2,423) (6,697) (2,337)
Intangible assets (1 ,979) (670) (2,038) (71 1)
Pre-need trust income (1 ,072) (363) (1 ,143) (399)
Financial instruments adjustment (137) (49) - -
Other (1 ,008) (344) (1 ,014) (359)
(80,210) (27,171) (79,184) (27,640)
(10,906) (3,698) (1 1 ,427) (3,993)
At October 31 , 2007, the Company had $4.4 million in unrecognized capital losses (2006 – $4.4 million), the benefit of which is
unlikely to be realized.
20. DISCONTINUED OPERATIONS
In the fourth quarter of 2006, the assets of two funeral branch operations met the criteria for being classified as discontinued
operations. The sale of one of these operations was completed in the fourth quarter of 2007 for net cash proceeds of $0.9 million.
The gain on the sale was $0.1 million. In the fourth quarter of 2007, the assets of three additional funeral branch operations met the
criteria for being classified as discontinued operations. For all four branch operations classified as discontinued at October 31 , 2007,
the Company is committed to a plan to sell the operations at a price that is likely to be realized within one year. In all three cases,
one or more purchasers have been identified and the Company is in the process of providing information and negotiating the
purchase price.
Revenue associated with discontinued operations in 2007 was $2.4 million (2006 – $2.9 million). The net loss in 2007 was
$1 .3 million (2006 – $0.2 million), which included after-tax impairment charges of $1 .4 million (2006 – $0.5 million). The prior year
comparative amounts in the statements of earnings, balance sheets and the statements of cash flows have been reclassified for the
funeral branches identified as discontinued operations in 2007. The impairment charges relate to the goodwill and fixed assets of
the two reporting units (consisting of three branch operations) classified as discontinued in 2007. The loss in the value of these
operations was recognized once the Company determined that the previous carrying amount was higher than the fair market value
based on discussions with potential buyers.
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2 1 . NET CHANGE IN OTHER OPERATING BALANCE SHEET ITEMS
($000) 2007 2006
Accounts receivable 1 ,134 (1 ,527)
Instalment accounts receivable (2,261) (789)
Deferred obtaining costs and stored merchandise (4,016) (1 ,006)
Developed land, crypt and niche cost of sales 8,083 8,240
Additions to developed land, crypts and niches (5,448) (5,845)
Accounts payable and accrued liabilities 6,945 (2,349)
Income taxes payable (2,559) 3,253
Deferred revenue 2,868 450
Other liabilities 1 ,760 (1 18)
Other changes (94) (401)
6,412 (92)
22. CONTRACTUAL COMMITMENTS
The Company is committed to the following minimum annual payments under operating leases over the next five years for premises
and equipment (in $000):
2008 1,890
2009 939
2010 294
201 1 75
2012 3
3,201
At October 31 , 2007, the Company was contractually committed to capital and cemetery burial space inventory expenditures of
$9.0 million (2006 – $2.0 million). The increase over prior year primarily relates to two new mausoleums with commitments of
$5.4 million. The Company is also contractually committed to funeral inventory purchases of $15.5 million, during the period from
February 1 , 2006 to January 31 , 2008. However, if the Company does not meet its commitment by January 31 , 2008, the term of
the commitment will be extended. From February 1 , 2006 to October 31 , 2007, the Company had purchased $10.8 million under
this commitment.
23. CONTINGENCIES AND GUARANTEES
Provision For Settlement of Pre-need Obligations of Sold Cemeteries
On January 31 , 2000, the Company sold the operating assets of four cemeteries, comprising two cemeteries in Nova Scotia, one in
Prince Edward Island, and one in New Brunswick, to a company called Atlantic Cemetery Holdings Inc. (“ACHI”). The sale provided
for ACHI to assume all of the obligations under the unfulfilled pre-need contracts at the time of the sale and the transfer of the
associated trust funds. However, under contract law, the Company is an original party to the pre-need contracts. Consequently, it is
believed that the Company retained a contingent liability for the provision of the undelivered merchandise and services on pre-need
contracts entered into prior to the sale. In early 2004, the cemeteries in Nova Scotia and Prince Edward Island were abandoned by
ACHI and the provincial authorities contacted the Company with respect to its obligations for the fulfillment of pre-need
merchandise and services.
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In 2005, the Company estimated that the pre-tax cost of settling the pre-need obligations of these three cemeteries with the
provincial authorities would be approximately $0.9 million. This estimate represented the present value of the cost of future delivery
of the undelivered merchandise and services. In 2007, the Company reached a settlement with Prince Edward Island, which was in
line with expectations, and anticipates reaching a settlement with Nova Scotia in 2008. The remaining provision of $0.4 million is
expected to be adequate to cover this liability.
Other Contingent Liabilities of Sold Cemeteries
The Company is also contingently liable for the pre-need obligations of six other cemeteries that were sold in prior years, in the event
that the current operators fail to perform their obligations. The Company sold two of these six cemeteries, including the cemetery in New
Brunswick noted above, in fiscal 1999 and 2000. The Company’s best estimate of its maximum potential exposure for these two
cemeteries is $2.2 million (2006 – $2.4 million), which represents the current cost to fulfill the estimated remaining pre-need obligations.
However, in the event that the Company does become liable for these pre-need obligations, it will have access to associated trust funds,
estimated at $0.8 million. The remaining four cemeteries were sold over 12 years ago and the Company is unable to quantify the
maximum potential exposure. No claims have ever been submitted to the Company related to these six cemeteries.
Indemnification of Officers and Directors
The Company’s by-laws provide for indemnification of its officers and directors against litigious claims arising from their duties as
officers and directors of the Company.
Legal
In the course of its business, the Company from time to time becomes involved in various claims and legal proceedings. Litigation is
subject to many uncertainties and the outcome of individual matters is not predictable. A provision for these claims has been
recorded in the financial statements based on management’s best estimate of the likely outcome. However, should claims be settled
for amounts over and above established accruals, the excess expense will be charged to operations as incurred.
Insurance
The Company carries insurance with coverage and coverage limits that it believes to be adequate. Although there can be no
assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance
protection is reasonable in view of the nature and scope of the Company’s operations.
Environmental
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, take appropriate corrective measures. The
Company has not included a provision or liability for future costs related to environmental risk.
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65A r b o r M e m o r i a l S e r v i c e s I n c .
24. SEGMENT DISCLOSURE
Industry segments ($000)
Cemetery Funeral Corporate(2) Consolidated
($000) 2007 2006 2007 2006 2007 2006 2007 2006
Sales(1) 99,061 94,725 1 13,310 102,928 - - 212,371 197,653
Investment and other income(1) 10,074 9,540 4,973 4,788 1,909 1,509 16,956 15,837
Revenue 109,135 104,265 1 18,283 107,716 1,909 1,509 229,327 213,490
Depreciation and amortization(1) 3,401 3,210 5,217 5,074 1,464 1,444 10,082 9,728
Earnings (loss) before other
income (expenses), interest
expense and income taxes(1) 12,897 15,921 35,734 30,01 1 (12,309) (12,1 14) 36,322 33,818
Other income (expenses)(1) 281 (51) (768) 51 60 - (427) -
Earnings (loss) before interest
expense and income taxes(1) 13,178 15,870 34,966 30,062 (12,249) (12,1 14) 35,895 33,818
Interest expense - - - - 4,649 5,067 4,649 5,067
Earnings (loss) before
income taxes(1) 13,178 15,870 34,966 30,062 (16,898) (17,181) 31,246 28,751
Identifiable assets 609,638 573,466 469,870 462,655 34,715 34,091 1,1 14,223 1,070,212
Capital expenditures 10,685 7,245 4,931 4,853 1,006 425 16,622 12,523
Acquisition - - - 23,997 - - - 23,997
Developed land, crypt and
niche additions 5,448 5,845 - - - - 5,448 5,845
Cemetery land held for future
development additions 151 5,021 - - - - 151 5,021
Pre-need contracts written 73,144 69,188 55,177 51,738 - - 128,321 120,926
(1) Figures provided for 2006 have been reclassfied to conform with the current year's presentation - see note 20. In addition, lease income in the corporate division was reclassified
from sales to investment and other income.
(2) The corporate balances are provided principally to reconcile the reportable segments to consolidated results.
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66A r b o r M e m o r i a l S e r v i c e s I n c .
2007company information
DIRECTORS
Daniel J. Scanlan,
Chairman of Arbor Memorial Services
Inc., Toronto, Ontario
Brian D. Snowdon,
President and Chief Executive Officer of
Arbor Memorial Services Inc.,
Toronto, Ontario
David J. Scanlan,
Senior Vice-President, Sales of Arbor
Memorial Services Inc., Toronto, Ontario
Michael J. Scanlan,
Senior Vice-President, Marketing,
Operations and Construction and
Development of Arbor Memorial
Services Inc., Toronto, Ontario
Philip L. Wilson,
Corporate Director, Toronto, Ontario
Roger A. Hall,
Corporate Director, Oliver, British
Columbia
Robert E. Rose,
Corporate Director and Partner, Clarke
Henning LLP, Toronto, Ontario
Brian L. Zenkovich,
Corporate Director and Chief Executive
Officer and Secretary of Winzen
Properties Inc., Toronto, Ontario
Joseph M. Scanlan,
Corporate Director, Toronto, Ontario
Kenneth T. Rosenberg,
Corporate Director and Partner with
Paliare Roland Rosenberg Rothstein LLP,
Toronto, Ontario
OFFICERS AND CORPORATE
MANAGEMENT
Daniel J. Scanlan,
Chairman
Brian D. Snowdon,
President and Chief Executive Officer
Gary R. Carmichael,
Vice-President, Government and
Corporate Affairs and Chief Privacy
Officer
Iain A. Robb,
Corporate Secretary and Partner with
Gowling Lafleur Henderson LLP, Toronto,
Ontario
Rita Burman,
Assistant Secretary
Cemetery Senior Management
David J. Scanlan,
Senior Vice-President, Sales
Gary D. Rogerson,
Vice-President, Operations
Virginia E. Barrett,
Director of Sales and Administrative
Services
Funeral Service Senior Management
Jeffrey S. Scott,
Senior Vice-President, Funeral Service
Jerry Roberts,
National Director of Operations and
Regional Director, Eastern Ontario
John S. Doney,
Corporate Development
Marketing
Michael J. Scanlan,
Senior Vice-President, Marketing,
Operations and Construction and
Development
Construction & Development
Stephen J. Rupert,
Vice-President, Construction and
Development
Finance
Laurel L. Ancheta,
Vice-President and Chief Financial Officer
Valerie J. Harvey,
Director of Finance
Charles Soroka,
Director of Internal Audit
Trust Administration
David Carnovale,
Director of Trust Accounting
Information Services
Mike Ayres,
Vice-President, Information Services
Human Resources
Maureen A. Carey,
Vice-President, Human Resources
CEMETERY SALES
REGIONAL MANAGEMENT
Paul F. Scanlan,
Regional Director, Greater Toronto Area
Gary Boyce,
Regional Director, Western Canada
2007 ARBOR 14-01-08 1/14/08 4:00 PM Page 66
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corporate profile Arbor Memorial Services Inc. (“Arbor” or the “Company”) is a
Canadian market leader in providing interment rights, cremations, funerals and associated
merchandise and services to customers across Canada. At October 3 1 , 2007, Arbor owned 4 1
cemeteries, 27 crematoria, 3 reception centres and 9 1 funeral homes in communities in eight
provinces of Canada. The Company’s cemeteries and funeral homes have been successful in
developing and providing customized products and services to many ethnic and religious groups
in Canada.
Cover: Funerary model of boat with 1 2 rowers and coxswain, 2055-2004 BC, Middle Kingdom, 1 1th Dynasty; Mentuhotepll, Deir el-Bahri, Egypt
This wooden model of a boat was excavated from the tomb of King Mentuhotep II at Deir el-Bahri, near modern Luxor. This model was
The model depicts a galley with twelve rowers and a coxswain, who steers the boat and has charge of the crew. Such a galley might have been
used to haul barges of produce or manufactured items. Models were placed in tombs to ensure the deceased everlasting prosperity, for it was
thought that both would magically come to life and work for the tomb owner in the afterlife.
reconstructed using the material from several other models strewn across the tomb floor and using other Middle Kingdom boat models as a guide.
.
Mark Agate,
Regional Director, South Eastern Ontario
Leonard Marceau,
Regional Director, South Western Ontario
Peter Bancroft,
Regional Director, Atlantic Canada
CEMETERY OPERATIONS
REGIONAL MANAGEMENT
James Risbey,
Regional Property Manager,
Alberta and British Columbia
Terry Bokshowan,
Regional Property Manager,
Manitoba and Saskatchewan
Rodger W. Halden,
Regional Property Manager,
Western Ontario
Donn Bailey,
Regional Property Manager,
Central/Western Ontario
Kenneth Gurney,
Regional Property Manager,
Niagara and Thunder Bay
P. Bradley Hunter,
Regional Property Manager,
Eastern Ontario
William E. Grady,
Regional Property Manager,
Eastern Canada
CEMETERY ADMINISTRATION
REGIONAL MANAGEMENT
Diane E. Vinje,
Regional Manager, Calgary, British
Columbia and Saskatchewan
Teresa M. Bastin,
Regional Manager, Edmonton, Manitoba
and Thunder Bay
Mary A. Brandoline,
Regional Manager, Western Ontario
and Toronto
Liane Coviensky,
Regional Manager, Toronto West and
South Western Ontario
Barbara E. Weatherdon,
Regional Manager, Quebec, Eastern
Ontario and Atlantic
FUNERAL OPERATIONS
REGIONAL MANAGEMENT
James M. Fletcher,
Regional Director, Western Canada
Alenka Manners,
Regional Director, South Western Ontario
Terry A. Eccles,
Regional Director, Central Ontario
Denis Marcoux,
Regional Director, Quebec and
Northern New Brunswick
David McEachnie,
Regional Director, Atlantic Canada
Valerie Scott,
Manager, Funeral Planning Services,
Ontario and New Brunswick
HEAD OFFICE
2 Jane Street, Toronto, Ontario
M6S 4W8
Telephone: (416) 763-4531
WEB SITE
www.arbormemorial.com
AUDITORS
Deloitte & Touche LLP
PRINCIPAL BANKERS
TD Bank Financial Group
Bank of Montreal
TRANSFER AGENT AND
REGISTRAR
Computershare Investor Services Inc.
Phone: 514-982-7555 or 1-800-564-6253
Fax: 416-263-9524 or 1-866-249-7775
service@computershare.com
PRINCIPAL TRUSTEES OF FUNDS
TD Canada Trust Company
The Bank of Nova Scotia Trust Company
ANNUAL MEETING
The annual meeting of Arbor
Memorial Services Inc. will be held
in the Brulé Room,
The Old Mill, 21 Old Mill Road,
Toronto, Ontario,
on Thursday, February 28th, 2008
at 10:00 a.m. (Toronto time).
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