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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 000-31182
The Neptune Society, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-2492929
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3500 W. Olive, Suite 1430, 91505
Burbank, California
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 953-9995
Securities to be registered pursuant to Section 12(b) of the Act:
None None
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Title of each class to be so registered Name of each exchange on which
each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Shares, Par Value of $0.008 per Share
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(Title of Class)
Not Applicable
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
Aggregate market value of the Registrant's Common Shares held by
non-affiliates as of March 28, 2002 was approximately $5,121,500, based on the
closing price of the Registrant's commons stock on the NASD Over the Counter
Bulletin Board of $2.15 per share. The number of shares of the Registrant's
Common Shares outstanding as of March 28, 2002 was 2,424,401.
On March 22, 2002, the Registrant effected a 4:1 reverse stock split.
Information contained in this annual report gives effect to such reverse split.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS....................................................1
ITEM 1. BUSINESS............................................................2
ITEM 2. PROPERTIES..........................................................36
ITEM 3. LEGAL PROCEEDINGS...................................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................37
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................38
ITEM 6. SELECTED FINANCIAL DATA.............................................40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION............................................42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................87
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
SECTION 16(a) COMPLIANCE............................................88
ITEM 11. EXECUTIVE COMPENSATION..............................................93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.....................................99
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................100
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...102
SIGNATURES...................................................................107
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FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements, including without
limitation, statements that include the words "anticipates," "believes,"
"estimates" and "expects" and similar expressions and statements relating to our
strategic plans, capital expenditures, industry trends and our financial
position. Such forward-looking statements reflect our current views with respect
to future events and are subject to certain risks, uncertainties and
assumptions, including competition for and availability of crematory
acquisitions, our ability to manage an increasing number of sales offices and
crematories, our ability to retain key management personnel and to continue to
attract and retain skilled funeral home and crematory management personnel,
state and federal regulations, changes in the death rate or deceleration of the
trend towards cremation, availability and cost of capital and general industry
and economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. We
do not intend to update these forward-looking statements and information.
Our management has included projections and estimates in this Report, which
are based primarily on management's experience in the industry, assessments of
our results of operations, discussions and negotiations with third parties and a
review of information filed by its competitors with the Securities and Exchange
Commission. Investors are cautioned against attributing undue certainty to
management's projections.
On March 22, 2002, Neptune Society effected a 4:1 reverse stock split and
the symbol for its common stock was changed to "NPTI". Information contained in
this report gives effect to the reverse stock split effected on March 22, 2002.
ITEM 1. BUSINESS
Overview
The Registrant was incorporated in the State of Florida on January 4, 1985
under the name "L R Associates, Inc.", and subsequently changed its name to
"Lari Corp." on August 3, 1998. On March 31, 1999, Lari Corp., paid $1,000,000
cash, $310,000 in transaction costs, 125,000 shares of common stock and
$21,000,000 of promissory notes valued at $19,968,529 (for total consideration
of $26,278,529), to acquire a group of privately held companies and limited
partnerships that were engaged in the business of marketing and administering
Pre-Need and At-Need (at the time of death) cremation services under the name
"Neptune Society." See "History of the Neptune Society - Neptune Group
Acquisition." At the time of the acquisition, Lari Corp. was engaged in the
business of acquiring the group of privately held companies for the purpose of
engaging in the business of marketing and administering Pre-Need and At-Need
cremation services. On April 26, 1999, Lari Corp. changed its name to "Neptune
Society, Inc."
The Neptune Society, Inc., is the holding company for the Neptune Society
of America, Inc., a California corporation. Neptune Society of America, Inc. is
the holding company for Neptune Management Corp. and Heritage Alternatives,
Inc., which are engaged in marketing and administering Pre-Need and At-Need
cremation services in California, Florida, Iowa, New York, Oregon, Washington
and Colorado. See "Properties" for a list of our locations and a description of
their operations. Neptune Society also operates three crematories and licensed
holding facilities in Los Angeles, California, one licensed holding facility in
Ventura, California, one crematory and licensed holding facility in Ankeny,
Iowa, three crematories and one licensed holding facility in Oregon and one
crematory and licensed holding facility in Spokane, Washington. Our crematories
and holding facilities service our pre-need fulfilled contracts in the areas in
which Neptune society owned crematories are located. In geographic areas where
Neptune Society does not own and operate its own crematories and holding
facilities, the Neptune Society uses the services of qualified and licensed
third-party crematories and holding facilities in those particular areas of the
United States. See "History of the Neptune Society."
Unless the context otherwise requires, (i) "Neptune Society" and the
"Registrant" refers to The Neptune Society, Inc., (ii) "Neptune of America"
refers to Neptune Society of America, Inc., (iii) "Neptune Management" refers to
Neptune Management Corp., Inc. (iv) "Heritage Alternatives" refers to Heritage
Alternatives, Inc. The Neptune Group or Predecessor refers to the privately held
group of companies acquired by the Registrant on March 31, 1999. "We," "us," and
"our" refers to Neptune Society, and its subsidiaries and associated entities.
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On March 22, 2002, Neptune Society effected a 4:1 reverse stock split and
the symbol for its common stock was changed to "NPTI". Information in this
report gives effect to the reverse stock split effected on March 22, 2002.
Our principal corporate and executive offices are located at 3500 W. Olive,
Suite 1430, Burbank, California 91505. Our telephone number is (818) 953-9995.
All dollar amounts are in United States dollars unless otherwise indicated.
The Neptune Society Business
Our business strategy is to pursue revenue and growth opportunities in the
cremation sector of the death care service industry. We operate all our
locations under one nationally branded name, "The Neptune Society," and offer
only cremation services and products related to cremation services. We do not
intend to evolve into a traditional funeral burial services company and do not
intend to compete directly with the larger corporate consolidators in the death
care service industry by providing traditional funeral and burial services.
Neptune Society Services
Our primary business is marketing and administering Pre-Need and At-Need
cremation services in the states of California, Florida, Iowa, New York, Oregon,
Colorado and Washington. We also operate a telemarketing center in Tempe,
Arizona.
The Neptune Society Pre-Need Program
The Neptune Group started our Pre-Need program in 1988. Our simple Pre-Need
program is designed to eliminate as much of the emotional and financial burden
as possible for the individuals' heirs and Successors. Our Pre-Need Program
allows individuals to pre-arrange simple and basic cremation services at a
guaranteed fixed price by entering into a Pre-Need contract.
Regulations governing the sale of Pre-Need contracts vary from state to
state. The following is a brief description of the regulatory requirements
related to the sale of Pre-Need contracts in the states where we currently
operate:
California
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of California. Our California Pre-Need cremation service business is
subject to the regulatory requirements of the California Business and
Professions Code and the Federal Trade Commission. We are required to file
reports on an annual basis with the California Department of Consumer Affairs
Cemetery Board. We were also required to obtain Cemetery Board approval for our
California Pre-Need contracts. Our California Pre-Need contracts must contain
certain disclosures and terms to comply with state regulatory requirements. Our
California Pre-Need contract has been approved for use in California.
California Pre-Need Contracts: Our California Pre-Need Plans consist of an
agreement related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide. The
Pre-Need Plan is a guaranteed price plan, which means we guarantee that we will
provide the cremation service at the time of need without additional payment for
the service.
Price for Pre-Need Plan: We currently charge $1,299 for a California
Pre-Need Plan, including $529 for the Pre-Need cremation service and $770
for merchandise that is delivered at the point of sale. We also offer two
installment payment plans, which allows a client to purchase a Pre-Need
Plan by paying us a down payment and making monthly installment payments.
We charge interest at the rate of 8% per annum on the outstanding balance
of the amount due under the installment plan. See "Installment Payment
Plans."
California Trust Fund Deposits Requirements: Under the California
regulatory requirements, we are required to hold or put the money we
receive for the future cremation services in trust until the contract is
fulfilled and the cremation services are delivered. We place the funds we
receive for the pre need cremation service portion of
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our Pre-Need Plan (approximately 45% of the total funds related to the cost
of a Pre-Need Plan) into a Pre-Need trust fund in accordance with our
standard California Pre-Need services contract and California regulatory
requirements.
The purchase price for merchandise that is delivered at the time a Pre-Need
Plan is sold is excluded from the requirement to hold funds in trust. We
deliver merchandise related to the Pre-Need Plan as soon as payment is
received under the agreement. A purchaser may, at their option, ask us to
deliver the merchandise to a third-party insured warehouse to store the
merchandise until the time of need. We contract with an insured third-party
warehouse to store the merchandise, which stores such merchandise for
approximately 95% of our California Pre-Need Plan members.
Under California law, we are entitled to an annual maintenance fee of up to
4% of the California Pre Need Trust fund balance for maintenance expenses
associated with administering and managing the trust fund. The trust fund
has three trustees, one of which is an employee of Neptune Society and the
other two are independent, third party trustees. A third party trust
administrator provides administrative services for such trust deposits
Cancellation: A purchaser of a California Pre-Need Plan may cancel the plan
by providing us with written notice prior to midnight on the 30th calendar
day after the date of the contract and receive a full refund of all monies
paid, provided that the merchandise is returned and no services have been
provided under the contract. After the 30th day, a purchaser may cancel the
contract and receive the funds (with accrued interest) we have placed into
trust on their behalf, less a revocation fee equal to 10% of the trust fund
balance related to such plan, which may be collected only from the income
earned by the trust, if any.
We may cancel a California Pre-Need Plan if the purchase is more than 90
days in arrears on installment payments due under an installment payment
plan by providing two written notices 30 days apart and by refunding the
funds held in trust for the benefit of the purchaser. We may revoke a
California Pre-Need Plan if we are unable to perform the cremation services
under the plan by providing notice to the beneficiary of the plan of our
inability to perform such services and by refunding the trust fund balance
related to such plan to the beneficiary.
Colorado
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Colorado. Our Colorado Pre-Need cremation service business is subject
to the regulatory requirements of the Colorado Business and Professions Code and
the Federal Trade Commission. We are required to file reports on an annual basis
with the Insurance and Banking Departments of Consumer Affairs. We were also
required to submit a $10,000 Bond running to the Banking and Insurance
Department of Colorado. Our Colorado Pre-Need contracts must contain certain
disclosures and terms to comply with state regulatory requirements. Our Colorado
Pre-Need contract has been approved for use in Colorado.
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Colorado Pre-Need Contracts: Our Colorado Pre-Need Plans consist of an
agreement related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide. The
Pre-Need Plan is a guaranteed price plan, which means we guarantee that we will
provide the cremation service at the time of need without additional payment for
the service.
Price for Pre-Need Plan: We currently charge $999 for a Colorado Pre-Need
Plan, including $610 for the Pre-Need cremation service and $389 for
merchandise and sales tax that is delivered at the point of sale. We also
offer two installment payment plans, which allows a client to purchase a
Pre-Need Plan by paying us a down payment and making monthly installment
payments. We charge an average interest rate of 8% per annum on the
outstanding balance of the amount due under the installment plan. See
"Installment Payment Plans."
Colorado Trust Fund Deposits Requirements: Under the Colorado regulatory
requirements, we are required to hold or put 75% of the money we receive
for the future cremation services in trust until the contract is fulfilled
and the cremation services are delivered. We place the funds we receive for
the pre need cremation service portion of our Pre-Need Plan (approximately
60% of the total funds related to the cost of a Pre-Need Plan) into a
Pre-Need trust fund in accordance with our standard Colorado Pre-Need
services contract and Colorado regulatory requirements. A third party trust
administrator provides administrative services for such trust deposits
The purchase price for merchandise that is delivered at the time a Pre-Need
Plan is sold is excluded from the requirement to hold funds in trust. We
deliver merchandise related to the Pre-Need Plan as soon as payment is
received under the agreement. A purchaser may, at their option, ask us to
deliver the merchandise to a third-party insured warehouse to store the
merchandise until the time of need. We contract with an insured third-party
warehouse to store the merchandise, which stores such merchandise for
approximately 95% of our Colorado Pre-Need Plan members.
Cancellation: A purchaser of a Colorado Pre-Need Plan may cancel the plan
by providing us with written notice prior to midnight on the 30th calendar
day after the date of the contract and receive a full refund of all monies
paid, provided that the merchandise is returned and no services have been
provided under the contract. After the 30th day, a purchaser may cancel the
contract and receive the funds (with accrued interest) we have placed into
trust on their behalf. We may cancel a Colorado Pre-Need Plan if the
purchase is more than 90 days in arrears on installment payments due under
an installment payment plan by providing two written notices 30 days apart
and by refunding the funds held in trust for the benefit of the purchaser.
We may revoke a Colorado Pre-Need Plan if we are unable to perform the
cremation services under the plan by providing notice to the beneficiary of
the plan of our inability to perform such services and by refunding the
trust fund balance related to such plan to the beneficiary or providing the
beneficiary of such plan notice that another general service provider has
agreed to provide such services in place of the Neptune Society.
4
Florida
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Florida. Our Florida Pre-Need cremation service business is subject to
the regulatory requirements of Florida Funeral and Cemetery Services Act. We are
required to file reports on an annual basis with the Florida Cemetery Board.
Florida Cemetery Board approval is required for our Pre-Need contracts, which
must contain certain disclosures and terms. Our Florida Pre-Need contracts are
approved for use in Florida.
Florida Pre-Need Contracts: Our Florida Pre-Need Plans consist of a
contract related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet. The Pre-Need Plan is a
guaranteed price plan, which means we guarantee that we will provide the
cremation service at the time of need without additional payment for the
service.
Price for Pre-Need Plan: We currently charge $1,199 for a Florida Pre-Need
Plan, including $625 for the Pre-Need cremation service and $574 for
merchandise. We also offer installment payment plans, which allows a client
to purchase a Pre-Need Plan by paying us a down payment and making monthly
installment payments. See "Installment Payment Plans."
Trust Fund Deposits: The Florida Funeral and Cemetery Services Act requires
us to place into a trust fund an amount at least equal to the sum of 70% of
the purchase price collected for all future cremation services sold into
trust for the benefit of the member. Under the terms of our Florida
Pre-Need contracts, we deposit 70% of the funds we receive for Pre-Need
services into trust for each Pre-Need Plan we sell in Florida.
We are required to place 30% of the purchase price collected or 110% of the
wholesale cost, whichever is greater, for the merchandise sold under a
Pre-Need contract. Under the terms of our Florida Pre-Need contracts, we
deposit 30% of the funds we receive for merchandise into trust.
Cancellation: Under the Florida Funeral and Cemetery Services Act, a
purchaser may, in writing, cancel a Pre-Need Plan as follows:
o within 30 days of the date the contract is entered into, the purchaser
may cancel the entire contract receive all of the payments made,
provided that the services have not been provided;
o anytime after 30 days, the purchaser may cancel the services portion
of the contract provided that the services have not been provided, and
receive a full refund of all of the amounts deposited into trust that
are related to the services; and
o anytime after 30 days, a purchaser may cancel the merchandise portion
of a Pre-Need plan and shall be entitled to a full refund of the
purchase price allocable to the specific item or items of merchandise
that we cannot or do not deliver in accordance with the agreement.
We may cancel a Florida Pre-Need Plan if the purchase is more than 90 days
in arrears on installment payments due under an installment payment plan by
providing a written notice of our intent to cancel 30 days prior to the
date of the cancellation and by refunding the funds
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related to the cremation services held in trust for the benefit of the
purchaser. Upon such cancellation, the funds held in trust related to the
merchandise are retained by us as liquidated damages for breach of the
agreement.
Iowa
Licensing: In the State of Iowa, we have separate establishment permits for
our crematory, our at-need funeral/cremation service and our pre-need sales. Our
crematory and at-need business are subject to the Code of Iowa, the Federal
Trade Commission and regulated by the Iowa Department of Health, Board of
Mortuary Science. Pre-need sales are subject to the Code of Iowa and regulated
by the Iowa Insurance Division, Regulated Industries Unit. We file an annual
report of pre-need sales including a copy of our contract with the Insurance
Division each year.
Iowa Pre-Need Contracts: Our Iowa Pre-Need Plans consist of a contract
related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide. The
contract related to the Pre-Need cremation service accounts for approximately
50% of the cost of a Pre-Need Plan, and the contract related to the purchase of
the merchandise accounts for the remaining cost of the Pre-Need Plan. The
Pre-Need Plan is a guaranteed price plan, which means we guarantee that we will
provide the cremation service at the time of need without additional payment for
the service.
Price of Pre-Need Plan: We currently charge $1,199 for an Iowa Pre-Need
Plan, including approximately $592 for the Pre-Need cremation service and
$607 for merchandise and State taxes. We offer two installment payment
plans, which allows a client to purchase a Pre-Need Plan by paying us a
down payment and making monthly installment payments. See "Installment
Payment Plans."
Trust Fund Deposits: The Code of Iowa, Chapter 523 requires us to comply
with trusting requirements by:
o placing 80% of the purchase price related to the pre need cremation
service into a pre need trust fund or purchasing an insurance policy
to fund the pre need cremation service obligation; and
o delivering the merchandise or post a surety bond to insure delivery of
the merchandise in lieu of placing the purchase price of the
merchandise into trust.
Under the Iowa law, the purchase price for merchandise that is delivered at
the time a Pre-Need Plan is sold, including merchandise delivered into
storage in a warehouse or separate facility approved by the Iowa Mortuary
Board, is excluded from the requirement to hold funds in trust. Under the
terms of our Iowa pre-need contracts, we place $474 or 80% of the purchase
price related to the pre-need cremation service into a pre need trust fund
and deliver the merchandise at the time of sale. We deliver merchandise
related to the Pre-Need Plan upon receipt of payment. A purchaser may, at
their option, ask us to deliver the merchandise to a third-party warehouse,
approved by the State of Iowa to store the merchandise until the time of
need. We contract on behalf of the purchaser with an insured third-party
warehouse to store the merchandise.
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Cancellation: A purchaser of Iowa Pre-Need Plan may cancel the plan by
providing us with written notice prior to midnight on the third calendar
day after the date of the contract and receive a full refund, provided that
the merchandise is returned and no services have been provided under the
contract. After the third calendar day, a purchaser may cancel an Iowa
Pre-Need Plan by providing us written notice, and we are required to refund
all monies held in trust for the benefit of the member without penalty
within 10 days after cancellation.
We may cancel an Iowa Pre-Need Plan if the purchase is more than 60 days in
arrears on installment payments due under an installment payment plan by
providing a written notice of our intent to cancel at least 10 days prior
to such cancellation. The funds held in trust for the benefit of the
purchaser are retained by us as liquidated damages for breach of the
agreement.
Oregon
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Oregon. Our Pre-Need cremation service business is subject to the
regulatory requirements of the Oregon Revised Statute - Funerals, Cemeteries and
Crematoriums Act and the Uniform Trustees' Powers Act and the Federal Trade
Commission. We are required to file reports on an annual basis with the Oregon
Cemetery Board. Oregon Cemetery Board approval is required for our Oregon
Pre-Need contracts, which must contain certain disclosures and terms. Our Oregon
Pre-Need contracts are approved for use in Oregon. All pre-need sales
representatives are required to be licensed in Oregon.
Oregon Pre-Need Contracts: Our Oregon Pre-Need Plans consist of a contract
related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide. The
Pre-Need Plan is a guaranteed price plan, which means we guarantee that we will
provide the cremation service at the time of need without additional payment for
the service.
Price of Pre-Need Plan: We currently charge $1,099 for an Oregon Pre-Need
Plan, including $515 for the Pre-Need cremation service and $584 for
merchandise delivered at the point of sale. We offer two installment
payment plans, which allows a client to purchase a Pre-Need Plan by paying
us a down payment and making monthly installment payments. See "Installment
Payment Plans."
Trust Fund Deposits: The Oregon Uniform Trustees' Powers Act requires us to
place at least 90% of the purchase price collected for Pre-Need services
into a trust fund. Under the terms of our Oregon Pre-Need contracts, we
place 90% of the amount collected for the Pre-Need services into trust. A
third party trust administrator administers such trust funds.
Under the Oregon regulatory requirements, the purchase price for
merchandise that is delivered at the time a Pre-Need Plan is sold, is
excluded from the requirement to hold funds in trust. We deliver
merchandise related to the Pre-Need Plan upon receipt of payment. A
purchaser may, at their option, ask us to deliver the merchandise to a
third-party warehouse to store the merchandise until the time of need. We
contract with an
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insured third-party warehouse to store the merchandise, which stores such
merchandise for approximately 95% of our Oregon Pre-Need Plan members.
Cancellation: A purchaser of Oregon Pre-Need Plan may cancel the plan by
providing us with written notice prior to midnight on the third calendar
day after the date of the contract and receive a full refund, provided that
the merchandise is returned and no services have been provided under the
contract. After the three day period, if the guaranteed price Pre-Need plan
is cancelled, we are permitted to retain 10% of the amount collected for
Pre-Need services and are not required to refund any amounts related to
merchandise sold.
We may cancel a Oregon Pre-Need Plan if the purchase is more than 90 days
in arrears on installment payments due under an installment payment plan by
providing two written notices 30 days apart and by refunding the funds held
in trust for the benefit of the purchaser.
Washington
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Washington. Our Washington Pre-Need cremation service business is
subject to the regulatory requirements of the Revised Code of Washington
regulating embalmer and funeral directors and the Federal Trade Commission. We
are required to file reports on an annual basis with the Washington Cemetery
Board. Washington Cemetery Board approval is required for our Washington
Pre-Need contracts, which must contain certain disclosures and terms. Our
Washington Pre-Need contracts are approved for use in Washington.
Washington Pre-Need Contracts: Our Washington Pre-Need Plans consist of a
contract related to the Pre-Need cremation service and an agreement to purchase
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide.
Price of Pre-Need Plan: We currently charge $999 for a Spokane, Washington
Pre-Need Plan, including $510 for the Pre-Need cremation service and $489
for merchandise delivered at the point of sale. For a Everett, Washington
Pre-Need Plan, we currently charge $1,099, including $556 for Pre-Need
cremation service and $543 for merchandise delivered at the point of sale.
We also offer installment payment plans, which allows a client to purchase
a Pre-Need Plan by paying us a down payment and making monthly installment
payments. See "Installment Payment Plans."
Trust Fund Deposits: Washington law requires us to place at least 90% of
the purchase price collected for Pre-Need services into a trust fund. Under
the terms of our Washington Pre-Need contracts, we place 90% of the amount
collected for the Pre-Need services into trust A third party trust
administrator administers such trust funds.
Under Washington law, the purchase price for merchandise that is delivered
at the time a Pre-Need Plan is sold is excluded from the requirement to
hold funds in trust. We deliver merchandise related to the Pre-Need Plan
upon receipt of payment. A purchaser may, at their option, ask us to
deliver the merchandise to a third-party warehouse to store the merchandise
until the time of need. We contract with an insured third-party warehouse
to store the merchandise, which stores such merchandise for approximately
95% of our Washington Pre-Need Plan members.
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Cancellation: Under Washington law, a purchaser may, in writing, cancel a
Pre-Need plan as follows:
o within 30 days of the date the contract is entered into and receive
all of the payments made, provided that the services have not been
used; and
o anytime after 30 days, if cancelled in writing, provided that the
services have not been provided, and receive a full refund of all
amounts deposited into trust that are related to services, less 10%
for costs associated with selling and setting up the contract.
We may cancel a Washington Pre-Need Plan if the purchase is more than 60
days in arrears on installment payments due under an installment payment
plan by providing a written notice of our intent to cancel at least 10 days
prior to such cancellation.
We refund 90% of the funds held in trust for the benefit of the purchaser
upon cancellation. We may revoke a Washington Pre-Need Plan if we are
unable to perform the cremation services under the plan by providing notice
to the beneficiary of the plan of our inability to perform such services
and by refunding the trust fund balance related to such plan to the
beneficiary.
New York
Licensing: We are a licensed provider of both pre-need and at-need
cremation services in the State of New York. Our cremation service business is
subject to the regulatory requirements of the Consolidated Laws of New York,
Chapter 20, Article 28-A - Cemetery Property and Funeral Services, and Chapter
45, Article 34 - Funeral Directing and the Federal Trade Commission. We are
licensed to offer cremation services in the State of New York.
New York Pre-Need Contracts: Our New York Pre-Need Plans consist of a
contract related to the Pre-Need cremation service and the purchase of
merchandise, including an urn, a memorial plaque, a Neptune Society Registration
Package and a Neptune Society Information Booklet and Estate Planning Guide. The
Pre-Need Plan is a guaranteed price plan, which means we guarantee that we will
provide the cremation service and merchandise at the time of need without
additional payment for the service.
Price of Pre-Need Plan: We currently charge $ 1,499 for a New York Pre-Need
Plan. We offer only plans which are paid in full at the point of sale.
Trust Fund Deposits: 100% of the funds we receive for the purchase of a New
York Pre-Need Plan are deposited into trust for the purchaser until the
time of need. Under the New York regulatory requirements, the funds
received for merchandise that is not to be delivered or services that are
not to be rendered until the occurrence of the death of the person for who
the contract is purchased remains the money of the purchaser making the
payment and is required to be held in trust for the benefit of such person.
The funds are not permitted to be commingled. Consequently, we establish an
individual trust for each purchaser of a New York Pre-Need Plan in an
interest bearing account in a bank, national bank, federal savings bank or
other such institution authorized to accept such trust by the
9
State of New York. These funds are administered by a third party trust
administration company licensed to conduct business in the State of new
York.
Cancellation: A purchaser of New York Pre-Need Plan may cancel the plan by
providing us with written notice at any time and receive a full refund,
together with accrued interest, if any, provided that the merchandise has
not been delivered and no services have been provided under the contract. A
New York Pre-Need Plan may not be cancelled by the purchaser when the
purchaser has received supplemental security benefits from the State of New
York assisting them in paying for such plan.
No administrative, consultation or other fee may be assessed against the
person in connection with the sale of the Pre-Need Plan.
Trust Fund Administration
We administer our Pre-Need trust funds in accordance with applicable state
regulation. Generally, the funds related to each Pre-Need contract are released
to us when we perform the crematory service or the contract is cancelled. See
"Industry Regulation - Pre-Need Trust Fund." In addition, in the States of
Oregon, Washington, Iowa, Colorado and New York, we engage the services of a
third party trust administrator, "American Funeral & Cemetery Trust Services"
(AFCTS) to administer such trust funds. AFCTS also administers the California
Trust fund on a limited basis, providing year end auditing and mailing of
required annual statements to trust fund beneficiaries.
Approximately 94,000 individuals have become members of our Pre-Need
programs since 1988, some of whom have since died or cancelled their membership.
Since 1988, the cancellation rate of active Pre-Need Contracts has been
approximately 1% on an annual basis. As of December 31, 2001, we had
approximately 67,000 active Pre-Need members.
The Neptune Society At-Need Programs
We also provide cremation services on an At-Need basis (at the time of
death). We provide a full range of cremation services and merchandise and care
for all aspects of the deceased's cremation needs according to the decisions and
plans of the decedent's heirs, including service planning, optional services for
scattering remains, and delivery of ashes to family members. These services are
typically far less expensive than traditional burials.
The Neptune Society Registration Service
We offer a registration service that allows individuals to record and
register their request to be cremated, and we maintain a record of information
necessary for us to provide cremation services at the time of death, however
these registration services do not provide for a guarantee of price to the
individual unless such services are paid for in advance.
Crematory Services
We own and operate crematories and licensed holding facilities in
California, Iowa, Oregon and Washington. Our crematories and licensed holding
facilities provide cremation services in the areas where we market and
administer Pre-Need programs. We also use the services of licensed and qualified
third-party crematories and holding facilities to service our Pre-Need and
At-Need programs in those areas where we do not own and operate crematories.
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Other Services and Products
We offer premium, upgraded services and products, including higher quality
urns, and memorialization options. These options include upgraded permanent
memorial urns or keepsakes, memorial record books, memorial life celebration
videos, assistance in arranging for private or public memorial services,
arranging for disposition of the ashes other than common scattering at sea such
as delivery to cemeteries or other points of permanent disposition. Our offices
in Miami, Fort Lauderdale, Ankeny, Portland, and Spokane have chapels for
cremation memorial services.
Pricing
We define our pricing strategy as a simple and economical alternative to
traditionally more expensive and elaborate funerals and burials. Our strategy is
to maintain a simple product and pricing structure to assist customer
decision-making. For example:
We charge a one time $50 non-refundable registration fee for customers who
chose only to register their cremation wishes. A customer may remove their
cremation wishes from the register at no charge.
We offer a worldwide guaranteed travel plan to Pre-Need members for $300,
which guarantees service coverage throughout the world if a member dies
while away from home. Under our travel plan, the travel plan provider will
provide a member cremation services from any place in world, regardless of
where the Pre-Need Plan is purchased.
The current price of our basic Pre-Need Plan sells for between $999 and
$1,299. Our goal is to create a standardized Pre-Need Plan that is priced
according to the market price for similar plans in each geographic area
that we serve. The purchase price allocated towards the cost of the
cremation services and the costs for the merchandise varies from state to
state depending on market conditions and the laws and regulations of the
state. See "Neptune Society Services - The Neptune Society Pre-Need
Program."
Our standard Pre-Need service program includes services, such as burial at
sea, rose garden scattering and delivery of ashes to family members.
Our cremation services are typically less expensive than traditional
funeral services.
Installment Payment Plans:
We offer two installment payment programs, which allow purchasers to
finance the purchase of a Pre-Need Plan:
o A client may purchase a Pre-Need Plan by paying us a down payment of
$299 and making monthly payments of $25 until the Pre-Need Plan is
paid in full; or
o A client may purchase a Pre-Need Plan by paying us a down payment of
$449 and making monthly payments of $25 until the Pre-Need Plan is
paid in full.
We do not charge interest on the balance due under our installment payment
programs in Florida, Iowa or Washington. We charge interest of 8% per annum on
balances due under our installment payment programs in California, Oregon and
Colorado.
11
Existing Facilities
Our offices are generally located within or near major metropolitan
geographic areas. We believe that by locating our offices in these areas, it
provides us with future opportunities to share personnel, vehicles and other
resources, reduce per location operating and administrative costs, and implement
integrated marketing programs with additional offices that we may open in that
particular market area in the future.
We currently have locations in the states of California, Colorado, Florida,
Iowa, New York, Oregon, and Washington, representing approximately 35 major
metropolitan market areas. Our national telemarketing center is located in
Tempe, Arizona. See "Properties."
Expansion
Our present growth strategy is to expand our operations through
establishing new "start-up" offices in major metropolitan market areas with
reasonable operating laws and attractive demographics relating to our business.
In addition, we will selectively review strategic acquisitions opportunities of
existing cremation service providers with established market presence in certain
geographic areas. Since March 31, 1999, we have acquired existing cremation
service providers or established new "start-up" offices in Colorado, Iowa,
Oregon, Washington and Florida. We are currently exploring new "start-up"
opportunities in Arizona, Illinois, Ohio, Minnesota and Michigan. To date, we
have targeted approximately 26 additional states which have attractive
demographics for our business and will continue to review these particular
market areas for further expansion.
The cremation segment within the death care industry is highly fragmented,
and we believe there may be many small owner-manager cremation operations
throughout North America that are possible acquisition targets. Our strategy is
to enter new geographic market areas with large population centers where
existing cremation rates are 15% to 50%, with projected rates increasing over
the next 10 years. Based on our experience, we anticipate that most new targeted
market areas will not have established effective prearranged cremation sales
programs, thus enabling us to implement our Pre-Need cremation program quickly
and successfully. We apply specific selection criteria when evaluating new
geographic locations for expansion, including:
o death and cremation rates for the area;
o existing market area competition;
o forecasted growth in cremation rates for the area; and
o operating regulatory requirements.
We cannot assure you that we will successfully implement new "start-ups" or
acquire any additional cremation service providers or that "start-ups" or
acquisitions, if any, will result in increased operating efficiencies or
revenues to us.
We may also acquire or construct additional crematories and licensed
holding facilities if we determine that the demand for cremation services in a
particular geographic region warrants expansion. We anticipate that our existing
crematories and third party service providers have the capacity to service our
cremation service needs.
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Marketing
We currently market our services in all our locations under the name "The
Neptune Society." Our marketing strategy is focused on maintaining and further
developing the strength of our brand name and creating consumer awareness of our
death care services and products. We promote our death care services and
products using targeted advertising campaigns, including, for example:
o advertisements in the Yellow Pages;
o local television and radio advertisements;
o a Web site providing up-to-date, on-line information related to our
death care services and products;
o direct marketing campaigns
We market our Pre-Need programs using a combination of sales and direct
marketing programs to generate sales.
Direct Mail
We use a monthly direct mail campaign to generate leads. We have
historically mailed a total of approximately 6 million pieces of direct mail
marketing materials per year in the geographic areas we serve. Our marketing
materials provide information related to our Pre-Need programs, including a
description of the services, pricing information, our toll free phone number,
and a business reply card to obtain additional information or to make an
appointment with one of our area sales representatives. We received a response
rate of approximately 0.54% from our direct mail campaigns, representing
approximately 32,000 leads and we have historically sold approximately 9,000
pre-need contracts as a result of these direct mail leads per year. We
anticipate we can sell Pre-Need plans to approximately 28% of these leads
through our direct sales efforts.
Telemarketing
On November 15, 1999, we established a Predictive Dialling Telemarketing
Center (PDS Center) in Tempe, Arizona. As of December 31, 2001, we employed 22
telemarketers. Our current telemarketing program is primarily designed to
generate leads from people who have not responded to our direct mail marketing
campaigns. We anticipate that telemarketing will allow us to increase the number
of Pre-Need plans we sell to leads generated by our direct mail marketing
campaign.
During the year ended December 31, 2001, our Tempe call center produced
approximately 12,000 prospective customer appointments in the states we serve.
We estimate that approximately 3,000 Pre-Need contract sales have resulted from
these leads representing approximately a 25% conversion rate of these PDS leads.
The goal of our telemarketing strategy is to increase the sales of our Pre-Need
plans resulting from direct mail leads. Based on our research of the
telemarketing industry, we believe we can achieve this goal by using our call
center as a convenient forum for providing information to potential members and
for setting appointments for our area sales representatives. Our call center is
anticipated to allow us to consolidate our telemarketing efforts and to schedule
appointments for our area sales
13
representatives in one centralized location. We believe this will allow us to
implement a uniform telemarketing and promotional strategy using professional
telemarketers. We anticipate this will relieve our area sales representatives of
some of their prior administrative duties, which may facilitate an increased
number of sales calls and increase our sales productivity. We cannot assure you
that we will successfully implement our telemarketing programs or that the
number of Pre-Need plans we sell or leads generated by our direct mail marketing
campaign will increase as a result of our call center.
Personal Sales
We use commissioned independent contractors to provide services as area
sales representatives to sell our Pre-Need Plans. As of December 31, 2001, we
had approximately 133 commissioned area sales representatives, including 30 in
California, 7 in Colorado, 12 in Oregon, 36 in Florida, 8 in Iowa, and 40 in
Washington. These area sales representatives are provided leads generated from
our direct mail campaigns and telemarketing efforts, and they meet with
potential clients individually to determine the service needs of the individual.
The area sales representatives are paid on a commission basis according to the
type of plan sold, and the conversion percentage from lead to sales ratio and
the method of payment selected by the customer. A majority of our area sales
representatives are in California and Florida and have worked with our
subsidiaries for over four years. Each of our Pre-Need sales offices has a sales
manager who recruits, trains and engages commissioned independent contractors to
provide services as area sales representatives to sell our Pre-Need Plans.
Internet Web Site
We developed and operate a fully integrated and comprehensive web site
located at www.neptunesociety.com, targeted at the baby boomer generation. We
believe that the aging of the baby boomers, represents an opportunity to expand
our business by marketing our Pre-Need Programs on the Internet. Baby boomers
represent one of the fasting growing segments of Internet users. Consumers may
inquire on how to purchase Pre-Need plans on-line at our web site. As our
website matures, we believe it will lead to increased education of the consumer
and potential future customers.
Death Care Industry
According to statistics provided in the National Vital Statistics Reports,
Vol. 48, No. 11, the number of deaths in North America has risen by 1% annually
between 1980 and 1998, and is expected to continue to grow at a similar rate
over the next 10-15 years. The growth in death rates results not only from an
increase in the overall population, but also from the demographics of an aging
population as the baby boomer generation matures.
According to information available on the National Funeral Directors
Association's web site located at www.nfda.org:
o There are more than 22,100 funeral homes in the United States
employing approximately 35,000 licensed funeral directors/embalmers
and 89,000 additional funeral service and crematory personnel;
o There were 2,345,702 deaths in the United States during the 12-month
period ending December 1999, or 8.6 deaths per thousand population.
(source: U.S. Department of Health & Human Services, 1999);
14
In 1999, the average cost of an adult funeral, not including cemetery expenses,
was approximately $5,020; and
Death rates are projected to rise to:
o 9.32 deaths per thousand in 2010; and
o 10.24 deaths per thousand in 2020.
We believe that the popularity and acceptance of cremation services will
increase in the future as a result of the differences in costs between
traditional burial funerals and cremations and as a result of a consumer shift
in attitude towards cremation and perception of value. According to a survey of
crematory operations conducted by Smith, Bucklin & Associates, Market Research
and Statistics Division in 2000 on behalf of the Cremation Association of North
America:
o The popularity of cremation varies by geographic location in the
United States, ranging from a low of 4.45% in Mississippi to a high of
59.83% in Hawaii;
o In 2000, cremation services were chosen for approximately 25.48% of
total deaths in the United States, representing approximately 603,092
cremations;
o The demand for cremation services as a percentage of death services
grew on average approximately 4.6% annually over the last ten years
from 1989 to 1999 and approximately 3.8% over the last five years from
1995 to 1999; and
o Cremation services are expected to account for approximately 26.2% of
all death services in 2001 and approximately 39.38% of all death
services in 2010 and 48% in 2025.
We cannot assure you that the trend towards cremation will continue or that
we will benefit from the growth demand for cremation services, if any. Our
business strategy is to provide Pre-Need and At-Need cremation services. A
decline in the demand for such services may have a material adverse affect on
our business and our results of operations.
Competition
The death care industry in general is fragmented, comprised of mostly
family-owned businesses and small independently owned chains of death care
service providers. Currently, there are publicly traded companies in the death
care services industry that in the past have pursued consolidation and
aggressive growth strategies. The major corporate competitors in the death care
industry include Service Corporation International, Alderwoods Group, Inc.
(formerly The Loewen Group), Stewart Enterprises, Inc., Carriage Services, Inc.,
Hamilton Group and Keystone Group. The large corporate competitors offer a broad
range of traditional funeral and burial products and services, including:
burial services tombstones and markers
embalming services plaques and urns
burial plots Pre-Need burial services
memorial/funeral services Pre-Need cremation services
caskets
15
Based on information contained in the public filings of Service Corporation
International, Loewen Group Inc., Stewart Enterprises, Inc., and Carriage
Services, Inc., we believe that corporate competitors generally focus their
marketing efforts on providing traditional at-need burial services, burial
plots, caskets, memorial/funeral services and burial merchandise.
We believe that the competitive factors in the death care service industry
generally include:
o inter-family loyalty to established, local death care service
providers;
o consumer price sensitivity for death care services;
o consumer demand for personalized service and memorial/funeral
services;
o the availability of qualified personnel and management;
o high fixed costs for facilities and cemeteries; and
o regulatory compliance costs.
Generally, existing death care service providers may, on a local community
level, have competitive advantages based on established local reputations, local
ownership and management, brand loyalty and existing capital facilities. The
larger publicly traded death care service providers generally compete on the
basis of price and service, and dedicate a significant amount of their resources
to acquiring established death care service providers in local and regional
markets. They are generally well capitalized and can achieve certain
efficiencies through their integrated marketing, management and administration
structures.
We intend to compete by focusing on the Pre-Need cremation segment of the
death care industry. We believe that we can effectively market cremation
services on a Pre-Need basis by offering a lower cost alternative to burial
funerals. In addition, we believe that by marketing our company as "America's
Cremation Specialist"(R), we hope to capture the market as the only company that
is not owned by a traditional funeral company specializing in cremation.
We cannot assure you that we will effectively compete against existing
local death care service providers or corporate consolidators. Many of these
competitors offer a full range of death care services, including cremation
services and Pre-Need service plans. Several of these competitors also have
significantly greater financial and other resources than us and have long
established reputations in the markets they serve.
Industry Regulation
Death Care Service Industry Regulation
The funeral service industry is regulated primarily on a State by State
basis with all jurisdictions requiring licensing and supervision of individuals
who provide funeral-related services. All jurisdictions also regulate the sale
of Pre-Need services and the administration of any resulting trust funds or
insurance contracts. See "Business - The Neptune Society Pre-Need Program." In
addition, concerns regarding lack of competition have led a few jurisdictions to
enact legislation designed to encourage competition by restricting the common
ownership of funeral homes, cemeteries and related operations within a specific
geographic region.
16
Our operations must also comply with federal legislation, including the
laws administered by the Occupational Safety and Health Administration, the
Americans with Disabilities Act and the Federal Trade Commission ("FTC")
regulations. The FTC administers the Trade Regulation Rule on Funeral Industry
Practices, the purpose of which is to prevent unfair or deceptive acts or
practices in connection with the provision of funeral goods or services.
On February 25, 1998, the State of California issued an interim suspension
order against the Neptune Group's California operations under California's
Business and Profession Code for failure to comply with appropriate storage
procedures. On May 6, 1998, the Neptune Group entered into a Stipulation and
Settlement and Decision, which required the Neptune Group's controlling
shareholder, Emanuel Weintraub, to sell his interests in the Neptune Group and
cease all management or control, directly or indirectly, of any funeral or
cremation activities licensed by the State. In addition, the Neptune Group was
ordered to demonstrate compliance with the requirements for storage facilities
under the State's Business and Professions Code and to be subject to random
inspections.
In compliance with the stipulation, Mr. Weintraub, among others, sold the
Neptune Group of companies to Neptune of America, the Registrant's wholly owned
subsidiary, and on April 9, 1999, we entered into an agreement with the State of
California and applied for an assignment of licenses in connection with the
closing of the sale of the business. California approved the assignment, subject
to amending the Stipulation and Settlement and Decision to incorporate a
requirement for us to complete audits of the Pre-Need trust funds under the
Business and Profession Code, to comply with all other requirements for
licensure, and to be placed on probation until June 2000. We complied with the
terms and conditions of the Stipulation and Settlement and Decision. On July 21,
2000, the State of California officially assigned all three California funeral
establishment licenses to us after we submitted a zoning letter from the City of
Los Angeles in the fourth quarter of 2000. As a condition of the assignment, we
agreed to remain on probation for a period of one year, until June 2001, or as
long as Mr. Weintraub continues to be a shareholder of our company. Under the
terms of our probation, we must continue to comply with the California
regulatory requirements related to licensed funeral establishments applicable to
our business of providing cremation services and marketing pre need cremation
services. In the event we fail to comply with these requirements, our California
funeral establishment licenses may be revoked.
Pre-Need Trust Funds
We are required to deposit a portion of the funds we receive from the sale
of a Pre-Need plan into trust for the benefit of the subscriber. See Item 1.
"Business - The Neptune Society Business - Neptune Society Services." Each
Pre-Need Plan is a contract for the sale of cremation services at the time of
death and for merchandise delivered at the point of sale. The payments we
receive for the services portion of Pre-Need Plans are generally held in trust.
The trust funds are maintained by financial institutions in accordance with the
laws of the state in which the Pre-Need Plan is sold. In addition, the Neptune
Society utilizes the services of a third party administrator (AFCTS) in certain
states. At December 31, 2001, the balance of the Pre-Need trust fund was
approximately $40 million and we had over 67,000 active members. We anticipate
that the size of the Pre-Need trust funds will increase if the trend toward
cremation services continues and we successfully implement our growth strategy
as planned. We cannot assure you that we will successfully increase our Pre-Need
membership to levels that would
17
result in growth of the Pre-Need trust or that the Pre-Need trust will not
decline as a result of increased death rates of our membership. In most states,
we are not permitted to withdraw principal or investment income from trust funds
until the time the cremation service is performed. Earnings on the trust funds
increase the amount of cash received by us at the time the cremation service is
performed and, historically, have allowed us to adequately cover the
inflationary increase in costs of performing cremation services.
Although applicable laws vary from state to state, typically we are not
required to place money we receive for merchandise in connection with the sale
of a Pre-Need Plan into trust if we immediately deliver at the time of sale. In
all states in which we offer Pre-Need plans except California, we are allowed to
retain a percentage of the future cremation service costs related to the sale of
the Pre-Need Plan. See "Business-Overview - The Neptune Society Pre-Need
Program."
Sales commissions applicable to pre-need cremation service and merchandise
sales are deferred and amortized over the expected timing of the performance of
the services covered by pre-need arrangements.
Personnel
At December 31, 2001, we employed 55 full time counselors and mortuary
personnel, 22 telemarketers, and 19 administrative personnel. In addition, we
had contracts with 133 independent contractors to serve as commissioned sales
representatives, including 30 in California, 36 in Florida, 7 in Colorado, 12 in
Oregon, 8 in Iowa, and 40 in Washington. Management believes that our
relationships with our employees and independent contractors are good. None of
our employees are members of collective bargaining units.
We anticipate that we will hire 17 additional personnel during 2002,
including 6 at-need and mortuary personnel, 4 telemarketers, 4 pre-need
administrative personnel and 3 corporate administrative personnel. We also
intend to engage approximately 20 additional independent contractors to serve as
commissioned sales representatives during 2002.
Neptune Society Acquisitions
Neptune Group Acquisition
On March 31, 1999, the Neptune Society, through Neptune of America,
acquired a group of privately-held companies engaged in the business of
marketing and administering Pre-Need and At-Need cremation services in
California, Florida and New York under the name the "Neptune Society." Neptune
Society paid the owners of the Neptune Group a total of $1,000,000 in cash and
issued them a total of 125,000 shares of its common stock valued at $5,000,000.
In addition, Neptune of America issued the former owners two promissory notes in
the amounts of $19,000,000 (the "$19 Million Note") and $2,000,000 (the "$2
Million Note"). The notes were guaranteed by the Neptune Society and secured by
the assets and business of Neptune Management and Heritage Alternatives. The
$19,000,000 note was interest free until July 31, 1999 when interest at the rate
of 9% per annum was to accrue until the note was fully paid. The note was
originally due as follows: $19,000,000 on or before July 31, 1999 or $9,000,000
on or before July 31, 1999 and $10,000,000, together with all accrued and unpaid
interest, payable on or before July 31, 2000. The $2,000,000 note was interest
free and was
18
payable in equal monthly installments commencing April 30, 1999 until fully paid
with the last payment due March 31, 2002.
In July 1999, the monthly payments due under the $2 Million Note were
reduced from $55,555 per month to $40,000 per month with the $15,555 of deferred
principal earning 9% simple interest due on a monthly basis until March 31,
2001, at which time the final payment of $596,742 is due.
In August 1999, the $19 Million Note was amended as follows: in exchange
for $76,000 in cash and 34,375 warrants to acquire common shares at $48.00 per
share, $9,625,088 of the note due to Emanuel Weintraub Intervivos Trust became
interest free with payments and due dates of $386,776 on August 11, 1999,
$4,172,476 on January 3, 2000, and $5,065,836 on July 31, 2000. The remaining
$9,374,912 due under the $19,000,000 note retained a 9% interest rate with
maturities of $3,739,008 due on August 11, 1999, $701,740 due on January 3,
2000, and $4,934,164 due on July 31, 2000.
In July 2000, the balance due under the $19 Million Note to the Weintraub
Trust was $5,065,836. We paid $341,396 on the principal balance. In exchange for
releasing the Weintraub Trust from liability for loss of revenue or loss of
projected revenue as a result of the pending Leneda legal proceeding (See "Legal
Proceedings - Leneda Litigation"), the due date on the remaining $4,724,440 was
extended for twelve months to July 31, 2001. In connection with the extension of
the due date on the $19 Million Note, Neptune Society guaranteed the difference
between the aggregate cash received and $47,250 on the sale of 844 shares
monthly of Neptune Society's common stock held by the Weintraub Trust over the
extension term. As a result of the guarantee, the Company paid Weintraub Trust
$254,000 through December 31, 2001.
On January 1, 2001, Neptune America owed a remaining balance of $4,724,440
under the $19,000,000 promissory note, due July 31, 2001 (the "$19 Million
Note").
2001 Neptune Group Debt Restructurings
August 2001 Debt Restructuring
In August, 2001, we negotiated a restructuring of our obligations under the
$19 Million Note (the "August Restructuring"). Under the terms of the August
Restructuring, we agreed to pay $2 million of the $4.7 million balance due under
the $19 Million Note and to defer the payment of the remaining $2.7 million
until January 2, 2002, in consideration of a cash loan fee of $168,000, due
January 2, 2002, and the issuance of 13,750 shares of Neptune Society common
stock. The restructured amount accrued interest at 12% per annum, payable
monthly. We also released Mr. Weintraub from liability for loss of, or projected
loss of, revenue as a result of the Leneda legal proceeding. See "Legal
Proceedings". We financed the payment under the August Restructuring by
obtaining a loan through Wilhelm Mortuary, Inc., our wholly-owned Oregon
subsidiary, in the amount of $1.5 million from Green Leaf Investors II, LLC. See
"Oregon Acquisition - Disposition of Portland Assets and Related Transactions -
Green Leaf Bridge Loan."
December 2001 Debt Restructuring
In December 2001, Neptune America and Emanuel Weintraub and the Emanuel
Weintraub Inter Vivos Trust (collectively, "Weintraub") entered into an
agreement to restructure
19
the $2.7 million balance due January 2, 2002 under the $19 Million Note (the
"December Debt Restructuring"). Under the terms of the agreement, Neptune has
America had the option to restructure the payment of the balance due under the
$19 Million Note as follows: (i) $500,000 on or before January 2, 2002, (ii)
eighteen monthly installments of $78,471 beginning January 2002 and (iii) the
remaining principal balance of approximately $1,400,000 due on July 31, 2003.
Neptune America agreed to pay interest on the principal amount restructured at
the rate of 13% per annum. Neptune America exercised its right to restructure
the $19 Million Note on December 28, 2001.
Under the terms of the December Debt Restructuring, Neptune America and
Neptune Society agreed to pay Weintraub a loan fee consisting of (i) $350,000,
in the form of a note payable and (ii) 75,000 shares of Neptune Society common
stock, issuable to Weintraub's nominees. Neptune America and Neptune Society
also ratified its obligations under its consulting agreement with Mr. Weintraub
and agreed to pay Mr. Weintraub all consulting fees due under the consulting
agreement and to reimburse certain expenses under the agreement on January 2,
2002. On December 28, 2001, the Company paid-out the remainder of all payments
due over Weintraub's consulting agreement in the amount of $335,000 and
terminated the agreement. Neptune Society also agreed to reimburse Mr. Weintraub
for attorneys' fees in the amount of $120,000 incurred by him in connection with
the Leneda litigation in consideration of an agreement to forebear from
asserting claims against Neptune Society's insurers or settling such claims
arising out of the Leneda litigation. See "Legal Proceedings."
Spokane, Washington Acquisition
On December 31, 1999, we acquired all of the assets of the business of
Cremation Society of Washington, Inc. in Spokane, Washington, pursuant to the
terms of an asset purchase agreement. Under the terms of the agreement, we paid
Cremation Society of Washington, $500,000 in cash and issued it 5,682 shares of
Neptune Society common stock valued at $250,000. In addition, we agreed to pay
Cremation Society of Washington the following amounts:
o on or before March 2, 2001, (i) 3% of gross revenues and (ii) 12.5% of
the earnings before income tax, depreciation and amortization
("EBITDA") of the Cremation Society of Washington during the twelve
month period ending December 31, 2000;
o on or before March 2, 2002, (i) 2.75% of gross revenues and (ii) 12.5%
of EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2001;
o on or before March 2, 2003, (i) 1% of gross revenues and (ii) 7.5% of
EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2002;
and
o on or before March 1, 2004, (i) 1% of gross revenues and (ii) 7.5% of
EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2003.
We agreed to pay an additional $125,000 in cash or additional shares of
Neptune Society common stock, at our option, if the average trading price of our
shares for the 30 day period from December 1 to December 31, 2000 declines below
$44.00 per share. For periods subsequent to
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December 31, 2004, we have agreed to pay an earn out payment equal to 10% of
EBITDA of Cremation Society of Washington provided that John C. Ayres, the
founder and sole shareholder of Cremation Society of Washington, and/or Charles
S. Wetmore, the general business manager of Cremation Society of Washington,
continue to be employed by us. In May 2001, we issued 1,168 shares of common
stock to the former owner's under this obligation.
In connection with our acquisition of the Spokane, Washington operations,
we entered into a consulting agreement with John Ayres and an employment
agreement with Charles Wetmore. The consulting agreement was subsequently
terminated upon agreement of the parties and we have no further obligations to
Mr. Ayres under the consulting agreement. Mr. Ayres remains bound under the
terms of the non-compete clause of the consulting agreement and cannot provide
funeral, burial or cremation services, including the sale pre-need cremation
services in the states of Washington and Idaho for a period of 3 years, expiring
December 31, 2002.
Under the terms of our employment agreement with Mr. Wetmore, we agreed to
pay Mr. Wetmore an annual salary of $75,000, subject to annual adjustments at
the discretion of our board, for his services as General Manager. Mr. Wetmore
shall also be granted 1,250 options to purchase our common stock for each year
the agreement is in effect. Mr. Wetmore's options vest one year from the date of
grant. The agreement is for a term of 3 years and expires on December 31, 2002.
The agreement contains non-compete provisions that restrict Mr. Wetmore from
providing funeral, burial and cremation services, including the sale of pre-need
cremation services in the states of Washington and Idaho for a period of 3
years, expiring December 31, 2002. We paid Mr. Wetmore consideration of
$145,000, in the form of $20,000 cash and 2,841 shares of our common stock
valued at $120,000 (at the deemed value of $44.00 per share), for his promise to
not compete with us.
Iowa Acquisition
On March 15, 2000, we acquired all of the issued and outstanding common
stock of Cremation Society of Iowa, Inc. in Ankeny, Iowa pursuant to the terms
of a share purchase agreement. Under the terms of the agreement, we agreed to
pay John Bethel and David Noftsger, the co-founders and shareholders of
Cremation Society of Iowa, $110,000 cash and to issue 20,129 shares of Neptune
Society common stock valued at $1,000,000. In addition, we agreed to make earn
out payments to Mr. Bethel and Mr. Noftsger equal to 3% of the gross revenues
and 10% of EBITDA from the operations of the Cremation Society of Iowa for a
period of three years ending on March 15, 2003, payable on March 15 of each
year.
Renegotiation of Iowa Acquisition
On August 1, 2000, we and Mr. Bethel and Mr. Noftsger amended the share
purchase agreement. Under the amended terms, Mr. Bethel and Mr. Noftsger
retained the $110,000 cash payment made to them under the terms of the original
agreement. The remaining consideration we were obligated to pay to Mr. Bethel
and Mr. Noftsger was adjusted as follows:
o The 20,129 shares of Neptune Society common stock that we were
originally obligated to issue was reduced to 15,000 shares. We issued
these shares in February 2001. We also agreed that if the average
closing price of Neptune Society common stock was less than $32.00 per
share for the 5 day period preceding the 120th day following August 1,
2000, we would issue additional
21
shares or pay in cash to Mr. Bethel and Mr. Noftsger, an amount equal
to the difference between $600,000 and the value of 15,000 shares
(based on the trading price of Neptune Society shares on August 1,
2000). The trading price exceeded $32.00 per share and no additional
payment was made.
o The earn out payments we were originally required to make to Mr.
Bethel and Mr. Noftsger were replaced with the following earn out
payment obligations:
o Within 60 days of August 1, 2001, we agreed to pay Mr. Bethel and
Mr. Noftsger, $200,000 in cash plus 3% of the gross revenues and
19% of EBITDA from the business operations of Cremation Society
of Iowa during the twelve month period ending August 1, 2001; and
o Within 60 days of August 1, 2002, we agreed to pay Mr. Bethel and
Mr. Noftsger, $100,000 in cash plus 3% of the gross revenues and
19% of EBITDA from the business operations of Cremation Society
of Iowa during the twelve month period ending August 1, 2002.
The earn out payments are contingent on the Cremation Society of Iowa's
gross revenues equaling or exceeding $750,000 and EBITDA equaling or
exceeding $175,000 for each twelve month period of time.
In connection with our acquisition of Cremation Society of Iowa, we entered
into employment and non-competition agreements with Mr. Noftsger and Mr. Bethel.
Second Amendment of Iowa Acquisition
In March 2001, Neptune Society entered into an Amended Agreement with both
Noftsger and Bethel. In exchange for deletion of the "Contingent Purchase Price"
provisions of the Cremation Society of Iowa, Inc. Share Purchase Agreement,
Neptune Society agreed to issue up to 10,000 additional shares of its common
stock to Noftsger and Bethel. Any shares issued under the terms of this
Agreement are subject to trading restrictions for a 12 month period. On December
1, 2001, David Noftsger's Employment Agreement was renegotiated whereby Noftsger
was released from daily general management responsibilities of the Neptune
Society of Iowa in order for him to become the Pre-Need Sales Manager of that
location. Noftsger's base salary requirements under the terms of the Employment
Agreement were terminated and replaced with commissioned compensation based upon
meeting certain pre-need sales goals as established by the Company. On May 25,
2001, John Bethel resigned as an employee of the Neptune Society, effective
April 1, 2001. Under the terms of his resignation, Bethel received cash
consideration in the amount of $2,500, in addition to the accrued salary due.
Oregon Acquisition
Effective July 17, 2000, we, through our wholly-owned subsidiary, acquired
a funeral, burial and cremation business in Portland, Oregon in a series of
transactions. Heritage Memorial Society, L.L.C. and Community Memorial Centers,
L.L.C. operated businesses under the trade names Heritage Memorial, Heritage
Memorial Society, Heritage Memorial Cremation Society, The Heritage Society,
Wilhelm Funeral Home, Wilhelm Crematory, Oregon Cremation Company, Oregon
Cremation & Burial Company and AAA Cremation Company (the "Portland Business")
and certain real property used in connection with the Portland Business (the
"Portland Property"). David Schroeder and Michael Ashe, the owners of Heritage
Memorial Society,
22
L.L.C. and Community Memorial Centers, L.L.C. ("CMC") formed Wilhelm Mortuary,
Inc., which acquired the assets of CMC and Heritage Memorial Society. We
acquired Wilhelm Mortuary, Inc. under the terms of an agreement under which
Wilhelm Mortuary, Inc. merged with and into Neptune Acquisition, Inc., our
wholly-owned subsidiary.
Under the terms of the agreement, we paid the former owners of the Portland
Business the following consideration:
o $500,000 in cash,
o a three year $1,000,000 convertible debenture issued by Neptune
Society to CMC with a conversion rate at $48.00 per share issued to
CMC (the "CMC Debenture"); and
o 78,327 shares of Neptune Society common stock.
We also agreed that if the value of the common stock (based on the average
trading price for the 60 day period preceding the first trading day following
July 17, 2001) issued to the former owners of the Portland Business was less
than $3,885,000, we would pay the owners the difference between $3,885,000 and
the value of the shares in cash or, at our option, common stock of Neptune
Society. In August 2001, we issued 140,424 shares of common stock to the former
owners of the Portland Business under this agreement.
In connection with the acquisition of the Oregon businesses, on July 17,
2000, we, through our subsidiary Neptune Management, entered into an employment
agreement with Michael Ashe:
Michael Ashe Employment Agreement: Under the terms of Mr. Ashe's employment
agreement, Mr. Ashe agreed to serve as our Vice President of Oregon
Operations. The agreement is for a term of 3 years, expiring in July 2003.
Mr. Ashe is paid a salary of $82,000 per year, subject to adjustments at
the discretion of our board of directors, and is entitled to benefits
offered to our officers, including health insurance, a vehicle allowance
and participation in our Stock Option Plan. The agreement contains an
agreement not to compete with the Neptune Society in the Portland, Oregon
area for a period of 3 years in the event Mr. Ashe ceases to be an employee
of the Neptune Society for any reason other than termination without cause.
We granted Mr. Ashe options exercisable to purchase a total of 2,500 shares
of Neptune Society, at an exercise price of $49.60, vesting one year from
the date of the option grant, July 1, 2000.
We appointed David Schroeder as our Chief Operating Officer and Michael
Ashe as our Vice President of Oregon Operations on June 1, 2000 prior to the
closing of the acquisition of our the Portland Business. In January 2001 ,
Michael Ashe accepted the position as our National Vice President of At-Need
Operations, and in August 2001 we appointed Mr. Schroeder as our President. See
"Directors and Executive Officers of the Registrant" and "Executive
Compensation."
Disposition of Portland Assets and Related Transactions
Green Leaf Bridge Loan
In August 2001, Wilhelm Mortuary, Inc. obtained a bridge loan in the
principal amount of $1,575,000 from Green Leaf Investors II, LLC ("Green Leaf"),
evidenced by a promissory
23
note due January 31, 2002 (the "Green Leaf Note"), and secured by a deed of
trust on the Portland Property and a security interest in assets of the Portland
Business (the "Green Leaf Bridge Loan"). Green Leaf is a California limited
liability company managed by Tom Camp, a former director of Neptune Society, who
resigned on February 28, 2002. Under the terms of the Green Leaf Bridge Loan, we
agreed (i) Wilhelm would pay Green Leaf interest in the amount of 13% per
annual, payable monthly in arrears, (ii) Wilhelm would pay Green Leaf a loan fee
in the amount of $75,000, which was added to the principal amount of the note,
(iii) Neptune Society would issue Green Leaf a warrant exercisable to acquire
7,500 shares of common stock at $24.00 per share for a period of one year; (iv)
Neptune Society would issue Green Leaf 3,948 shares of common stock as an
additional loan fee; (v) Neptune Society would grant piggy-back registration
rights on any shares of Neptune Society common stock held by Green Leaf; and
(vi) Neptune Society and Neptune America would guarantee Wilhlem's obligations
to Green Leaf. The proceeds of the bridge loan was used to meet certain of our
obligations to Weintraub. See "August 2001 Debt Restructuring." The Green Leaf
Bridge Loan was restructured in connection with the disposition of the Portland
Business. See, "Sale of Portland Assets" and "Green Leaf Bridge Loan
Restructuring."
Sale of Portland Assets
During the fourth quarter 2001 as part of our overall business strategy to
focus on our pre-need marketing and sales operations, we determined that it was
in the company's best interest to restructure our Oregon operations to dispose
of certain physical assets related to the Portland Business and the Portland
Property for the purposes of (i) reducing the liabilities owed to CMC and Green
Leaf; and (ii) focusing our resources on marketing and selling pre-need
contracts on a national basis. Effective December 31, 2001, we sold
substantially all of the assets related to the Portland Business and the
Portland Property to Western Management Services, L.L.C., an Oregon limited
liability company managed by Michael Ashe ("Western"), under the terms of an
asset purchase agreement (the "Portland Purchase Agreement"). In connection with
the sale of the Portland Business and the Portland Property (collectively, the
"Portland Assets"), Mr. Ashe's employment agreement with Neptune Society was
terminated in its entirety and Mr. Ashe entered into a consulting agreement with
Neptune Management to provide consulting services to us.
Under the terms of the Portland Purchase Agreement, we agreed as follows:
(i) Western would purchase the assets related to the Portland Business and
the Portland Property in consideration of (a) assuming $1,500,000 of Wilhelm's
obligations under the Green Leaf Note, (b) assuming Neptune Society's
obligations under the CMC Debenture in the amount of $1,000,000, and (c)
entering into a service agreement to provide Neptune Society at-need services in
connection with pre-need services sold within 100 miles of Portland, Oregon;
(ii) Wilhelm would (a) pay $75,000 of the principal balance due under the
Green Leaf Note, (b) arrange to restructure terms of the Green Leaf Note to
extend the due date to July 31, 2002, and (c) obtain the consent of Green Leaf
related to Western's assumption of the obligations under the Green Leaf Note and
purchase of the Portland Assets;
(iii) Neptune Society and CMC would amend and restate the CMC Debenture to
delete the conversion features of the CMC Debenture and obtain the consent of
CMC related to Western's assumption of the obligations under the CMC Debenture;
and
24
(iv) Western's obligations are secured by a security interest in the assets
of the Portland Business granted to Wilhelm and a deed of trust on the Portland
Property, each of which is subordinate to Green Leaf's security interest and
deed of trust and to CMC's deed of trust.
The sale of the Portland Assets was closed on March 12, 2002.
Restructuring of Green Leaf Bridge Loan
In connection with our sale of the Portland Assets, we entered into a note
extension and assumption agreement with Green Leaf and Western (the "Note
Extension Agreement"). Under the terms of the Note Extension Agreement, we
agreed as follows:
(i) we agreed to pay Green Leaf a fee of 75,000 shares of Neptune Society
common stock with piggy-back registration rights (the "Green Leaf Consideration
Shares") in consideration of (a) extending the due date of the Green Leaf Note
until July 31, 2002, (b) consenting to the assumption of the Green Leaf Note by
Western, and (c) consenting to the sale of the Portland Assets by Wilhelm to
Western;
(ii) we granted preemptive rights related to the Green Leaf Consideration
Shares, under which Green Leaf may purchase its pro rata share (based on the
percentage interest represented by the Green Leaf Consideration Shares to the
issued and outstanding share of common stock of Neptune Society at closing) of
any equity offering by Neptune Society; and
(iii) we agreed to pay $75,000 of the principal due under the Green Leaf
Note by Neptune Society issuing Green Leaf a convertible debenture in the
principal amount of $75,000, due July 31, 2002, convertible into shares of
common stock of Neptune Society at $0.333333 per share, subject to anti-dilution
price protection, which in the event that the Neptune Society effects a reverse
split of its common stock the conversion price of the convertible debenture
would not exceed $0.333333 per share (post split).
The transactions under the Note Extension Agreement closed on March 12,
2002. On March 22, 2002, we effected a 4:1 reverse split of our capital stock.
Other Events
Effective December 31, 2001, Neptune Society amended the terms of (i)
Convertible Debentures dated December 24, 1999, due February 24, 2005 (the
"Debentures"), in the initial principal amounts of $3,000,000 issued to CapEx,
L.P., a Delaware limited partnership ("CapEx"), and $2,000,000 issued to D.H.
Blair Investment Banking Corp., a New York corporation ("DHB") and (ii) warrants
issued to CapEx exercisable to purchase 30,000 shares of Common Stock and
warrants issued to DHB exercisable to purchase 20,000 shares of Common Stock.
The Debentures contained a "full ratchet" anti-dilution provision that reset the
conversion price of the Debenture in the event Neptune Society issued equity
securities at a price lower than the effective conversion price of the
Debenture. The Debentures also contained certain debt coverage ratios (requiring
Neptune Society to maintain certain levels of cash flow in excess of debt
obligations), which were in material default and constituted events of default
under the terms of the Debentures (the "Coverage Ratios"). Neptune Society
determined that it was in the best interest of the corporation to amend the
Debentures to delete the "full ratchet" anti-dilution to allow the corporation
flexibility in future equity financings and to adjust the Coverage Ratios
25
to achievable levels. The closing price for Neptune Society common stock on the
NASD OTCBB was $1.60 per share on December 31, 2001, and $2.15 per share on
March 28, 2002.
In connection with the Debenture and Warrant amendments, Neptune Society,
CapEx and DHB entered into a Debenture and Warrant Amendment Agreement (the
"Debenture Amendment Agreement") in of December, 2001.
Under the terms of the Debenture Amendment Agreement, the parties agreed
that:
(a) the terms of the Debentures and Warrants would be amended to among
other things:
(i) adjust the conversion ratio of the Debentures (the "Conversion
Ratio") to provide an effective conversion price of $3.00 per
share, subject to future adjustments;
(ii) eliminate the "full ratchet" anti-dilution provision;
(iii)amend the Debentures to provide that, in the event Neptune
Society effected a reverse split of its Common Stock, the
Conversion Ratio would not be adjusted below a ratio that would
increase the effective conversion price above $3.00 per share
(after giving effect to the adjustment) subject to certain
limitations on conversion;
(iv) amend the Debentures to accelerate the payment of certain
deferred interest payments under the Debentures;
(v) amend the Coverage Ratio; and
(vi) amend the Warrants to decrease the exercise price to $3.00 per
share, subject to future adjustments under the terms thereof.
(b) Neptune Society would (i) issue CapEx and DHB, a total of 168,750
shares of Neptune Society Common Stock as a restructuring fee
("CapEx/DHB Shares"), (ii) provide CapEx and DHB with certain
preemptive rights to maintain their pro rata interest in Neptune
Society (based on the percentage interest represented by the CapEx/DHB
Shares) in the event the Company offers to sell common stock or equity
securities, and (iii) provide CapEx and DHB registration rights with
respect to the CapEx/DHB Shares;
(c) Neptune Society would effect a 4:1 reverse stock split on or before
June 30, 2002 (the "Reverse Split");
(d) CapEx would not convert Debentures, which after giving effect to such
conversion, would cause Neptune Society to issue shares of common
stock representing more than 11.99% of the issued and outstanding
shares of common stock of Neptune Society and DHB would not convert
Debentures, which after giving effect to such conversion, would cause
Neptune Society to issue shares of common stock representing more than
7.99% of the issued and outstanding shares of common stock of Neptune
Society until the earlier of: (i) Neptune Society issuing shares of
common stock or equity securities ("Equity Securities") in
satisfaction of $750,000 or more of its present aggregate debt
liabilities owed to either (ii) Consulting Commerce Distribution
AG/SA/LTD in the amount of
26
$800,000 and/or (ii) Private Investment Company, Ltd. in the amount of
$1,000,000; (b) Neptune Society issuing new shares of common stock or
equity securities for gross cash consideration of at least $1,000,000;
(iii) Neptune Society issuing at least 250,000 shares (as adjusted to
give effect to any capital reclassification, stock dividend,
subdivision, split up, combination, consolidation or other
reorganization of Common Stock) of common stock or equity securities;
(iv) 120 days after the Company effects the Reverse Split; or (v)
September 15, 2002; and
(e) Neptune Society would not, so long as: (i) CapEx or its affiliates
holds Debentures in the aggregate principal amount of $300,000 or
more, without the prior written consent of CapEx, and/or (ii) DHB or
its affiliates holds Debentures in the aggregate principal amount of
$200,000 or more, without the prior written consent of DHB: (A) issue
Equity Securities to cause the fully diluted capital of the Company
(after giving effect to the conversion of options, warrants and other
convertible securities, other than the Debentures) to exceed 6,250,000
shares of Common Stock, after giving effect to the Reverse Split,
unless such Equity Securities are issued for consideration in cash or
with a Fair Market Value in excess of $2.00 per share of common stock
(as calculated on a post Reverse Split basis); or (B) issue Equity
Securities to cause the fully diluted capital of the Company to exceed
7,500,000 shares of common stock, after giving effect to the Reverse
Split.
The Debenture Amendment Agreement was closed on March 15, 2002.
Effective at 5:00 p.m. (Eastern time) on March 22, 2002, Neptune Society
effected the 4:1 Reverse Split. On March 22, 2002, Neptune Society had 9,697,601
shares of common stock issued and outstanding and 25,000,000 shares of common
stock authorized for issuance. As a result of the Reverse Split, Neptune Society
had approximately 2,424,401 shares of common stock issued and outstanding and
6,250,000 shares of common stock authorized for issuance. Neptune Society filed
a current report on Form 8-K to report the Reverse Split on March 25, 2002. All
information contained in this report gives effect to the Reverse Split.
RISK FACTORS
We have included information in this Report that contains "forward looking
statements." Our actual results may materially differ from those projected in
the forward looking statements as a result of risks and uncertainties. Although
we believe that the assumptions made and expectations reflected in the forward
looking statements are reasonable, we cannot assure you that the underlying
assumptions will, in fact, prove to be correct or that actual future results
will not be different from the expectations expressed in this report. An
investment in our securities is speculative in nature and involves a high degree
of risk. You should read this Report carefully and consider the following risk
factors.
27
We have a history of losses and anticipate that we may continue to experience
losses in the future.
Since our acquisition of the Neptune Group of companies, we have had a
history of losses. We incurred losses of $1,890,000 during the nine-month period
ended December 31, 1999 and $8,839,000 and $10,304,000,respectively, during the
years ended December 31, 2000 and 2001. We had an accumulated deficit of
$1,890,000 at December 31, 1999, $10,729,000 at December 31, 2000 and
$21,032,000 at December 31, 2001, respectively. We anticipate that we will incur
losses for the foreseeable future until we successfully integrate our Spokane,
Washington, and Ankeny, Iowa operations and achieve operating efficiencies in
our business. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We cannot assure you
that we will ever successfully integrate our Spokane, Washington, and Ankeny,
Iowa operations or that we will achieve any operating efficiencies as a result
of our acquisitions.
In addition, the operations that we acquire in the future, even if
profitable when acquired, may incur operating losses pending their integration
into our business. Accordingly, there can be no assurance that we will not
continue to incur losses. Failure to achieve profitability could have a material
adverse effect on our business, results of operations and financial condition.
We have a limited operating history as a stand-alone company in the death care
industry.
Although our predecessors, the Neptune Group of companies, have operated
Pre-Need and At-Need cremation businesses, we have operated the Neptune Society
only since April 1999. See "History of our Company." Prior to our acquisition of
the Neptune Group of companies, we had no operating business. Accordingly, we
have only a limited operating history upon which an evaluation of our business
and its prospects may be based. Although we have experienced revenue and net
income growth in recent periods, there can be no assurance that our operations
will be profitable in the future or that we will be able to successfully
integrate and oversee the Neptune Group of companies and our acquisitions.
Failure to successfully integrate the operations of our offices and cremation
facilities and to implement our operating and growth strategy could have a
material adverse effect on our net revenue and earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We may not be able to execute our business strategy to acquire existing
crematory service providers unless we obtain additional financing.
Our business strategy is to grow through the opening of new offices
("start-ups") and selective acquisitions of existing cremation service providers
and to increase the performance of our existing operations. To date, we have
financed the acquisitions of the Neptune Group of companies and our Spokane,
Washington, Ankeny, Iowa, and Portland, Oregon acquisitions through a
combination of $2,110,000 in cash, 458,921 shares of Neptune Society common
stock, $21,000,000 in promissory notes, and $1,000,000 in a convertible
debenture. We may finance future acquisitions through bank indebtedness, cash
from operations, issuing common stock or other securities, or any combination of
these. In the event that our common stock does not maintain a sufficient market
value, or potential acquisition candidates are otherwise unwilling to accept our
common stock or other securities as part of the consideration for the sale of
their businesses, we may be required to use more of our cash resources or incur
substantial debt in order to finance future acquisitions. If we do not have
sufficient cash resources, our ability to
28
open new offices ("start-ups") or make selective acquisitions could be limited
unless we are able to obtain additional capital through debt or equity
financings. We cannot assure you that we will be able to obtain the financing we
will need in the future on terms we deem acceptable, if at all.
We may not be able to execute our business strategy to open new offices
("start-ups") or selectively acquire existing crematory service providers unless
we are able to effectively target new geographic market areas for "start-ups" or
acquisitions in a competing environment.
We cannot assure you that our current management, personnel and other
corporate infrastructure will be adequate to effectively target acquisitions and
then integrate them into our business without substantial costs, delays or other
operational or financial problems. In connection with certain acquisitions, we
may need certain licenses and approvals. Obtaining such licenses and approvals
could delay the closing of an acquisition.
Even though several major death care companies have reduced their ongoing
acquisition activities, we may be competing with several publicly held North
American death care companies, including Service Corporation International,
Stewart Enterprises, Inc. and Carriage Services, Inc. to selectively acquire
cremation service providers. Each of these other companies has greater financial
and other resources than us and has, in the past, actively engaged in acquiring
death care service providers in a number of markets. Because we are seeking to
acquire only cremation service providers, we limit the number of potential
acquisition targets available to us and consequently may not be able to execute
our business acquisition strategy.
The success of our "start-up" or selective acquisition plans depends on
several factors, including:
o our ability to identify suitable "start-up" or selective acquisition
opportunities;
o our ability to obtain a license to open a "start-up" or operate the
target acquisition;
o the level of competition for a "start-up" geographic area or selective
acquisition target;
o the "start-up" cost or purchase price for selective acquisitions;
o the financial performance of facilities after "start-up" or
acquisition; and
o our ability to effectively integrate the "start-up" or acquired
facilities' operations.
If we fail to achieve our "start-up" or selective acquisition plans or to
operate "start-ups" or acquired facilities and integrate them into our
operations, such failure could materially and adversely affect our business,
financial condition and results of operations.
We will not become a profitable business until we are able to fully integrate
our "start-ups" or selective business acquisitions into our existing
infrastructure.
Assuming that we are successful in completing "start-ups" or selective
acquisitions, we may not be able to effectively integrate them into our business
due to the geographic disparity of management personnel and the cost of
centralizing operations in our California head office. Part of our "start-up"
and acquisition strategy will be to recruit and retain key employees at new
"start-ups" or locations acquired and our failure to do so may result in a
decline in the performance of the continuing operations at those newly opened or
acquired locations. We may also experience increased costs related to the hiring
and training of new personnel, which may
29
adversely affect our ability to operate our newly opened "start-ups" or acquired
locations on a cost-effective basis.
A decline in death rates may impair our ability to become profitable in the
future.
As we continue to see improvements in technology related to health care
that may prolong life expectancy, we may experience a decline in expected death
rates. Such a decline, coupled with our current business strategy to expand
through acquisitions and increased performance of our existing operations, may
result in a decrease in the demand for our cremation services and adversely
affect our ability to become profitable. A decline in demand and revenues
together with increased costs resulting from our acquisitions may result in
increased losses and we may never achieve profitability.
A decline in the choice of cremation rather than burial services may impair our
ability to be profitable in the future.
Our business strategy is premised on the current trend in the death care
industry where consumers are selecting cremation services over the more
traditional burial services. We may be unable to achieve the growth in our
revenues necessary to operate profitably as we expand our operations and
increase our marketing and sales efforts. Our acquisition strategy is expected
to increase our costs of operations and a decline in the number of cremation
services may result in a decrease in our revenues, which may increase losses and
decrease the likelihood we will achieve profitability.
Our ability to execute our business plan is predicated on our ability to retain
key personnel with experience in the death care industry.
We depend to a large extent upon the abilities and continued efforts of
Marco Markin, our Chief Executive Officer and a director, David Schroeder, our
President and Chief Operating Officer and Rodney Bagley, our Chief Financial
Officer and Executive Vice President to provide overall direction and decision
making in developing and implementing our business strategy and identifying and
opening new "start-ups" and selectively acquiring existing cremation service
providers. We may incur additional costs and delays in our expected growth
should we lose these key personnel. In addition, our success is also determined
by offering quality Pre-Need and At-Need cremation services, which are
supervised by our senior management team. The loss of the services of the key
members of our senior management could have a material adverse effect on our
continued ability to compete in the death care industry through delivery of
quality services to consumers.
In the event that we are not able to comply with the substantial regulations
under which we operate, we may be subject to business operation closures, fines
and penalties.
The death care industry is subject to regulation, supervision and licensing
under numerous federal, state and local laws, ordinances and regulations,
including extensive regulations concerning trust funds, Pre-Need sales of
cremation products and services, and various other aspects of our business. The
impact of such regulations varies depending on the location of our offices and
facilities and failure to comply with such regulations may result in business
closures, fines and penalties; all of which may affect the profitability of our
business.
From time to time, states and other regulatory agencies have considered and
may enact additional legislation or regulations that could affect the death care
industry and in particular our
30
ability to be profitable. For example, some states and regulatory agencies have
considered or are considering regulations that could require more liberal refund
and cancellation policies for Pre-Need sales of products and services, prohibit
door-to-door or telephone solicitation of potential customers, increase trust
requirements and prohibit the common ownership of funeral homes and crematoriums
in the same market. If adopted in the states in which we operate, these and
other possible proposals could have a material adverse effect on our
profitability.
Your investment in our shares may be diluted in the event that we may be
required to sell additional common stock or parties exercise options and
warrants or the conversion of convertible debentures.
As at December 31, 2001, we had issued warrants exercisable to acquire up
to 88,750 shares of our common stock at prices between $12.00 and $50.00 per
share. We have an aggregate of 225,000 shares of our common stock reserved for
issuance to our employees, directors and consultants under our 1999 Stock
Incentive Plan. We have granted options exercisable to acquire up to 106,688
shares of our common stock at $47.00 per share, 38,500 shares of our common
stock at $48.48 per share, 3,750 shares of our common stock at $56.00 per share,
21,250 shares of our common stock at $53.00 per share, 250 shares of our common
stock at $57.00 per share, 89,750 shares of our common stock at $10.00 per share
and 2,500 shares of our common stock at $3.64 per share to our employees,
officers, directors, trustees, and area sales representatives. We have also
granted options exercisable to acquire 392,046 shares of our common stock at
$4.40 under certain executive employment agreements. See "Executive
Compensation".
As at March 15, 2002, we had issued convertible debentures in the aggregate
principal amount of $5,000,000, which were convertible at $3.00 per share, and
$75,000, which were convertible at $0.333333 per share. Each of these debentures
had certain anti-dilution rights in the event we effected a reverse stock split.
On March 22, 2002, we effected a 4:1 reverse split, which triggered the
anti-dilution rights.
Subsequent to December 31, 2001, we also issued 243,750 shares of our
common stock in connection with restructuring debt agreements and extending debt
payments. See "Oregon Acquisition - Disposition of Portland Assets and Related
Transactions - Green Leaf Bridge Loan" and "Description of Business - Other
Events." The Company issued 6,250 shares of its common stock in connection with
the employment of certain senior staff.
Holders of the options and warrants are likely to exercise them when, in
all likelihood, we could obtain additional capital on terms more favorable than
those provided by the options. This will increase the supply of common stock and
dilute your investment in our shares. However, we cannot make assurances that
such options will be exercised. Further, while the options are outstanding, our
ability to obtain additional financing on favorable terms may be adversely
affected as investors may not invest given the possibility of dilution through
exercise of options.
We have issued securities that have certain anti-dilution rights, which could
require us to issue the holders of such securities additional shares, causing
dilution to shares held by you.
We provided anti-dilution rights in connection with the issuance of 13%
convertible debentures issued to CapEx and DHB on December 30, 1999, which were
amended to provide certain anti-dilution protection in the event we effected a
reverse split of our common stock. See
31
"Description of Business - Other Events". On March 21, 2002, we issued a
convertible debenture in the principle amount of $75,000 convertible into shares
of common stock at $0.333333 per share with certain anti-dilution rights, in the
event Neptune Society effects a reverse split of its common stock. See "Oregon
Acquisition - Disposition of Portland Assets and Related Transactions - Green
Leaf Bridge Loan." On March 22, 2002 we effected a 4:1 reverse split, which
triggered the anti-dilution rights granted to CapEx , DHB and Green Leaf. After
giving effect to the 4:1 reverse split, the holders of the debentures may
acquire a total of 1,891,667 (post-split) shares of our common stock. To the
extent we are required to issue additional securities as a result of these or
similar rights, it will increase the number of issued and outstanding common
stock and dilute your investment in our shares.
We have agreed to pay certain persons a percentage of the revenues from the
operations of our Spokane, Washington and Ankeny, Iowa operations, which will
affect the profitability of these operations.
In connection with our acquisitions of Spokane, Washington, and Ankeny,
Iowa operations, we agreed to pay the former owners of these businesses a
percentage of the gross revenues and/or earnings before income tax, depreciation
and amortization ("EBITDA") as follows:
o to the former owners of our Spokane, Washington operations 3% of gross
revenues and 12.5% of the EBITDA for the twelve month period ending
December 31, 2000; 2.75% of gross revenues and 12.5% of EBITDA for the
twelve month period ending December 31, 2001; 1% of gross revenues and
7.5% of EBITDA for the twelve month periods ending December 31, 2002
and 2003, from our Spokane, Washington operations; and provided that
John C. Ayres and/or Charles S. Wetmore continue to be employed by us,
10% of EBITDA during each year ending December 31 commencing after
January 1, 2005; and
o to the former owners of our Iowa operations 3% of gross revenues for
the twelve month period ending August 1, 2001; 19% of gross revenues
for the twelve month period ending August 1, 2002, provided that gross
revenues equal or exceed $750,000 and EBITDA equals or exceeds
$175,000 for each twelve month period of time.
Our agreements to pay a percentage of our revenues and/or profits from our
Spokane, Washington and Ankeny, Iowa operations to the former owners will have a
material affect on our profitability. In the future, we may negotiate additional
acquisitions where we agree to share our revenues and/or profits. We cannot
assure you that we will generate sufficient profits from our operations to meet
these obligations and achieve profitability.
We have substantial debt obligations that may affect our future profitability
At December 31, 2001, we had outstanding approximately $10,182,000
principal amount of debt, excluding accrued interest of $673,000, at an average
interest rate of 19.4% per annum. Of the principal amount of our total debt,
$2,890,000 (considering discount) becomes due in the year ending December 31,
2002; $2,223,000 (considering discount) becomes due in the year ending December
31, 2003; $69,000 (considering discount) becomes due in the year ending December
31, 2004 and $5,000,000 becomes due in the year ending December 31, 2005. Debt
becoming due in fiscal years 2003 and 2005, respectively, are convertible in
nature and can be
32
redeemed for common stock of the Company. Certain convertible debt has a
discount recorded that reduces its carrying value. It is unforeseeable as to
whether debt holders will opt for redemption. During the years ended December
31, 2001, December 31, 2000 and the nine months ended December 31, 1999, total
interest expense was approximately $2,515,000, $2,485,000 and $1,184,000,
respectively.
On December 31, 2001, under the terms of a series of debt restructuring
agreements with the Weintraub Trust, the outstanding balance due under the $19
Million Note due to the Weintraub Trust was $2,392,000. Under the terms of the
debt restructuring effective as of November 22, 2001, the $19 Million Note as
follows: (i) $500,000 on or before January 2, 2002 (paid), (ii) eighteen monthly
installments of $78,471 beginning January 2002, and (iii) the remaining
principal balance of approximately $1,429,000 due on July 31, 2003. We
anticipate that we may increase our debt as we acquire additional death care
service operations and open new offices. In the future, we may issue additional
notes or convertible debentures. There can be no assurance that we will generate
sufficient cash flow or obtain sufficient financing to satisfy these
obligations. If we are unable to satisfy these obligations as they become due,
there can be no assurance that we will be able to obtain extensions on the
maturity dates of the notes or of the convertible debenture.
Cancellations of existing Pre-Need contracts may have a material adverse effect
on our future profitability.
We anticipate that a significant portion of our future revenues will be
derived when we perform services under our Pre-Need contracts. We are required
to place a percentage of the funds we receive from the sale of our Pre-Need
programs in trust until we perform the cremation service. At that time, we are
able to recognize revenue from the sale of the Pre-Need service. Currently, we
manage approximately $40 million in trust funds for the benefit of our members.
Although each state has different regulatory requirements regarding the trust
funds, the states in which we conduct business, California, Colorado, Iowa,
Florida, Oregon and Washington, require us to refund all or a portion of trust
monies to our members that cancel their Pre-Need contracts. See "Government
Regulation." Historically, our cancellation rate has been approximately 1% on an
annual basis. Any substantial increase in cancellations may have a material
adverse affect on our future revenues and results of operations.
In the event that your investment in our shares is for the purpose of deriving
dividend income or in expectation of an increase in market price of our shares
from the declaration and payment of dividends, your investment will be
compromised because we do not intend to pay dividends.
We have never paid a dividend to our shareholders and we intend to retain
our cash for the continued development of our business. We do not intend to pay
cash dividends on the common stock in the foreseeable future. As a result, your
return on investment will be solely determined by your ability to sell your
shares in a secondary market.
Broker-dealers may be discouraged from effecting transactions in our shares
because they are considered penny stocks and are subject to the penny stock
rules
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of
1934, as amended, impose sales practice and disclosure requirements on NASD
brokers-dealers who make a market in "a penny stock." A penny stock generally
includes any non-NASDAQ equity
33
security that has a market price of less than $5.00 per share and stock quoted
on the NASD OTCBB. Our shares are quoted on the NASD OTCBB, and the price of our
shares ranged from $1.60 (low) to $36.50 (high) during the year ended December
31, 2001 and from $1.60 (low) to $6.72 (high) during the three month period
ended December 31, 2001. The closing price of our shares on March 28, 2002 was
$2.15. Purchases and sales of our shares are generally facilitated by NASD
broker-dealers who act as market makers for our shares. The additional sales
practice and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to
anyone other than an established customer or "accredited investor" (generally,
an individual with net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse) must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt.
In addition, the penny stock regulations require the broker-dealer to
deliver, prior to any transaction involving a penny stock, a disclosure schedule
prepared by the Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also
required to disclose commissions payable to the broker-dealer and the registered
representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
Our ability to be profitable is premised on our ability to compete effectively
in a highly competitive industry.
The death care service industry is intensely competitive and rapidly
evolving with the consolidation efforts of our competitors. Unless we can be
competitive, we will lose revenue to our competitors and will not be able to be
profitable. Our competitors are small independent death care service providers
and large publicly traded companies, including Carriage Services which owns or
operates more than 176 funeral homes and over 38 cemeteries in the United
States, Service Corporation International, which operates more than 3,700
funeral service locations worldwide, and Stewart Enterprises, Inc., which owns
and operates over 700 funeral homes and cemeteries worldwide. These competitors
also offer cremation services that compete directly with our services and
products. We also compete on a local basis to provide services in communities
with service providers that have established reputations and long histories of
operations.
ITEM 2. PROPERTIES
We lease properties in eighteen locations in Arizona, California, Florida,
Iowa, New York, Oregon and Washington. There are three sales offices in
California, three in Florida, one in Iowa, two in New York, one in Oregon and
two in Washington. Two of the offices in Florida and the office in Iowa have
chapels for funeral services. We lease two properties for holding facilities,
one of which also stores merchandise inventory and the other has the crematory.
We
34
also lease our corporate offices in Florida and Los Angeles. We lease a call
center in Tempe, Arizona. All of our leases are on standard terms and
conditions, and we do not rely on any one lease for its continuing operations.
The operations are currently concentrated at the following locations:
Summary of our operational locations
------------------------------------
Location Operation Term of Lease Expiration Date
-------- --------- ------------- ---------------
Arizona
Tempe Telemarketing center 3 years 10/31/2002
California
Burbank-Corporate Administration and operations headquarters 2 years 10/14/2002
Burbank Sales and administrative office 6 years 8/31/2005
San Pedro Pre-Need/At-Need sales and administrative office 10 years 3/31/2002
Santa Barbara Pre-Need/At-Need sales and administrative office 2 years 7/31/2002
Los Angeles - Holding facility, crematory and viewing room 10 years 1/31/2002
Heritage Santa Holding facility and inventory warehouse Monthly
Barbara/Ventura
Canoga Park Inventory warehouse Monthly
Colorado
Arvada Pre-Need/At-Need sales and administrative office 4 Years 9/1/2005
Florida
Miami Pre-Need/At-Need sales and administrative office and 5 years 9/12/2003
chapel
Fort Lauderdale Pre-Need/At-Need sales and administrative office and 10 years 9/3/2006
chapel
St. Petersburg Pre-Need/At-Need sales and administrative office 5 years 8/31/2006
Iowa
Ankeny Pre-Need/At-Need sales and administrative office, 5 years 10/14/2003
crematory and chapel
Oregon
Portland Pre-Need sales and administrative office 1 Year 8/31/2002
New York
Long Island At-Need sales and administrative office Monthly
Yonkers At-Need sales and administrative office Monthly
Washington
Spokane Pre-Need/At-Need sales and administrative office, 6 years 1/01/2005
holding facility, crematory and viewing room
Everett Pre-Need/At-Need sales and administrative office 1 year 5/31/2002
Denver Pre-Need/At-Need sales and administrative 3 years 8/1/2006
35
ITEM 3. LEGAL PROCEEDINGS
Leneda Litigation
On May 15, 2000, Leneda, Inc. dba Neptune Society of San Diego County, San
Bernardino County, Riverside County, and Imperial County filed a Complaint for
service mark infringement, breach of contract, unfair business practices, and
interference with prospective economic advantage in the United States District
Court in and for the Central District of California (Honorable Gary A. Fees).
Both Leneda and we operate under the service mark "Neptune Society", and the
concurrent use of that mark was the subject of a lawsuit before the U.S. Patent
and Trademark Office, which stretched from 1986 to 1995. We and Leneda were
parties to that lawsuit, which was resolved through a settlement agreement that,
in essence, divided up the territories in which the parties could use the mark.
Leneda received exclusive rights in four southern California counties and we
received rights for use in some limited areas in the Los Angeles, California
area and outside of California. Subsequent to the settlement, we had an
arrangement with Leneda whereby Leneda would perform at-need services for
certain of the pre-need contracts sold within Leneda's territories. Leneda's
lawsuit alleges that we unlawfully used a trademark, "Neptune Society", for
certain services in a prohibited geographic area defined by the settlement
agreement.
On October 22, 2001, the Company entered into a settlement and
confidentiality agreement, effective August 8, 2001 (the "Settlement
Agreement"), by and among Leneda, Inc., a California corporation, doing business
as Neptune Society of San Diego County, Neptune Society of San Bernardino
County, Neptune Society of Riverside County and Neptune Society of Imperial
County ("Leneda"); the Registrant, Neptune Management Corporation, a California
corporation, Neptune Society of Florida, Inc., a Florida corporation, Heritage
Alternatives, Inc., a California corporation, Heritage Alternatives, L.P.,
Neptune-Los Angeles, Ltd., Neptune-Santa Barbara, Ltd., Neptune-St. Petersburg,
Ltd., Neptune-Fort Lauderdale, Ltd., and Neptune-Miami, Ltd. (collectively,
"Neptune Society"), and Emanuel Weintraub, individually ("Weintraub"). The
Settlement Agreement provided for the dismissal of the lawsuit filed by Leneda
(the "Leneda Litigation"). The "Neptune Society" Service Mark is the subject of
the United States Patent and Trademark Office's Trademark Trial and Appeals
Board Concurrent Use Order No. 871 and a 1995 Settlement Agreement pertaining
thereto.
Under the terms of the Settlement Agreement, Neptune Society and Leneda
entered into a Service Agreement under which Leneda agreed to be the sole
service provider of fulfillment cremation services for a total of 7,300 existing
pre-need contracts (the "Relevant Contracts"), which were either executed in or
otherwise indicate that the contract holder resided within the counties of San
Diego, San Bernardino, Riverside and Imperial, all located in the state of
California. These fulfillment services will be provided by Leneda for a
specified price, which will be paid from the proceeds of the amount trusted for
the beneficiary of the Relevant Contract with the remaining balance in the
trust, if any, paid to the Neptune Society in accordance with the terms of the
trust. Neptune Society also granted to Leneda a security interest in the
Relevant Contracts to secure performance of the Neptune Society's obligations
under the Service Agreement and the Settlement Agreement. Leneda and Neptune
Society each agreed to implement appropriate procedures to ensure that the
36
Service Mark would be used in a manner consistent with the United States Patent
and Trademark Office's Trademark Trial and Appeals Board Concurrent Use Order
No. 871 and a 1995 Settlement Agreement. Neptune Society's insurers agreed to
pay Leneda $900,000 under the terms of the Settlement Agreement.
In connection with the Settlement Agreement, Neptune Society agreed to
release any and all claims for indemnification against Weintraub under the terms
of the Share Purchase Agreement dated March 26, 1999. Weintraub agreed to
subordinate a security interest in the Relevant Contracts to Leneda.
Except as set forth above, there is no other material litigation pending
against us. From time to time, we may become a party to litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, we believe that the final outcome
of such matters will not have a material adverse effect on our business,
financial condition, operating results and cash flows.
California Administrative Proceeding
During March 1998, the Department of Consumer Affairs, Funeral and Cemetery
Division (the "Department") commenced an administrative proceeding alleging
various statutory and regulatory violations arising from an incident occurring
at the Heritage Crematory. This proceeding was settled by the Predecessor
Company agreeing to sell its business by a date certain or surrender its funeral
director's license. A sale of the Predecessor Company to Lari Corp, Inc. (see
Note 1 to the Consolidated Financial Statements) was concluded in March 1999.
The Department granted us a transfer of the funeral establishment license on
July 22, 2000, with the same probationary terms and conditions applicable to the
Neptune Group. These conditions require us to comply with the California
regulatory requirements related to our business of providing cremation services
and marketing pre-need plans for one year, or as long as Mr. Weintraub continues
to be a shareholder of the Company.
We may become a party to other legal proceedings in the ordinary course of
our business. We do not expect the outcome of any of the above or other
proceedings, individually or in the aggregate, to have a material adverse effect
on our financial statements taken as a whole or our liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Registrant's securities holders
during the fourth quarter ended December 31, 2001, or any subsequent period to
the date of this report.
37
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 26, 1998, the common shares of the Neptune Society were listed
under its former name Lari Corp. on the NASD OTC Bulletin Board under the symbol
"LREE". On May 3, 1999, Lari Corp. changed its name to Neptune Society and on
May 4, 1999, the symbol was changed to "NPTN". In March, 2000, the common stock
of the Neptune Society was de-listed from the NASD OTCBB, and began quotation on
the National Quotation Bureau's pink sheets. On May 19, 2000, after affecting a
reverse stock split, the symbol for Neptune Society's common stock was changed
to "NTUN". On August 2, 1999, 2001, our common stock began quotation on the
OTCBB. On March 22, 2002, Neptune Society effected a 4:1 reverse stock split and
the symbol for its common stock was changed to "NPTI". Information in this
report gives effect to the reverse stock split effected on March 22, 2002.
The high and low bid quotations of our common stock on the NASD OTC
Bulletin Board as reported by the NASD for each of the quarterly periods from
January 1, 2002 through March 31, 2000, and the National Quotation Bureau's pink
sheets for period beginning April 1 through December 31, 2001 were as follows:
Period High(1) Low(1)
- ------ ------- ------
2000
First Quarter $53.00 $41.00
Second Quarter(2) $57.00 $53.50
Third Quarter(2) $56.50 $49.75
Fourth Quarter(2) $53.50 $30.00
2001
First Quarter(2) $36.50 $6.40
Second Quarter(2) $24.80 $8.50
Third Quarter(2) $24.72 $5.60
Fourth Quarter(2) $6.72 $1.60
- -----------------------
(1) Gives effect to the two for one reverse stock split that occurred on May
19, 2000, and the four for one reverse split effected on March 22, 2002.
(2) Based on National Quotation Bureau pink sheet quotation.
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
As of March 28, 2002, the closing bid quotation for our common shares was
$2.15.
As of March 28, 2002, we had 107 registered shareholders.
The declaration of dividends on our shares is within the discretion of our
board of directors and will depend upon the assessment of, among other factors,
earnings, capital requirements and the operating and financial condition of
Neptune Society. The Board has never declared a dividend. At the present time,
we anticipate that all available funds will be invested to finance the growth of
our business.
38
Recent Sales of Unregistered Securities
In March 2001, Neptune Society agreed to issue 10,000 additional shares of
its common stock to John Bethel and David Noftsger, the co-founders and
shareholders of Cremation Society of Iowa, in consideration for deletion of the
"Contingent Purchase Price" provisions of the Cremation Society of Iowa, Inc.
See "Description of Business - Neptune Society Acquisitions - Iowa Acquisition -
Second Amendment of Iowa Acquisition." The shares were issued to two
shareholders pursuant to an exemption from the registration requirement
available under Section 4(2) of the Securities Act of 1933, as amended.
In June 2001, Neptune Society issued 739 shares of common stock to the
former owners of the Spokane, Washington property in a private transaction
pursuant to the purchase agreement. See, "Description of Business - Neptune
Society Acquisitions - Spokane, Washington Acquisition." The agreement required
an adjustment to the number of original shares issued to the extent Neptune
Society's stock traded below a certain price on January 2, 2001. Neptune
Society's stock traded below that price which triggered the issuance of the
above mentioned shares. The shares were issued to two shareholders pursuant to
an exemption from the registration requirement available under Section 4(2) of
the Securities Act of 1933, as amended.
In August 2001, Neptune Society issued 140,424 shares of common stock to
the former owners of the Portland Business in a private transaction pursuant to
the purchase agreement. See "Description of Business - Neptune Society
Acquisitions - Oregon Acquisition." The agreement required an adjustment to the
number of original shares issued to the extent Neptune Society's stock traded
below a certain average price for a sixty day period immediately prior to July
5, 2001. Neptune Society's stock traded below that price which triggered the
issuance of the above mentioned shares. The shares were issued to two
shareholders pursuant to an exemption from the registration requirement
available under Section 4(2) of the Securities Act of 1933, as amended.
In August 2001, Neptune Society issued Green Leaf Investors II, LLC, 3,948
shares of common stock and a warrant exercisable to acquire 7,500 shares of
common stock at $24.00 per share for a period of one year. See "Description of
Business - Oregon Acquisition - Disposition of Portland Assets and Related
Transactions - Green Leaf Bridge Loan." The shares and warrant were issued in a
private transaction as a loan fee in connection with a short term $1,500,000
loan, pursuant to an exemption from the registration requirement available under
Section 4(2) of the Securities Act of 1933, as amended.
In August, 2001, Neptune Society issued a total of 13,750 shares of Neptune
Society common stock to Weintraub's nominees, each an accredited investor as
that term is defined under Rule 501(a) of Regulation D, promulgated under the
Securities Act of 1933, as amended. See "Description of Business - Neptune
Society Acquisitions - Neptune Group Acquisition." The shares were issued
pursuant to an exemption from the registration requirements available under Rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
In December 2001, Neptune Society issued a total of 75,000 shares of
Neptune Society common stock to Weintraub's nominees, each an accredited
investor as that term is defined under Rule 501(a) of Regulation D, promulgated
under the Securities Act of 1933, as amended.
39
See "Description of Business - Neptune Society Acquisitions - Neptune Group
Acquisition." The shares were issued in a private transaction pursuant to an
exemption from the registration requirement available under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
In June 2001, we have granted options exercisable to acquire 392,046 shares
of stock at $1.10 under certain Executive Employment Agreements. The shares were
issued in a private transaction pursuant to an exemption from the registration
requirement available under Section 4(2) of the Securities Act of 1933, as
amended.
Subsequent Events
In February, 2002, Neptune Society issued 25,000 shares, and cancelled
3,750 shares previously issued in October 2001, of Neptune Society common stock
to Dorsey & Whitney LLP in connection with a fee restructuring agreement to
restructure our obligations of approximately $460,000 in accrued and unpaid
legal fees and expenses. The shares were issued in a private transaction
pursuant to an exemption from the registration requirement available under Rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
In March, 2002, Neptune Society issued Green Leaf in a private transaction
75,000 shares of common stock as a loan extension fee and a convertible
debenture in the principal amount of $75,000 convertible into shares of common
stock at $0.333333 per share, subject to certain anti-dilution rights. See
"Description of Business - Oregon Acquisition - Disposition of Portland Assets
and Related Transactions - Restructuring of Green Leaf Bridge Loan." The shares
and the convertible debenture were issued pursuant to an exemption from the
registration requirement available under Section 4(2) of the Securities Act of
1933, as amended.
In March 2002, Neptune Society issued CapEx 101,250 shares of common stock
and DHB 67,500 shares of common stock in a private transaction as a debenture
restructuring fee. See "Description of Business - Other Events." The shares were
issued in a private transaction pursuant to an exemption from the registration
requirement available under Section 4(2) of the Securities Act of 1933, as
amended.
In March, 2002, we issued 6,250 shares of our common stock in connection
with the employment of certain senior staff. The shares were issued in a private
transaction pursuant to an exemption from the registration requirement available
under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below as of and for the years
ended December 31, 2001, 2000, the nine months ended December 31, 1999 and the
three months ended December 31, 1999 are derived from the consolidated financial
statements of the Neptune Society. See Item 8 "Financial Statements and
Supplementary Data".
On March 31, 1999, the Registrant, Neptune Society (formerly known as, Lari
Corp.), acquired a group of corporations and limited liability partnerships,
which marketed and administered Pre-Need and At-Need cremation services under
the name "Neptune Society" (the "Neptune Group"). See "Description of
Business--Neptune Society Acquisitions--Neptune
40
Group Acquisitions." The business combination was accounted for using the
purchase method of accounting, and the excess of the purchase price over the
fair value of identifiable net tangible assets acquired has been recorded as
names and reputations. The financial information for Neptune Society prior to
April 1, 1999 has not been included as it is not material to the Neptune Group
financial statements. The financial data as of and prior to March 31, 1999 is
the combined financial information of the Neptune Group. Since purchase
accounting was reflected on the opening balance sheet of the Successor Company
on April 1, 1999, the financial information of the Successor Company are not
comparable to the financial information of the Predecessor Company. Accordingly,
a vertical black line is shown to separate Successor Company financial
information from those of the Predecessor Company for periods ended prior to
April 1, 1999.
The pro forma information for the year ended December 31, 1999 reflects the
combined results of the Predecessor and Successor as if the acquisition of the
Predecessor had occurred on January 1, 1999, subject to certain assumptions and
adjustments. The pro forma information has been derived from the historical
consolidated financial statements of the Predecessor and Successor and are
qualified in their entirety by reference to, and should be read in conjunction
with, such historical consolidated financial statements and related notes
thereto. The pro forma information are presented for illustrative purposes only
and do not purport to be indicative of the operating results or financial
position that would have actually occurred if the acquisition had occurred on
the date indicated, nor are they necessarily indicative of future operating
results or financial position of the combined company. The pro forma information
gives effect to any cost savings or synergies which may result from the
integration of the Predecessor and Successor operations.
Predecessor Company Successor Company
Three Months Nine Months Pro forma
Ended Ended
Year Year Year
Ended Ended Ended
December 31, December December December December
1997 1998 1999 31, 1999 31, 2000 31, 2001 31, 1999
-------------------------------- -------------------------------------------
000's, except per share amount (000's, except per share amount)
INCOME STATEMENT DATA:
Total Revenue 8,966 7,865 2,962 5,688 7,689 13,030 8,650
Gross Profit 5,304 4,107 1,763 3,436 3,237 6,767 5,199
General and Administrative Expenses 2,907 2,847 748 3,032 6,003 7,798 3,780
Compensation to Principal Shareholder 1,841 2,200 430 - - - -
Professional Fees 245 669 536 340 1,245 1,765 959
Amortization and Depreciation Expense - - - 1,024 1,685 2,082 1,365
Interest Expense - - - 1,184 2,485 2,515 (1,690)
Income (loss) before cumulative effect
of change in accounting principle 311 (1,609) 49 (1,890) (8,435) (10,151) (2,297)
Net Income/(loss) 311 (1,609) 49 (1,890) (8,839) (10,151) (2,297)
Loss before cumulative effect of
change in accounting principle per share - - - (1.23) (4.75) (5.09) (1.52)
Loss per share - - - (1.23) (4.98) (5.09) (1.52)
Predecessor Company Successor Company
Three Months Nine Months Pro forma
Ended Ended
Year Year Year
Ended Ended Ended
December 31, December December December December
1997 1998 1999 31, 1999 31, 2000 31, 2001 31, 1999
-------------------------------- -------------------------------------------
000's, except per share amount (000's, except per share amount)
BALANCE SHEET DATA:
Current Assets 2,008 835 1,172 7,046 1,421 2,078 -
Current Liabilities 491 647 916 11,730 8,281 6,069 -
Long Term Debt - - - 5,722 101 2,292 -
Convertible Debentures - - - 4,438 5,937 5,000 -
Shareholders Equity 2,578 808 792 12,385 16,108 7,023 -
OTHER FINANCIAL DATA:
Number of Offices 10 10 10 13 18 18 -
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 2000 and ending
December 31, 2001 as well as the percentage of the Company's revenue represented
by each item. The unaudited financial statements have been prepared on the same
basis as the audited financial statements contained herein and include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary to present fairly this information when read in conjunction
with the Company's audited financial statements and the notes thereto appearing
elsewhere in this report. In view of the Company's recent growth, its recent
acquisitions and other factors, the Company believes that quarterly comparisons
of its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2001:
Net revenues $ 2,689 3,184 3,854 3,302
Gross profit 1,304 1,797 2,250 1,416
Operating loss (1,172) (1,243) (412) (4,809)
Loss before cumulative effect of
change in accounting principle (1,791) (1,669) (1,083) (5,608)
Net loss (1,791) (1,669) (1,083) (5,608)
Loss before cumulative effect of change
in accounting principle per share (0.92) (0.88) (0.52) (2.68)
Basic net loss per share(1) $ (0.92) (0.88) (0.52) (2.68)
41
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net revenues $ 1,602 1,664 1,992 2,430
Gross profit 651 631 747 1,208
Operating loss (1,407) (1,367) (1,691) (1,231)
Loss before cumulative effect of
change in accounting principle (1,855) (1,789) (3,144) (1,647)
Net loss (2,259) (1,789) (3,144) (1,647)
Loss before cumulative effect of change
in accounting principle per share (1.12) (1.04) (1.72) (0.88)
Basic net loss per share(1) $ (1.36) (1.04) (1.72) (0.88)
1) Net income per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
Gives effect to the 4:1 reverse split effected on March 22, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the consolidated financial
statements and accompanying notes.
Overview
We are a provider of pure cremation services in North America. As of March
28, 2002, we operate 19 locations serving California, Colorado, Florida, Iowa,
Oregon, New York, and Washington. Our strategy is to grow by: (i) s initiating
start-up operations; (ii) electively acquiring small, family-owned cremation
service providers strategically located across North America ; (iii) operating
all our locations under one nationally branded name, "The Neptune Society"
(where permitted); (iv) avoiding direct competition with corporate consolidators
by concentrating solely on cremation services and cremation products; and (v)
improving revenue and profitability of newly acquired operations by
consolidating administrative and management functions within our organization.
We believe that implementing these initiatives are critical to achieving
profitability and are our most important challenges in competing effectively in
the death care industry.
Critical Accounting Policies:
We recognize revenue according to the following:
At-need cremation services--We recognize revenue on at-need cremation
services and merchandise sales at the time the services are provided and the
merchandise is delivered.
Pre-need cremation arrangements--We sell pre-need cremation services and
merchandise under contracts that provide for delivery of the services at the
time of need. Revenues related to pre-need cremation services are recorded as
revenue in the period the services are performed.
Prior to 2000, revenue related to merchandise sold with a pre-need
cremation service arrangement was recognized upon meeting certain state
regulatory criteria, which, in California, Iowa, Washington and Oregon may be
prior to the performance of cremation services. The Company considered such
criteria met when the Company was permitted to receive one hundred
42
percent of the unrestricted funds associated with the merchandise sale, the
merchandise was in a condition for its intended use and the Company did not
retain any specific performance obligations essential to the functionality of
the merchandise, the customer accepted the merchandise as evidenced by a written
transfer of title to the customer and certificate of ownership, and, if the
customer so requested, the Company stored the merchandise in an insured location
on the customer's behalf until customer pick-up or the time of need, but no
later than the customer's death. Customers that purchase pre-need cremation
arrangements do not have cancellation rights with respect to the purchase of
merchandise.
In response to SAB No. 101, the Company changed its revenue recognition
accounting policy with respect to merchandise sold in a pre-need arrangement to
include certain conditions beyond current state regulations. As of January 1,
2000, the Company added the following criteria related to its revenue
recognition policy for the sale of merchandise: (i) a definitive delivery date,
(ii) stored merchandise is required to be segregated and specifically identified
by customer, (iii) a customer's merchandise is labeled or marked for such
customer and may not be used to fill another customer's order, and exchange for
a different piece of merchandise in the future is remote. In addition, the
merchandise must not be subject to claims of the Company's creditors, the risks
and rewards of merchandise ownership must have transferred to the customer, and
the Company's custodial risks are insurable and insured. The Company shall defer
pre-need merchandise sales until such time as the merchandise has been
physically delivered or upon satisfaction of the additional criteria noted. The
Company recognizes revenue on the sale of future pre-need merchandise sales upon
the physical delivery of the merchandise or upon the satisfaction of the
Company's current revenue recognition policy criteria outlined above.
During the four month period beginning June 1, 2001 and ending September
30, 2001, we recognized pre-need merchandise revenue in accordance with our
revenue recognition policy.
Effective on October 1, 2001, the Company adopted changes to its inventory
management policy in an effort to reduce expenses related to storing certain
delivered merchandise in connection with the sale of pre-need contracts. The
Company will continue to deliver and store certain merchandise sold in
connection with pre-need sales contracts as required by applicable law, but
because this certain merchandise is identical in each pre-need contract, the
Company will no longer segregate and specifically identify such merchandise by
customer. As a result of this change in inventory management policy, the Company
will not continue to recognize revenue on the sale of certain future pre-need
merchandise sales. This change in inventory management is expected to result in
an immediate improvement in the Company's cash flow.
Florida and New York do not allow us to deliver cremation merchandise prior
to the provision of cremation services, and as such, revenue related to
merchandise sold with a pre-need cremation arrangement in these states is not
recognized until the merchandise is delivered, which is generally concurrent
with the period services are performed.
We are allowed under state regulations in Iowa, Washington, Oregon and
Florida to retain certain cash receipts received related to services to be
performed in the future. These cash receipts are recorded as deferred revenue
and recognized when services are provided.
43
Pre-need installment sales--We also sell pre-need cremation arrangements
under installment plans. Under such plans, the customer makes an initial
down-payment and pays the balance in monthly installments plus interest. To the
extent that cash received is not trusted, the Company accounts for this cash as
deferred revenue until the transaction qualifies for revenue recognition under
our accounting policies. Prior to January 1, 2001, due to the uncertainty of
collections of these accounts, we recorded these transactions in accordance with
our revenue recognition accounting policies as cash was received. Subsequent to
December 31, 2000, we record these transactions in accordance with our revenue
recognition accounting policies on an accrual basis.
Worldwide travel sales--We sell a worldwide travel assurance plan (the
"plan") which guarantees the provision of cremation services anywhere in the
world to the extent the plan holder is more than 75 miles away from their legal
residence at the time of death. The plan is underwritten by a third party
carrier who receives a premium payment, and is obligated to perform services if
the above criteria is met. The Company recognizes revenue related to these plans
at the time of sale. We also sell worldwide travel plans under installment
plans. Under such plans, the customer makes an initial down-payment and pays the
balance in monthly installments plus interest.
Commission income-- Under pre-need cremation services and merchandise
arrangements funded through insurance purchased by customers from third party
insurance companies, we earn a commission on the sale of the policies.
Commission income, net of related expenses, are recognized at the point at which
the commission is no longer subject to refund, generally 3 to 5 days after the
contract is sold. Policy proceeds are paid to us as cremation services and
merchandise are delivered.
Direct and indirect costs--We expense direct and indirect costs in the
period incurred, with the exception of expenses specifically identifiable to
individual pre-need cremation arrangements, such as commissions. Such expenses
are recognized when the related pre-need merchandise and/or service revenues,
respectively, are recognized.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000:
Results of Operations
The following discussion compares the operations of the registrant for the
year ended December 31, 2001 to the operations of the registrant for the three
and year ended December 31, 2000.
Revenues
In May 2001, the Company changed its inventory procedures and sales
contracts to conform to its revised revenue recognition policy. Under the
Company's revised revenue recognition policy, the Company recognizes certain
pre-need merchandise revenues from the sale of pre-need contracts prior to the
performance of the related cremation service.
Cremation service and merchandise revenues were $11,775,000 for the year
ended December 31, 2001 compared to $6,188,000 for the same period in 2000.
Revenues increased $4,195,000 or
44
90% due to the recognition of pre-need merchandise revenue, increased at-need
revenues and travel assurance product offering. During the four month period
beginning June 1, 2001 and ending September 30, 2001, the Company recognized
pre-need merchandise revenues of $1,804,000. Effective October 1, 2001, the
Company changed its inventory management policy and no longer recognized revenue
on the sale of pre-need merchandise. The introduction of the Worldwide Travel
Assurance Plan (the "Travel Plan"), which was introduced company-wide during the
first quarter of 2001, contributed $1,905,000 to the increase in revenues.
During the year ended December 31, 2001 and 2000, merchandise sales of
$5,097,000 and $4,326,000, respectively, were deferred as we did not meet our
revenue recognition criteria. Although such revenues were deferred, pre-need
cremation arrangement sales contract volume increased 18% over the same period
in 2000.
During the year ended December 31, 2001, the Company recognized previously
deferred pre-need merchandise revenues and costs of approximately $34,000 and
$14,000, respectively, related to the fiscal year 2000 cumulative effect of
change in accounting principle adjustment.
The Company believes that revenues were also lower during the year ended
December 31, 2001 as we suspended marketing activities in Riverside, Imperial,
San Bernardino and San Diego Counties pending resolution of resulting from the
Leneda litigation for trademark infringement as a result of our use of the
"Neptune Society" name in those counties Riverside, Imperial, San Bernardino and
San Diego Counties. We suspended sales in these areas, and we estimate that the
Leneda litigation caused our revenues to decline by approximately $350,000 or 3%
during the year ended December 31, 2001. See "Legal Proceedings." In October,
2001, the Company entered into a settlement agreement with Leneda. Under the
terms of the settlement agreement, we are permitted to market pre-need
arrangement contracts under the name "Trident Society." The Company believes the
Leneda settlement will not have a material financial impact on operations. We
can not predict when, or if, revenues related to the affected areas will return
to historical levels.
During 2000, the Company acquired the Ankeny, Iowa and Portland, Oregon
properties, respectively, and opened two new offices. Cremation service and
merchandise revenues related to acquisitions and new office openings after
December 31, 1999 were $2,800,000 and $1,077,000 for the year ended December 31,
2001 and 2000, respectively. The Company did not acquire or open any new
properties or offices during 2001. The Company sold substantially all assets
related to its Portland, Oregon businesses in December 2001. See "Loss on
Disposal of Assets."
Revenues earned for the year ended December 31, 2001 and 2000 from trust
fund management and finance fees were $1,255,000 and $1,501,000, respectively.
The $246,000 or 16% decrease is attributable to decreased management fees due to
reduced investment yields, which was partially offset by increased finance fee
income. Finance fees increased due to the Company's current ability to recognize
income over the life of the pre-need contract versus at the end of the contract,
as previously recognized.
Costs and Expenses and Gross Profit
Direct costs and expenses were $6,263,000 or 48% of revenues for the year
ended December 31, 2001 compared to $4,451,463 or 58% of revenues for the
comparable period in 2000. The
45
$1,812,000 or 41% increase was attributable to fiscal 2000 acquisitions and new
office openings, and increases in costs related to the Travel Plan. The gross
profit during the year ended December 31, 2001 was 6,767,000, an $3,530,000 or
109% increase over the comparable period in 2000.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2001
were $7,798,000 or 60% of revenues. General and administrative expenses for the
year ended December 31, 2000 were $5,802,000 or 75% of revenues. The
$1,995,000or 34% increase in general and administrative expenses in 2001
compared to 2000 is related to additional costs associated with the increased
number of management level personnel, non-cash compensation costs related to
employment agreements entered into with certain executive management staff
members, accrued performance bonuses and incentives and the additional costs
associated with supporting an increased number of geographic locations.
Amortization and Depreciation Expenses
Amortization and depreciation expenses were $2,082,000 and $1,886,000,
respectively, for the year ended December 31, 2001 and 2000. The increase in
amortization and depreciation expenses during 2001 was primarily the result of
the Iowa and Oregon acquisitions.
Professional Fees
Professional fees were $1,765,000 or 14% of revenues for the year ended
December 31, 2001 compared to $1,245,000 or 16% of revenues for the year ended
December 31, 2000. The increase in professional fees during 2001 was related to
the successful completion of registration of the Company's common stock with the
Securities and Exchange Commission in the second quarter of 2001 and the
re-structuring of the Company's capitalization. Certain provisions of the Leneda
Settlement Agreement required the Company to pay $120,000 in legal expenses of
the former principal shareholder. See "Other Financings." The Company issued a
note payable related to such obligation. Professional fees also include
$443,000and $333,000 of consulting fees paid by us to the former principal
shareholder in 2001 and 2000, respectively, for marketing and sales
consultation. The consulting agreement with the former principal shareholder was
terminated in December 2001. A sum-lump payment of $335,000 was paid upon
termination.
Loss on Disposal of Assets
In December 2001, the Company sold substantially all of the assets related
to its Portland, Oregon businesses. The Company sold those assets for total
consideration of $2.5 million. Such consideration consisted of: a) assumption of
$1.5 million of the Company's debt, and b) the forgiven of the $1 million
convertible debenture previously due July 2003. As a result of the disposal of
those assets, the Company recognized a $2.8 million loss. The Company purchased
those assets in July 2000 for $5.7 million, $500,000 cash, $1 million
convertible debenture and $4.2 million in stock.
Interest Expense
Interest expense was $2,515,000 or 19% of revenues for the year ended
December 31, 2001 compared to $2,485,000 or 32% of revenues for the year ended
December 31, 2000. The
46
increase in interest expense in 2001 was a result of certain debt restructuring
and refinancing to partially extinguish, and extend the due date of the current
portion of acquisition debt previously due January 2, 2002.
We anticipate interest expense will increase in subsequent periods. The
Company entered into a Letter of Memorandum with Private Investment Company with
terms to convert a $1 million non-interest bearing promissory note, due December
31, 2001, into an a 12% per annum interest bearing convertible debenture
maturing in September 2004.
The Company entered an agreement to borrow up to $1,500,000 at 19.98% per
annum. Under the terms of the Agreement, the Company borrowed $800,000 in
December 2001 due and payable December 2002, interest payable monthly. The
Company anticipates borrowing an additional $700,000 with similar terms under
the Agreement. The above mentioned transactions in addition to the extension of
acquisition debt principal payments will likely contribute to higher interest
costs. See "Other Financings".
Loss before Cumulative Effect of Change in Accounting Principle
Loss before cumulative effect of a change in accounting principle was
$10,151,000 and $8,435,000, respectively, for the year ended December 31, 2001
and 2000. The loss related the reasons described above.
Cumulative Effect of Change in Accounting Principle
In response to the Securities and Exchange Commission's issuance of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
No. 101), effective January 1, 2000, the Company changed its accounting policies
applicable to pre-need merchandise sales. The implementation of SAB No. 101 had
no effect on the consolidated cash flows of the Company.
Prior to 2000, revenue related to merchandise sold with a pre-need
cremation service arrangement was recognized upon physical delivery of
merchandise to the customer or upon satisfying certain state regulatory
criteria, which, in California, Iowa, Washington and Oregon may occur prior to
the performance of cremation services. The Company considered the criteria to be
satisfied when (i) the Company was permitted to receive one hundred percent of
the unrestricted funds associated with the merchandise sale, (ii) the
merchandise was in a condition for its intended use (iii) the Company had no
specific performance obligations essential to the functionality of the
merchandise; (iv) the customer accepted title of the merchandise, evidenced by a
written transfer of title to the customer and certificate of ownership. And,
also at the request of the customer, the Company arranged for the storage of the
merchandise on the customer's behalf in an insured location until the customer
picked up the merchandise or at the time of need, but no later than the
customer's death. Customers that purchase pre-need cremation arrangements in
California, Iowa, Washington and Oregon do not have cancellation rights with
respect to the purchase of merchandise.
In response to SAB No. 101, the Company changed its revenue recognition
accounting policy with respect to merchandise sold in a pre-need arrangement to
include certain conditions beyond current state regulations. As of January 1,
2000, the Company added the following criteria to its revenue recognition policy
for the sale of merchandise: (i) a definitive delivery date, (ii) stored
merchandise is required to be segregated and specifically identified by
customer, (iii) a
47
customer's merchandise is labeled or marked for such customer and may not be
used to fill another customer's order, and exchange for a different piece of
merchandise in the future is remote. In addition, the merchandise must not be
subject to claims of the Company's creditors, the risks and rewards of
merchandise ownership must have transferred to the customer, and the Company's
custodial risks are insurable and insured. The Company deferred revenues and
costs of $5,097,000 and $1,771,000, respectively, during the year ended December
31, 2001, until such time as the merchandise has been physically delivered or
upon satisfaction of the additional criteria noted. The Company recognizes
revenue on the sale of future pre-need merchandise sales upon the physical
delivery of the merchandise or upon the satisfaction of the Company's current
revenue recognition policy criteria outlined above.
The cumulative effect adjustment represents revenue and cost deferrals of
$488,000 and $84,000, respectively, related to pre-need merchandise sales
transactions previously recognized in 1999. For the year ended December 31, 2000
the effect of this change on loss before the cumulative effect of the accounting
change was to increase such loss by $404,000, or $0.23 per diluted share.
Net Loss
Net loss was $10,151,000 and $8,839,000, respectively, for the year ended
December 31, 2001 and 2000. The net loss related to the reasons described above.
YEAR END DECEMBER 31, 2000 (SUCCESSOR COMPANY) COMPARED WITH THE NINE MONTHS
ENDED DECEMBER 31, 1999 (SUCCESSOR COMPANY) AND THE THREE MONTHS ENDED MARCH 31,
1999 (PREDECESSOR COMPANY):
Results of Operations
The following discussion compares the operations of the registrant for the
year ended December 31, 2000 to the operations of the registrant for the nine
month period ended December 31, 1999. In certain cases, we have compared our
operations for the year ended December 31, 2000 to our pro forma results for the
year December 31, 1999, which reflect the revenues, cost of sales and gross
margin of our operations as if our acquisition of the Predecessor had occurred
on January 1, 1999.
Revenues
Cremation service revenues for the Successor Company were $6,188,000 for
the year ended December 31, 2000 compared to the pro forma revenues of
$6,724,000 for the same period in 1999. Included in pro forma cremation service
revenues in the first half of 1999 are $961,000 of pre-need merchandise revenues
that were recognized under the Company's previous revenue recognition policy
(see discussion below of Cumulative Effect of Change in Accounting Principle.)
As a result, pro forma 1999 cremation service revenues exceed 2000 cremation
service revenues. Also, during the third and fourth quarters of 1999, $995,000
of merchandise sales were deferred as we did not meet our previous revenue
recognition criteria. In 2000, the Company deferred $4,326,000 of merchandise
sales due to the change in accounting principle as of January 1, 2000. Revenues
were also lower during the year ended December 31, 2000 resulting from the
Leneda litigation for trademark infringement as a result of our use of the
"Neptune Society" name in Riverside, Imperial, San Bernardino and San Diego
Counties. We suspended sales in these areas, and we estimate that the Leneda
litigation caused our revenues to decline by approximately $200,000 or 2.6%
during the year ended December 31, 2000. See
48
"Litigation." We began marketing pre-need arrangement contracts in the Southern
California areas affected by the Leneda litigation under the Trident Society,
Inc. name in the first quarter 2001, which over time is expected to allow us to
generate revenues from the affected area at historical levels.
Cremation service and merchandise revenues related to the December 31, 1999
Spokane, Washington acquisition, current year acquisitions and new office
openings were $1,077,000 for the year ended December 31, 2000.
Additionally, pro forma revenues for the year ended December 31, 1999,
reflect a non-recurring liquidation of amounts trusted by the Predecessor in
1996 of approximately $525,000. The trust was created as a result of California
trusting requirements that had required the Predecessor to trust 100% of
Pre-Need sales during an approximate two month period of 1996, pending
clarification of the merchandise delivery requirements in California by the
California staff funeral home regulations. Subsequently, California state
regulators required the Predecessor to liquidate this fund and actually purchase
and deliver merchandise at the time the contract for the pre-need service is
made in accordance with the state's merchandise delivery administrative rules.
See "Industry Regulations--Death Care Service Industry Regulations."
Revenues earned for the year ended December 31, 2000 from Trust Fund
management and finance fees were $1,501,000 compared to pro forma revenues of
$1,400,000 for the same period in 1999, a 7.2% increase. The increase is
attributable to increasing yields on trust fund assets.
Costs and Expenses and Gross Profit
Direct costs and expenses were $4,451,000 or 57.9% for the year ended
December 31, 2000 compared to pro forma direct costs and expenses of $3,451,000
or 39.9% for the comparable period in 1999. The increase is attributable to the
Spokane, Washington acquisition, current year acquisitions, new office openings
and additional costs of $656,000 to operate the PDS Center, which was opened in
November 1999.
The gross profit during the year ended December 31, 2000 was $3,237,000 or
42.1% of total revenues compared to $5,199,000 or 60.1% for the comparable pro
forma period in 1999. If revenues and costs of sales related to merchandise
sales in connection with 2,350 pre-need sales contracts could have been
recognized currently, gross profit and gross profit margin for the pro forma
year ended December 31, 1999 would have been $4,312,000 or 62.7% of revenues,
excluding the non-recurring revenue item noted above; and gross profit and gross
profit margin for the year ended December 31, 2000 would have been $5,974,000 or
54.2% of revenues.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2000
were $6,003,000 or 78.1% of revenues. General and administrative for the nine
months ended December 31, 1999 were $3,032,000 or 53.3% of revenues. The
relative increase in general and administrative expenses in 2000 compared to
1999 is related to additional costs associated with the increased number of
management level personnel and the additional costs associated with supporting
increased geographic locations.
49
Amortization Expense
Amortization expense was $1,685,000 for the year ended December 31, 2000.
Amortization expense was $1,024,000 for the nine month period ended December 31,
1999. The relative increase in amortization expense during 2000 was a result of
the Washington, Iowa and Oregon acquisitions.
Professional Fees
Professional fees were $1,245,000 or 16.2% of revenues for the year ended
December 31, 2000. Professional fees were $340,000 for the nine month period
ended December 31, 1999 or 6.0% of revenues. The relative increase in
professional fees during 2000 were related to costs associated with the Leneda
litigation and advisory services in connection with our ongoing efforts to
register common stock with the Securities and Exchange Commission. Professional
fees also include $333,000 and $263,000 of consulting fees paid by us to the
former principal shareholder in 2000 and 1999, respectively, for marketing and
sales consultation.
Interest Expense
Interest expense was $2,485,000 or 32.3% of revenues for the year ended
December 31, 2000. Interest expense was $1,184,000 or 20.8% of revenues for the
nine month period ended December 31, 1999. The relative increase in interest
expense in 2000 was a result of our additional borrowings and higher average
interest rates.
Loss before Cumulative Effect of Change in Accounting Principle
Loss before cumulative effect of a change in accounting principle was
$8,435,000 for the year ended December 31, 2000. Loss before cumulative effect
of a change in accounting principle was $1,890,000 for the nine month period
ended December 31, 1999, respectively. The net loss related to each respective
period differed for the reasons described above.
Cumulative Effect of Change in Accounting Principle
In response to the Securities and Exchange Commission's issuance of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
No. 101), effective January 1, 2000, the Company changed its accounting policies
applicable to pre-need merchandise sales. The implementation of SAB No. 101 had
no effect on the consolidated cash flows of the Company.
Prior to 2000, revenue related to merchandise sold with a pre-need
cremation service arrangement was recognized upon meeting certain state
regulatory criteria, which, in California, Iowa, Washington and Oregon may be
prior to the performance of cremation services. The Company considered such
criteria met when the Company was permitted to receive one hundred percent of
the unrestricted funds associated with the merchandise sale, the merchandise was
in a condition for its intended use and the Company did not retain any specific
performance obligations essential to the functionality of the merchandise, the
customer accepted the merchandise as evidenced by a written transfer of title to
the customer and certificate of ownership, and, if the customer so requested,
the Company stored the merchandise in an insured location on the customer's
behalf until customer pick-up or the time of need, but no later than the
customer's death.. Customers that purchase pre-need cremation arrangements do
not have cancellation rights with respect to the purchase of merchandise.
50
In response to SAB No. 101, the Company changed its revenue recognition
accounting policy with respect to merchandise sold in a pre-need arrangement to
include conditions beyond current state regulations. As of January 1, 2000, the
Company has included a definitive delivery date, the requirement that stored
merchandise be segregated and specifically identified by customer, not subject
to being used to fill other orders, and exchange for a different piece of
merchandise at a later date is remote. In addition, the merchandise must not be
subject to claims of the Company's creditors, the risks and rewards of
merchandise ownership must have transferred to the customer, and the Company's
custodial risks are insurable and insured. Since the additional criteria had not
been met for pre-need merchandise sales through December 31, 1999 a cumulative
effect adjustment of $404,000 or $0.23 per diluted share, was recorded at
January 1, 2000 representing the cumulative effect of deferring revenues of
$488,000 on those sales for which our additional revenue recognition criteria
had not been met. The Company has deferred revenues of $4,326,000 since January
1, 2000 until such time as the additional criteria noted above has been
satisfied. Future pre-need merchandise sales will be recognized upon
satisfaction of the Company's current revenue recognition policy.
The cumulative effect adjustment represents the deferral of revenues and
costs related to pre-need merchandise sales transactions previously recognized
in 1999. All other pre-need merchandise sales transactions for the nine months
ended December 31, 1999 had been deferred previously (see discussions in
"Revenue" sections of Results of Operations for Years Ended December 31, 2000
and 1999, respectively.) For the year 2000, the effect of this change on loss
before the cumulative effect of the accounting change was to increase such loss
by $3,613,000, or $2.03 per diluted share. This amount represents deferred
revenues and costs related to pre-need merchandise sales transactions for the
entire year 2000.
If the new accounting principle had been in effect for the nine months
ended December 31, 1999, three months ended March 31, 1999 and the year ended
December 31, 1998, net loss would have been $2,294,000, $280,000 and $2,268,000,
respectively. The diluted loss per share for the nine-month period ended
December 31, 1999 would have been $1.50.
Net Loss
Net loss was $8,839,000 for the year ended December 31, 2000. Net loss was
$1,890,000 for the nine month period ended December 31, 1999. The net loss
related to each respective period differed for the reasons described above.
Subsequent Events
On January 2, 2002, the Company began operations out of its Colorado
office.
On March 22, 2002, Neptune Society effected a 4:1 reverse stock split and
the symbol for its common stock was changed to NPTI. Information in this report
gives effect to the reverse stock split effected on March 22, 2002.
During March 2002, the Company submitted applications to open offices in
the state of Illinois.
51
Liquidity and Capital Resources
At December 31, 2001, we had current assets of $2,091,000, which is
comprised of cash, accounts receivable and prepaid expenses. Our total current
liabilities were $6,228,000 comprised mainly of accounts payable, accrued
liabilities, and the current portion of long term debt. We had long-term debt,
including convertible debentures, of $5,000,000. We had a working capital
deficit of $4,137,000 at December 31, 2001.
As of December 31, 2001, we had the following debt obligations:
Obligations as of December 31, 2001: Principal Interest Due
Due Rate Date
Convertible debentures $ 5,000,000 13.00% February 2005
Note payable (original acquisition debt) 2,391,940 13.00% July 2003
Note payable* 1,000,000 0.00% September 2001
Note payable 800,000 19.98% December 2002
Notes payable, net discount of $60,090 369,872 11.87% November 2003
Note payable 350,000 13.00% July 2003
Note payable 94,102 10.00% July 2002
Line of credit 90,000 9.00% April 2002
Convertible debentures 75,000 13.00% July 2002
Notes payable 10,877 9.00% May 2002
Total Debt Obligations 10,181,791
Current Portion (Due During 2002) 2,890,215
------------
Long-term obligations $ 7,291,576
============
* In August 2001, the Company entered into a Memorandum of Understanding
(the "MOU") to convert its $1,000,000 note due to Private Investment Company,
Ltd. on September 30, 2001 into a 12% convertible debenture with interest
payable annually on September 30th of each year of the term. Under the terms of
the MOU, the debenture was anticipated to have a conversion price of $24.00 per
share and a maturity date of September 30, 2004. The Company agreed to issue
2,500 shares of the Company's common stock valued at approximately $45,000. As
of March 22, 2002, the Company has not entered into a definite agreement to
convert the promissory note.
We had net cash used by operating activities of $775,000 and $873,000,
respectively, for the three months ended December 31, 2001 and 2000. We had net
cash used by operating activities of $735,000 and $732,000, respectively, for
the year ended December 31, 2001 and 2000. Interest paid for the three months
ended December 31, 2001 and 2000 were $529,000 and $157,000, respectively.
Interest paid for the year ended December 31, 2001 and 2000 were $1,132,000 and
$659,000, respectively.
52
Plan of Operation
Our Plan of Operation is based, in part, on information provided in the
reports of our consultants and the decisions of management. Our independent
auditors have not examined, compiled or otherwise applied procedures to the plan
of operations presented herein, and, accordingly, do not express an opinion or
any other form of assurance on it. Information contained in this plan of
operation is presented on a cash basis, which is not in accordance with US GAAP,
and represents to projections and assumptions of management. Actual results can
vary materially from the estimates of management and investors are cautioned not
to place undue reliance on management's projections and assumptions. See
"Forward-Looking Statements."
Set out below is a summary of our Plan of Operation for the fiscal year
ending 2002.
Material Commitments--Short-term Funding Requirements
-------------------------------- --------------------
Operating expenditures (incl. Working capital) $17.8 million
Interest payments 1.2 million
Current portion of long-term debt 2.9 million
Capital expenditures 0.1 million
Estimated total Short-term commitments 22.0 million
Estimated total Cash from Operations 19.6 million
Estimated total Cash from Debt Proceeds 0.7 million
--------------------
Estimated net Cash Funding Requirements $1.7 million
--------------------
Net Cash Flow operations: Management's current year budget projects it will
achieve $1.8 million in positive net cash flows before the payment of debt and
interest and capital expenditures. We anticipate generating cash receipts from
sales and other income of $19.6 million, on cash expenditures of $17.8 million.
Working capital: Management entered the current year (2002) with a net
working capital deficit of $4.1 million. The majority of the deficit relates to
the current portion of long-term debt of $2.9 million due or coming due during
the fourth quarter of 2002. See "Liquidity & Capital Resources". The remainder
relates to accounts payable and accrued expenses in connection with our on-going
operations. The Company enter into a loan agreement to borrow $1.5 million in
December 2001. The Company has drawn down $800,000 against the loan precedent to
January 1, 2002. We anticipate the remaining $700,000 will be drawn in the first
half of 2002. See "Other Financings".
Interest payments: We carry outstanding debt, including convertible debt,
requiring annual cash interest payments of $1.1 million, payable in monthly
installments. There is no guarantee that any convertible debt will be converted;
therefore the maximum amount of interest payments have been projected.
Capital Expenditures: We anticipate capital expenditures to amount to
approximately $78,000. These expenditures include office furniture and office
and computer equipment.
53
We will have to raise capital during the first eleven months of 2002 to
extinguish the current portions of long-term debt due or coming due during the
fourth quarter. See "Liquidity and Capital Resources". We intend to raise the
capital required to fund our financing needs by issuance of debt and equity. We
are attempting to raise such financing; however, we have no current arrangement
to obtain such financing. There can be no assurance financing will be available
or accessible on reasonable terms.
Our total operating and capital budgets for the fiscal year ended December
31, 2002 is estimated to be approximately $19 million. There is no assurance
that our actual expenditures for the fiscal year ending December 31, 2002 will
not exceed our estimated operating budgets. Actual expenditures will depend on a
number of factors, some of which are beyond our control including, among other
things, timing of regulatory approval of its projects, the availability of
financing on acceptable terms, reliability of the assumptions of management in
estimating cost and timing, the death and cremation rates in the geographical
locations that we serve, consumer acceptance of our pre need plans, changes in
governmental regulation as they relate to our business, certain economic and
political factors, the time expended by consultants and professionals and fees
associated with applications related obtaining and maintaining licenses for our
locations and the professional fees associated with our reporting obligations
under the Securities Exchange Act of 1934. If the actual expenditures for such
costs exceed the estimated costs or if events occur that require additional
expenditures, we will be required to raise additional financing or to defer
certain expenditures to meet other obligations. If we cannot raise adequate
financing to fund our plan of operation, we may be required to suspend our
growth strategy; consolidate our operations through reductions in staffing,
marketing and sales, promotion and hours of operation; terminate our operations
in unprofitable or difficult to service markets; sell assets or operations in
some of the markets we service and/or suspend our operations in certain markets.
The failure to meet certain expenditures may cause us to default on material
obligations and such default may have a material adverse effect on our business
and results of operations.
Material Commitments--Long-term (3 year period ending December 2005):
Operating expenditures (incl. Working capital) $72.9 million
Interest payments 2.9 million
Long-term debt 8.0 million
Capital expenditures 0.4 million
Estimated total Long-term commitments 84.2 million
Estimated total Cash from Operations 94.8 million
--------------------
Estimated net Cash Surplus $10.6 million
Net Cash operations: Management projects that long-term, 2003 through 2005,
it will achieve $21.9 million in positive net cash flows before the payment of
debt and interest and capital expenditures. The Company anticipates generating
cash receipts from sales and other income of $94.8 million, on cash expenditures
of $72.9 million.
54
Long-term debt: We anticipate we will generate sufficient cash to
extinguish all outstanding debt coming due and to finance our long-term location
expansion plan. See "Liquidity and Capital Resources".
Interest payments: We carry outstanding debt, including convertible debt,
requiring cash interest payments of $2.9 million. Of the $2.9 million, a balloon
payment of $1.6 million will be due February 2005. The remainder of interest
payments is payable in monthly installments. There is no guarantee that any
convertible debt will be converted; therefore the maximum amount of interest
payments have been projected.
Capital Expenditures: We anticipate capital expenditures to amount to
approximately $353,000 million. These expenditures include office furniture and
office and computer equipment.
Lease payments-future years: We are obligated under certain office rental,
facility rental, storage rental equipment rental, temporary housing rental and
automotive rental agreements. See "Properties". Future lease payments from 2003
through 2005 amount to $1.0 million.
Long-term, for the fiscal years 2003 through 2005, we anticipate generating
sufficient capital from our operations to finance basic operations, extinguish
outstanding debt, and execute the location expansion initiative of our plan of
operation. We do not anticipate needing additional financing beyond that
required for 2002 to fund these initiatives. See "Liquidity and Capital
Resources".
Our cumulative operating and capital budgets for the three fiscal years
ended December 31, 2005 is estimated to be approximately $76 million. There is
no assurance that our actual expenditures for the three fiscal years ending
December 31, 2005 will not exceed our estimated operating budgets. Actual
expenditures will depend on a number of factors, some of which are beyond our
control including, among other things, market price for our common stock, timing
of regulatory approval of its projects, the availability of financing on
acceptable terms, reliability of the assumptions of management in estimating
cost and timing, the death and cremation rates in the geographical locations
that we serve, consumer acceptance of our pre need plans, changes in
governmental regulation as they relate to our business, certain economic and
political factors, the time expended by consultants and professionals and fees
associated with applications related obtaining and maintaining licenses for our
locations and the professional fees associated with completing the registration
of our shares under the Securities Exchange Act of 1934. On March 28, 2002, the
closing price for our common stock was $2.15. Our ability to raise additional
financing without substantial dilution to our existing shareholders will be
affected by the market price for our common stock. We cannot assure you that our
stock price will not decline as a result of our financing activities. If the
actual expenditures for such costs exceed the estimated costs or if events occur
that require additional expenditures, we will be required to raise additional
financing or to defer certain expenditures to meet other obligations. The
failure to meet certain expenditures may cause us to default on material
obligations and such default may have a material adverse effect on our business
and results of operations.
We expect operating cash flows, before debt servicing and expansion
expenditures, to be adequate to finance our basic operations. We anticipate that
we will finance the current portion of long-term debt, additional acquisitions,
if any, and growth, in part, by issuing equity and/or debt securities.
55
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the Commission)
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, which is to be applied beginning with the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. SAB 101 summarizes
certain of the Staff's views in applying GAAP to revenue recognition in
financial statements. The Company has changed its accounting for revenue
recognition as a result of SAB 101 as described in Note 3 to the Consolidated
Financial Statements.
In March, 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions
Involving Stock Compensation". Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under APB Opinion No. 25, Accounting for
Stock-Based Compensation. Interpretation 44 is effective July 1, 2000, with
certain provisions that are effective retroactively to December 15, 1998 and
January 12, 2000. Interpretation 44 did not impact the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company does not expect the adoption to impact the Company's
financial position or results of operations since the Company does not
participate in such activities.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002.
56
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $24.4 million which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $1.8 million and $1.7 million, respectively, for the years ended December
31, 2001 and 2000. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement 121) and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and
57
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as previously defined
in that Opinion). Statement 144 retains the fundamental provisions in Statement
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with Statement 121. Statement 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike Statement
121, an impairment assessment under Statement 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under
Statement No. 142.
The Company is required to adopt Statement 144 no later than the year
beginning after December 15, 2001. Accordingly, the Company will adopt Statement
144 in the first quarter of 2002. Management does not expect the adoption of
Statement 144 for long-lived assets held for use to have a material impact on
the Company's financial statements because the impairment assessment under
Statement 144 is largely unchanged from Statement 121. The provisions of the
Statement for assets held for sale or other disposal generally are required to
be applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effects that
adoption of Statement 144 will have on the Company's financial statements.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible ling-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our market risk sensitive instruments and
positions is the potential change arising from increases or decreases in
interest rates as discussed below. Our exposure to market risk as discussed
below includes "Forward-Looking Statements" and represents an estimate of
possible changes in fair value or future earnings that would occur assuming
hypothetical future movements in interest rates. Our views on market risk are
not necessarily indicative of actual results that may occur and do not represent
the maximum possible gains and losses that may occur, since actual gains and
losses will differ from those estimated, based upon actual fluctuations in
interest rates and the timing of transactions.
58
We entered into various fixed rate debt obligations, which are detailed in
Note 5 to our consolidated financial statements included in Item 8.
As of December 31, 2001, the carrying value of our long term fixed rate
debt was approximately $10.2 million, which approximated fair value. Fair value
was determined using discounted future cash flows based on our current
incremental borrowing rates for similar types of borrowing arrangements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed under the heading "(a)(1) Financial
Statements" of Item 14 herein, are included immediately following this page.
59
Stonefield Josephson, Inc.
Certified Public Accountants/Business & Personal Advisors
Member of DFK and The Leading Edge Alliance
INDEPENDENT AUDITORS' REPORT
Board of Directors
Neptune Society, Inc.
Burbank, California
We have audited the accompanying consolidated balance sheet of Neptune Society,
Inc. and subsidiaries as of December 31, 2001, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Neptune Society, Inc. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficit and
has experienced operating losses over the past three years, which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 20, 2002
Santa Monica 1620 26th Street/Suite 400 South/Santa Monica/
California 90404-4041/Tel 310.453.9400/Fax 310.453.1187
Irvine 18500 Von Karman Avenue/Suite 560/Irvine/California
92612-0540/Tel 949.653.9400/Fax 949.833.3582
San Francisco 655 Montgomery Street/Suite 1220/San Francisco/
California 94111-2630/Tel 415.981.9400/Fax 415.391.2310
Walnut Creek 2121 North California Blvd./Suite 900/Walnut Creek/
California 94596-7306/Tel 925.938.9400/Fax 925.930-0107
60
Independent Auditors' Report
The Board of Directors
The Neptune Society, Inc.:
We have audited the accompanying consolidated balance sheets of Neptune Society,
Inc. and Subsidiaries (Successor Company) as of December 31, 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the nine months ended December 31, 1999 and the year ended December
31, 2000, respectively, (Successor Company Period) and the combined statements
of operations, shareholders' equity, and cash flows of Neptune Society
(Predecessor Company) for the three month period ended March 31, 1999
(Predecessor Company Period). 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial statements
present fairly, in all material respects, the financial position of Neptune
Society, Inc. and Subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for the Successor Company Period in conformity
with accounting principles generally accepted in the United States of America.
Further, in our opinion, the aforementioned Predecessor Company combined
financial statements present fairly, in all material respects, the results of
their operations and their cash flows for the Predecessor Company Period in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in note 3 to the consolidated financial statements, the Company
changed its method of revenue recognition in 2000.
As discussed in note 1 to the consolidated financial statements, effective March
31, 1999, all of the outstanding capital stock of the Predecessor Company was
acquired in a business combination accounted for as a purchase. As a result of
the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
March 16, 2001
/s/ KPMG LLP
61
Neptune Society, Inc.
Consolidated Balance Sheets
December 31, 2000 and 2001
2000 2001
------------- -------------
Assets (Note 5)
Current assets:
Cash $ 1,065,339 213,219
Accounts receivable 234,370 1,751,276
Prepaid expenses and other current assets 121,061 113,644
------------- -------------
Total current assets 1,420,770 2,078,138
Property and equipment, net 2,365,806 548,469
Names and reputations, net 29,451,385 24,364,472
Non compete agreements, net 474,051 48,333
Deferred financing costs 1,208,081 1,539,132
Deferred charges and other assets 2,572,340 4,343,159
------------- -------------
37,492,433 32,921,704
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt 5,748,946 2,890,215
Accounts payable 1,399,538 1,700,487
Accrued and other current liabilities 1,132,671 1,478,188
------------- -------------
Total current liabilities 8,281,155 6,068,890
Long-term debt 100,878 2,291,575
Convertible debentures 5,937,303 5,000,000
Other long-term liabilities 467,087 848,861
Deferred pre-need revenues 6,598,247 11,688,952
------------- -------------
21,384,670 25,898,278
Shareholders' equity:
Common stock, $.008 par value,
6,250,000 shares authorized, 2,152,952
and 1,915,343 shares issued and outstanding
at December 31, 2001 and 2000, respectively 15,323 17,224
Additional paid-in capital 26,821,240 27,886,170
Accumulated deficit (10,728,800) (20,879,968)
------------- -------------
Total shareholders' equity 16,107,763 7,023,426
------------- -------------
$ 37,492,433 32,921,704
============= =============
See accompanying notes to consolidated financial statements.
Effective as of March 22, 2002, the Corporation effected a 1 for 4 reverse split
of its common stock. Information contained in these Consolidated Financial
Statements gives effect to the reverse stock split.
62
Neptune Society, Inc.
Consolidated Statements of Operations
Three Months ended March 31, 1999, Nine Months ended December 31, 1999
And Years ended December 31, 2000 and 2001
Predecessor
Company Successor Company
---------------- ---------------------------------------------------------
Three months
ended March 31, Nine months ended Year Ended Year Ended December
1999 December 31, 1999 December 31, 2000 31, 2001
---------------- ---------------------------------------------------------
Revenues:
Services and merchandise $ 2,128,857 4,595,014 6,187,708 11,775,109
Non-recurring trust liquidation 525,467 - - -
Management and finance fees 307,196 1,093,156 1,500,996 1,255,187
---------------- ---------------------------------------------------------
Total revenues 13,030,296
2,961,520 5,688,170 7,688,704
Costs and expenses 1,198,469 2,252,169 4,451,463 6,263,073
---------------- ---------------------------------------------------------
Gross profit 1,763,051 3,436,001 3,237,241 6,767,223
General and administrative expenses 748,385 2,986,392 5,802,283 7,797,566
Compensation to principal shareholder 430,090 - - -
Amortization and depreciation expense - 1,069,898 1,886,203 2,081,585
Professional fees 535,878 339,836 1,244,836 1,765,289
Loss on disposal of assets, net - - - 2,759,380
---------------- ---------------------------------------------------------
Total general and administrative expenses 1,714,353 4,396,136 8,933,322 14,403,821
---------------- ---------------------------------------------------------
Loss from operations 48,698 (960,135) (5,696,081) (7,636,598)
Interest expense - 1,183,627 2,485,030 2,514,570
---------------- ---------------------------------------------------------
Loss before income taxes 48,698 (2,143,762) (8,181,111) (10,151,168)
Income tax (benefit) expense - (254,128) 254,128 -
---------------- ---------------------------------------------------------
Loss before cumulative
effect of change in accounting
principle 48,698 (1,889,634) (8,435,239) (10,151,168)
Cumulative effect of change in
accounting principle - - 403,927 -
---------------- ---------------------------------------------------------
Net loss $
48,698 (1,889,634) (8,839,166) (10,151,168)
================ ==========================================================
Loss per share - Basic and Diluted
Loss before cumulative effect of change
in accounting principle $ (01.23) (4.75) (5.09)
Cumulative effect on prior years of
changing to a different revenue
recognition method - (0.23) -
Loss per share - Basic and Diluted $ (01.23) (4.98) (5.09)
Weighted average number of shares-
Basic and Diluted 1,530,643 1,776,119 1,994,991
See accompanying notes to consolidated financial statements.
Effective as of March 22, 2002, the Corporation effected a 1 for 4 reverse split
of its common stock. Information contained in these Consolidated Financial
Statements gives effect to the reverse stock split.
63
Neptune Society, Inc.
Consolidated Statements of Shareholders' Equity
Year ended December 31, 2001 and 2000
Common Stock
Additional Total
paid-in Accumulated Shareholders'
Shares Amount capital deficit equity
------------ ----------- ------------ ------------- -------------
Successor Company:
Balance at March 31, 1999 375,000 $ 3,000 198,000 - 201,000
Exercise of warrants 1,000,000 8,000 792,000 - 800,000
Issuance of common stock for
acquisition of Predecessor 125,000 1,000 4,999,000 - 5,000,000
------------ ----------- ------------ ------------- -------------
Balance after effects of
acquisition of Predecessor 1,500,000 12,000 5,989,000 - 6,001,000
Net loss - - - (1,889,634) (1,889,634)
Issuance of common stock, net
of $473,690 of offering costs 143,750 1,150 6,425,160 - 6,426,310
Issuance of common stock
for acquisitions 5,682 45 249,953 - 249,998
Discount on convertible debentures - - 562,000 - 562,000
Detachable warrants issued
with convertible debentures - - 670,409 - 670,409
Shares issued in connection with
long-term debt - - 364,840 - 364,840
------------ ----------- ------------ ------------- -------------
Balance at December 31, 1999 1,649,432 13,195 14,261,362 (1,889,634) 12,384,923
------------ ----------- ------------ ------------- -------------
Net loss - - - (8,839,166) (8,839,166)
Issuance of common stock, net
of $82,500 of offering costs 164,584 1,317 7,006,178 - 7,007,495
Issuance of common stock
for acquisitions 93,327 747 4,987,672 - 4,988,419
Discount on convertible
debentures - - 115,000 - 115,000
Compensation related to stock
options - - 51,081 - 51,081
Shares issued in connection with
long-term debt 8,000 64 399,947 - 400,011
------------ ----------- ------------ ------------- -------------
Balance at December 31, 2000 1,915,343 $ 15,323 26,821,240 (10,728,800) 16,107,763
------------ ----------- ------------ ------------- -------------
Net loss (10,151,168) (10,151,168)
Discount on convertible
debentures - - 60,090 - 60,090
Compensation related to stock
options - - 530,532 - 530,532
Shares issued in connection with
long- and short-term debt 96,447 772 475,437 - 476,209
Issuance of common stock
related acquisition
activities 141,162 1,129 (1,129) - -
------------ ----------- ------------ ------------- -------------
Balance at December 31, 2001 2,152,952 17,224 27,886,170 (20,879,968) 7,023,426
============ =========== ============ ============= =============
See accompanying notes to consolidated financial statements.
Effective as of March 22, 2002, the Corporation effected a 1 for 4 reverse split
of its common stock. Information contained in these Consolidated Financial
Statements gives effect to the reverse stock split.
64
Neptune Society, Inc.
Consolidated Statements of Cash Flows
Three Months ended March 31, 1999, Nine Months ended December 31, 1999
And Years ended December 21, 2001 and 2000
Predecessor
Company Successor Company
-------------------------------------------------------------
3/31/1999 12/31/1999 12/31/2000 12/31/2001
--------------- ------------------------------------------
Net loss $ (8,839,166) (10,151,168)
Adjustments to reconcile net loss to net 48,698 (1,889,634)
net cash provided by (used in) operating
activities:
Depreciation and amortization 9,611 1,069,898 1,886,203 2,081,585
Accretion of discount on notes payable - 932,253 697,783 67,605
Non-cash interest & amortization of
deferred finance costs - - 1,126,306 1,315,279
Stock issued for professional services - - - 31,658
Stock compensation - - 51,081 530,532
Loss on disposal of assets - - - 2,759,380
Deferred tax benefit - (254,128) 254,128 -
Change in operating assets and liabilities:
Accounts receivable 145,811 (178,310) (56,060) (1,516,906)
Prepaid expenses and other current assets 4,924 (32,642) (12,710) 7,417
Deferred charges and other assets (65,659) (660,101) (2,481,375) (320,915)
Accounts payable 306,892 10,108 901,531 300,949
Accrued and other liabilities (38,843) 232,652 823,561 (931,133)
Deferred preneed revenues 149,082 1,682,014 4,916,233 5,090,705
--------------- ------------------------------------------
Net cash used in operating activities: 560,516 912,110 (732,485) (735,012)
--------------- ------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (7,934) (156,872) (216,803) (4,403)
Acquisitions, net of cash acquired - (1,814,455) (703,620) -
--------------- ------------------------------------------
Net cash provided by (used in) investing activities (7,934) (1,971,327) (920,423) (4,403)
--------------- ------------------------------------------
Cash flows from financing activities:
Payments on notes payable - (4,548,005) (11,864,781) (2,412,704)
Proceeds from issuance of debt, net - 5,005,439 750,000 2,300,000
Net proceeds of common stock issued - 6,426,310 7,007,495 (0)
Proceeds from exercise of warrants - 800,000 - -
Distribution to owners (64,000) - - -
--------------- ------------------------------------------
Net cash provided by (used in) financing activities (64,000) 7,683,744 (4,107,286) (112,704)
--------------- ------------------------------------------
Net decrease in cash 488,582 6,624,527 (5,760,194) (852,120)
Cash, beginning of period 612,370 201,006 6,825,533 1,065,339
--------------- ------------------------------------------
Cash, end of period $ 1,100,952 6,825,533 1,065,339 213,219
=============== ==========================================
Supplemental disclosure of cash flow information -
Cash paid during the period for Interest - 186,921 659,000 1,132,000
=============== ==========================================
Supplemental disclosure of noncash investing and financing activities:
Detachable warrants issued with convertible
debentures - 670,409 - -
Debt assumed by third party resulting from
asset sale - - - 1,500,000
Debt forgiveness related to asset sale - - - 1,000,000
Discount on note payable - 926,840 115,000 60,090
Common stock issued for acquisitions - 5,249,998 4,988,419 -
Notes issued for acquisition - 19,968,529 1,000,000 -
=============== ==========================================
See accompanying notes to consolidated financial statements.
Effective as of March 22, 2002, the Corporation effected a 1 for 4 reverse split
of its common stock. Information contained in these Consolidated Financial
Statements gives effect to the reverse stock split.
65
Notes to the Consolidated Financial Statements
(1) The Business, Basis of Presentation and Liquidity
Neptune Society, Inc., a Florida Corporation, is the holding company for
Neptune America, Inc., a California Corporation. Neptune Management
Corporation and Heritage Alternatives, Inc. are wholly owned subsidiaries
of Neptune America, Inc. and engage in marketing and administering pre-need
and at-need cremation services in California, Colorado, Florida, New York
and Washington. Neptune Society, Inc. operates crematories in Los Angeles,
California and Spokane, Washington, Portland, Oregon and Ankeny, Iowa.
On March 31, 1999, Lari Corp. paid $1,000,000 cash, $310,000 in transaction
costs, 125,000 shares of common stock valued at $5,000,000 and $21,000,000
of promissory notes valued at $19,968,529, (for total consideration of
$26,278,529, see Note 7 for allocation of the purchase price), to acquire
all of the outstanding shares and cause to be acquired the partnership
interests of the following entities (collectively referred to as the
Predecessor Company):
Neptune Management Corp.
Neptune Pre-Need Plan, Inc.
Heritage Alternatives, Inc.
Heritage Alternatives, L.P.
Neptune Funeral Services, Inc.
Neptune Funeral Services of Westchester, Inc.
Neptune-Los Angeles, Ltd.
Neptune-Santa Barbara, Ltd.
Neptune-Ft. Lauderdale, Ltd.
Neptune-St. Petersburg, Ltd.
Neptune-Miami, Ltd.
Neptune-Westchester, Ltd.
Neptune-Nassau, Ltd.
The business combination was accounted for using the purchase method of
accounting, and the excess of the purchase price over the fair value of
identifiable net assets and liabilities acquired, $26,809,237 was recorded
as names and reputations. In addition, the Company entered into a
three-year $1,000,000 consulting agreement with the former controlling
owner of the Predecessor. The financial statements of Lari Corp. prior to
April 1, 1999 have not been included as they are not material to the
Predecessor Company financial statements. In January 1999, Lari Corp.
issued 250,000 shares of common stock and 1,000,000 warrants to purchase
common stock for $200,000. The warrants were fully exercised in April 1999
for $800,000 and, with the proceeds from the sale of the 250,000 shares for
$200,000, used to fund the acquisition. On April 26, 1999, Lari Corp.
changed its name to Neptune Society, Inc. (the Successor Company).
Collectively, the Predecessor Company and Successor Company are herein
referred to as the Company.
Since purchase accounting was reflected on the opening balance sheet of the
Successor Company on April 1, 1999, the financial statements of the
Successor Company are not comparable to the financial statements of the
Predecessor Company. Accordingly, a
66
vertical black line is shown to separate Successor Company financial
statements from those of the Predecessor Company for periods ended prior to
April 1, 1999.
Liquidity
As of December 31, 2001, the Company has a working capital deficit of $4.0
million and has experienced operating losses over the past three years. The
Company has obtained additional financing (see Note 5 and Note 11) and is
currently exploring other financing alternatives to further address such
working capital deficiency.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements as of and for the nine months
ended December 31, 1999 and the years ended December 31, 2000 and 2001
present the consolidated accounts of Neptune Society, Inc. and
subsidiaries. The operating results of Neptune Society, Inc. for the
nine months ended December 31, 1999 equal those for the twelve months
ended December 31, 1999. All significant intercompany balances and
transactions have been eliminated in consolidation.
The combined financial statements for the three months ended March 31,
1999 present the combined financial position and results of operations
of the acquired Predecessor Companies. The Predecessor Companies have
been presented on a combined basis as they were either owned or
controlled by a certain individual, related trusts, or members of his
family and the operations of each entity were interrelated.
All significant intercompany balances and transactions have been
eliminated in consolidation or combination.
(b) Revenue recognition
At-need cremation services--We recognize revenue on at-need cremation
services and merchandise sales at the time the services are provided
and the merchandise is delivered.
Pre-need cremation arrangements--We sell pre-need cremation services
and merchandise under contracts that provide for delivery of the
services at the time of need. Revenues related to pre-need cremation
services are recorded as revenue in the period the services are
performed.
Prior to 2000, revenue related to merchandise sold with a pre-need
cremation service arrangement was recognized upon meeting certain
state regulatory criteria, which, in California, Colorado, Iowa,
Washington and Oregon may be prior to the performance of cremation
services. The Company considered such criteria met when the Company
was permitted to receive one hundred percent of the unrestricted funds
associated with the merchandise sale, the merchandise was in a
condition for its intended use and the Company did not retain any
specific performance obligations essential to the functionality of the
merchandise, the customer accepted the merchandise as evidenced by a
written transfer of title to the customer and certificate of
ownership, and, if the customer so requested, the Company stored the
merchandise in an insured location on the customer's behalf until
customer pick-up or the time of need, but no later than the customer's
death. Customers that purchase pre-need cremation arrangements do not
have cancellation rights with respect to the purchase of merchandise.
67
In response to SAB No. 101, the Company changed its revenue
recognition accounting policy with respect to merchandise sold in a
pre-need arrangement to include certain conditions beyond current
state regulations. As of January 1, 2000, the Company added the
following criteria related to its revenue recognition policy for the
sale of merchandise: (i) a definitive delivery date, (ii) stored
merchandise is required to be segregated and specifically identified
by customer, (iii) a customer's merchandise is labeled or marked for
such customer and may not be used to fill another customer's order,
and exchange for a different piece of merchandise in the future is
remote. In addition, the merchandise must not be subject to claims of
the Company's creditors, the risks and rewards of merchandise
ownership must have transferred to the customer, and the Company's
custodial risks are insurable and insured. The Company shall defer
pre-need merchandise sales until such time as the merchandise has been
physically delivered or upon satisfaction of the additional criteria
noted. The Company recognizes revenue on the sale of future pre-need
merchandise sales upon the physical delivery of the merchandise or
upon the satisfaction of the Company's current revenue recognition
policy criteria outlined above.
Florida and New York do not allow us to deliver cremation merchandise
prior to the provision of cremation services, and as such, revenue
related to merchandise sold with a pre-need cremation arrangement in
these states is not recognized until the merchandise is delivered,
which is generally concurrent with the period services are performed.
We are allowed under state regulations in Colorado, Iowa, Washington,
Oregon and Florida to retain certain cash receipts received related to
services to be performed in the future. These cash receipts are
recorded as deferred revenue and recognized when services are
provided.
During the year ended December 31, 2001, the Company recognized
previously deferred pre-need merchandise revenues and costs of
approximately $34,000 and $14,000, respectively, related to the fiscal
year 2000 cumulative effect of change in accounting principle
adjustment.
Pre-need installment sales--We also sell pre-need cremation
arrangements under installment plans. Under such plans, the customer
makes an initial down-payment and pays the balance in monthly
installments plus interest. To the extent that cash received is not
trusted, the Company accounts for this cash as deferred revenue until
the transaction qualifies for revenue recognition under our accounting
policies. Prior to January 1, 2001, due to the uncertainty of
collections of these accounts, we recorded these transactions in
accordance with our revenue recognition accounting policies as cash
was received.
Worldwide travel sales--We sell a worldwide travel assurance plan (the
"plan") which guarantees the provision of cremation services anywhere
in the world to the extent the plan holder is more than 75 miles away
from their legal residence at the time of death. The plan is
underwritten by a third party carrier who receives a premium payment,
and is obligated to perform services if the above criteria is met. The
Company recognizes revenue related to these plans at the time of sale.
We also sell worldwide travel plans under installment plans. Under
such plans, the customer makes an initial down-payment and pays the
balance in monthly installments plus interest.
Commission income-- Under pre-need cremation services and merchandise
arrangements funded through insurance purchased by customers from
third party
68
insurance companies, we earn a commission on the sale of the policies.
Commission income, net of related expenses, are recognized at the
point at which the commission is no longer subject to refund,
generally 3 to 5 days after the contract is sold. Policy proceeds are
paid to us as cremation services and merchandise are delivered.
Direct and indirect costs--We expense direct and indirect costs in the
period incurred, with the exception of expenses specifically
identifiable to individual pre-need cremation arrangements, such as
commissions. Such expenses are recognized when the related pre-need
merchandise and/or service revenues, respectively, are recognized.
(c) Trust Funds
Depending upon the jurisdiction in which a pre-need arrangement is
sold, the Company is required to place in trust or escrow certain, if
not all, of the proceeds received from the sale of a pre-need
arrangement. The trustors of such trusts are the purchasers of the
pre-need arrangements. Funds deposited in trust are not segregated
between amounts received for cremation services and funds received for
merchandise. The Company does not have access to or control of the
trust fund or escrow corpus and, therefore, such amounts are not
reflected in the accompanying consolidated financial statements.
Earnings on the trust funds and escrow deposits generally accumulate
in the trust fund or escrow deposit until the cremation service is
performed and the funds are released to the Company. The earnings on
the trust funds are provided to the Company to offset inflation in
costs to provide the cremation services. Accordingly, the Company
recognizes such earnings as additional revenue at the time the
cremation service is performed and the funds are released to the
Company. However, California and Florida allow the Company to withdraw
non-refundable fees from the trust on an annual basis in consideration
for administering the funds activities. California allows a maximum
fee of four percent of beginning year trust fund equity, subject to
the trust fund's annual performance. A certain Florida trust fund
allows the Company to withdraw the annual earnings of the fund as a
fee, subject to meeting certain funding requirements. Such fees are
recognized currently as management fees in the accompanying
consolidated statements of operations.
The Company records deferred revenue to the extent it is not required
to place in trust or escrow funds received with respect to pre-need
cremation services and merchandise upon which the Company's revenue
recognition criteria have not been met. Where revenue is deferred, the
related commission costs are deferred until the pre-need contracts are
fulfilled (see Note 2(k)). Indirect costs of marketing pre-need
cremation services are expensed in the period incurred.
The fair value of the pre-need funeral trust assets summarized below
were $36,680,000 and $36,328,000 at December 31, 2000 and 2001,
respectively, which, in the opinion of management, exceeds the future
obligations under such arrangements.
December 31, December 31,
2000 2001
--------------- ----------------
Cash & Cash Equivalents $ 2,035,000 2,235,000
Fixed income investment contracts 7,319,000 3,140,000
Mutual funds and stocks 4,715,000 2,072,000
U.S. Government Investments 20,831,000 28,881,000
Life Insurance 1,780,000 -
--------------- ----------------
Total $ 36,680,000 36,328,000
================ ================
69
Under pre-need cremation services and merchandise arrangements funded
through insurance purchased by customers from third party insurance
companies, the Company earns a commission on the sale of the policies.
Commission income, net of related expenses, are recognized at the
point at which the commission is no longer subject to refund,
generally 3 to 5 days after the contract is sold. Policy proceeds are
paid to the Company as cremation services and merchandise are
delivered.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(e) Property and Equipment
Property and equipment are stated at cost. The costs of ordinary
maintenance and repairs are charged to operations as incurred, while
renewals and betterments are capitalized. Depreciation of property and
equipment is computed based on the straight-line method over the
following estimated useful lives of the assets:
Leasehold improvements Useful life or remaining lease
term, whichever is shorter
Furniture and fixtures 5 to 7 years
Equipment 5 years
Nautical equipment 5 years
Automobiles 5 years
(f) Names and Reputations
Names and Reputations consists of the excess of the purchase price
paid over the fair value of identifiable net assets acquired in
transactions accounted for as purchases. "Names and Reputations" is a
term used in the death care industry and is similar to goodwill. Such
amounts are amortized over 20 years using the straight-line method.
Many of the acquired cremation service entities have provided high
quality service to customers for generations. The resulting loyalty
often represents a substantial portion of the value of a cremation
business. The Company continually monitors the recoverability of this
intangible asset based on the projections of future undiscounted cash
flows of the acquired businesses. If impairment is indicated, then an
adjustment will be made to reduce the carrying amount of the
intangible asset to its fair value. At December 31, 2001, no
impairment was deemed to have occurred. Accumulated amortization at
December 31, 2000 and 2001 was $2,551,000 and $1,713,000,
respectively.
(g) Non-compete agreements
The Company amortizes its non-compete agreements over the expected
period of benefit, not to exceed the contractual term of the
agreements, generally 3 years. The Company monitors the recoverability
of its non-compete agreements based on the projections of future
undiscounted cash flows of the geographic area to which the
non-compete agreement relates. If an impairment is indicated, then an
adjustment will be made to reduce the carrying amount of the
intangible asset to its fair value.
70
At December 31, 2001, no impairment was deemed to have occurred.
Accumulated amortization at December 31, 2000 and 2001 was $159,000
and $97,000, respectively.
(h) Advertising
Costs of advertising are expensed as incurred. Advertising expense was
approximately $59,000, $185,000, $373,000 and $423,000for the three
months ended March 31, 1999, the nine months ended December 31, 1999
and the years ended December 31, 2000 and 2001, respectively.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded to reduce deferred
tax assets to their estimated net realizable value.
As a result of the Company's continuing losses, during the years ended
December 31, 2000 and 2001, respectively, the Company recorded a
valuation allowance against all of its deferred tax assets.
(j) Stock Option Plan
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and continues to apply Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its
stock-based compensation plans.
(k) Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions applicable to
pre-need cremation service and merchandise sales. These costs are
deferred and expensed in the period of performance of the services and
delivery of merchandise covered by pre-need arrangements.
(l) Deferred Financing Costs
Under certain debt agreements, the Company is obligated to pay a
portion of the lender's expenses and loan origination costs. These
costs are deferred and expensed as interest expense over the life of
the associated debt.
(m) Computation of Earnings (Loss) Per Common Share
For the nine months ended December 31, 1999 and the years ended
December 31, 2000 and 2001, basic and diluted loss per share is
computed by dividing net loss by the weighted average number of common
shares outstanding during the period. For the nine months ended
December 31, 1999 and the years ended December 31, 2000 and 2001,
options to purchase 106,688, 158,438 and 215,250, respectively, shares
of common stock at prices ranging from $3.64 to $57.00 per share were
not included in the computation of diluted loss per share because the
effect would be anti-dilutive.
71
Additionally, 84,375, 84,375 and 88,750, respectively, warrants to
purchase common stock ranging from $12.00 to $50.00 per share were not
included in the computation of diluted loss per share at the nine
months ended December 31, 1999, and the years ended December 31, 2000
and December 31, 2001 because the effect would be anti-dilutive.
(n) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and current
receivables and payables approximate fair value due to the short-term
nature of these instruments. The fair value of the Company's long-term
fixed rate debt is estimated using future cash flows discounted at
rates for similar types of borrowing arrangements and approximates its
carrying value.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(p) Comprehensive Income (loss)
Except for net income (loss) the Company does not have any
transactions or other economic events that enter into other
comprehensive income (loss) during the periods presented.
(3) Change in Accounting Principle
In response to the Securities and Exchange Commission's issuance of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
(SAB No. 101), effective January 1, 2000, the Company changed its
accounting policies applicable to pre-need merchandise sales. The
implementation of SAB No. 101 had no effect on the consolidated cash flows
of the Company.
In response to SAB No. 101, the Company changed its revenue recognition
accounting policy with respect to merchandise sold in a pre-need
arrangement to include conditions beyond current state regulations. As of
January 1, 2000, the Company has included a definitive delivery date, the
requirement that stored merchandise be segregated and specifically
identified by customer, not subject to being used to fill other orders, and
exchange for a different piece of merchandise at a later date is remote. In
addition, the merchandise must not be subject to claims of the Company's
creditors, the risks and rewards of merchandise ownership must have
transferred to the customer, and the Company's custodial risks are
insurable and insured. Since the additional criteria had not been met for
pre-need merchandise sales for the nine months ended December 31, 1999 a
cumulative effect adjustment of $404,000 or $0.23 per diluted share, was
recorded at January 1, 2000 representing the cumulative effect of deferring
revenues of $488,000 on those sales for which our additional revenue
recognition criteria had not been met. The Company deferred revenues of
$4,326,000 and $5,097,000, respectively, for the years ended December 31,
2000 and 2001 until such time as the additional criteria noted above has
been satisfied. Future pre-need merchandise sales will be recognized upon
satisfaction of the Company's current revenue recognition policy.
72
The effect of this change on income before the cumulative effect of the
accounting change, for the years ended December 31, 2000 and 2001 was to
increase net loss $3,613,000 and $3,326,000, respectively, or $2.03 and
$1.67 per diluted share. If the new accounting principle had been in effect
for the nine months ended December 31, 1999 and three months ended March
31, 1999, net loss would have been $2,294,000 and $280,000, respectively.
The diluted loss per share for the nine-month period ended December 31,
1999 would have been $1.50.
(4) Property and Equipment
Property and equipment is summarized as follows:
December 31, December 31,
2000 2001
----------------- -----------------
Land $ 1,000,000 0
Building 404,000 0
Furniture and fixtures 195,828 143,606
Nautical equipment 110,000 110,000
Automobiles 117,308 97,611
Equipment 461,963 416,971
Leasehold improvements 322,935 191,882
----------------- -----------------
Total property and equipment 2,612,034 960,070
Less accumulated depreciation and amortization 246,228 411,601
----------------- -----------------
Property and equipment, net $ 2,365,806 548,469
================= =================
(5) Long Term Debt
Long-term debt at December 31, 2000 and 2001, respectively, is as follows:
December 31, December 31,
2000 2001
13% Convertible debentures, non-amortizing, interest accruing at 13% per year
payable monthly at 6.5% per year, due February 24, 2005. See (b) below. $ 5,000,000 5,000,000
Note payable, non-amortizing, interest accruing at 9% per year on $5,635,905
payable in monthly installments of $37,006. Non-interest bearing on $9,238,313.
Balance due in three payments of $4,874,216, $5,275,562, and $4,724,440, on
January 3, 2000 and July 31, 2000 and 2001, respectively. In July 2000, this
note was amended to extend the due date of $4,724,440 to July 31, 2001. Secured
by a first trust deed on all assets of the Company. See (a) & (e) below.
4,724,440 2,391,940
Note payable to a private investor, non-interest bearing, non-amortizing, due
on September 30, 2001. 3,000 shares of the Company's common shares were
issued in connection with the transaction. The value of these shares is
being amortized over the life of the note. See (c) below. 1,000,000 1,000,000
Note payable, non-amortizing, interest accruing at 19.98% payable monthly due
December 2002. See (k) below. - 800,000
73
December 31, December 31,
2000 2001
Note payable, non-amortizing, non-interest bearing due July 2003. See (l)
below. - 350,000
8% Convertible debentures, non-amortizing, interest accruing at 8% per year
payable monthly, due July 17, 2003. The balance is net of unaccreted discount of
$0, arising from the beneficial conversion feature of the
debentures. See (d) & (m)below. 937,503 -
13% Convertible debentures, non-amortizing, interest accruing at 12% per year
payable monthly, due July 31, 2003. See (g) & (m) below. - 75,000
Notes payable, non-interest bearing payable in monthly installments of
$15,000, due November 2003 and February 2004. The balance is net of
unaccreted discount of $60,090. See (i) below. - 369,872
Note payable, interest accruing at 10% payable in monthly installments of
$14,000, due July 2003. See (j) below. - 94,102
Notes payable, interest accruing at 9% payable in monthly installments of
$1,244 and $980, respectively, both notes due May 31, 2002. 35,184 10,877
Line of credit, interest accruing at 9%, interest only payable monthly,
maximum limit $100,000, principal due April 1, 2002. 90,000 90,000
11,787,127 10,181,791
Less current installments 5,748,946 2,890,215
---------------- ---------------
$ 6,038,181 7,291,576
================ ===============
(a) On August 1, 1999, a $19,000,000 note issued in connection with
the acquisition of the Predecessor was amended as follows: i)
$9,625,088 of the note became interest free in exchange for $76,000
cash, 34,375 warrants to acquire common shares at $48 per share and
revised payment due dates of $386,776 on August 11, 1999, $4,172,476
on January 3, 2000 and $5,065,836 on July 31, 2000, and ii) $9,374,912
retained its 9% interest rate and became due as follows: $3,739,008 on
August 11, 1999, $701,740 on January 3, 2000 and $4,934,164 on July
31, 2000. The costs associated with the amendment and the fair value
of the warrants issued have been deferred and recognized as an
adjustment to the notes' interest rate on a prospective basis from
August 1, 1999. The fair value of the warrants issued was estimated to
be $401,324 based on the Black-Scholes option pricing model using the
following assumptions: dividends yield of zero; expected volatility
20%; risk free interest rate 4.61%; and expected life of 4 years.
(b) On December 30, 1999, the Company issued $5,000,000 of 13%
convertible debentures due February 24, 2005. The debentures were
issued with detachable warrants to acquire 25,000 common shares at
$41.68 per share and 25,000 common shares at $50.00 per share. The
fair value of the warrants, $670,409, was recorded as a deferred
financing cost and a credit to additional paid-in-capital. The
following assumptions were used in the Black Scholes pricing model:
expected volatility of 20%, risk free interest rate of 5.11%, and the
expected life of the warrants of 4 years. The amortization of such
deferred financing cost results in an effective interest rate of
15.8%. In addition, the debentures are convertible to common stock at
an initial conversion ratio of 40:1 (adjustable based on certain
anti-dilution rights), or a total of 125,000 common shares. The
intrinsic value of the beneficial conversion feature, $562,000, has
been recorded as a credit to additional paid-in-capital and a discount
to the related debt. The fair value of the Company's common stock is
based on its quoted market price. Such discount was recognized as
interest expense over the period up to the initial conversion date,
September 30, 2000. Under the terms of the debenture purchase
agreement, the Company has granted demand and piggy-back registration
rights, at the Company's expense, for the resale of any shares
received upon conversion or exercise of the debentures or warrants.
The Company is also obligated to adjust the number of shares issuable
under the convertible debentures and warrants if it issues additional
shares of common stock under the following scenarios: (i) the Company
issues shares for less than $40.00 in cash, in which case the
debenture shall be convertible at the lower price or (ii) the Company
issues shares without consideration in a transaction that results in
the issuance of shares for consideration of less than $40.00 per
share, in which case the debenture shall be convertible at a price
adjusted to give effect to the lower value of the share issuance.
74
In December 2001, in exchange for the amendment of certain terms in
the debenture agreements, the Company agreed to (i) issue 168,750
shares of the Company's common stock to the above convertible
debenture holder, (ii) reduce the conversion price to $3.00 per share,
(iii) accelerate payment of certain deferred interest payments, (iv)
reduce the warrant exercise price to $12.00, (v) effect a 4:1 reverse
stock split on or before June 30, 2002, and (vi) restrict the amount
of equity securities issued by the Company. The debenture holder
agreed to (i) eliminate the "full ratchet" anti-dilution provision and
(ii) amend the certain debt coverage ratios. The debenture holder
retained certain anti-dilution rights that would allow it to maintain
its proportion ownership percentage.
(c) On March 31, 2000, the Company obtained an additional $750,000
loan from Private Investment Company, Ltd., bringing the total of the
promissory note to $1,000,000. The note is an interest-free,
non-amortizing, promissory note to be repaid no later than September
30, 2001. Financing costs of 3,000 common shares valued at $50.00 per
share were paid in connection with this loan and are being amortized
to interest expense over the life of the loan.
(d) On July 17, 2000, the Company issued a three-year $1,000,000
convertible debenture in connection with the purchase of the Portland
acquisition at an interest rate of 8%, payable in monthly
installments. The debenture is convertible into 20,833 shares of our
common stock upon election of the holder at any time between the first
anniversary of the closing date and the due date. The intrinsic value
of the beneficial conversion feature, $115,000 was recorded as a
credit to additional paid-in-capital and a discount to the carrying
value of the debentures. The discount is being accreted to the
redemption price of the debentures and results in an effective
interest rate of 11.8%. Upon our notification of our intention to
redeem the debenture, the holder has the right to convert the
debenture, or accept the cash payment and receive a warrant to
purchase shares of our common stock calculated by dividing the then
principal amount by $48.00 at the time of the redemption. The warrant
shall be exercisable until July 2003. We granted the purchaser
piggyback registration rights pursuant to which we agreed to register
the purchasers' common stock in the event we file a registration
statement, at our expense, to register any of our securities for our
own account or for the account of other security holders.
(e) On July 31, 2000, the Company restructured its note due to the
Weintraub Trust. The Company i) repaid $1,297,778 ($1,024,000 carrying
value) outstanding under its $2,000,000 acquisition note, ii) repaid
$341,396 under the $19,000,000 acquisition note resulting in a
remaining balance of $4,724,440 outstanding and extended the due date
on such amount to July 31, 2001. In consideration for the extension of
the due date, the Company guaranteed the difference between $47,250
and the aggregate cash to be received on the sale of 844 shares of the
Company's common stock held by the Weintraub Trust monthly over the
extension term (a total of 10,125 shares). As a result of the
guarantee, the Company has paid and expensed $254,000 and $16,676,
respectively, through December 31, 2001 and 2000. The Company has
recorded a liability and deferred financing costs for the fair value
of such guarantee and adjustments to such liability are recorded
through interest expense.
(f) In August 2001, the Company paid $2 million of its $4.7 million
note payable and restructured the remaining $2.7 million of its
original acquisition debt. The remaining $2.7 million became due and
payable on January 2, 2002, along with a cash loan fee of $168,000.
The restructured amount will accrue interest at 12% per annum, payable
monthly. The Company also issued 13,750 shares of the Company's common
stock valued at $224,000. The value of the shares and the cash loan
fees was amortized to interest expense over the life of the note.
(g) In August 2001, the Company borrowed $1,575,000 at 12% interest
per annum, payable monthly, which was due and payable January 2, 2002.
Of the principle amount, $75,000 represents a loan fee. The Company
also issued 3,947 shares of the Company's common stock valued at
$41,000 and a warrant to purchase up to 7,500 shares of the Company's
common stock at $41.68 per share. The value of the shares and warrants
and cash loan fees was amortized to interest expense over the life of
the note. The debt is collateralized by certain assets of the Company.
75
(h) In August 2001, the Company entered into a Memorandum of
Understanding to convert its $1,000,000 note due to Private Investment
Company, Ltd. on September 30, 2001 into a 12% convertible debenture
with interest payable annually on September 30th of each year of the
term. The debenture shall have a conversion price of $24.00 per share
of the Company's common stock and a maturity date of September 30,
2004. The Company shall issue 2,500 shares of the Company's common
stock valued at approximately $45,000. This transaction was not
consummated as of December 31, 2001.
(i) In November 2001, the Company issued non-interest bearing, notes
payable of $360,000 and $70,000, respectively, in connection with
professional services rendered due November 2003 and February 2004.
The $360,000 note is amortizing at $15,000 per month. The Company also
issued 25,000 shares valued at $72,000. The notes were discounted
$65,000 to their approximate fair market value. The value of the
shares and the discount is being amortized to interest expense over
the respective lives of the notes. The carrying value of the notes
payable at December 31, 2001 was $370,000. To the extent the Company
complies with the terms of the notes, the note holder shall forgive
the $70,000 obligation. The notes are collateralized by certain assets
of the Company.
(j) In November 2001, the Company issued a 10% amortizing, note
payable of $120,000 in connection with professional services rendered
due July 31, 2002. The debt is collateralized by certain assets of the
Company.
(k) In December 2001, the Company entered into an agreement to borrow
a total of $1,500,000 for payment of Weintraub debt and working
capital purposes. On December 28, 2001, the Company issued a 19.98%
non-amortizing, note payable of $800,000 due December 28, 2002. Under
the agreement, the Company may borrow an additional $700,000 at 19.98%
due one year from the date of the note which would also be
non-amortizing.
(l) In December 2001, the Company executed an agreement with Mr.
Weintraub and the Weintraub Trust ("Weintraub") to restructure the
remaining $2.7 million of acquisition debt, previously due January
2002, at 12% interest per annum. On December 28, 2001, the Company
paid Weintraub $333,000 of note principle, and agreed to amortize
$963,000 over 18 months and make a lump-sum payment of $1,429,000 in
July 2003. Also as a part of the agreement, the Company paid $168,000
in loan fees related to previous loan restructurings, issued a 13%
non-amortizing, note payable of $350,000 due July 31, 2001 for
additional loan fees related to this restructuring and issued
Weintraub 75,000 shares of the Company's common stock valued to
$126,000. The value of the shares and the cash loan fees is being
amortized to interest expense over the life of the note. The Company
and Weintraub further agreed to either mutual releases with insurers
and/or Weintraub to forebear from suing insurers. (See Note 8(b)
Litigation".) The Company also paid-out the remainder of all payments
due over Weintraub's consulting agreement in the amount of $355,000
and terminated the agreement.
(m) In December 2001, as a condition of the sale of certain assets
related to its Portland, Oregon businesses (the "Oregon Assets"), the
Company entered into an agreement to restructure and extend its
$1,575,000 note payable at 12% previously due January 2, 2002 to a
July 2002 due date. Under the agreement, $1,500,000 of the $1,575,000
note payable and the $1,000,000 convertible debenture, respectively,
were assumed by the purchaser of the Oregon Assets. The debt holder
exchanged the remaining $75,000 of the note for a 13% debenture
convertible at $0.33333 per share maturing July 2002, subject to
anti-dilution price protection, which in the event that the Company
effects a reverse split of it common stock prior to July 31, 2002, the
conversion price of the convertible debenture would not exceed
$0.333333 per share (post split). Also, the Company issued the debt
holder 75,000 shares of the Company's common stock valued at $120,000
and guaranteed the payment of the $1,500,000 assumed note. The value
of the shares is being amortized to interest expense over the life of
the debenture.
76
The aggregate maturities of long-term borrowings after consideration
of unaccreted discount at December 31, 2001 are as follows:
2002 $ 2,890,215
2003 2,222,796
2004 68,780
2005 5,000,000
2006 and thereafter 0
-
$ 10,181,791
(6) Shareholders' Equity
(a) Common Stock
In January 1999, Neptune Society, Inc., the Successor, issued 250,000
shares of common stock at $0.80 per share in a private placement. In
addition, four share purchase warrants were issued with each share. In
April 1999, the Company received gross proceeds of $800,000 from the
exercise of the share purchase warrants. In July 1999, the Company
entered into a private placement Agency Agreement for the sale of
145,834 shares of the Company's common stock at $48.00 per share.
During 1999, 143,750 shares were sold under such agreement for gross
proceeds of $6,900,000. The remaining 2,084 shares were sold for gross
proceeds of $100,000 in January 2000. The Company paid an agency fee
of $420,000 in connection with such private placement.
Effective as of May 19, 2000, the Company's Board of Directors
authorized and effected a 1 for 2 reverse split of its common stock.
Per share amounts in the accompanying consolidated financial
statements give retroactive effect to the reverse stock split.
In July 2000, the Company entered into a private placement Agency
Agreement for the sale of 125,000 shares of the Company's common stock
at $56.00 per share. On August 9, 2000, the private placement was
closed for gross proceeds of $7,000,000. The Company paid an agency
fee of $75,000, legal fees of $7,500 and a finder's fee of 37,500 of
the Company's common shares valued at $2,100,000 in connection with
such private placement.
Effective as of March 22, 2002, the Company effected a 1 for 4 reverse
split of its common stock. Information contained in these consolidated
financial statements gives effect to the reverse stock split.
(b) Stock Option Plan
In 1999, the Board of Directors of the Company adopted the 1999 Stock
Incentive Plan (Stock Option Plan) for the grant of qualified
incentive stock options (ISO), stock options non-qualified and
deferred stock and restricted stock. The exercise price for any option
granted may not be less than fair value (110% of fair value for ISOs
granted to certain employees). Under the Stock Option Plan, 225,000
shares are reserved for issuance. On December 31, 2001, 92,250 options
to acquire common stock were granted at an exercise price of $3.64 to
$10.00 per share, which was equal to the market value on such date.
The options vest one year from the date of grant and expire three
years from the date of grant. 35,438 options were canceled during
2001. At December 31, 2001 and 2000, 9,750 and 66,563 options,
respectively, were available for grant.
During the year ended December 31, 2000, 87,500 options to acquire
common stock were granted at exercise prices ranging from $48.48 to
$57.00 per share. The options vest one year from the date of grant and
expire three years from the date of grant. In addition, 35,750 options
were canceled during the year.
(c) Stock Compensation
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," and applies Accounting
Principles Board Opinion No. 25 and related interpretations in
accounting for its stock based compensation plans. The following table
is a summary of the Company's stock options outstanding as of December
31, 2000 and 2001 and the changes that occurred during the years ended
December 31, 2000 and 2001.
77
2000 2001
------------------------------------------ --------------------------------------
Number of Shares Weighted Average Number of Shares Weighted Average
Underlying Options Exercise Prices Underlying Options Exercise Prices
------------------------------------------ --------------------------------------
Outstanding Beg of year 106,688 $ 47.00 158,438 $ 39.08
Granted 87,500 $ 51.28 484,296 $ 5.40
Cancelled (35,750) $ - (35,438) $ -
Outstanding End of year 158,438 $ 49.28 607,296 $ 14.52
Exercisable End of year 64,438 $ 47.00 275,256 $ 24.20
------------------------------------------ --------------------------------------
The following table further describes the Company's stock options
outstanding as of December 31, 2001:
Options
Number Options Weighted Average Weighted Number
Outstanding at Remaining Life Average Exercise Price Exercisable at
December 31, 2001 December 31, 2001 December 31, 2001 December 31, 2001
----------------- ----------------- ----------------- -----------------
$0 to $0.99 2,500 2.80 $ 3.64 -
$1.00 to $1.99 392,046 9.50 $ 5.44 119,319
$2.00 to $2.99 89,750 2.40 $ 5.44 -
Total 484,296 8.15 $ 5.40 119,319
SFAS 123 applies only to options granted since April 1, 1999. If the
Company had elected to recognize compensation cost for its stock
options based on the fair value at the grant dates for awards under
those plans, in accordance with SFAS 123, net earnings and earnings
per share for the years ended December 31, 2000 and 2001 would have
been as follows:
2000 2001
Net loss as reported (8,839,166) $ (10,151,168)
pro forma (10,396,000) $ (12,563,891)
Basic and diluted loss per common share
as reported (4.98) $ (5.09)
pro forma (5.84) $ (6.28)
The fair value of the Company's stock options used to compute pro
forma net earnings and earnings per share disclosures are the
estimated present value at grant date using the Black-Scholes
option-pricing model.
The fair value of each option is estimated on the date of grant using
the Black Scholes option pricing model. The following weighted-average
assumptions were used in the Black Scholes option-pricing model:
78
2000 2001
---- ----
Dividend yield - -
Expected volatility 30.5%-34.5% 32%
Risk-free interest rate 6.02-6.77% 6.00%
Expected life of option 3 years 3 years
The weighted-average fair value of options granted during December 31,
2000 and 2001 was $11.36 and $5.00, respectively.
(7) Acquisitions
As described in Note 1, during 1999, the Company acquired all of the
outstanding shares and caused to be acquired the limited partnership
interests of the Predecessor Company. This transaction has been accounted
for utilizing the purchase method of accounting and the results of
operations of the acquired businesses have been included in the Company's
results of operations from the respective dates of acquisition.
The amounts and components of the purchase price and the allocation of the
purchase price to assets and liabilities acquired are as follows:
Cash (including $310,000 of transaction costs) $ 1,310,000
Common Stock 5,000,000
Fair value of $21,000,000 of notes issued 19,968,529
------------------
$ 26,278,529
==================
Property and equipment $ 326,774
Names and reputations 26,809,237
Current liabilities (857,482)
------------------
$ 26,278,529
==================
The fair value of the 125,000 common shares issued in connection with the
purchase of the Predecessor was based on the market value of the Company's
common stock before and after the acquisition.
Accounting Principles Board Opinion No. 16, Business Combinations, requires
that obligations to perform future services acquired in a purchase business
combination be recorded by the acquiring company at the present value of
the costs that will be incurred to perform the future services plus an
allowance for normal profit on those costs to perform the future services.
No purchase price consideration was allocated to the Predecessor's deferred
service revenue as the future additional cash consideration to be received
by the Company (in the form of trust proceeds) exceeds the fair value of
the future services to be performed. In addition, because the Company had
sufficient inventory to satisfy the Predecessor's pre-need merchandise
sales, the fair value of the remaining commitment with respect to such
merchandise is negligible.
On December 31, 1999, the Company acquired a crematory in Spokane,
Washington for $500,000 cash and 5,682 shares of common stock for a total
purchase price of $749,998 under an asset purchase agreement and a
non-compete agreement. The business combination was accounted for using the
purchase method of accounting and the excess of the purchase price over the
fair value of identifiable net assets acquired, $491,752, has been recorded
as names and reputations. The purchase agreement also contains provisions
for additional consideration to be paid based on future earnings of the
acquired entity. In addition, the Company is obligated to pay additional
consideration, not to exceed $125,000, based on the future market price of
the Company's common stock. Amounts paid as additional consideration, if
any, in accordance with the purchase agreement will be recorded as
additional purchase price. Such amounts are not contingent upon employment
of the seller with the Company. Pro forma results of operations for 1998
and 1999 as if the Spokane, Washington acquisition had occurred on January
1, 1998 are not significantly different from the reported operating
results.
In March 2000, the Company acquired all of the outstanding stock of the
Cremation Society of Iowa, Inc. in exchange for 20,129 shares of the
Company's common stock with a fair value of $1,000,000 and $110,000 in
cash.
79
In August, 2000, the Company renegotiated the purchase price for Cremation
Society of Iowa to 12,077 shares of the Company's common stock, with a fair
value of $640,000 at the date of the renegotiation, and $110,000 in cash.
The renegotiated purchase price also includes certain earn out provisions
based on gross revenues and EBITDA, and a price guarantee on the shares
issued in the purchase such that their fair value will not be less than
$640,000 on December 1, 2000. As of July 2000, the Company did not meet
certain conditions of the agreement. As such, the Company was required to
issue the former owners an additional 2,923 shares of its common stock
valued at $158,000.
In July 2000 the Company purchased all of the outstanding stock of Wilhelm
Mortuary, Inc., certain assets of Heritage Memorial Society, LLC and
Community Memorial Centers, LLC (Oregon businesses) in exchange for 78,327
shares of the Company's common stock value at $4,191,000, $500,000 in cash
and a convertible debenture of $1,000,000 maturing on July 17, 2003. The
debenture bears interest at 8% per year and is convertible into 20,833
shares of the Company's common stock at any time after July 2001, based
upon a conversion price of $48.00 per share. The intrinsic value of the
beneficial conversion feature, $115,000, was recorded as a credit to
paid-in-capital and a discount to the carrying value of the debentures. The
discount is being accreted to the redemption price of the debentures. This
acquisition was accounted for as a purchase. Of the abovementioned 78,327
common shares issued, 7,762 shares relate to non-compete agreements with
former owners of the acquired entities. The Company also issued 2,500
options exercisable at $49.60 per share, vesting July 1, 2001, and expiring
July 1, 2003 to a certain former employee of the acquired entities.
Pursuant to the Oregon businesses purchase agreement, if the value of the
common stock (based on the average trading price for the 60 day period
preceding the first trading day following July 17, 2001) issued to the
former owners of the Portland Business was less than $3,885,000, we would
pay the owners the difference between $3,885,000 and the value of the
shares in cash or, at our option, common stock of Neptune Society. In
August 2001, we issued 140,424 shares of common stock to the former owners
of the Portland Business under this agreement.
As described above, during the year ended December 31, 2000, the Company
acquired all of the outstanding shares of the Cremation Society of Iowa and
the Oregon businesses. These transactions have been accounted for utilizing
the purchase method of accounting and the results of operations of the
acquired businesses have been included in the Company's results of
operations from the respective dates of acquisition.
The amounts and components of the purchase price and the allocation of the
purchase price to assets and liabilities acquired are as follows:
Cash (including $93,620 of transaction costs) $ 703,620
Common Stock 5,103,419
Fair value of $1,000,000 of note issued 885,000
------------------
$ 6,692,039
==================
Current assets $ 66,009
Property and equipment 1,805,585
Names and reputations 4,618,165
Non-compete agreement 487,674
Current liabilities (173,891)
Long term debt (111,503)
------------------
$ 6,692,039
==================
The purchase price of the above acquisitions was allocated to the net
assets acquired based on management's estimate of the fair value of the
acquired assets and liabilities at the dates of acquisition.
80
The unaudited pro forma revenues and net loss, as if the acquisition of the
Companies had occurred at the beginning of 2000, would have been $8,293,000
and $8,852,000, respectively.
The unaudited pro forma results of operations does not necessarily reflect
the results of operations that would have occurred had the combined
companies constituted a single entity during such periods, and is not
necessarily indicative of results which may be obtained in the future.
Sale of Portland Assets
During the fourth quarter 2001 as part of our overall business strategy to
focus on our pre-need marketing and sales operations, we determined that it
was in our best interest to restructure our Oregon operations to dispose of
certain physical assets related to the Portland Business and the Portland
Property for the purposes of (i) reducing the liabilities of Wilhelm
Mortuary, Inc. to CMC and Green Leaf; and (ii) focusing our resources on
marketing and selling pre-need contracts on a national basis using third
party independent contractors to provide at-need services. Effective
December 31, 2001, we sold substantially all of the assets related to the
Portland Business and the Portland Property to Western Management Services,
L.L.C., an Oregon limited liability company managed by Michael Ashe
("Western"), under the terms of an asset purchase agreement (the "Portland
Purchase Agreement"). In connection with the acquisition of the Portland
Business and the Portland Property (collectively, the "Portland Assets"),
Mr. Ashe's employment agreement with Neptune Management was terminated in
its entirety and Mr. Ashe entered into a consulting agreement with the
Company to provide consulting services to us. Under the terms of the
Portland Purchase Agreement, we agreed as follows:
(i) Western would purchase the assets related to the Portland Business
and the Portland Property in consideration of (a) assuming $1,500,000 of
Wilhelm's obligations under the Green Leaf Note, (b) assuming Neptune
Society's obligations under the CMC Debenture in the amount of $1,000,000,
and (c) entering into a service agreement to provide Neptune Society
at-need services in connection with pre-need services sold within 100 miles
of Portland, Oregon;
(ii) Wilhelm would (a) pay $75,000 of the principal balance due under
the Green Leaf Note, (b) restructure terms of the Green Leaf Note to extend
the due date to July 31, 2002, and (c) obtain the consent of Green Leaf
related to Western's assumption of the obligations under the Green Leaf
Note;
(iii) Neptune Society and CMC would amend and restate the CMC
Debenture to delete the conversion features of the CMC Debenture and obtain
the consent of CMC related to Western's assumption of the obligations under
the CMC Debenture; and
(iv) Western's obligations are secured by a security interest in the
asset of the Portland Business granted to Wilhelm and a deed of trust on
the Portland Property, each of which is subordinate to Green Leaf's
security interest and deed of trust and to CMC's deed of trust.
In connection with our sale of the Portland Assets, we amended the terms of
a $1 million convertible debenture issued to Community Memorial Centers,
L.L.C., a limited liability company. David Schroeder, our Chief Operating
Officer, President and Director, and Michael Ashe, our Former Vice
President of Operations, are members of Community Memorial Centers, L.L.C.
The sale of the Portland Assets was closed on March 12, 2002.
81
(8) Commitments and Contingencies
(a) Leases
The Company leases facilities under operating lease agreements
expiring through November 2010. The Company also leases certain
equipment and automobiles under operating lease agreements expiring at
various dates through 2012. Rent expense for the three months ended
March 31, 1999, the nine months ended December 31, 1999 and the years
ended December 31, 2000 and 2001 were $62,000, $318,000, $515,000 and
$645,000, respectively.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2001 are as follows:
Year ending December 31:
2003 $ 409,765
2004 239,803
2005 219,214
2006 160,883
Thereafter 251,875
-------------------
$ 1,715,722
===================
(b) Litigation
During March 1998, the Department of Consumer Affairs, Funeral and
Cemetery Division (the "Department") commenced an administrative
proceeding alleging various statutory and regulatory violations
arising from an incident occurring at the Heritage Crematory. This
proceeding was settled by the Predecessor Company agreeing to sell its
business by a date certain or surrender its funeral director's
license. A sale of the Predecessor Company to Lari Corp, Inc. (see
Note 1) was concluded in March 1999. The Department granted us a
transfer of the funeral establishment license on July 22, 2000, with
the same probationary terms and conditions applicable to the Neptune
Group. These conditions require us to comply with the California
regulatory requirements related to our business of providing cremation
services and marketing pre-need plans for one year, or as long as Mr.
Weintraub continues to be a shareholder of the Company.
The Company was a defendant in litigation over the use of the service
mark "Neptune Society" in certain geographic areas of southern
California. The Company is currently prohibited from using such
service mark in the disputed geographic areas and the plaintiff is
seeking monetary damages in an unspecified amount. The Company
believes the lawsuit is without merit and intends to defend the case
vigorously. No provision has been made in the financial statements for
the ultimate outcome of this uncertainty. Additionally, the Company is
from time to time subject to routine litigation arising in the normal
course of business. Management, with the advice of legal counsel,
believes that the results of any such routine litigation or other
pending legal proceedings will not have a material effect on the
Company.
On May 15, 2000, Leneda, Inc. dba Neptune Society of San Diego County,
San Bernardino County, Riverside County, and Imperial County filed a
Complaint for service mark infringement, breach of contract, unfair
business practices, and interference with prospective economic
advantage in the United States District Court in and for the Central
District of California (Honorable Gary A. Fees). Both Leneda and the
Company operate under the service mark "Neptune Society", and the
concurrent use of that mark was the subject of a lawsuit before the
U.S. Patent and Trademark Office, which stretched from 1986 to 1995.
The Company and Leneda were parties to that lawsuit, which was
resolved through a settlement agreement that, in essence, divided up
the territories in which the parties could use the mark. Leneda
received exclusive rights in four southern California counties and the
Company received rights for use in some limited areas in the Los
Angeles, California area and outside of California. Subsequent to the
settlement, the Company had an arrangement with Leneda whereby Leneda
would perform at-need services for certain of the Company's pre-need
contracts sold within Leneda's territories. Leneda's lawsuit alleges
that the Company unlawfully used a trademark, "Neptune Society", for
certain services in a prohibited geographic area defined by the
settlement agreement.
On October 22, 2001, the Company entered into a settlement and
confidentiality agreement, effective August 8, 2001 (the "Settlement
Agreement"), by and among Leneda, Inc., a California corporation,
doing business as Neptune Society of San Diego County, Neptune Society
of San Bernardino County, Neptune Society of Riverside County and
Neptune Society of Imperial County ("Leneda"); the Registrant, Neptune
Management Corporation, a California corporation, Neptune Society of
Florida, Inc., a Florida corporation, Heritage Alternatives, Inc., a
California corporation, Heritage Alternatives, L.P., Neptune-Los
Angeles, Ltd., Neptune-Santa Barbara, Ltd., Neptune-St. Petersburg,
Ltd., Neptune-Fort Lauderdale, Ltd., and Neptune-Miami, Ltd.
(collectively, "Neptune Society"), and Emanuel Weintraub, individually
("Weintraub"). The Settlement Agreement provided for the dismissal of
the lawsuit filed by Leneda (the "Leneda Litigation"). The "Neptune
Society" Service Mark is the subject of the United States Patent and
Trademark Office's Trademark Trial and Appeals Board Concurrent Use
Order No. 871 and a 1995 Settlement Agreement pertaining thereto.
82
Under the terms of the Settlement Agreement, Neptune Society and
Leneda entered into a Service Agreement under which Leneda agreed to
be the sole service provider of fulfillment cremation services for a
total of 7,300 existing pre-need contracts (the "Relevant Contracts"),
which were either executed in or otherwise indicate that the contract
holder resided within the counties of San Diego, San Bernardino,
Riverside and Imperial, all located in the state of California. These
fulfillment services will be provided by Leneda for a specified price,
which will be paid from the proceeds of the amount trusted for the
beneficiary of the Relevant Contract with the remaining balance in the
trust, if any, paid to the Neptune Society in accordance with the
terms of the trust. Neptune Society also granted to Leneda a security
interest in the Relevant Contracts to secure performance of the
Neptune Society's obligations under the Service Agreement and the
Settlement Agreement. Leneda and Neptune Society each agreed to
implement appropriate procedures to ensure that the Service Mark would
be used in a manner consistent with the United States Patent and
Trademark Office's Trademark Trial and Appeals Board Concurrent Use
Order No. 871 and a 1995 Settlement Agreement. Neptune Society's
insurers agreed to pay Leneda $900,000 under the terms of the
Settlement Agreement.
In connection with the Settlement Agreement, Neptune Society agreed to
release any and all claims for indemnification against Weintraub under the
terms of the Share Purchase Agreement dated March 26, 1999. Weintraub
agreed to subordinate a security interest in the Relevant Contracts to
Leneda.
(9) Income Taxes
The Predecessor Company filed separate federal and state income tax returns
for each of the combining entities. Since no taxes were due from the C
corporations and any income taxes from the limited partnerships and the S
corporation (other than state taxes on certain S corporation earnings) were
the obligations of the partners or shareholders, no income taxes have been
provided in the consolidated financial statements for periods through March
31, 1999.
Income tax (benefit) expense for the nine months ended December 31, 1999
and the years ended December 31, 2000 and 2001 is summarized below.
1999 2000 2001
Current expense:
Federal $ - - -
State 800 800 -
----------- ----------- -----------
Total current 800 800 -
----------- ----------- -----------
Deferred (benefit) expense:
Federal (217,629) 217,629 -
State (37,299) 35,699 -
----------- ----------- -----------
Total deferred (254,928) 253,328 -
----------- ----------- -----------
Income tax (benefit) expense $(254,128) 254,128 -
=========== =========== ===========
Income tax (benefit) expense differs from the expected statutory amount for
the nine months ended December 31, 1999 and the years ended December 31,
2000 and 2001 as follows:
1999 2000 2001
Expected income tax expense (benefit) $ (728,879) (2,781,578) (3,451,937)
State income tax, net of federal benefit (125,076) (477,319) (600,701)
Nondeductible goodwill 377,682 592,632 832,602
Change in valuation allowance 200,773 2,822,093 2,780,000
Other 21,372 98,300 (440,036)
----------------- ---------------- --------------
Income tax (benefit) expense $ (254,128) 254,128 -
================= ================ ==============
83
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 2000 and 2001 is presented below:
2000 2001
----------------- ---------------
Deferred tax assets:
Deferred revenue $ 2,628,372 3,976,400
State taxes -
272
Net operating loss 1,395,566 3,350,600
Other 23,333 84,600
------------------- ---------------
Total gross deferred tax assets 4,047,543 7,411,600
------------------- ---------------
Valuation allowance (3,022,866) (5,802,600)
------------------- ---------------
Net deferred tax assets 1,024,677 1,609,000
Deferred tax liability:
Deferred commissions (1,024,677) (1,609,000)
------------------- ---------------
Net deferred taxes - -
=================== ===============
The Company's deferred tax asset is fully offset by a valuation allowance.
Management will continue to assess the valuation allowance and to the
extent it is determined that such allowance is no longer required, the tax
benefit of the remaining net deferred tax assets will be recognized in the
future.
The net operating loss carryforwards for federal income tax purposes of
approximately $8.7 million (federal) start to expire in the year 2019.
State income tax loss carryforwards of approximately $3.0 million start to
expire in the year 2004.
(10) Selected Quarterly Financial Data (Unaudited)
The quarterly results of operations for fiscal 2001 and 2000 were as
follows:
IN THOUSANDS, EXCEPT PER SHARE DATA
- -----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2001:
Net revenues $ 2,689 3,184 3,854 3,302
Gross profit 1,304 1,797 2,250 1,416
Operating loss (1,172) (1,243) (412) (4,809)
Loss before cumulative effect of change
in accounting principle (1,791) (1,669) (1,083) (5,608)
Net loss (1,791) (1,669) (1,083) (5,608)
Basic loss per share cumulative effect
of change in accounting principle (0.92) (0.88) (0.52) (2.68)
Basic net loss per share (1) $ (0.92) (0.88) (0.52) (2.68)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2000:
Net revenues 1,602 1,664 1,992 2,430
Gross profit 651 631 747 1,208
Operating loss (1,407) (1,367) (1,691) (1,231)
Loss before cumulative effect of
change in accounting principle (1,855) (1,789) (3,144) (1,647)
Net loss (2,259) (1,789) (3,144) (1,647)
Basic loss per share before extraordinary
item and cumulative effect of change in
accounting principle (1.12) (1.04) (1.72) (0.88)
Basic net loss per share (1) $ (1.36) (1.04) (1.72) (0.88)
- -----------------------
(1) Net income per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year.
(2) The Neptune Group was acquired March 31, 1999. As a result, operating
results for 1999 reflect the nine-month period ended December 31, 1999.
(11) Subsequent Events
On January 2, 2002, the Company began operations out of its Colorado
office.
Effective as of March 22, 2002, the Company effected a 1 for 4 reverse
split of its common stock. Information contained in these Consolidated
Financial Statements gives effect to the reverse stock split.
On March 27, 2002, the Company entered into a private placement agreement
for the sale of 1,388,889 shares of the Company's common stock at $1.08 per
share. On March 29, 2002, the Company received $1,400,000 of the $1,500,000
of gross proceeds due.
On March 28, 2002, the Company paid $700,000 of its $1,000,000 PIC note
payable (see Note 5).
84
(12) New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not
be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in
a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement
141 for recognition apart from goodwill. Upon adoption of Statement 142,
the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations,
and make any necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in
the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
will then have up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may
be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized
and unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. Any transitional impairment loss will be recognized
as the cumulative effect of a change in accounting principle in the
Company's statement of earnings.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $24.4 million which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $1.7 million and $1.8 million, respectively, for
the years ended December 31, 2000 and 2001. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report, including
whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
85
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which supersedes both FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (Statement 121) and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 retains the fundamental
provisions in Statement 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with Statement 121. Statement 144 retains the basic provisions of Opinion
30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than
a segment of a business). Unlike Statement 121, an impairment assessment
under Statement 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under Statement No. 142.
The Company is required to adopt Statement 144 no later than the year
beginning after December 15, 2001. Accordingly, the Company will adopt
Statement 144 in the first quarter of 2002. Management does not expect the
adoption of Statement 144 for long-lived assets held for use to have a
material impact on the Company's financial statements because the
impairment assessment under Statement 144 is largely unchanged from
Statement 121. The provisions of the Statement for assets held for sale or
other disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities. Therefore, management
cannot determine the potential effects that adoption of Statement 144 will
have on the Company's financial statements.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair
value of a liability for asset retirement obligations in the period in
which they are incurred. The statement applies to a company's legal
obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, and development or through
the normal operation of a long-lived asset. When a liability is initially
recorded, the company would capitalize the cost, thereby increasing the
carrying amount of the related asset. The capitalized asset retirement cost
is depreciated over the life of the respective asset while the liability is
accreted to its present value. Upon settlement of the liability, the
obligation is settled at its recorded amount or the company incurs a gain
or loss. The statement is effective for fiscal years beginning after June
30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported on Form 8-K filed on February 12, 2002, as amended
March 5, 2002, on January 25, 2002, KPMG LLP (the "Former Accountant"), was
dismissed as independent certified public accountant and independent auditor for
Neptune Society.
The consolidated reports of the Former Accountant on Neptune Society and
its subsidiaries' financial statements for either of the past two years did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles except that
the Former Accountant's report on the December 31, 2000 financial statement
contained a separate paragraph stating that: "The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company had
suffered recurring losses from operations and has a net working capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
In a letter dated December 18, 2001, the Former Accountant informed Neptune
Society that they noted certain matters involving Neptune Society's internal
controls and its operations that they considered to be reportable conditions
under standards established by the American Institute of Certified Public
Accountants ("AICPA"). The reportable conditions are related to:
(a) the design and operation of internal controls over the systems and
processes for recording deferred revenue and related deferred costs; and
(b) information technology to track, account, and monitor accounts
receivable detail by customer for pre-need, at-need, and travel receivables,
which the Former Accountant advised
87
Neptune Society that if not addressed in the near term, will likely become a
material weakness to Neptune Society.
Management has discussed the above matters with Neptune Society's board of
directors and Neptune Society has authorized the Former Accountant to fully
respond to the inquiries of Stonefield Josephson, Inc., regarding these matters.
Neither Neptune Society's Board of Directors nor any committee of the Board of
Directors has discussed the subject matter of the reportable conditions with the
Former Accountant. However, the letter containing the reportable conditions was
addressed to the Board of Directors. These conditions did not result in any
disagreement or difference in opinion between Neptune Society and the Former
Accountant.
During Neptune Society's two most recent fiscal years and the subsequent
interim period through January 25, 2002, there were no disagreements with the
Former Accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of the Former Accountant would have caused it
to make reference to the subject matter of the disagreement in connection with
its report.
On January 25, 2002 Neptune Society engaged Stonefield Josephson, Inc., as
its independent auditor and independent certified public accountant. The
decision to change accountants from the Former Accountant to Stonefield
Josephson, Inc., was approved by the board of directors. During Neptune
Society's two most recent fiscal years, and any subsequent interim period prior
to engaging Stonefield Josephson, Inc., Neptune Society has not consulted
Stonefield Josephson, Inc., regarding: (i) either (a) the application of
accounting principles to a specified transaction, either completed or proposed;
or (b) the type of audit opinion that might be rendered on Neptune Society's
financial statements, and neither a written report was provided to Neptune
Society or oral advice was provided that Stonefield Josephson, Inc., concluded
was an important factor considered by Neptune Society in reaching a decision as
to the accounting, auditing, or financial reporting issue; or (ii) any matter
that was either the subject of a disagreement (as defined in paragraph 304(a)
(1) (iv) of Regulation S-K) or a reportable event (as described in paragraph 304
(a)(1)(v) of Regulation S-K).
Neptune Society filed a current report on Form 8-K, as amended on March 5,
2002-, in substantially the form as this set forth in this Item 9, provided the
Former Accountant with a copy of the disclosure and requested in writing that
the Former Accountant furnish it with a letter addressed to the Securities and
Exchange Commission stating whether it agrees with the foregoing statements made
by Neptune Society. A copy of the letter of the Former Accountant to the
Securities and Exchange Commission, dated February 1, 2002 was filed as Exhibit
16.1 to the Form 8-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
SECTION 16(a) COMPLIANCE
The following table sets forth certain information with respect to our
current directors, executive officers and key employees. The term for each
director expires at our next annual meeting or until his or her Successor is
appointed. The ages of the directors, executive officers and key employees are
shown as of December 31, 2001.
88
Director/ Age
Name Position Officer Since
- ---------------------------------------------------------------------------------------------------------------
Marco P. Markin CEO and Director of each of Neptune Society, June 1999 37
Neptune of America, (since October) and
Neptune Management (since June 1999)
David Schroeder (1) President, Chief Operating Officer Secretary November 2000 55
and Director of each of Neptune Society,
Neptune of America and Neptune Management;
President of Heritage Alternatives (since
January 2001)
Gary R. Loffredo(2) Director of Neptune Society (since October April 1999 39
1999) and Neptune Management (since April
1999)
Thomas J. Soucy(3) Director of each of Neptune Society (since March 2000 43
June 1999); Chief Financial Officer,
Treasurer (from March 2000 to November 2000)
of each of Neptune Society, Neptune of
America, Neptune Management and Heritage
Alternatives
Rodney Bagley (1) Chief Financial Officer, Treasurer, November 2000 41
Secretary and Director of each of Neptune
Society, Neptune of America, Neptune
Management and Heritage Alternatives
Gary I. Harris(4) Director of Neptune Society October 1999 61
Tom R. Camp (5) Director of Neptune Society June 5, 2001 47
- ---------------------------------------------------------------------------------------------------------------
(1) Mr. Schroeder resigned as Secretary of all Neptune Companies on March 6,
2002, and was replaced by Mr. Bagley.
(2) Mr. Loffredo resigned as a Director of Neptune Management effective as of
March 7, 2002.
(3) Mr. Soucy resigned effective as of January 18, 2002.
(4) Mr. Harris resigned as a Director effective as of March 11, 2002.
(5) Mr. Camp resigned effective as of February 27, 2002.
Marco P. Markin - Mr. Markin joined Neptune Society full time as our
Chairman of the Board and Chief Executive Officer in September 1999. From
November 1994 to September 1999, Mr. Markin was the Executive Vice President of
TPP Management Inc., a private investment company, having a diverse portfolio
consisting of residential/commercial real estate, merchant banking, and
securities. Expertise included corporate management, and corporate development,
research and marketing. From January 1991 to November 1995, Mr. Markin was the
founder and CEO of a commercial real estate company, which secured and managed a
portfolio of 400,000 square feet of real estate. He was also the co-founder of
one of the largest direct marketing companies in Canada, which was subsequently
sold to the Financial Post. From 1985 - 1990, Mr. Markin was the founder and CEO
of Markin Development Group, a growing development company focusing on
construction of multi-family apartment buildings and commercial offices. Mr.
Markin graduated from Bishop College in Montreal in 1982. He also attended the
University of British Columbia's Science Program from 1982 - 1985.
89
David L. Schroeder - Mr. Schroeder was appointed Chief Operating Officer of
Neptune Society on June 1, 2000, as a Director and Secretary of Neptune Society
in November 2000, and as President of all Neptune companies in January 2001.
Prior to his work with Neptune, Mr. Schroeder worked as the CEO of Community
Memorial Centers, LLC, an Oregon cremation services company from May 1998 to
July 2000. He has served on the board of directors for The Loewen Group, Inc.,
from August 15, 1990 to May 1, 1993, he was president of Universal Memorial
Centers from 1984 to 1993, president and COO of Skyline Memorial Gardens &
Crematory, and he worked for 7 years as a licensed funeral director and
embalmer. Mr. Schroeder has served on the board and as an officer of the Oregon
State Funeral Directors Association and as Chairman of the Oregon State
Mortuary-Cemetery Licensing Board.
Rodney M. Bagley - Mr. Bagley has served as Director, Chief Financial
Officer and Treasurer of Neptune Society, Neptune of America, Neptune Management
and Heritage Alternatives since November 2000. Prior to his appointment at
Neptune Society, Mr. Bagley served as Chief Financial Officer of Avalon
Pictures, Inc., a subsidiary of Black Entertainment Television from 1993 to 1998
and was President of RMB Consulting from 1999 to September 2000. He also served
as Assistant General Manager and Controller of District Cablevision, L.P., a
subsidiary of Telecommunication, Inc. from 1988 to 1992. Mr. Bagley graduated
from the University of Maryland at College Park with a B.S. in Accounting in
1986.
Gary R. Loffredo - Since November 1998, Mr. Loffredo has been Vice
President of Investment Banking for BG Capital Group. BG Capital Group is a
venture capital and merchant banking firm with offices in Florida and Canada.
Prior to joining BG Capital, Mr. Loffredo began his career at Lehman Brothers in
New York and Miami where he worked for 12 years. From April 1997 to December
1998, Mr. Loffredo served as President for Rome Supply Corp, a private
construction company he founded based in Florida. Mr. Loffredo majored in
finance, graduating from the University of South Carolina with a Bachelor of
Science Degree in 1984. Mr. Loffredo resigned as a Director of Neptune
Management effective as of March 7, 2002.
Thomas J. Soucy - Mr. Soucy is a Director of Neptune Society. Mr. Soucy
served as the Chief Financial Officer for Neptune Society, Neptune of America,
Neptune Management and Heritage Alternatives from March 2000 to November 2000.
Mr. Soucy has worked as an accounting supervisor for Hughes Aircraft Company
from June, 1979 to June, 1984, progressed to the position of audit manager for
Deloitte & Touche from June, 1984 to September, 1990, and as CFO of Englewood
Park Cemetery and Green Hills Memorial Park from September, 1990 to January,
2000. Mr. Soucy is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants, the State Society of Certified Public
Accountants, he has served on various boards of nonprofit organizations. He is
also a member of the Internment Association of California and a past member of
the International Cemetery and Funeral Association. Mr. Soucy resigned effective
as of January 18, 2002.
Gary I. Harris - Mr. Harris is the National Sales Manager of Neptune and a
Director. Prior to joining Neptune in March 2000, Mr. Harris was the Senior
Vice-President in charge of the print division at T.V. Fanfare Publication, an
international advertising company, where he
90
worked since 1985. He attended both the University of Toledo and New York
University. Mr. Harris resigned as a Director effective as of March 11, 2002.
Tom Camp - Mr. Camp's professional background ranges from holding a
position as the Director of Programs for the Nebraska Safety Counsel to working
as an attorney for Gang, Tyre, Ramer & Brown, Inc., an entertainment law firm,
to his current position as CEO, Secretary and General Counsel of The Apogee
Companies. Mr. Camp has been a part of the Apogee Companies, its predecessors
and affiliates, since the company's formation in 1991. Mr. Camp is also Manager
of Green Leaf Investors II, LLC. In addition to his current status at Apogee,
Mr. Camp also currently serves as a Director of Hanna Car Wash Systems
International, LLC. Mr. Camp has also previously served as a Director of
Micromonitors, Inc. Mr. Camp resigned effective as of February 27, 2002.
Subsequent to December 31, 2001, we appointed Anthony George and Bryan G.
Symington Smith as directors to fill vacancies created as a result of the
resignations of four members of our board.
Bryan G. Symington Smith - Mr. Smith is currently serving as a Director for
Neptune. He started his career in 1967 with Nesbitt Thomson, served as Vice
President and Director of Draper Dobie Limited from 1973-1977, as Senior VP of
Gardiner Watson Limited from 1977-1987. In 1990 Mr. Smith co-founded Burgundy
Asset Management. Although Mr. Smith retired in 1998, he is currently serving as
a director of several companies and non-profit organizations.
Anthony George - Mr. George is currently serving as a Director for Neptune.
Since 2000 he has been a Head Trader at Yorkton Capital in Ontario Canada, and
is currently awaiting his approval to become a Senior VP with Yorkton. From 1986
- - 2000 Mr. George was a Trader with Midland/Merrill Lynch in Canada, and was
also nominated as the Vice President.
None of our executive officers or key employees are related by blood,
marriage or adoption to any director or other executive officer.
Board Committees
Our board of directors has established the following committees:
Audit Committee. The Company is in the process of appointing the Audit
Committee. The Audit Committee will be responsible for reviewing our financial
reporting procedures and internal controls, the scope of annual and any special
audit examinations carried out by our auditors, the performance of our auditors,
systems and controls established to comply with financial regulatory
requirements and our annual financial statements before they are reviewed and
approved by the Board. Such reviews will be carried out with the assistance of
our auditors and our senior financial management.
Compensation Committee. The Compensation Committee consists of three
directors: Marco Markin, David Schroeder and Rodney Bagley. The Compensation
Committee is responsible for the establishment and revision of our compensation
policy, the review of the compensation (including stock options) of our senior
management and its subsidiaries, and to make recommendations to the Board for
adjustments to such compensation. The Committee is also responsible for the
administration of our stock option plan and its benefit plans.
91
Our compensation committee submits compensation recommendations to our
board of directors for its approval. Compensation for our chief executive
officer was determined considering his efforts in assisting in the development
of our business strategy, the salaries of executives in similar positions, the
development of business, and our general financial condition. Our Board of
Directors believes that the use of direct stock awards is at times appropriate
for employees, and in the future intends to use direct stock awards to reward
outstanding service or to attract and retain individuals with exceptional talent
and credentials. The use of stock options and other awards is intended to
strengthen the alignment of interests of executive officers and other key
employees with those of our stockholders.
BOARD AND COMMITTEE MEETINGS
During 2001, the Board of Directors met 4 times including participants by
telephone, and approved actions by written consent 14 times. Each director
attended all of the Board meetings.
To our knowledge, there are no arrangements or understanding between any of
our executive officers of Neptune Society and any other person pursuant to which
the executive officer was selected to serve as an executive officer.
Section 16(a) Beneficial Ownership Reporting Compliance
The following represents each person who did not file on a timely basis
reports required by Section 16(a) of the Exchange Act during the year ended
December 31, 2001:
Name Reporting Person Form 3/# of Form 4/# of Form5/# of
transactions transactions transactions
- ---------------------------------------------------------------------------------------------------------------------
Marco P. Markin CEO and Director Late/1 N/A Late/2
David Schroeder(5) President, Chief Operating Officer Late/1 N/A Late/2
Secretary and Director
Gary R. Loffredo(1) Director Late/1 N/A Late/1
Thomas J. Soucy(2) Director Late/1 N/A Late/1
Rodney Bagley(6) Chief Financial Officer, Treasurer Late/1 N/A Late/2
and Director
Gary I. Harris(3) Director Late/1 N/A Late/1
Tom Camp (4) Director Late/1 Late/1 N/A
- ---------------------------------------------------------------------------------------------------------------------
1) Mr. Loffredo resigned as a Director of Neptune Management effective as of
March 7, 2002.
2) Mr. Soucy resigned effective as of January 18, 2002.
3) Mr. Harris resigned effective as of March 11, 2002.
4) Mr. Camp resigned effective as of February 27, 2002.
5) Mr. Schroeder resigned as Secretary effective as of March 6, 2002
6) Mr. Bagley was appointed as Secretary effective as of March 6, 2002.
92
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation paid to each of the individuals
who served as our Chief Executive Officer and our other most highly compensated
executive officers (the "named executives officers") for the fiscal years ended
December 31, 1999, 2000 and 2001. The determination as to which executive
officers were most highly compensated was made with reference to the amounts
required to be disclosed under the "Salary" and "Bonus" columns in the table.
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-----------------------------------------
Annual Compensation
--------------------------------------------------------------------------
Awards
Salary Bonus Other Annual Deferred Securities LTIP Payouts All Other
Compens- Compens- Under-lying Compens-ation
Name and ation ation Options/ SARs
Principal Position Year ($) ($) ($) ($) (#) ($)
- ---------------------------------------------------------------------------------------------------------------------
Marco Markin(1) 2001 $ 145,233 - $ 98,287 $ 54,767 159,432 $ -
President, CEO and 2000 $ 120,000 $ 83,000 37,500
Director of Neptune
Society 1999 $ 40,000
Emanuel Weintraub,(2) 2001 - - $ 587,325
Consultant to 2000 - $ 240,000
Neptune of America
1999 - $ 263,000
David Schroeder(3) 2001 $ 134,616 - $ 21,355 $ 38,263 149,432 $ 62,189
Chief Operating 2000 $ 120,000 - - 18,750
Officer of Neptune
Society 1999 -
Gary Harris4) 2001 $ 75,000 - $ 134,619 7,500
National Sales 2000 $ 75,000 - $ 78,000 3,125
Manager of Neptune
Management 1999 -
Rodney Bagley(5) 2001 $ 161,737 - $ 23,355 $ 38,263 149,432 $ 60,189
Chief Financial 2000 $ 51,000 - - 18,750
Officer, Secretary
and Director of 1999 -
Neptune Society
- ---------------------------------------------------------------------------------------------------------------------
93
(1) Mr. Markin was appointed as an Officer and Director of our subsidiary
companies n April 1999. He was appointed as Neptune Society's President and
CEO in October 1999. In 2001, his annual was salary of $200,000 of which
$54,767 was deferred. See "Employment Contract" section. In 2001, we paid
Mr. Markin $98,287 for lease payments on his home and for personal use of
an automobile.
(2) Mr. Weintraub was the President of the Neptune Group. The Neptune Group
paid compensation of $430,000 to Mr. Weintraub in 1999. Mr. Weintraub also
served as a consultant to the Company from April 1999 to December 2001.
During that period, all of Mr. Weintraub's compensation was related to his
consulting agreement with the Company.
(3) Mr. Schroeder has served as our Chief Operating Officer since June 1, 2000.
In 2001, his annual salary was $200,000 of which $38,263 was deferred. See
"Employment Contract" section. In 2001, we paid Mr. Schroeder $21,355 for
lease payments for personal use of an automobile. Under his employment, Mr.
Schroeder is entitled to $62,189 for lease payments on his home which have
been deferred.
(4) In 2001, Mr. Harris earned a salary of $75,000 per year and a bonus in the
form of sales commissions based on the number of Pre-Need Contracts sold by
independent contractors that he manages at the rate of $10 per contract.
Mr. Harris earned approximately $78,000 from sales commissions.
(5) Mr. Bagley was appointed Chief Financial Officer of Neptune Society in
November 2000. In 2001, his annual salary was $200,000 of which $38,263 was
deferred. See "Employment Contract" section. In 2001, we paid Mr. Bagley
$23,355 for lease payments for personal use of an automobile. Under his
employment agreement, Mr. Bagley is entitled to $62,189 for lease payments
on his home which have been deferred.
Director and Officer Stock Option/Stock Appreciation Rights ("SARs") Grants
Set forth below are the stock options we granted to our named executive
officers in most recently completed fiscal year. Such stock options expire three
years after the grant date. We did not grant any SARs during the most recently
completed fiscal year ended December 31, 2001.
OPTION/SAR GRANTS IN LAST FINANCIAL YEAR
Individual Grants
Market Value of
Common Shares
Common Shares % of Total Underlying
under Options/SARs Exercise or Options on the
Options/SARs Granted to Base Price Date of Grant Expiration
Granted Employees in ($/Common ($/Common Share) Date
Name # Financial Year Share)
- ------------------------------------------------------------------------------------------------------
Marco Markin 28,750 33% $10.00 $10.00 June 2003
President, CEO and 130,681 $ 4.40 $ 8.80 June 2010
Director of
Neptune Society
David Schroeder 18,750 31% $10.00 $10.00 June 2003
Chief Operating 130,681 $ 4.40 $ 8.80 June 2010
Officer of Neptune
Society
Gary Harris 7,500 2% $10.00 $10.00 June 2003
National Sales
Manager of Neptune
Management
94
Market Value of
Common Shares
Common Shares % of Total Underlying
under Options/SARs Exercise or Options on the
Options/SARs Granted to Base Price Date of Grant Expiration
Granted Employees in ($/Common ($/Common Share) Date
Name # Financial Year Share)
- ------------------------------------------------------------------------------------------------------
Rodney Bagley 18,750 31% $10.00 $10.00 June 2003
Chief Financial 130,681 $4.40 $ 8.80 June 2010
Officer of Neptune
Society
Gary Loffredo 2,500 >1% $10.00 $10.00 June 2003
Director of Neptune
Society
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
There were no stock options or SARs exercised during the last fiscal
year-end, and there were 275,256 vested options or SARs at December 31, 2001.
Long Term Incentive Plans
No long-term incentive awards were made during the most recently completed
fiscal years ended December 31, 1999, 2000 and 2001.
Defined Benefit or Actuarial Plan Disclosure
We do not provide retirement benefits for the directors or officers.
Compensation of Directors
None of our Directors received compensation for their service as directors
during the fiscal years ended December 31, 2000 and December 31, 2001, except
for Mr. Soucy who received $24,000.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Employment Arrangements
On June 6, 2001, the Company entered into employment agreements
("Agreement(s)") with Mr. Marco Markin, Chairman of the Board and Chief
Executive Officer, Mr. David Schroeder, President and Chief Operating Officer,
and Mr. Rodney M. Bagley, Executive Vice President-Finance and Chief Financial
Officer (collectively "Officers"). The Agreements are substantially the same.
The Agreements provide for each respective Officer's employment at their
respective position or higher. The Agreements provide for employment through
December 31, 2005.
Under the Agreements, each respective Officer receives an annual base
salary of $200,000 ($30,000 deferred subject to the Compensation Committee), up
to 113,750 options to purchase, at a discount, shares of the Company's common
stock vesting over the employment period, and a minimum annual bonus payments
equal to 50% of base salary subject to the Company achieving certain performance
based criteria. Our Compensation Committee determines the relevant performance
measures, the amount of the annual bonus payment and when deferred basic salary
payment will be made.
95
During the employment period, the Officers receive employee benefits no
less favorable than those provided to our other senior managers. The Agreements
provide that if any Officer resigns with good reason or if we terminate their
employment other than for cause or disability, then they will be entitled to
receive an immediate lump sum cash payment and certain installment payments
equal to the sum of:
* accrued, but unpaid, base salary or other payment and vacation through
the date of termination
* two or three times their base salary, depending upon period of
service, and
* the higher of $500,000 or three times the highest annual bonus paid
for any fiscal year during the employment period
They will also receive continued benefits for the longer of three years or
the remainder of the employment period. If any Officers' employment is
terminated due to disability, or in the event of death, the Officer(s) or his
estate will receive continued payments of the base salary for the remainder of
the scheduled term of the Agreement less any disability benefits. If any
Officers' employment is terminated for any other reason, he will be entitled to
receive his accrued, but unpaid, base salary and other payments and vacation
through the date of termination. The Company agreed to issue each of the
Officers a signing bonus of up to 17,000 options to purchase shares of the
Company's common stock at a discount.
Under the Agreement, the respective Officer can not compete with us, or
solicit our employees, during his employment term. In addition, if an Officer
terminates employment without good reason during the employment period or is
terminated by us for cause, the non-competition and non-solicitation continue
for one year after the termination of employment.
Report on Repricing of Options/SARs
We did not reprice any options or SARs outstanding during the most recently
completed fiscal years ended December 31, 2000 and 2001.
Additional Information with Respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
Our Compensation Committee consists of three directors: Marco Markin, a
director and our President and Chief Executive Officer, David Schroeder, a
director and our Chief Operating Officer, and Rodney Bagley, a director and our
Chief Financial Officer. The Compensation Committee is responsible for the
establishment and revision of our compensation policy, the review of the
compensation (including stock options) of our senior management and its
subsidiaries, and to make recommendations to the Board for adjustments to such
compensation. The Committee is also responsible for the administration of our
stock option plan and its benefit plans.
The Compensation Committee determined the compensation paid to Marco
Markin, our Chief Executive Officer, based on several factors, including the
compensation paid to chief executive officers of similarly situated companies,
our revenue growth and expansion growth over the past twelve months, our
financial position, our success raising financing to meet our
96
capital obligations and our financial performance. Mr. Markin did not
participate in the determination of his compensation.
Mr. Schroeder was a principal of the company we acquired our Portland
Business from, and we entered into an employment agreement with Mr. Schroeder in
connection with the acquisition. The determination of Mr. Schroeder's
compensation was negotiated at arms' length prior to his appointment to our
board of directors and the Compensation Committee. We subsequently sold our
Portland Business effective December 31, 2002.
Incentive Stock Option Plan
On October 8, 1999, shareholders of Neptune Society approved the 1999 Stock
Option Plan, as approved by the Board of Directors on June 1, 1999. The Option
Plan provides for the grant of incentive and non-qualified options to purchase
up to 225,000 shares of Neptune Society common stock to our employees and such
other persons as the Plan Administrator (which currently is the Board of
Directors) may select. The Plan is intended to help attract and retain key
employees and such other persons as the Plan Administrator may select and to
give such persons an equity incentive to achieve the objectives of our
shareholders.
Incentive stock options may be granted to any individual who, at the time
the option is granted, is an employee of Neptune Society or any related
corporation. Non-qualified stock options may be granted to employees and to such
other persons as the Plan Administrator may select. The Plan Administrator fixes
the exercise price for options in the exercise of its sole discretion, subject
to certain minimum exercise prices in the case of Incentive Stock Options. The
exercise price may be paid in cash, certified check or cashier's check. Options
will not be exercisable until they vest according to a vesting schedule
specified by the Plan Administrator at the time of grant of the option.
Options are non-transferable except by will or the laws of descent and
distribution. Except as otherwise specified by the Plan Administrator or the
employee's stock option agreement, vested but unexercised options terminate upon
the earlier of: (i) the expiration of the option term specified by the Plan
Administrator at the date of grant (generally ten years; or, with respect to
Incentive Stock options granted to greater-than ten percent shareholders, a
maximum of five years); or (ii) the expiration of ninety (90) days from the date
of an employee epitome's termination of employment with Neptune Society or any
related corporation for any reason whatsoever. Unless accelerated in accordance
with the Plan, unvested options terminate immediately upon termination of
employment of the optioned by us for any reason whatsoever, including death or
disability.
We have granted options exercisable to acquire a total of 210,875 shares of
our common stock as follows:
97
Number of Shares
Acquirable Upon Exercise Expiration Date
Grantee Exercise Price
- ---------------------------------------------------------------------------------------------
December 31, 1999 Grants
Sales Representatives 14,500 $47.00 3 Years
Directors, Employees and 53,125 $47.00 3 Years
Trustees
March 2, 2000 Grants
Employees 9,750 $48.48 3 Years
May 31, 2000 Grants
Trustees 1,250 $56.00 3 Years
July 5, 2000 Grants
Employees 21,250 $53.00 3 Years
July 7, 2000 Grants
Employees 1,250 $55.72 3 Years
September 25, 2000 Grants
Employees 18,750 $55.00 3 Years
June 5, 2001 Grants
Directors, Employees and Trustees 88,500 $10.00 3 Years
October 1, 2001 Grants
Employees 2,500 $ 3.64 3 Years
Total 210,875 ---- ---
- ---------------------------------------------------------------------------------------------
98
Number of acquirable shares upon exercise includes 71,188 options that have been
cancelled as of December 31, 2001.
Vesting Schedules
Options granted to sales representatives vest over a period of three years
and based on the number of contracts sold during the period from January 01 to
December 31, each year as follows:
Contracts Sold During Year Total # of Shares Eligible for Vesting
100-199 62.5
200-299 125
300-399 250
400-499 500
500-599 750
600+ 1,000
In addition, we may grant sales representatives options to acquire common shares
that are not subject to performance requirements.
Options granted under our Incentive Stock Option Plan to our directors,
trustees and other employees generally vest pro rata over one to three years
beginning on the date of grant.
Options granted under provisions of certain executive employment agreements
vest pro rata over the five year lives of the agreements.
Performance Graph
Set forth below is a graph comparing the cumulative total return to stockholders
on the Company's common stock with the cumulative total return of the Nasdaq
Composite Index for the period beginning on March 31, 2000 (the date the Company
began to be actively traded on the Pink Sheets), and the years ended on December
31, 2000 and 2001.
[Performance Graph]
March 31, December 31, December 31,
2000 2000 2001
---- ---- ----
The Neptune Society, Inc. $100 $164.57 $7.41
Nasdaq Composite Index $100 $100 $100
The total return on the common stock and the Nasdaq Composite Index assumes the
value of the investment was $100 on March 31, 2000, and that all dividends were
reinvested, although dividends have not been declared on the Company's common
stock. Return information is historical and not necessarily indicative of future
performance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
We are not, to the best of our knowledge, directly or indirectly owned or
controlled by another corporation or foreign government.
To our knowledge, no shareholder beneficially owns more that 5% of Neptune
Society's shares of common stock.
The following table sets forth the ownership interest, direct and indirect,
of our directors and named executive officers as of December 31, 2001:
Number of Common
Name of Director/Officer Address Shares Owned Percent of Class(1)
- -------------------------------------------------------------------------------------------------
Gary R. Loffredo 102 NE 2nd St, Suite 777 9,375 (2) (2)
Director Boca Raton, FL 33432
Gary I. Harris (8) 3500 W. Olive, Suite 1430
Director Burbank, CA 91505
99
Number of Common
Name of Director/Officer Address Shares Owned Percent of Class(1)
- -------------------------------------------------------------------------------------------------
Marco P. Markin 3500 W. Olive, Suite 1430 92,899 (3) 3.8%(3)
CEO, President & Director Burbank, CA 91505
Thomas J. Soucy(6) 3500 W. Olive, Suite 1430 None -
Director Burbank, CA 91505
Rodney Bagley(10) 3500 W. Olive, Suite 1430 58,523 2.4%
CFO, Treasurer & Director Burbank, CA 91505
David Schroeder (9) 3500 W. Olive, Suite 1430 61,334 (4) 2.5%(4)
COO, Secretary & Director Burbank, CA 91505
Tom Camp (7) 4444 Lakeside Drive, Suite 340 None
Director Burbank, CA 91505
Officers and Directors 225,880 (5) 9.3%(5)
as a group
(includes 6 persons)
- -------------------------------------------------------------------------------------------------
* Less than one percent (1%).
(1) Based on 2,424,401 shares issued and outstanding as of March 28, 2002.
(2) Consists of 9,375 shares of common stock that are acquirable upon exercise
of options within sixty (60) days of December 31, 2001.
(3) Consists of 15,625 shares of common stock and 77,273 shares of common stock
that are acquirable upon exercise of options within sixty (60) days of
December 31, 2001.
(4) Consists of 5,529 shares of common stock and 58,523 shares of common stock
that are acquirable upon exercise of options within
(5) Consists of 21,154 shares of common stock plus 204,727 options that are
acquirable upon exercise of options within sixty (60) days of December 31,
2001.
(6) Mr. Soucy resigned as a director effective on January 18, 2002.
(7) Mr. Camp resigned as a director effective on February 27, 2002
(8) Mr. Harris resigned as a director effective on March 11, 2002.
(9) Mr. Schroeder resigned as Secretary of all Neptune companies on March 7,
2002
(10) Mr. Bagley was appointed Secretary of all Neptune companies on March 7,
2002
We have no knowledge of any arrangements, including any pledge by any
person of securities of the Neptune Society, the operation of which may at a
subsequent date result in a change in our control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the transactions described below, none of our directors, senior
officers or principal shareholders, nor any associate or affiliate of the
foregoing have any interest, direct or indirect, in any transaction, during the
fiscal year ended December 31, 2001, or in any proposed transaction which has
materially affected or will materially affect us.
In December 2001, the Company executed an agreement with Mr. Weintraub, the
former President of the Neptune Group of companies and the Weintraub Trust
("Weintraub") to restructure the remaining $2.7 million of acquisition debt,
previously due January 2002, at 12%
100
interest per annum. On December 27, 2001, the Company paid Weintraub $333,000 of
note principle, and agreed to amortize $963,000 over 18 months and make a
lump-sum payment of $1,429,000 in July 2003. Also as a part of the agreement,
the Company paid $168,000 in loan fees related to previous loan restructurings,
issued a 12% non-amortizing, note payable of $350,000 due July 31, 2001 for
additional loan fees related to this restructuring and issue Weintraub 75,000
shares of the Company's common stock valued to $126,000. See "Description of
Business - Neptune Society Acquisitions - Neptune Group Acquisition - 2001
Neptune Group Debt Restructuring."
Green Leaf Bridge Loan
In August 2001, Wilhelm Mortuary, Inc. obtained a bridge loan in the
principal amount of $1,575,000 from Green Leaf Investors II, LLC a California
limited liability company managed by Tom Camp, a director of Neptune Society,
who resigned on February 28, 2002. See, "Description of Business - Oregon
Acquisition" and "Green Leaf Bridge Loan."
Sale of Portland Assets
Effective December 31, 2001, we sold substantially all of the assets
related to the Portland Business and the Portland Property to Western Management
Services, L.L.C., an Oregon limited liability company managed by Michael Ashe,
our former Vice President of Operations, under the terms of an asset purchase
agreement (the "Portland Purchase Agreement"). In connection with the
acquisition of the Portland Business and the Portland Property, Mr. Ashe's
employment agreement with Neptune Society was terminated in its entirety and Mr.
Ashe entered into a consulting agreement with Neptune Management to provide
consulting services to us. See "Description of Business - Oregon Acquisition -
Sale of Portland Assets."
Restructuring of Green Leaf Bridge Loan
In connection with our sale of the Portland Assets, we entered into a note
extension and assumption agreement with Green Leaf, under which (i) we agreed to
pay Green Leaf a fee of 75,000 shares of Neptune Society common stock; (ii) we
granted Green Leaf piggy-back registration rights and preemptive rights related
to the Green Leaf Consideration Shares; and (iii) we agreed to pay $75,000 of
the principal due under the Green Leaf Note by Neptune Society issuing Green
Leaf a convertible debenture in the principal amount of $75,000, due July 31,
2002, convertible into shares of common stock of Neptune Society at $0.333333
per share, subject to anti-dilution price protection, which in the event that
the Neptune Society effects a reverse split of it common stock prior to July 31,
2002 the conversion price of the convertible debenture would not exceed
$0.333333 per share (post split).
CMC Convertible Debenture Restructuring
In connection with our sale of the Portland Assets, we amended the terms of
a $1 million convertible debenture issued to Community Memorial Centers, L.L.C.,
a limited liability company. David Schroeder, our Chief Operating Officer,
President and Director, and Michael Ashe, our Former Vice President of
Operations, are members of Community Memorial Centers, L.L.C. See "Description
of Business - Oregon Acquisitions - Sale of Portland Assets".
101
We believe that the foregoing transactions were entered into terms as
favorable as would have been entered into with unrelated third parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
NEPTUNE SOCIETY, INC
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 60
Independent Auditors' Report 61
Audited Consolidated Financial Statements:
Consolidated Balance Sheets 62
Consolidated Statements of Operations 63
Consolidated Statements of Shareholders' Equity 64
Consolidated Statements of Cash Flows 65
Notes to Consolidated Financial Statements 66
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1(1) Articles of Incorporation of L R Associates, Inc., filed
January 4, 1985
3.2(1) Articles of Amendment of L R Associates, Inc. changing name
to Lari Corp., filed August 3, 1998
3.3(1) Articles of Amendment of Lari Corp. changing name to Neptune
Society, filed April 26, 1999
102
Exhibit
Number Description
------ -----------
3.4(1) Articles of Amendment of Neptune Society filed May 9, 2000,
effecting a combination of the Corporation's shares of
common stock
3.5(1) Bylaws of Neptune Society
10.1(1) Form of Stock Option Plan
10.2(1) Share Purchase Agreement dated for reference March 26, 1999
by and between Lari Acquisition Company, Inc., Emanuel
Weintraub Inter Vivos Trust, Emanuel Weintraub, Neptune
Management Corp., Heritage Alternatives, Inc., Neptune
Pre-Need Plan, Inc. and Lari Corp.
10.3(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Stanley
Zicklin
10.4(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Jill Schulman
10.5(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society and Stanley
Zicklin
10.6(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society, Emmanuel
Weintraub and Emmanuel Weintraub Inter Vivos Trust
10.7(1) Interest Purchase Agreement dated for reference March 31,
1999 by and between Neptune Management Corp. Lari Corp.,
Lari Acquisition Company, Inc. and the limited partners of
Neptune-Los Angeles, Ltd., Neptune-Santa Barbara, Ltd.,
Neptune-Miami, Ltd., Neptune-St. Petersburg, Ltd.,
Neptune-Ft. Lauderdale, Ltd., Neptune-Nassau, Ltd.,
Neptune-Yonkers, Ltd.
10.8(1) Interest Purchase Agreement dated for reference March 31,
1999 by and between Heritage Alternatives, Inc., Lari Corp.,
Lari Acquisition Company, Inc. and the limited partners of
Heritage Alternatives, L.P.
103
Exhibit
Number Description
------ -----------
10.9(1) Consulting Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc. and Emanuel Weintraub
10.10(1) Amendment to Consulting Agreement dated August 1, 1999 by
and between Lari Acquisition Company, Inc. and Emanuel
Weintraub
10.11(1) $19,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.12(1) Amendment to $19,000,000 Promissory Note dated August 1,
1999 by Lari Acquisition Company, Inc. in favor of Emanuel
Weintraub Inter Vivos Trust
10.13(1) $2,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.14(1) Amendment to $2,000,000 Promissory Note dated August 1, 1999
by Lari Acquisition Company, Inc. in favor of Emanuel
Weintraub Inter Vivos Trust
10.15(1) Pre-Need Trust Agreement dated October 1, 1993 by and
between Neptune Management Corp. and Sunbank/South Florida,
N.A.
10.16(1) Asset Purchase Agreement dated March 31, 1992 by and between
Heritage Cremation Services, Inc., Joseph Estephan, Elie
Estephan and Emanuel Weintraub
10.17(1) Form of Commissioned Contractor Agreement
10.18(1) Agency Agreement dated for reference July 22, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.19(1) Amendment to Agency Agreement dated August 5, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.20(1) Form of Subscription Agreement
104
Exhibit
Number Description
------ -----------
10.21(1) Form of Registration Rights Agreement
10.22(1) Debenture and Warrant Purchase Agreement dated November 24,
1999.
10.23(1) Form of Convertible Debenture
10.24(1) Asset Purchase Agreement dated December 31, 1999, by and
among Neptune Society, Crematory Society of Washington,
Inc., and John C. Ayres.
10.25(1) Asset Purchase Agreement dated March 15, 2000, by and among
Neptune Society, Cremation Society of Iowa, Inc., Dave
Noftsger, and John Bethel
10.26(1) Asset Purchase Agreements and Merger Agreement dated July 5,
2000, by and among Neptune Society, Heritage Memorial,
Community Memorial Centers, David Schroeder, and Michael
Ashe
10.26(1) Agency Agreement dated for reference July 31, 2000 by and
between Neptune Society and Standard Securities Capital
Corporation
10.27(2) Employment Agreement by and between the Company and Marco
Markin
10.28(2) Employment Agreement by and between the Company and David
Schroeder
10.29(2) Employment Agreement by and between the Company and Rodney
M. Bagley
10.30(2) Memorandum of Understanding by and between the Company and
Private Investment Company
10.31(2) Loan Agreement dated August 8, 2001 with Green Leaf
Investors I, LLC, a California limited liability company
10.32(2) Warrant issued to Green Leaf
10.33(2) Guaranty issued to Green Leaf
105
Exhibit
Number Description
------ -----------
10.34(3) Second Debt Restructuring Agreement
10.35(3) Third Debt Restructuring Agreement
10.36 Asset Purchase Agreement effective as of January 31, 2002 by
and between Western Management Services, L.L.C., an Oregon
limited liability company (the "Purchaser"), Wilhelm
Mortuary, Inc., a corporation incorporated under the laws of
the State of Oregon ("Seller"), and The Neptune Society,
Inc., a Florida corporation, and Neptune Society of America,
Inc., a California corporation .
10.37 Service Agreement effective as of March 8, 2002, by and
between Western Management Services, L.L.C., an Oregon
limited liability company ("Service Provider"), and The
Neptune Society, Inc., a Florida Corporation.
10.38 Note Extension And Assumption Agreement effective as of
January 31, 2002, and is made by and between Western
Management Services, L.L.C., an Oregon limited liability
company, Wilhelm Mortuary, Inc., an Oregon corporation, The
Neptune Society, Inc., a Florida corporation, Neptune
Society of America, Inc., a California corporation, and
Green Leaf Investors I, LLC, a California limited liability
company.
10.39 Convertible Debenture in the principal amount of $75,000,
due July 31, 2002, issued to Green Leaf Investors I, LLC, a
California limited liability company.
10.40 Debenture and Warrant Amendment Agreement effective as of
December 31, 2001, by and between The Neptune Society, Inc.,
a Florida corporation, CapEx, L.P., a Delaware limited
partnership, and D.H. Blair Investment Banking Corp., a New
York corporation.
10.41 Form of CapEx, L.P. Debenture Amendment
10.42 Form of D.H. Blair Investment Banking Corp. Debenture
Amendment
10.43 Form of Warrant Amendment
106
Exhibit
Number Description
------ -----------
21.1 List of Subsidiaries of the Registrant
- ---------------------
(1) Previously filed on February 12, 2001.
(2) Previously filed as an exhibit to Form 10Q (for the Period ended June 30,
2001) on August 14, 2001.
(3) Previously filed as an exhibit to Form 10Q/A (for the Period ended June 30,
2001) on August 20, 2001.
(b)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
to be signed by the following persons on behalf of The Neptune Society, Inc. in
the capacities and on the dates indicated.
Signature Title Date
/s/ Marco Markin Chief Executive Officer and March 31, 2002
- ------------------------- Director (principal executive
Marco Markin officer)
/s/ David Schroeder Chief Operating Officer, March 31, 2002
- ------------------------- President and Director
David Schroeder
/s/Rodney Bagley Chief Financial Officer, March 31, 2002
- ------------------------- Secretary and Director
Rodney Bagley (principal financial officer)
Director March ___, 2002
- -------------------------
Bryan G. Symington Smith
Director March ___, 2002
- -------------------------
Anthony George
107
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1(1) Articles of Incorporation of L R Associates, Inc., filed
January 4, 1985
3.2(1) Articles of Amendment of L R Associates, Inc. changing name
to Lari Corp., filed August 3, 1998
3.3(1) Articles of Amendment of Lari Corp. changing name to Neptune
Society, filed April 26, 1999
3.4(1) Articles of Amendment of Neptune Society filed May 9, 2000,
effecting a combination of the Corporation's shares of
common stock
3.5(1) Bylaws of Neptune Society
10.1(1) Form of Stock Option Plan
10.2(1) Share Purchase Agreement dated for reference March 26, 1999
by and between Lari Acquisition Company, Inc., Emanuel
Weintraub Inter Vivos Trust, Emanuel Weintraub, Neptune
Management Corp., Heritage Alternatives, Inc., Neptune
Pre-Need Plan, Inc. and Lari Corp.
10.3(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Stanley
Zicklin
10.4(1) Share Purchase Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc., Lari Corp. and Jill Schulman
10.5(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society and Stanley
Zicklin
10.6(1) Agreement dated August 1, 1999 by and between Lari
Acquisition Company, Inc., Neptune Society, Emmanuel
Weintraub and Emmanuel Weintraub Inter Vivos Trust
10.7(1) Interest Purchase Agreement dated for reference March 31,
1999 by and between Neptune Management Corp. Lari Corp.,
Lari Acquisition Company, Inc. and the limited partners of
Neptune-Los Angeles, Ltd., Neptune-Santa Barbara, Ltd.,
Neptune-Miami, Ltd., Neptune-St. Petersburg, Ltd.,
Neptune-Ft. Lauderdale, Ltd., Neptune-Nassau, Ltd.,
Neptune-Yonkers, Ltd.
10.8(1) Interest Purchase Agreement dated for reference March 31,
1999 by and between Heritage Alternatives, Inc., Lari Corp.,
Lari Acquisition Company, Inc. and the limited partners of
Heritage Alternatives, L.P.
Exhibit
Number Description
------ -----------
10.9(1) Consulting Agreement dated March 31, 1999 by and between
Lari Acquisition Company, Inc. and Emanuel Weintraub
10.10(1) Amendment to Consulting Agreement dated August 1, 1999 by
and between Lari Acquisition Company, Inc. and Emanuel
Weintraub
10.11(1) $19,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.12(1) Amendment to $19,000,000 Promissory Note dated August 1,
1999 by Lari Acquisition Company, Inc. in favor of Emanuel
Weintraub Inter Vivos Trust
10.13(1) $2,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.14(1) Amendment to $2,000,000 Promissory Note dated August 1, 1999
by Lari Acquisition Company, Inc. in favor of Emanuel
Weintraub Inter Vivos Trust
10.15(1) Pre-Need Trust Agreement dated October 1, 1993 by and
between Neptune Management Corp. and Sunbank/South Florida,
N.A.
10.16(1) Asset Purchase Agreement dated March 31, 1992 by and between
Heritage Cremation Services, Inc., Joseph Estephan, Elie
Estephan and Emanuel Weintraub
10.17(1) Form of Commissioned Contractor Agreement
10.18(1) Agency Agreement dated for reference July 22, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.19(1) Amendment to Agency Agreement dated August 5, 1999 by and
between Neptune Society and Standard Securities Capital
Corporation
10.20(1) Form of Subscription Agreement
10.21(1) Form of Registration Rights Agreement
10.22(1) Debenture and Warrant Purchase Agreement dated November 24,
1999.
10.23(1) Form of Convertible Debenture
10.24(1) Asset Purchase Agreement dated December 31, 1999, by and
among Neptune Society, Crematory Society of Washington,
Inc., and John C. Ayres.
10.25(1) Asset Purchase Agreement dated March 15, 2000, by and among
Neptune Society, Cremation Society of Iowa, Inc., Dave
Noftsger, and John Bethel
10.26(1) Asset Purchase Agreements and Merger Agreement dated July 5,
2000, by and among Neptune Society, Heritage Memorial,
Community Memorial Centers, David Schroeder, and Michael
Ashe
10.26(1) Agency Agreement dated for reference July 31, 2000 by and
between Neptune Society and Standard Securities Capital
Corporation
10.27(2) Employment Agreement by and between the Company and Marco
Markin
10.28(2) Employment Agreement by and between the Company and David
Schroeder
10.29(2) Employment Agreement by and between the Company and Rodney
M. Bagley
10.30(2) Memorandum of Understanding by and between the Company and
Private Investment Company
Exhibit
Number Description
------ -----------
10.31(2) Loan Agreement dated August 8, 2001 with Green Leaf
Investors I, LLC, a California limited liability company
10.32(2) Warrant issued to Green Leaf
10.33(2) Guaranty issued to Green Leaf
10.34(3) Second Debt Restructuring Agreement
10.35(3) Third Debt Restructuring Agreement
10.36 Asset Purchase Agreement effective as of January 31, 2002 by
and between Western Management Services, L.L.C., an Oregon
limited liability company (the "Purchaser"), Wilhelm
Mortuary, Inc., a corporation incorporated under the laws of
the State of Oregon ("Seller"), and The Neptune Society,
Inc., a Florida corporation, and Neptune Society of America,
Inc., a California corporation .
10.37 Service Agreement effective as of March 8, 2002, by and
between Western Management Services, L.L.C., an Oregon
limited liability company ("Service Provider"), and The
Neptune Society, Inc., a Florida Corporation.
10.38 Note Extension And Assumption Agreement effective as of
January 31, 2002, and is made by and between Western
Management Services, L.L.C., an Oregon limited liability
company, Wilhelm Mortuary, Inc., an Oregon corporation, The
Neptune Society, Inc., a Florida corporation, Neptune
Society of America, Inc., a California corporation, and
Green Leaf Investors I, LLC, a California limited liability
company.
10.39 Convertible Debenture in the principal amount of $75,000,
due July 31, 2002, issued to Green Leaf Investors I, LLC, a
California limited liability company.
10.40 Debenture and Warrant Amendment Agreement effective as of
December 31, 2001, by and between The Neptune Society, Inc.,
a Florida corporation, CapEx, L.P., a Delaware limited
partnership, and D.H. Blair Investment Banking Corp., a New
York corporation.
10.41 Form of CapEx, L.P. Debenture Amendment
10.42 Form of D.H. Blair Investment Banking Corp. Debenture
Amendment
10.43 Form of Warrant Amendment
21.1 List of Subsidiaries of the Registrant
- ---------------------
(1) Previously filed on February 12, 2001.
(2) Previously filed as an exhibit to Form 10Q (for the Period ended June 30,
2001) on August 14, 2001.
(3) Previously filed as an exhibit to Form 10Q/A (for the Period ended June 30,
2001) on August 20, 2001.