Arbor Memorial Services Inc

07

Arbor Memorial Services Inc.

Annual Report 2007

Global Reports LLC

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,


Manitoba and Saskatchewan

Rodger W. Halden,


Western Ontario

Donn Bailey,


Central/Western Ontario

Kenneth Gurney,


Niagara and Thunder Bay

P. Bradley Hunter,


Eastern Ontario

William E. Grady,


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,


Terry A. Eccles,

Regional Director, Central Ontario

Denis Marcoux,

Regional Director, Quebec and

Northern New Brunswick

David McEachnie,


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

[email protected]

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


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

2007 ARBOR 14-01-08 1/14/08 3:15 PM Page 22

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$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


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


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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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


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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


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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.


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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:







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:


Pre-need trust funds Available for sale Fair value

Cemetery care funds Available for sale Fair value






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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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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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,


2007 ARBOR 14-01-08 1/14/08 4:00 PM Page 66

Global Reports LLC

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,


Peter Bancroft,


CEMETERY OPERATIONS

REGIONAL MANAGEMENT

James Risbey,


Alberta and British Columbia

Terry Bokshowan,


Manitoba and Saskatchewan

Rodger W. Halden,


Western Ontario

Donn Bailey,


Central/Western Ontario

Kenneth Gurney,


Niagara and Thunder Bay

P. Bradley Hunter,


Eastern Ontario

William E. Grady,


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,


Alenka Manners,


Terry A. Eccles,

Regional Director, Central Ontario

Denis Marcoux,

Regional Director, Quebec and

Northern New Brunswick

David McEachnie,


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

[email protected]

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

07

Arbor Memorial Services Inc.

Annual Report 2007

Global Reports LLC

Documents

Arbor Memorial Services Inc