UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
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, 2002
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Florida 59-2492929
- ----------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer
organization) Identification No.)
4312 Woodman Avenue, Third Floor
Sherman Oaks, California 91423
- ----------------------------------- -----------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (818) 953-9995
Securities to be registered pursuant to Section 12(b) of the Act:
None None
- ----------------------------------- -----------------------------------
Title of each class to Name of each exchange on which
be so registered each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Shares, Par Value of $0.001 per Share
- --------------------------------------------------------------------------------
(Title of Class)
Not Applicable
- --------------------------------------------------------------------------------
(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. ______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold on National Association of Securities Dealers over-the-counter
bulletin board as of the last business day of the registrant's most recently
completed second fiscal quarter, which was June 30, 2002: $4,013,821.
The number of shares of the Registrant's Common Shares outstanding as of
April 7, 2003 was 4,651,332.
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in Item 15
of this Report.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS.....................................................1
ITEM 1. BUSINESS.............................................................2
ITEM 2. PROPERTIES..........................................................13
ITEM 3. LEGAL PROCEEDINGS...................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.....................................14
ITEM 6. SELECTED FINANCIAL DATA.............................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
SECTION 16(a) COMPLIANCE............................................30
ITEM 11. EXECUTIVE COMPENSATION..............................................33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................43
ITEM 14. CONTROLS AND PROCEDURES.............................................44
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.............................................44
SIGNATURES....................................................................48
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, but not limited to:
o our ability to manage an increasing number of sales offices and
crematories,
o our ability to retain key management personnel and to continue to
attract and retain skilled crematory management personnel,
o state and federal regulations,
o changes in the death rate or deceleration of the trend towards
cremation,
o availability and cost of capital,
o our ability to meet our obligations as they become due, and
o 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.
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.
We caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. We disclaim any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
1
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 valued at
$5,000,000 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 (collectively, referred to as the "Neptune Group") 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
"Neptune Society Acquisitions" 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., Heritage Alternatives, Inc.
and Trident Society, Inc., which are engaged in marketing and administering
Pre-Need and At-Need cremation services in Arizona, California, Colorado,
Florida, Illinois, Iowa, New York, Oregon and Washington. See "Properties" for a
list of our locations and a description of their operations. We also operate
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; and one crematory and a licensed holding
facility in Spokane, Washington. We provide cremation services in the areas we
own crematories. We use the services of qualified and licensed third-party
crematories and holding facilities in locations that we do not own crematories.
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. and (v) "Trident Society" refers to Trident Society, Inc.
"We," "us," and "our" refers to Neptune Society, and its subsidiaries and
associated entities.
Our principal corporate and executive offices are located at 4312 Woodman
Avenue, Third Floor, Sherman Oaks, California 91423. 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.
Neptune Society Services
Our primary business is marketing and administering Pre-Need and At-Need
cremation services in the states of Arizona, California, Colorado, Florida,
Illinois, Iowa, New York, Oregon and Washington.
The Neptune Society Pre-Need Program
------------------------------------
The Neptune Group started our Pre-Need program in 1988. Our Pre-Need
program is designed to eliminate some of the emotional and financial burdens
associated with death by allowing individuals to pre-arrange cremation services
at a guaranteed fixed price. We offer the same standard Pre-Need Plan in all the
states that we conduct business.
A Neptune Society Pre-Need Plan consists of the following:
o Merchandise: At the time of sale, we deliver a Neptune Information
Book, personalized Neptune registration portfolio, membership card and
specially designed Neptune urn.
o Administrative Services: At the time of sale, we also provide services
related to the administration of the Pre-Need Plan, including
registering the member on our permanent database and processing
documents related to third party administration, accounting and record
delivery.
2
o Cremation Services: At the time of death, we provide the basic
professional services of a funeral director and staff, the cremation
and related items required for the cremation.
The Neptune Pre-Need Plan is a guaranteed price plan, which means we
guarantee that we will provide the services at the time of need without
additional payment for the service. The purchase price of a Pre-Need Plan is
allocated to Merchandise, Cremation Services and Administrative Services based
on the regulatory requirements and market conditions of the states in which we
conduct business. See "Industry Regulation."
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.
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 Arizona, 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 pricing structure for our products.
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 $329,
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 at any place in the world, regardless of where the
Pre-Need Plan is purchased.
The price of our basic Pre-Need Plan currently ranges between $1,070 and
$1,499. We price our Pre-Need Plans to enable us to provide the purchaser a
future fixed price guarantee at our Neptune level of service and our assessment
of market conditions in each geographic area that we serve. Our standard
Pre-Need service program includes services such as burial at sea, rose garden
scattering or 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 with a down payment and monthly payments
together with interest. We currently charge interest of 8% per annum on balances
due under our installment payment programs in those States where permitted by
State law.
Existing Facilities
Our strategy is to maintain offices within or near major metropolitan
geographic areas. This strategy is designed to allow us to cost effectively
market our products using integrated marketing programs and to reduce general
expenses by centralizing administrative functions for multiple offices in a
particular metropolitan area. We
3
currently have locations in the states of Arizona, California, Colorado,
Florida, Illinois, Iowa, New York, Oregon and Washington, representing
approximately 40 major metropolitan market areas. We also have a national
telemarketing center located in Tempe, Arizona. See "Properties."
Expansion and Growth Strategy
Our present growth strategy is to expand our operations through
establishing new "start-up" offices in major metropolitan market areas that we
believe provide opportunities based on demographic and other characteristics. In
addition, we may acquire existing cremation service providers with established
market presence in certain geographic areas, subject to the availability of
financing. Since March 31, 1999, we have acquired existing cremation service
providers or established new "start-up" offices in Illinois, Arizona, Colorado,
Iowa, Oregon, Washington and Florida. We are currently exploring new "start-up"
opportunities in Missouri, Minnesota and Michigan, and we have identified 26
additional states which have demographic characteristics that may provide
opportunities for future expansion.
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. We evaluate opportunities for expansion using
a number of factors, including:
population demographics;
death and cremation rates for the area;
competition in the market;
forecasted growth in cremation rates for the area; and
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
present cremation service needs.
Marketing
We market our services in all our locations under the name "The Neptune
Society", except for San Diego, San Bernardino, Riverside and Imperial Counties
in California, where we market our services under the name "Trident Society."
Our marketing strategy is focused on maintaining and further developing the
strength of our brand name and creating consumer awareness of our services and
products. We promote our services and products using targeted advertising
campaigns, including Yellow Pages advertising, local television and radio
advertising, our website and direct marketing campaigns.
We market our Pre-Need programs using a combination of direct mail,
telemarketing and personal sales programs.
Direct Mail
-----------
We use a monthly direct mail campaign to generate sales leads. We presently
mail a total of approximately 6.6 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.
Telemarketing
-------------
We have established a Predictive Dialing Telemarketing Center (PDS Center)
in Tempe, Arizona. Our current telemarketing program is primarily designed to
generate leads from people who have not responded to our direct mail marketing
campaigns. Our call center is designed to provide information to potential
customers about Neptune Society products and services and to allow leads to
schedule appointments with our area sales
4
representatives. Our call center is designed to consolidate our telemarketing
efforts in one centralized location and allow us to implement a uniform
telemarketing and promotional strategy using professional telemarketers.
Personal Sales
--------------
We use commissioned independent contractors to provide services as area
sales representatives to sell our Pre-Need Plans. As of March 31, 2003, we had
approximately 115 commissioned area sales representatives. We provide our area
sales representatives with leads generated from our direct mail campaigns and
telemarketing efforts, and our sales representatives meet with potential clients
individually to determine the service needs of the individual. Our sales
representatives are paid on a commission. 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 maintain a fully integrated and comprehensive web site located at
www.neptunesociety.com. Visitors to our website may access information related
to our services and products. Our website also provides general information
related to cremation services and related topics.
Death Care Industry
According to Johnson Rice & Company, L.L.C., in an April 15, 2002 research
report, four publicly traded companies hold approximately 22% of the domestic
death care market and private independent operators control nearly 80% of the
domestic death care industry's revenue. The public companies are Service
Corporation International, Stewart Enterprises, Alderwoods Group, and Carriage
Services.
There are estimated to be approximately 22,000 funeral homes in the United
States.
There were approximately 2,400,000 deaths in the United States in the year
2000, or 8.7 deaths per thousand population. (National Vital Statistics Reports,
Vol 50, No15). The rate of increase in deaths in the United States has been
nearly 1% annually since 1980, based on National Vital Statistics Reports.
Johnson Rice & Company estimate the number of deaths will increase by 0.70% over
the years 2000 to 2010, taking into account current mortality rates. Industry
wide it is estimated that approximately 30% of all funerals are currently
prearranged. (Johnson Rice & Company).
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
statistics compiled by the Cremation Association of North America:
o The popularity of cremation varies by geographic location in the
United States, ranging from a low of 4.92% in Tennessee to a high of
60.87% in Hawaii;
o In 2001, cremation services were chosen for approximately 27.12% of
total deaths in the United States, representing approximately 653,350
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;
o Cremation services as a percentage of death services grew from 21.20%
in 1996 to 26.19% in 2000; and
o Cremation services are expected to account for approximately 39.24% of
all death services in 2010 and 47.98% 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.
5
Competition
The death care industry as a whole is highly fragmented. Neptune operates
only in the cremation segment of the death care industry. We estimate that the
Company performed approximately 1% of all cremations in the United States in
2002, while we operated in only 11 states. Approximately 53% of our cremations
in 2002 were prearranged.
Our competitors range from nation-wide large publicly held companies to
regional independently owned chains of death care providers, and local
family-owned businesses. The large public companies have much greater financial
resources and have by past consolidation strategies achieved greater economies
of scale in marketing and operations than we have. The local family owned death
care providers have competitive advantages based on established local
reputations, local ownership and management and existing capital facilities.
Full service death care providers of all sizes offer a broader range of
traditional funeral and burial products and services, including traditional
burial, embalming services, plots, caskets, tombstones and markers, cremation,
plaques and urns, and pre-need arrangements.
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 can differentiate ourselves from our competitors.
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
Licensing and 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. Generally, our operations must be licensed
in each state in which we provide services or sell our products. To maintain
these licenses we are required to comply with the rules and regulations of each
state, which are usually administered by a state regulatory board or funeral
board. Most states require us to pay annual licensing fees and renew our license
annually.
When we acquired the Neptune Group in 1999, the Neptune Group was subject
to a Stipulation and Settlement and Decision in California. On April 9, 1999, in
connection with our acquisition of the Neptune Group, we entered into an
agreement with the State of California and applied for an assignment of the
Neptune Group licenses. California approved the assignment, subject to amending
the Neptune Group's Stipulation and Settlement and Decision to incorporate a
requirement for us to complete audits of the Pre-Need trust funds in accordance
with the California 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 and the Neptune Group licenses were assigned to us 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, the controlling shareholder of the acquired business, 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 Fund Regulation and Pre-Need Contract Cancellation
-----------------------------------------------------------------
All jurisdictions regulate the sale of Pre-Need services and the
administration of any resulting trust funds or insurance contracts. Most states
require pre-approval of pre-need contracts entered into in connection with the
sale of Pre-Need Plans. Our Pre-Need Plans consists of a contract for the sale
of cremation services at the time of death, administrative services at the time
of sale and for merchandise delivered at the time of sale.
All states in which we currently operate require us to place into trust all
or a portion of the funds related the cremation services we will perform at the
time of death. In all states in which we offer Pre-Need plans, except California
and New York, we are allowed to retain a percentage of the future cremation
service price related to
6
the sale of the Pre-Need Plan. The amount we are required to place into trust
ranges from state-to-state: 70% of the cost in Florida, 75% in Colorado, 80% in
Iowa and 90% in Oregon and Washington. These trust funds are maintained by
financial institutions in accordance with the laws of the state in which the
Pre-Need Plan is sold.
In all of the states that we currently sell our Pre-Need Plans, except for
New York and Florida, we are generally not required to place into trust the
funds received for merchandise that is delivered to the customer at the time of
the sale. Florida requires us to place the greater of 30% of the price for
merchandise or 110% of the wholesale cost into trust and New York requires us to
place 100% of the price for merchandise into trust. The rules related to
merchandise stored for customers in connection with Pre-Need Plans differs from
state-to-state, but generally, merchandise is deemed to be delivered at the time
of sale if it is stored for the customer by a third-party or stored by the
customer. Effective January 1, 2003, we began delivering all merchandise to our
customers at the time of sale, except Florida, Illinois and New York.
In addition, all states in which we currently sell our Pre-Need Plans have
rules and regulations governing the cancellation of pre-need services.
Generally, a client has the right to cancel a Pre-Need plan within 30 days of
the initial purchase (3 days in Iowa and Oregon) and receive a full refund.
After this initial period, a Pre-Need contract may be cancelled by the purchaser
with proper notice to us, and in most cases, we are required to refund the funds
held in trust for the benefit of the purchaser. In most states, we can cancel a
Pre-Need contract where the purchaser is in arrears in making payments on
Pre-Need Plans purchased on an installment basis with proper notice and time to
cure the arrears.
Other Regulations
-----------------
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.
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.
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. In
Oregon, Washington, Iowa, Colorado, New York, Illinois and Arizona, 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. In the
Florida, we engage the services of SunTrust to administer our Pre-Need Trust
Funds.
Approximately 108,000 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 1.0% on an annual basis. At December 31, 2002, the balance of our
Pre-Need trust funds were approximately $42 million and we had over 78,000
active members.
Personnel
At December 31, 2002, we employed 56 full time counselors and mortuary
personnel, 20 telemarketers, and 35 administrative personnel. In addition, we
had contracts with 115 independent contractors to serve as commissioned sales
representatives, including 20 in California, 21 in Florida, 7 in Colorado, 13 in
Oregon, 5 in Iowa, 34 in Washington, 6 in Illinois and 9 in Arizona. 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 15 additional personnel during 2003,
including 3 at-need and mortuary personnel, 5 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 2003.
7
Neptune Society Acquisitions
Neptune Group Acquisition
On March 31, 1999, we 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." We paid the owners of the Neptune Group $1,000,000 in cash, a total of
125,000 common shares and issued two promissory notes in the amounts of
$2,000,000 (the "$2 Million Note") and $19,000,000 (the "$19 Million Note"). The
notes were guaranteed by the Neptune Society and secured by the assets and
business of Neptune Management and Heritage Alternatives. We have satisfied our
obligations under the $2 Million Note, and entered a series of transactions to
restructure our obligations under the $19 Million Note as previously described
under the heading "Item 1. Business - Neptune Society Acquisitions - Neptune
Group Acquisition" in our annual report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on April 1, 2002. In
December 2001, we negotiated a restructuring of the $2.7 million balance due
January 2, 2002 under the $19 Million Note, under which we paid $333,000 towards
the principal, and agreed to amortize $963,000 at an interest rate of 13% per
annum over 18 months and make a lump sum payment of $1,368,000 in July, 2003.
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. See "Item 1. Business - Neptune Society
Acquisitions - Spokane, Washington Acquisition" in our annual report on Form
10-K for the year ended December 31, 2001 filed with the Securities and Exchange
Commission on April 1, 2002 for a complete description of this transaction. In
connection with this acquisition, we agreed to pay Cremation Society of
Washington a percentage of the gross revenues (1% for 2003) and a percentage of
earnings before income tax, depreciation and amortization ("EBITDA") (7.5% for
2003) from our Spokane, Washington operations. Our obligations to make future
payments ends after the year ending December 31, 2003. We also agreed to pay an
earn out payment equal to 10% of EBITDA of our Spokane, Washington operations
for so long as Charles S. Wetmore, the general business manager of Cremation
Society of Washington, continues to be employed by 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 in a series of
transactions described under the heading "Item 1. Business - Neptune Society
Acquisitions - Iowa Acquisition" in our annual report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission on
April 1, 2002. As of December 31, 2002, we had no further payment obligations in
connection with our acquisition of Cremation Society of Iowa, Inc.
Oregon Acquisition and Disposition
Effective July 17, 2000, we, through a wholly-owned subsidiary, acquired a
funeral, burial and cremation business in Portland, Oregon in a series of
transactions from a group of companies owned and controlled by David Schroeder,
our former President and director, and Michael Ashe, a former Vice President. We
also entered into employment agreements with David Schroeder and Michael Ashe.
See "Item 1. Business - Neptune Society Acquisitions - Oregon Acquisition" in
our annual report on Form 10-K for the year ended December 31, 2001 filed with
the Securities and Exchange Commission on April 1, 2002 for a complete
description of this transaction.
During the fourth quarter 2001 as part of our overall business strategy to
focus on our pre-need marketing and sales operations, we disposed of certain
physical assets related to the Portland business in a series of transactions
previously described under "Item 1. Business - Neptune Society Acquisitions -
Disposition of Portland Assets and Related Transactions" in our annual report on
Form 10-K for the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 1, 2002. Under these transactions, effective
December 31, 2001, we sold substantially all of the assets related to the
Portland business and crematory to Western Management Services, L.L.C., an
Oregon limited liability company managed by Michael Ashe, in consideration of,
among other things, the assumption of a $1,500,000 promissory note issued by our
Oregon subsidiary and the assumption of the $1,000,000 convertible debenture
issued in connection with the original acquisition and 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. We also agreed to
terminate Mr. Ashe's employment agreement with the Neptune Society.
8
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.
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 $8,839,166, $10,151,168 and $6,705,576 respectively,
during the years ended December 31, 2000, 2001 and 2002. At December 31, 2002 we
had an accumulated deficit of $27,585,544. We anticipate that we will incur
losses for the foreseeable future until we are able to increase our sales and
reduce our level of debt. 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 achieve a sufficient level of
sales or reduce our level of debt to attain profitable operations.
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
implement our operating and growth strategy. Failure to successfully 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 and Ankeny, Iowa, acquisitions through a combination of cash, common
stock and debt. We may finance future acquisitions through debt, 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 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.
9
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., Alderwoods Group 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 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 and Douglas Irving, our
Chief Operating Officer 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
10
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.
New legislative restrictions impacting telemarketing activities may reduce the
number of sales leads we achieve.
Currently Neptune has a telemarketing center in Arizona that schedules in
excess of 1,100 appointments per month for our sales force. This represents
approximately 35% of the monthly leads currently obtained by Neptune, the
remainder are generated from direct mail, web site and advertising. In 2002, the
State of Colorado initiated a Statewide "Do Not Call" list. On March 11, 2003,
President Bush signed into law a national "Do Not Call" list that is scheduled
for implementation in the summer of 2003. This legislation will reduce the
number of potential pre-need purchasers available to us to contact by telephone
for sales appointments.
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 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.
In connection with our debt financings, we issued warrants and conversion
rights exercisable to acquire up to 2,617,211 shares of our common stock
(893,044 shares at $1.20 per share, 1,724,167 shares at $3.00 per share). At
December 31, 2002, we have granted options exercisable to acquire up to 86,000
shares of our common stock at prices ranging from $10.00 to $55.72 per share to
our employees, officers, directors, and area sales representatives. We have also
granted options exercisable to acquire 522,728 shares of our common stock at
$4.40 under certain executive employment agreements. See "Executive
Compensation". We have agreed to issue 512,002 shares of our common stock for
payment of deferred executive compensation.
Subsequent to December 31, 2002 we granted options to certain executives
and consultants to acquire up to 180,000 shares at a price of $0.70 per share.
The Company also issued 307,962 Units in February, 2003 under a private
placement funding agreement. Each unit comprises one share and one warrant for
the purchase of an additional share at $0.72 per share for the first year and
$0.79 per share in the second year.
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 agreed to pay certain persons a percentage of the revenues from the
operations of our Spokane, Washington business, which will affect the
profitability of these operations.
In connection with our acquisition of Spokane, Washington, we agreed to pay
the former owners of this business 1% percent of the gross revenues and 7.5% of
EBITDA from our Spokane, Washington operations, and for so long as Charles S.
Wetmore continues to be employed by us, 10% of EBITDA during each year ending
December 31 commencing after January 1, 2005.
11
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, 2002, we had approximately $9.1 million of debt
outstanding, at an average cost of 19% per annum. Of our total debt at December
31, 2002, approximately $2.3 million becomes due in the year ending December 31,
2003; and approximately $5.8 million becomes due in the year ending December 31,
2005. Debt becoming due in fiscal 2005 is convertible in nature into common
stock of the Company at the option of the debt holders. It is unforeseeable as
to whether debt holders will opt for conversion. During the years ended December
31, 2002, 2001 and 2000, total interest and finance expense was approximately
$2,579,000, $2,515,000, and $2,485,000, respectively.
Our debt may increase if we acquire additional death care service
operations or open new offices. In the future, we may also 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 $42 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, New York, Illinois, Arizona 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 .01% 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 our 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 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 $0.55 (low) to $3.10 (high)
during the year ended December 31, 2002 and from $1.60 (low) to $36.50 (high)
during the year ended December 31, 2001. The closing price of our shares on
March 31, 2003 was $0.80. 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,
12
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, Colorado,
Florida, Illinois, 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 also lease our corporate offices in Florida and Los Angeles. 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 | Pre-Need/At-Need sales and administrative office and | 5 years | 9/30/2007 |
| | Telemarketing Center | | |
|-------------------------|--------------------------------------------------------|----------------|------------------|
|California | | | |
| Sherman Oaks - | Administration and operations headquarters | 7 years | 7/31/2009 |
|Corporate | Pre-Need/At-Need sales and administrative office | | |
| | | | |
| San Pedro | Pre-Need/At-Need sales and administrative office | 5 years | 3/31/2007 |
| Santa Barbara | Pre-Need/At-Need sales and administrative office | 1 year | 7/31/2003 |
| Los Angeles - | Holding facility, crematory and viewing room | 5 years | 1/31/2007 |
|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 | | | |
| | | | |
| 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 |
- -----------------------------------------------------------------------------------------------------------------------
13
- -----------------------------------------------------------------------------------------------------------------------
|Iowa | | | |
| Ankeny | Pre-Need/At-Need sales and administrative office, and | 1 year | 05/31/2003 |
| | chapel | | |
| | | | |
| Ankeny | Crematory | 5 years | 10/14/2003 |
|-------------------------|--------------------------------------------------------|----------------|------------------|
|Illinois | | | |
| Chicago | Pre-Need/At-Need sales and administrative office | 4 years | 5/31/2006 |
|-------------------------|--------------------------------------------------------|----------------|------------------|
|Oregon | | | |
| Portland | Pre-Need sales and administrative office | 5 Years | 1/31/2008 |
| | | | |
|-------------------------|--------------------------------------------------------|----------------|------------------|
|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 | | |
| | | | |
| Lynnwood | Pre-Need/At-Need sales and administrative office | 3 years | 4/30/2005 |
- -----------------------------------------------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
There are no material litigation proceedings current pending, and no
material litigation proceedings were terminated during the fourth quarter ended
December 31, 2002.
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, 2002.
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, 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 retroactive effect to the reverse stock splits effected on May 19, 2000
and March 22, 2002.
The high and low bid quotations of our common stock on the NASD OTC
Bulletin Board as reported by the NASD and the National Quotation Bureau's pink
sheets were as follows:
Period High(1) Low(1)
------ ------- ------
2003
First Quarter $1.01 $0.68
2002
14
Period High(1) Low(1)
------ ------- ------
First Quarter $2.15 $1.28
Second Quarter $3.15 $1.01
Third Quarter $1.08 $0.55
Fourth Quarter $1.08 $0.60
2001
First Quarter(2) $36.50 $6.40
Second Quarter(2) $24.80 $8.50
Third Quarter(2) $24.72 $5.60
Fourth Quarter $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 31, 2003, the closing bid quotation for our common shares was
$0.80 per share as quoted by the NASD OTCBB.
As of April 7, 2003, we had 4,651,332 shares of common stock issued and
outstanding, held by 103 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.
Recent Sales of Unregistered Securities
Set forth below is a description of unregistered securities issued by us
during the quarter ended December 31, 2002 and for prior periods not previously
reported on Form 10-Q.
In September, 2002, we issued 40,000 shares to two Directors in payment of
Directors fees. The shares were issued in a private transaction pursuant to an
exemption from the registration requirements available under Section 4(2) of the
Securities Act of 1933, as amended.
Subsequent Events
In February, 2003, we granted options under the 2002 Stock Option Plan to
certain senior executives to acquire up to 80,000 shares at a price of $0.70 per
share, expiring February 1, 2006. The options vest on February 1, 2004. In March
2003, we granted options under the 2002 Stock Option Plan to certain senior
executives to acquire up to 100,000 shares at a price of $0.70 per share,
expiring on March 1, 2006. The options vest on March 1, 2004. These securities
were issued in a private transaction pursuant to an exemption from the
registration requirements available under Section 4(2) of the Securities Act of
1933, as amended.
In February, 2003, we issued 83,118 shares of common shares at $0.65 per
share in settlement of deferred compensation to three senior executives. These
securities were issued in a private transaction pursuant to an exemption from
the registration requirements available under Section 4(2) of the Securities Act
of 1933, as amended.
In February 2003, we issued 39,622 shares of common stock at $0.65 per
share pursuant to the exercise of preemptive rights. The consideration for the
shares was paid by canceling deferred interest payable to the holders of these
preemptive rights in the amount of $25,728.30. These securities were issued in a
private transaction pursuant to an exemption from the registration requirements
available under Section 4(2) of the Securities Act of 1933, as amended.
15
In February, 2003 we issued 307,962 units, each unit consisting of one
share of common stock and one warrant to acquire an additional share of common
stock to 570421 BC, Ltd., a private Company controlled by the family of an
executive officer and director. The units were issued at $0.65 per unit, and the
proceeds of $200,000 we received were used for working capital purposes. The
warrants are exercisable at the price of $0.72 per share by February 19, 2004
and thereafter until February 19, 2005 at the price of $0.79 per share. These
securities were issued in a private transaction pursuant to an exemption from
the registration requirements available under Section 4(2) of the Securities Act
of 1933, as amended.
In February 2003, we issued 23,810 units at $0.65 per unit, each unit
consisting of one share of common stock and one warrant exercisable to acquire
one additional common share at $0.72 per share until February 19, 2004 and $0.79
per share until February 19, 2005. The units were issued pursuant to the
exercise of preemptive rights, and the consideration for the units was paid by
canceling deferred interest payable to the holders of the preemptive rights.
These securities were issued in a private transaction pursuant to an exemption
from the registration requirements 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, 2002, 2001 and 2000 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 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.
16
Predecessor Company | Successor Company
Three | Nine
Year Months | Months Pro forma Year
Ended Ended | Ended Year Ended Ended Year Ended Year Ended
December March | December December December December December
31, 1998 31, 1999 | 31, 1999 31, 1999 31, 2000 31, 2001 31, 2002
- ----------------------------------------------------------------------|-------------------------------------------------------------
(000's, except per share amount) | (000's, except per share amount)
INCOME STATEMENT DATA: |
Total Revenue 7,865 2,962 | 5,688 8,650 7,689 13,030 11,767
Gross Profit 4,107 1,763 | 3,436 5,199 3,237 6,767 5,348
General and Administrative |
Expenses 2,847 748 | 3,032 3,780 6,003 7,798 8,709
Compensation to Principal |
Shareholder 2,200 430 | - - - - -
Professional Fees 669 536 | 340 959 1,245 1,765 677
Amortization and |
Depreciation Expense - - | 1,024 1,365 1,685 2,082 253
Interest Expense (income) - - | 1,184 (1,690) 2,485 2,515 2,579
Income (loss) before cumulative effect |
of change in accounting principle (1,609) 49 | (1,890) (2,297) (8,435) (10,151) (6,706)
Net Income/(loss) (1,609) 49 | (1,890) (2,297) (8,839) (10,151) (6,706)
(Loss) per share before cumulative |
effect of change in accounting |
accounting principle per share - - | (1.23) (1.52) (4.75) (5.09) (1.88)
Loss per share - - | (1.23) (1.52) (4.98) (5.09) (1.88)
|
BALANCE SHEET DATA: |
|
Current Assets 835 1,172 | 7,046 - 1,421 2,078 2,701
Current Liabilities 647 916 | 11,730 - 8,281 5,273 5,046
Long Term Debt - - | 5,722 - 101 198 389
Convertible Debentures - - | 4,438 - 5,937 7,942 6,754
Shareholders Equity 808 792 | 12,385 - 16,108 7,023 3,492
|
OTHER FINANCIAL DATA: |
Number of Offices 10 10 | 13 - 18 18 19
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations
data for each of the eight quarters beginning January 1, 2001 and ending
December 31, 2002. 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.
17
First Second Third Fourth
(000's except per share amount) 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 per share 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)
First Second Third Fourth
(000's except per share amount) Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL 2002:
Net revenues $ 2,777 3,115 2,778 3,112
Gross profit 1,388 1,687 1,258 1,075
Operating loss (689) (755) (1,301) (1,309)
Loss before cumulative effect
of change in accounting
principle (1,188) (1,371) (1,833) (2,314)
Net loss (1,188) (1,371) (1,833) (2,314)
Loss per share before
cumulative effect of change
in accounting principle
per share (0.54) (0.35) (0.45) (0.66)
Basic net loss per share (1) $ (0.54) (0.35) (0.45) (0.66)
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 the United States. We operate 19
locations serving Arizona, California, Colorado, Florida, Illinois, Iowa,
Oregon, New York, and Washington.
Critical Accounting Policies:
Revenue Recognition
Since January 1, 2000 when we adopted our current revenue recognition policy in
response to the Securities Exchange Commission SAB No. 101, we account for our
various revenue sources as follows:
At-need cremation services-- all merchandise and services revenue is recognized
at the time services are provided.
Pre-need cremation arrangements- Revenue related to cremation services is
deferred at the time of sale of the arrangement, and is recognized as operating
revenue only when the services are actually performed. Administrative services
revenue is recognized when the administrative services are provided, generally
at the point of sale. Prior to 2003 we generally did not deliver merchandise to
the customer, but rather stored such on the customer's behalf. Merchandise
revenue may be recognized at the point of sale of the arrangement so long as all
of the following
18
conditions are met; the goods are segregated and specifically identified by
customer, the goods are individually labeled and may not be used to fill another
order, the possibility of future exchange is remote, the goods are not subject
to the claims of our creditors, custodial risks are insured, and generally the
risks and rewards of their ownership is transferred to the customer.
With the exception of a four month period in 2001 (June 1 to September 30,
2001), our pre-need merchandise handling procedures in virtually all locations
did not meet the test for revenue recognition at the point of sale. Rather,
revenue related to the merchandise component of pre-need arrangements has
generally been recorded as deferred pre-need revenue. Commissions paid with
respect to obtaining pre-need arrangements have been matched with revenue, and
with the exception noted above have been recorded as deferred costs. Both the
deferred revenue and deferred costs related to merchandise sales, as well as the
services revenue have been transferred and recognized as operating revenue at
the time the cremation services are performed.
During the four month period June 1 to September 30, 2001, our merchandise
handling procedures were such that all of the necessary conditions for
merchandise revenue recognition at the time of sale were met. The effect of this
on the comparability of operating revenue between 2002 and 2001 is discussed
below.
Installment sales- commencing January 1, 2001 we recognize an account receivable
for the unpaid amount of the pre-need arrangement at the time of sale, to the
extent installment payments will not be required to be trusted. Prior to that
date, we recorded installment sales only as payment was received.
Worldwide Travel Plan sales- we recognize revenue related to the sale of travel
plans at the time of sale. We also concurrently recognize the premium cost to
the third party carrier who is obligated to perform the services if required.
Commencing January 1, 2003 we began delivering all merchandise purchased under
pre-need arrangements to the customer at the time of sale, except in the States
of Florida, New York and Illinois, where this is not allowed by regulations.
Accordingly, under generally accepted accounting principles, we will begin to
recognize revenue from merchandise sales at the time of delivery, which is
usually the time of sale of the pre-need arrangement. On a pro forma basis, if
this delivery policy had been in effect from January 1, 2002, gross profit would
have increased and net loss decreased by approximately $ 5.5 million for the
2002 year. There would have been no effect on cash flow from operations.
Deferred Costs
We defer sales commissions applicable to pre-need cremation service and
merchandise sales which do not meet our revenue recognition criteria. These
deferred costs are expensed in the period of performance of the services and
delivery of merchandise covered by the related pre-need arrangements.
New Accounting Pronouncements
Goodwill (Names and Reputations)
In July 2001 the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and other Intangible Assets", which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. We adopted FASB 142 effective
January 1, 2002. The asset "Names and Reputations" meets the definition of
goodwill under FASB 142.
On implementation of FASB 142, management determined that the fair value of the
Company as a single reporting unit under FASB 142 exceeded the carrying value of
the net assets, including goodwill. We completed the required annual evaluation
of the implied value of our goodwill on December 31, 2002, and determined that
there was no impairment in value.
The carrying value of goodwill (Names and Reputations) constitutes the single
most significant asset of the company. An analysis of its current carrying value
is as follows:
19
2002 2001
---- ----
Cost
Names and Reputations recorded
on acquisition of:
Predecessor Companies $ 26,809,237 $ 26,809,237
Washington crematory 732,968 699,744
Iowa crematory 816,390 816,390
------------- --------------
28,358,595 28,325,371
Less:
Accumulated amortization (1999 to 2001) (3,960,899) (3,960,899)
------------ -------------
Net book Value $ 24,397,696 $ 24,364,472
============= ==============
For the 2001 and prior fiscal years, the Company amortized Names and Reputations
over a period of 20 years from acquisition, resulting in amortization expense of
approximately $ 1,500,000 annually. There was no amortization recorded in 2002
as the implied value of goodwill exceeds its carrying value.
With the requirement to adopt FASB 142, the Company will no longer amortize its
acquired goodwill on a systematic basis. Rather it will test the value of
Goodwill annually, and if it is determined that goodwill is impaired, the
carrying value of Names and Reputations will be written down to its implied
value by a charge to operations in the year that such determination is made.
The following table provides a reconciliation between the loss for the years for
each of 2002, 2001 and 2000 adjusted for the exclusion of amortization expense
on goodwill (names and reputations);
2002 2001 2000
Loss before extraordinary items
as previously reported ($6,705,576) ($10,151,168) ($8,839,166)
Extraordinary items - - -
---------------------------------------------------
Loss for the year (6,705,576) (10,151,168) (8,839,166)
----------- ------------ -----------
Add back:
Amortization on Names and Reputations - 1,574,992 1,627,263
no longer subject to amortization
effective January 1, 2002
---------------------------------------------------
Adjusted loss for the year ($6,705,576) ($8,576,176) ($7,211,903)
============ ============ ============
Adjusted loss per share-basic and diluted $1.88 $4.29 $4.06
===== ===== =====
Other accounting pronouncements
- -------------------------------
In October 2001, the FASB 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
20
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. We do not expect the adoption to have a material impact on our
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived
assets. The statement provides a single accounting model for long-lived
assets to be disposed of. New criteria must be met to classify the asset as
an asset held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This statement is
effective for fiscal years beginning after December 15, 2001. We do not
expect the adoption to have a material impact to our financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Issued 4/02)" which we do not believe will materially affect
our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan, as previously required under Emerging Issues Task Force
("EITF") Issue 94-3. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this statement
are effective for exit or disposal activities that are initiated after
December 31, 2002. We do not believe that this SFAS will have a significant
impact on our results of operations or financial position.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions--an amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." We do
not believe that these pronouncements will affect us because either they
are not relevant to our business or we will not adopt their elective
provisions.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on our financial
position or results of operations as we have not elected to change to the
fair value based method of accounting for stock-based employee
compensation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Among other
21
things, the Interpretation requires guarantors to recognize, at fair value,
their obligations to stand ready to perform under certain guarantees.
Interpretation 45 is effective for guarantees issued or modified on or
after January 1, 2003. The adoption of this pronouncement is not expected
to have a material impact on our financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by
which one company includes another entity in its consolidated financial
statements. Previously, the criteria were based on control through voting
interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. A company that
consolidates a variable interest entity is called the primary beneficiary
of that entity. The consolidation requirements of Interpretation 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this interpretation is not expected to have a
material impact on our financial position or results of operations.
Results of Operations
Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001
The following discussion compares the financial results of our operations for
the year ended December 31, 2002 to the financial results of our operations for
the year ended December 31, 2001.
Revenue
- -------
Service and Merchandise Revenue: Overall, our services and merchandise revenue
decreased from $11,775,109 in 2001 to $10,899,026 in 2002, a decrease of
$876,000 or 7.5%. Services and merchandise revenue consists of cremation
service, at-need merchandise revenue, pre-need merchandise revenue recognized,
and travel plan revenue. The decrease in services and merchandise revenue
resulted from an increase of $1,244,000 in Travel Plan revenue offset by a
decrease of $844,000 in cremation services and at need merchandise revenue,
largely due to the sale of our Portland cremation business at the end of 2001,
and a decrease of $1,276,000 in pre-need merchandise revenue recognized because
of our decision to change our inventory management procedures in the third
quarter of 2001. Cremation services revenue and at-need merchandise sales from
the two new locations opened in 2002 did not have a material impact on
consolidated revenue.
Travel plan revenue increased by $1,244,000 (65%) from $1,904,000 in 2001 to
$3,149,000 in 2002. Travel plan contracts are sold in combination with our
pre-need cremation plans, however all revenue from travel contracts is
recognized at the point of sale, as we concurrently arrange with a third party
to provide the service on an individual contract basis. This was the first year
that this popular feature was sold company wide for the full 12 months,
accordingly travel plan growth as an annual percentage is expected to more
closely track the rate of pre-need cremation plan sales in future years.
Pre-Need merchandise revenue recognized decreased from $2,407,000 in 2001 to
$1,390,000 in 2002, a decrease of $1,017,000 or 42%. Our revenue recognition
policy requires us to specifically identify and physically segregate each
individual's merchandise until the time of death to allow us to recognize
revenue. From June through September 2001, we specifically identified and
segregated for each individual sold a pre-need plan allowing us to recognize
$1,804,000 in revenue in accordance with our revenue recognition policy. In
October 2001, we changed our inventory management policy to discontinue our
practice of individually identifying merchandise in an effort to reduce
operating costs. As a consequence, with the exception of $514,000, all receipts
for merchandise sold in 2002 under pre-need plans, which were still active at
year end, were deferred and not included in the revenue that we recognized. We
currently maintain only a general inventory sufficient to meet our requirements
in the normal course of business, except where required by State law to
segregate purchased merchandise for past or new sales.
22
Pre-need contracts funded and deferred in the accounts in 2002 were 25% higher
than in 2001, however except for the small number of those contracts which were
also fulfilled in 2002, substantially all of the contract proceeds relating to
merchandise revenue has been deferred to future years.
Management and finance fees: Management and finance fees decreased from
$1,255,187 in 2001 to $867,583 in 2002, a decrease of $387,604 or 31%. The
management fees we earn for administering pre-need trusts declined from $756,769
in 2001 to $608,708 in 2002, as a result of reduced yields on investments being
reinvested at current lower market rates of interest.
Finance fees declined from $498,418 in 2001 to $258,875 in 2002, a decline of
$239,503 or 48%, due in part to the transitional adjustment in 2001 when the
company began recognizing finance income on pre-need contracts over the life of
the contract. Previously this income was recognized only on fulfillment of the
contract.
Costs and expenses and gross profit
- -----------------------------------
Direct costs and expenses include all costs related to cremation, at need
merchandise services, previously deferred merchandise and obtaining costs
recognized on fulfillment of services for pre-need customers, and travel plan
premiums paid. Direct costs were $6,419,000 or 55% of revenues in 2002 compared
with $6,263,000 or 48% of revenues for 2001. The number of services we performed
in 2002 was approximately 9% higher in 2002 than in 2001. Our gross profit was
$5,348,000 or 45% in 2002 compared with $6,767,223 or 52% in 2001. The reduction
of 7% in our gross profit was primarily due to 2001 revenue including
merchandise revenue on pre-need sales for a 4 month period due to the inventory
management decision discussed under services and merchandise revenue above.
General, administrative and selling expenses
- --------------------------------------------
General, administrative and selling expenses for 2002 were $8,709,000 compared
with $7,798,000 in 2001. The increase of $911,000 in 2002 over 2001 was due to a
number of factors. Advertising costs in 2002 were $300,000 higher than in 2001.
We increased our provision for uncollectible at need accounts receivable by
$276,000 in 2002. The remainder of the increase in general and administrative
expenses were attributable to the addition of 2 locations in 2002, increased
insurance costs, and costs associated with seeking additional financing. The
increases were partially offset by reduced overhead expense associated with the
Portland business which was sold effective December 31, 2001.
Amortization and depreciation expense
- -------------------------------------
Amortization and depreciation expense was $253,000 for 2002 compared with
$2,082,000 for 2001, a decrease of $1,829,000 in 2002. The decrease was due to
the adoption of FASB 142 effective January 31, 2002. FASB 142 requires that
goodwill and intangibles of an indefinite life (such as the "Names and
Reputations" recorded by the company on the acquisition of the Neptune Group
business) no longer be amortized, but instead be tested for impairment at least
annually. The Company's acquired Goodwill was tested for impairment in
accordance with FASB 142 and is not considered impaired, accordingly no
reduction of its value is necessary, or permitted by way of amortization under
FASB 142.
Professional fees
- -----------------
Professional fees expense comprises legal and audit fees, and fees paid to
consultants for business and financial consulting. Professional fees expense was
$677,000 in 2002 compared with $1,765,000 in 2001, for a decrease of $1,088,000.
Fiscal 2001 expenses were higher than 2002 expenses due to significant legal and
audit fees in 2001 associated with the registration of our stock with the
Securities Exchange Commission, and consulting fees of $430,000 paid to the
former principal owner of the Neptune Group. The consulting contract was
terminated in 2001.
Loss on disposal of assets
- --------------------------
In 2001 we sold substantially all of the assets of our Portland, Oregon
businesses. We had purchased those assets in 2000 for $5.7 million, comprising
$500,000 cash, a $1,000,000 convertible debenture, and $4.2 million in stock. We
23
sold those assets in 2001 for total consideration of $2.5 million, comprising
assumption of a $1.5 million promissory note and the $1.0 million convertible
debenture. We guaranteed repayment of the $ 1.5 million promissory note as a
term of the sale, which note has now been repaid. As a result of this
disposition, we recognized a $2.7 million loss in 2001. We sold no businesses in
2002.
Interest and finance expense
- ----------------------------
This expense item comprises interest on notes payable originally classified as
long term, amortization of fees and expenses directly associated with procuring
such financing which are initially deferred, and accretion of discount on debt
charged to operations over the life of the debt. In 2002, interest and finance
expense was $2,579,000 compared with $2,515,000 in 2001. We reduced our related
debt by a net amount of $1,755,000 in 2002. Fees and expenses incurred with the
fourth restructuring of our acquisition debt in 2001, which added to 2002
amortization, and restructuring fees on the conversion of an $800,000 note
payable to a convertible debenture in 2002 increased this expense item in 2002.
This was offset by interest charges saved as a consequence of the debt reduction
referred to above and the sale of the Portland businesses.
Other income - lawsuit of settlement proceeds.
- ----------------------------------------------
In 2002 the Company received $165,000 to settle a lawsuit for service mark
infringement (2001-nil)
Net loss
- --------
Net loss for 2002 was $6,705,000 compared with $10,151,000 for 2001. The net
loss related to the reasons described above.
Year Ended December 31, 2001 Compared With Year Ended December 31, 2000:
The following discussion compares the financial results of our operations for
the year ended December 31, 2001 to the financial results of our operations for
the year ended December 31, 2000.
Revenues
- --------
In May 2001, we changed our inventory procedures and sales contracts to conform
to our revised revenue recognition policy. Under our revised revenue recognition
policy, we recognize 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 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, we recognized pre-need merchandise revenues of $1,804,000. Effective
October 1, 2001, we changed our inventory management policy and no longer
recognized revenue on the sale of pre-need merchandise. The introduction of our
worldwide 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, we 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.
We believe 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 litigation for trademark
infringement resulting from our use of the "Neptune Society" name in those
counties. We suspended sales in these areas, and we estimate that the litigation
caused our revenues to decline by approximately $350,000 or 3% during the year
ended December 31, 2001. In October, 2001, we entered into a settlement
agreement to resolve the litigation. Under the terms of the settlement
agreement, we are permitted to market pre-
24
need arrangement contracts under the name "Trident Society." We believe the
settlement will not have a material financial impact on operations; however, we
can not predict when, or if, revenues related to the affected areas will return
to historical levels.
During 2000, we acquired businesses in Ankeny, Iowa and Portland, Oregon 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. We did
not acquire any new business or open any new offices during 2001. We sold
substantially all the assets related to our Portland, Oregon cremation
businesses in December 2001.
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 was attributable to decreased management fees due to
reduced investment yields, which was partially offset by increased finance fee
income. Finance fees increased due to our 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 $4,451,000 or 58% of revenues for the comparable
period in 2000. The $1,812,000 or 41% increase was attributable to fiscal 2000
acquisitions and new office openings, and increases in costs related to sales of
our travel plans. The gross profit during the year ended December 31, 2001 was
$6,767,000, a $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 $1,995,000 or
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, for the
years ended December 31, 2001 and 2000, respectively. The increase in
amortization and depreciation expenses during 2001 was primarily the result of
our acquisitions of business in Iowa and Oregon.
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
completion of registration of our common stock with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 in the second quarter of
2001 and reporting and auditing expenses. We also paid $120,000 in legal
expenses of the former principal shareholder as part of our trademark
infringement settlement in 2001 by issuing a promissory note. Professional fees
also included $443,000 and $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 lump-sum payment of $335,000 was paid upon
termination.
Loss on Disposal of Assets
- --------------------------
In December 2001, we sold substantially all of the assets related to our
Portland, Oregon businesses. We had purchased those assets in July 2000 for $5.7
million, consisting of $500,000 in cash, a $1 million convertible debenture and
$4.2 million in stock. We sold those assets as part of our efforts to focus our
strategy on our marketing and selling pre-need operations and to reduce debt. We
sold the assets for total consideration of $2.5 million. Such consideration
consisted of assumption of a $1.5 million promissory note and the forgiveness of
the $1
25
million convertible debenture previously due July 2003. We remain obligated
under our guarantee of the $1.5 million promissory note. As a result of the
disposal of those assets, we recognized a $2.7 million loss.
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 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.
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, for the year ended December 31, 2001 and 2000,
respectively. The 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, we changed our accounting policies
applicable to pre-need merchandise sales. The implementation of SAB No. 101 had
no effect on our consolidated cash flows.
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. We considered the criteria to be satisfied when:
o we were permitted to receive one hundred percent of the unrestricted
funds associated with the merchandise sale,
o the merchandise was in a condition for its intended use
o we had no specific performance obligations essential to the
functionality of the merchandise; and
o the customer accepted title of the merchandise, evidenced by a written
transfer of title to the customer and certificate of ownership.
At the request of the customer, we 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, we changed our 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, we added the
following criteria to our revenue recognition policy for the sale of
merchandise:
o a definitive delivery date,
o stored merchandise is required to be segregated and specifically
identified by customer, and
o 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 our creditors, the
risks and rewards of merchandise ownership must have transferred to the
customer, and our custodial risks are insurable and insured. We 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. We recognize
revenue on the sale of future pre-need merchandise sales upon the physical
delivery of the merchandise or
26
upon the satisfaction of our 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 for the year ended December 31, 2001 and
2000, respectively. The net loss related to the reasons described above.
Liquidity and Capital Resources
This section should be read in conjunction with our audited financial statements
included under Item 8. Financial Statements and Supplementary Data, and in
particular the Consolidated Statements of Cash Flows. The section titled Cash
Flows From (Used In) Operations for 2002 reconciles the net loss of $(6,705,576)
to the net cash provided by operating activities of a positive $734,238. This is
primarily due to net pre-need cash revenues of $8,013,790 that are not
recognized in current year results, but deferred as to recognition until the
underlying cremations are performed. Conversely, net commissions with respect to
pre need contracts deferred of $(2,620,579) have been capitalized and are to be
charged against contracts on fulfillment. This meets the requirement of matching
revenues and expenses with the period in which they are earned as required by
generally accepted accounting principles in the United States.
At December 31, 2002, we had current assets of $2,700,000, offset by accounts
payable and accrued liabilities of approximately $(2,689,000), resulting in
substantially no excess working capital in reserve.
In February 2003, we raised $200,000 in a private placement of units, consisting
of one share of common stock and one stock purchase warrant.
Our only internal sources of liquid assets are cash flows from operations. We
have no standby line of credit, nor have we been able to make arrangements for
such line of credit. We have no external sources of liquid assets.
The principal amount of $2,357,000 in debt payments fall due in the upcoming 12
months is relatively evenly distributed throughout the year with the exception
of $1,780,000 that is due July 31, 2003 under the terms of a promissory note
issued in connection with our acquisition of the Neptune Group. See "Item 1.
Business - Neptune Society Acquisitions - Neptune Group Acquisition." Repayment
of the promissory note is secured by our assets.
We project that we will have working capital in the amount of $1,000,000 at July
31, 2003, and that we will be required to raise $800,000 in additional financing
to make the final payment under the promissory note due July 31, 2003. We are in
the process of attempting to secure financing to meet this obligation and may
seek a restructuring of the remaining balance of the promissory note. There can
be no assurance that management will be able to raise the financing required to
satisfy our obligations under the promissory note or to negotiate a
restructuring of the remaining balance of the promissory note on acceptable
terms, if at all.
In addition to the promissory note due on July 31, 2003, we have long term debt
with a fair value and book value of $6.8 million due in 2004 and 2005. This long
term debt consists of the following:
o Convertible Debentures in the principal amount of $1.1 million, which
are mandatorily convertible into shares of our common stock on March
31, 2004 at the price of $1.20 per share, unless we exercise our right
to retire the debenture for cash with a premium payment of 50%; and
o 13% Convertible Debentures in the aggregated principal amount of $5.8
million, due February 24, 2005. We have an obligation under these
Convertible Debentures to maintain a specified fixed charge coverage
ratio (requiring us to maintain certain levels of cash flow in excess
of debt obligations). Although we are current in respect of all our
payment obligations under the 13% Convertible Debentures, we did not
maintain the Coverage Ratio for the quarters ended September
27
30, 2002 and December 31, 2002. If the lenders provide us with written
notice, we would have 30 days to meet the Coverage Ratio or the
holders could accelerate the due date of the 13% Convertible
Debentures, which would have a material adverse effect on our business
and results of operations. The lenders have not provided us with
written notice. A default under the debentures could cause us to
default under other obligations.
We intend to finance any acquisitions or start ups in 2003 from operational cash
flow, or a combination of operational cash flow and vendor financing. We have no
material commitments for capital expenditures at this time.
As at December 31, 2002, we had the following contractual obligations and
commercial commitments:
---------------------------------------------------------------------------------------------------------
| Contractual | Payments Due by Period |
| Obligations | ---------------------- |
| |---------------------------------------------------------------------------------|
| | Total | Less Than One | 1-3 Years | 4-5 Years | After 5 |
| | | Year | | | Years |
| ----------------------|----------------|------------------|---------------|---------------|-------------|
| Long-Term Debt | $ 9,112,230 | $ 2,357,265 | $ 6,754,965 | Nil | Nil |
| Obligations | | | | | |
| ----------------------|----------------|------------------|---------------|---------------|-------------|
| Capital Lease | Nil | Nil | Nil | Nil | Nil |
| Obligations | | | | | |
| ----------------------|----------------|------------------|---------------|---------------|-------------|
| Operating Leases | $ 3,301,879 | $ 736,890 | $ 2,048,483 | $ 516,506 | Nil |
| ----------------------|----------------|------------------|---------------|---------------|-------------|
| Employment Contracts | 2,550,200 | 913,200 | 1,637,000 | Nil | Nil |
| ----------------------|----------------|------------------|---------------|---------------|-------------|
| Total Contractual | $ 14,964,309 | $ 4,007,355 | $10,440,448 | $ 516,506 | Nil |
| Obligations | | | | | |
---------------------------------------------------------------------------------------------------------
We anticipate that we will have to raise capital during the next 12 months to
meet our obligations under the portions of long-term debt due. We intend to
raise the capital required to fund our financing needs by issuance of debt and
equity. There can be no assurance financing will be available or accessible on
reasonable terms.
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.
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, 2002, the carrying value of our long term fixed rate
debt was approximately $9.1 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.
28
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
CONTENTS
Page
----
Independent Auditors' Report for 2002 and 2001 F-1
Independent Auditors' Report for 2000 F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5-6
Consolidated Statements of Cash Flows F-7-8
Notes to Consolidated Financial Statements F-9-36
Stonefield Josephson, Inc.
Certified Public Accountants/Business & Personal Advisors Member of DFK and The
Leading Edge Alliance
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Neptune Society, Inc.
Sherman Oaks, California
We have audited the accompanying consolidated balance sheets of The Neptune
Society, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 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
audits 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 The Neptune Society, Inc. and
subsidiaries as of December 31, 2002 and 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.
CERTIFIED PUBLIC ACCOUNTANTS
/s/ Stonefield Josephson, Inc.
Santa Monica, California
March 21, 2003
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
F-1
Independent Auditors' Report
The Board of Directors
The Neptune Society, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Neptune Society, Inc. and Subsidiaries
for the year ended December 31, 2000. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Neptune Society, Inc. and Subsidiaries for the year ended December 31, 2000 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.
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.
/s/ KPMG LLP
March 16, 2001
Los Angeles, California
F-2
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash $ 775,966 $ 213,219
Accounts receivable, net 1,818,162 1,751,276
Prepaid expenses and other current assets 106,642 113,644
-------------- --------------
Total current assets 2,700,770 2,078,139
Accounts receivable, net - non current 252,305 -
Property and equipment, net 520,759 548,469
Names and reputation 24,397,696 24,364,472
Non compete agreement, net - 48,333
Deferred financing costs 810,347 1,539,132
Deferred charges and other assets 6,963,738 4,343,159
-------------- --------------
$ 35,645,615 $ 32,921,704
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,005,139 $ 1,700,487
Accrued and other current liabilities 1,683,700 681,846
Current portion of long-term debt 2,357,265 2,890,215
-------------- --------------
Total current liabilities 5,046,104 5,272,548
-------------- --------------
Notes payable 6,754,965 7,942,465
-------------- --------------
Other long-term liabilities 389,662 197,971
-------------- --------------
Deferred pre-need revenues 19,702,742 11,688,952
-------------- --------------
Liabilities to be settled by issue of shares 260,525 796,342
-------------- --------------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.001 par value, 75,000,000 shares authorized,
4,280,423 and 2,154,400 shares issued and outstanding at
December 31, 2002 and 2001, respectively 4,280 2,153
Additional paid-in capital 31,072,881 27,901,241
Accumulated deficit (27,585,544) (20,879,968)
-------------- --------------
Total stockholders' equity 3,491,617 7,023,426
-------------- --------------
$ 35,645,615 $ 32,921,704
============== ==============
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended Year ended
December 31, December 31, December 31,
2002 2001 2000
--------------- --------------- --------------
Revenue:
Services and merchandise $ 10,899,026 $ 11,775,109 $ 6,187,708
Management and finance fees 867,583 1,255,187 1,500,996
--------------- --------------- --------------
Total revenues 11,766,609 13,030,296 7,688,704
--------------- --------------- --------------
Costs and expenses 6,418,544 6,263,073 4,451,463
--------------- --------------- --------------
Gross profit 5,348,065 6,767,223 3,237,241
--------------- --------------- --------------
General, administrative and selling expenses 8,708,742 7,797,567 5,802,283
Amortization and depreciation expense 253,428 2,081,585 1,886,203
Professional fees 677,009 1,765,289 1,244,836
Loss on disposal of assets, net - 2,759,380 -
--------------- --------------- --------------
Total general, administrative, selling
and other expenses 9,639,179 14,403,821 8,933,322
--------------- --------------- --------------
Other income - lawsuit settlement proceeds 165,000 - -
Loss from operations (4,126,114) (7,636,598) (5,696,081)
Interest and finance expense 2,579,462 2,514,570 2,485,030
--------------- --------------- --------------
Loss before income taxes (6,705,576) (10,151,168) (8,181,111)
Income tax expense - - 254,128
--------------- --------------- --------------
Loss before cumulative effect of change in
accounting principle (6,705,576) (10,151,168) (8,435,239)
Cumulative effect of a change in accounting
principle - - (403,927)
--------------- --------------- --------------
Net loss $ (6,705,576) $ (10,151,168) $ (8,839,166)
--------------- --------------- --------------
Loss per share - basic and diluted
Loss before cumulative effect of
change in accounting principle $ (1.88) $ (5.09) $ (4.75)
--------------- --------------- --------------
Cumulative effect on prior years of
change in accounting principle $ - $ - $ (0.23)
--------------- --------------- --------------
Loss per share - basic and diluted $ (1.88) $ (5.09) $ (4.98)
--------------- --------------- --------------
Weighted average number of shares -
basic and diluted 3,576,100 1,994,991 1,776,119
--------------- --------------- --------------
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accum- Total
Common Stock paid-in ulated Stockholders'
Shares Amount capital deficit equity
--------------------------------------------------------------------------------
Balance at December 31, 1999 1,649,432 1,649 14,272,908 (1,889,634) 12,384,923
Net loss - - - (8,839,166) (8,839,166)
Shares issued:
For cash net of $82,500 of
offering costs 164,584 165 7,007,330 - 7,007,495
In connection with long-term
Debt 8,000 8 400,003 - 400,011
For acquisitions 93,327 93 4,988,326 - 4,988,419
Discount on convertible
debentures - - 115,000 - 115,000
Compensation related to stock
Options - - 51,081 - 51,081
----------- ----------- ------------ ------------- -------------
Balance at December 31, 2000 1,915,343 1,915 26,834,648 (10,728,800) 16,107,763
Net loss - - - (10,151,168) (10,151,168)
Shares issued:
In connection with long and
short-term debt 96,447 97 476,112 - 476,209
For acquisition activities 141,162 141 (141) - -
Discount on convertible
Debentures - - 60,090 - 60,090
Compensation related to stock
Options - - 530,532 - 530,532
----------- ----------- ------------ ------------- -------------
Balance at December 31, 2001 2,152,952 2,153 27,901,241 (20,879,968) 7,023,426
(Continued)
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Additional Accum- Total
Common stock paid-in ulated Stockholders'
Shares Amount capital deficit equity
------------------------------------------------------------------------------
Net loss (6,705,576) (6,705,576)
Shares issued for:
Settlement of accrued
liabilities 21,250 21 406,321 - 406,342
Restructuring fees on long term
debt 327,083 327 389,673 - 390,000
Cash 1,388,889 1,389 1,498,611 - 1,500,000
Conversion of debenture 225,000 225 74,775 - 75,000
Acquisitions and other 6,559 7 2,282 - 2,289
Compensation - shares issued 51,250 51 59,050 - 59,101
Settlement of debenture interest 107,440 107 115,928 - 116,035
Compensation related to stock
options - - 345,000 - 345,000
Beneficial conversion feature on
convertible debt - - 280,000 - 280,000
---------- ------- ----------- ------------ -----------
Balance at December 31, 2002 4,280,423 4,280 31,072,881 (27,585,544) 3,491,617
========== ======= =========== ============ ===========
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended
December 31, December 31, December 31,
2002 2001 2000
--------------- -------------- -------------
Cash flows provided by (used for) operating activities:
Net loss $ (6,705,576) $(10,151,168) $ (8,839,166)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 253,428 2,081,585 1,886,203
Accretion of discount on notes payable 135,239 67,605 697,783
Non-cash interest & amortization of deferred
finance costs 1,098,993 1,315,279 1,126,306
Stock issued for professional services - 31,658 -
Stock compensation 404,101 530,532 51,081
Loss on disposal of assets - 2,759,380 -
Deferred tax benefit - - 254,128
Compensation expense to be settled by stock 160,525 - -
Change in operating assets and liabilities:
Accounts receivable, net (319,191) (1,516,906) (56,060)
Prepaid expenses and other current assets 7,002 7,417 (12,710)
Deferred charges and other assets (2,620,579) (320,915) (2,481,375)
Accounts payable (695,348) 300,949 901,531
Accrued and other liabilities 1,001,854 (931,133) 823,561
Deferred pre need revenues 8,013,790 5,090,705 4,916,233
--------------- -------------- -------------
Net cash provided by (used for) operating activities 734,238 (735,012) (732,485)
--------------- -------------- -------------
Cash flows used for investing activities:
Purchases of property and equipment, net (175,096) (4,404) (216,803)
Acquisitions, net of cash acquired (33,224) - (703,620)
--------------- -------------- -------------
Net cash used for investing activities (208,320) (4,404) (920,423)
--------------- -------------- -------------
Cash flows provided by (used for) financing activities:
Payments on notes payable (1,954,862) (2,412,704) (11,864,781)
Proceeds from issuance of debt, net 200,000 2,300,000 750,000
Net proceeds of common stock issued 1,500,000 - 7,007,495
Increase in long term liabilities 291,691 - -
--------------- -------------- -------------
Net cash provided by (used for) financing activities 36,829 (112,704) (4,107,286)
--------------- -------------- -------------
Net increase (decrease) in cash 562,747 (852,120) (5,760,194)
Cash, beginning of year 213,219 1,065,339 6,825,533
--------------- -------------- -------------
Cash, end of year $ 775,966 $ 213,219 $ 1,065,339
=============== ============== =============
The accompanying notes form an integral part of these consolidated financial
statements.
F-7
THE NEPTUNE SOCIETY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended
December 31, December 31, December 31,
2002 2001 2000
--------------- -------------- -------------
Supplemental disclosure of cash flow information -
cash paid during the period for interest $ 1,147,469 $ 1,132,000 $ 659,000
=============== ============== =============
Supplemental disclosure of noncash investing
and financing activities:
Debt assumed by third party resulting from asset sale $ - $ 1,500,000 $ -
=============== ============== =============
Debt forgiveness related to asset sale $ - $ 1,000,000 $ -
=============== ============== =============
Discount on debenture payable $ 280,000 $ 60,090 $ 115,000
=============== ============== =============
Common stock issued for acquisitions $ 2,289 $ - $ 4,988,419
=============== ============== =============
Notes issued for acquisition $ - $ - $ 1,000,000
=============== ============== =============
Accrued interest settled by issue of stock $ 116,035 $ - $ -
=============== ============== =============
Accrued liabilities settled by issue of stock $ 796,342 $ - $ -
=============== ============== =============
Deferred compensation to be settled by stock $ 100,000 $ - $ -
=============== ============== =============
Conversion of debentures by issue of stock $ 75,000 $ - $ -
=============== ============== =============
The accompanying notes form an integral part of these consolidated financial
statements.
F-8
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(1) The Business, Basis of Presentation and Liquidity:
The Neptune Society, Inc., a Florida Corporation, is the holding
company for Neptune America, Inc., a California Corporation. Neptune
Management Corporation, Heritage Alternatives, Inc., and Trident
Society, Inc. are wholly owned subsidiaries of Neptune America, Inc.
and engage in marketing and administering pre-need and/or at-need
cremation services in California, Colorado, Florida, New York,
Arizona, Illinois, Iowa, Oregon and Washington. The Neptune Society,
Inc. operates crematories in California, Washington, Oregon and Iowa.
On March 31, 1999, The Neptune Society, Inc. (formerly Lari Corp.
"Lari") 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) to acquire all of the outstanding shares and the
partnership interests of the following entities (collectively referred
to as the Predecessor Companies):
Neptune Management Corporation
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 goodwill ("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
Companies. In January 1999, Lari Corp. issued 250,000 shares of common
stock and 1,000,000 warrants to purchase common stock for total
consideration of $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 The Neptune Society, Inc. (the
"Successor Company"). Collectively, the Predecessor Companies and
Successor Company are herein referred to as ("the Company").
F-9
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(1) The Business, Basis of Presentation and Liquidity, Continued:
As of December 31, 2002, the Company has a working capital deficit of
approximately $2.3 million. Management believes it will obtain, on
acceptable terms, a fifth restructuring of the remaining balance of
the acquisition debt, which at December 31, 2002 is approximately $2.1
million and is currently due in the upcoming year. In fiscal 2002, the
Company achieved positive operating cash flow of approximately
$700,000 after several years of negative operating cash flow. The
company believes that it has sufficient liquidity from continuing
positive cash flow to maintain operations and to allow it to build a
cash reserve to partially retire and successfully renegotiate the
current portion of its acquisition debt.
(2) Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements as of December 31, 2002 and 2001
and for the years ended December 31, 2002, 2001 and 2000 present the
consolidated accounts of The Neptune Society, Inc. and subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition:
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.
F-10
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
Revenue Recognition, Continued:
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 the Company 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.
The Company is 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.
At-need cremation services--The Company recognizes 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--The Company sells pre-need cremation
services and merchandise under contracts that provide for delivery of
the services at the time of need. Services and merchandise revenues
related to pre-need cremation services are recorded as revenue in the
period the services are performed. Until the services are performed,
the proceeds received from the sale of pre-need cremation contracts
are recorded as deferred pre-need revenue to the extent that such
proceeds are not required to be trusted.
F-11
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
Revenue Recognition, Continued:
Pre-need installment sales--The Company also sells 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 pre-need
revenue until the transaction qualifies for revenue recognition under
the Company's accounting policies.
Prior to January 1, 2001, due to the uncertainty of collections of
these accounts, the Company recorded these transactions in accordance
with the Company's revenue recognition accounting policies as cash was
received.
Worldwide travel sales--The Company sells a worldwide travel assurance
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 the sale of travel plans at the
time of sale.
Commission income--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.
Direct and indirect costs--The Company expenses direct and indirect
costs in the period incurred, with the exception of sales commissions,
which are specifically identifiable to individual pre-need cremation
arrangements. Sales commissions are initially recorded as deferred
charges and other assets. When the related pre-need services are
performed, such deferred charges are recorded to operations.
F-12
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
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. 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 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 trust funds. California allows a maximum fee of four
percent of beginning year trust fund corpus, subject to the trust
fund's annual performance. The 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 - Deferred Obtaining Costs). 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 $41,944,000 and $36,328,000 at December 31, 2002 and 2001,
respectively, which, in the opinion of management, exceeds the future
obligations under such arrangements.
2002 2001
---- ----
Cash and cash equivalents $ 26,728,000 $ 2,235,000
Fixed income investment contracts 1,171,000 3,140,000
Mutual funds, stocks and treasury bills 14,045,000 2,072,000
U.S. Government investments - 28,881,000
--------------- --------------
Total $ 41,944,000 $ 36,328,000
=============== ==============
F-13
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
Cash and Cash Equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
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
Names and Reputations:
In July 2001 the Financial Accounting Standards Board issued Statement
No. 142, "Goodwill and other Intangible Assets", which requires that
goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least annually. The
Company adopted FASB 142 effective January 1, 2002. The classification
"Names and Reputations" meets the definition of goodwill under FASB
142. For the 2001 and prior fiscal years, the Company amortized Names
and Reputations over a period of 20 years from acquisition.
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 projection of future
undiscounted cash flows of the geographic area to which the
non-compete agreement relates. If an impairment is indicated, then an
adjustment is made to reduce the carrying amount of the intangible
asset to its fair value.
At December 31, 2002, the unamortized carrying value of this asset was
nil (2001: $48,333). Accumulated amortization at December 31, 2002 and
2001 was $145,333 and $97,000 respectively.
F-14
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
Advertising
Costs of advertising are expensed as incurred. Advertising expense was
approximately $1,877,078, $1,577,213 and $1,167,294 for the years
ended December 31, 2002, 2001 and 2000, respectively.
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 basis, operating losses 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, 2002 and 2001, the Company recorded a valuation allowance
of 100% against all of its deferred tax assets.
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. The Company has adopted the amended
disclosure provisions of SFAS No. 148, "Accounting for Stock Based
Compensation - Transitional Disclosure" with respect to the effect of
its use of the disclosure-only provisions of FASB 123 in accounting
for stock-based compensation, and the effect of the method used on
reported results.
Deferred Obtaining Costs
Deferred obtaining costs (included in deferred charges and other
assets) 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.
Deferred Financing Costs
These costs are deferred and expensed as interest and finance cost
over the life of the respective debt instrument. The amount so
classified comprises fees and direct costs incurred on the obtaining
and restructuring of long term debt.
F-15
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(2) Summary of Significant Accounting Policies, Continued:
Computation of Earnings (Loss) Per Common Share:
Basic and diluted loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the
year. For the years ended December 31, 2002, 2001 and 2000, options to
purchase 608,728, 607,296 and 158,438 shares, respectively, of common
stock at prices ranging from $4.40 to $57.00 per share were not
included in the computation of diluted loss per share because the
effect would be anti-dilutive.
Additionally, warrants and conversion rights to purchase 84,375,
1,724,167 and 2,617,211 shares at December 31, 2000, 2001 and 2002
respectively at prices ranging from $1.20 to $57.00 per share were not
included in the computation of diluted loss per share because the
effect would be anti-dilutive.
Fair Value of Financial Instruments
The carrying amounts of cash, current receivables and payables
approximate their 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Comprehensive Income (Loss)
Except for net loss, the Company does not have any transactions or
other economic events that enter into other comprehensive loss during
the years presented.
(3) Changes in Accounting Principles
Revenue Recognition:
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.
F-16
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(3) Changes in Accounting Principles, Continued:
Revenue Recognition, Continued:
In response to SAB No. 101, the Company changed its revenue
recognition accounting policy with respect to merchandise sold in
pre-need arrangements to include conditions beyond current state
regulations. As of January 1, 2000, the Company 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 the test that 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 additional
revenue recognition criteria had not been met. The Company has
deferred revenues of $4,326,000, $5,097,000 and $8,224,013
respectively, for the years ended December 31, 2000, 2001 and 2002 as
the additional criteria noted above had not been satisfied.
Goodwill (Names and Reputations):
In July 2001, the Financial Accounting Standards Board issued
Statement No. 142, "Goodwill and Other Intangible Assets", which
requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually. The Company adopted FASB 142 effective January 1,
2002. The asset "Names and Reputations" meets the definition of
goodwill under FASB 142.
On implementation of FASB 142, management determined that the fair
value of the Company as a single reporting unit under FASB 142
exceeded the carrying value of the net assets, including goodwill. The
Company has subsequently completed the evaluation of the implied value
of its goodwill, and determined that there is no impairment in value.
For 2001 and prior fiscal years, the Company amortized Names and
Reputations over a period of 20 years from acquisition, resulting in
amortization expense of approximately $1,500,000 annually. There was
no amortization recorded in 2002 due to the adoption of SFAS No. 142.
With the requirement to adopt FASB 142, the Company will no longer
amortize its acquired goodwill on a systematic basis. Rather it will
test the value of Goodwill annually, and if it is determined that
goodwill is impaired, the carrying value will be adjusted by a charge
to operations in the year that such determination is made.
F-17
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(3) Changes in Accounting Policies, Continued:
Goodwill (Names and Reputations), Continued:
An analysis of the historical carrying value of goodwill is as
follows:
2002 2001
---- ----
Cost
Names and Reputations recorded on acquisition of:
Predecessor Companies $ 26,809,237 $ 26,809,237
Washington crematory 732,968 699,744
Iowa crematory 816,390 816,390
--------------- --------------
28,358,595 28,325,371
Less:
Accumulated amortization (1999 to 2001) (3,960,899) (3,960,899)
--------------- --------------
Net book Value $ 24,397,696 $ 24,364,472
=============== ==============
(4) Property and Equipment
Property and equipment is summarized as follows:
2002 2001
---- ----
Furniture and fixtures $ 195,344 $ 143,606
Nautical equipment - 110,000
Automobiles 154,208 97,611
Equipment 496,532 416,971
Leasehold improvements 194,931 191,882
--------------- --------------
Total property and equipment 1,041,015 960,070
Less accumulated depreciation and amortization 520,256 411,601
--------------- --------------
Property and equipment, net $ 520,759 $ 548,469
=============== ==============
(5) Notes Payable
2002 2001
---- ----
13% Convertible debentures
Non-amortizing, interest accruing at 13% per annum payable
(with interest at 6.5% per annum deferred as to payment
until June 2003), due February 24, 2005. Includes accrued
interest of $788,202 (2001: $650,890). See (a) below. $ 5,788,202 $ 5,650,890
F-18
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued:
2002 2001
---- ----
Acquisition debt
Promissory notes bearing interest at 13% per annum,
payable in monthly installments of $78,471, including interest
due July 31, 2003. Secured by a first trust deed on all assets
of the Company. See (b) below. 1,782,057 2,391,940
Acquisition debt - 2001
Promissory note, non-amortizing, 13% interest due July 2003.
Includes accrued interest of $45,208 (December 31, 2001: nil).
See (b) below. 395,208 350,000
13.75% mandatory convertible debentures
Interest only payable monthly. See (c) below. 896,653 -
Professional services debt
Notes payable, non-interest bearing, payable in monthly
installments of $15,000, due November 2003 and February 2004.
See (d) below. 250,110 369,872
12% Convertible debentures
Non-amortizing, interest accruing at 12% per year payable
monthly, due July 31, 2003. See (e) below. - 75,000
Other
Note payable, non-amortizing, interest accruing at 19.98%
payable monthly, due December 2002. See (f) below. - 800,000
Note payable to a private investor, non-interest bearing,
non- amortizing, due on September 30, 2001. See (g) below. - 1,000,000
Note payable, interest accruing at 10% per annum,
payable in monthly installments of $14,000, due July 2002.
See (h) 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. - 10,876
F-19
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued:
2002 2001
---- ----
Line of credit, interest accruing at 9%, interest only
payable monthly, maximum limit $100,000, principal due
April 1, 2002. (not renewed) - 90,000
------------- ------------
9,112,230 10,832,680
Less current portion 2,357,265 2,890,215
------------- ------------
$ 6,754,965 $ 7,942,465
============= ============
(a) 13% Convertible debentures
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 this deferred financing cost
results in an effective interest rate of 15.8%. In addition, the
debentures were 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, was 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 was based on its quoted market price. The
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 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 was also obligated to adjust the
number of shares issuable under the convertible debentures and
warrants if it issued additional shares of common stock under the
following scenarios: (i) for less than $40.00 in cash, in which case
the debenture was to be convertible at the lower price or (ii) the
Company issued shares without consideration in a transaction that
resulted in the issuance of shares for consideration of less than
$40.00 per share, in which case the debenture was convertible at a
price adjusted to give effect to the lower value of the share
issuance.
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 holders, (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 certain debt
coverage ratios. The debenture holder retained certain anti-dilution
rights that allow it to maintain its proportionate ownership
percentage in the Company.
F-20
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued
(a) 13% Convertible debentures, Continued
Under the terms of the debentures, interest at the rate of 6.5% per
annum is deferred as to payment until May 31, 2003. Commencing June 1,
2003, monthly interest payments increase to 13% per annum, accrued
interest representing the 6.5% per annum interest deferred in prior
years becomes payable commencing June 1, 2003 at the rate of $15,000
per month, unless the Company provides written notice of its inability
to do so due to insufficient cash flow.
During 2002, the note holders exercised their pre-emptive right to
acquire the amount of $71,563 of 13.75% convertible debentures, which
debentures are automatically convertible into common shares at $1.20
per share on March 31, 2004. The note holders also exercised their
pre-emptive rights to acquire 107,440 common shares at a cost of
$116,035. The acquisition of the shares and the convertible debentures
by the note holders effectively reduced accrued interest owed to them.
The Company has an obligation under the Convertible debentures to
maintain a specified fixed charge coverage ratio (the "Coverage
Ratio"). Although the Company is current in respect to all of its
payment obligations under the debentures, the Company did not maintain
the Coverage Ratio for the quarters ended September 30, 2002 and
December 31, 2002. If the holders provide the Company with written
notice, the Company would have 30 days to meet the Coverage Ratio or
the holders could accelerate the due date of the debentures, which
would have a material adverse affect on the Company's business and
results of operations. The holders have not provided the Company with
written notice. A default under the debenture could cause the Company
to default under other obligations.
(b) Acquisition debt
Acquisition debt is comprised of two ($19,000,000 and $2,000,000)
promissory notes to the owners of the Predecessor Companies.
First restructuring
On August 1, 1999, a $19,000,000 note issued in connection with the
acquisition was amended as follows: i) $9,625,088 of the note became
interest free in exchange for $76,000 cash, 34,375 warrants were
issued to acquire common shares at $48 per share and payment due dates
were amended to $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 were 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.
F-21
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued
(b) Acquisition debt, Continued
Second restructuring
On July 31, 2000, the Company restructured both the $19,000,000 and
$2,000,000 notes. 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 its $19,000,000 acquisition note resulting in a
remaining balance of $4,724,440 outstanding and extended the due date
on this 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 creditor 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 the
guarantee and adjustments to the liability are recorded through
interest expense.
Third restructuring
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 accrued 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 were amortized to interest expense over the life of the note.
Fourth restructuring
In December 2001, the Company executed an agreement to restructure the
remaining $2.7 million of acquisition debt, previously due January
2002. On December 28, 2001, the Company paid $333,000 of note
principal, and agreed to amortize $963,000 over 18 months and make a
lump-sum payment of $1,429,000 on July 31, 2003. 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, 2003 for additional loan fees related to this
restructuring ("Acquisition debt - 2001") and issued the creditors
75,000 shares of the Company's common stock valued at $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 also agreed to
release the creditors with respect to liability under the Leneda
litigation, which was settled during the year. The Company also
paid-out the remainder of all payments due under the creditor's
consulting agreement in the amount of $355,000 and terminated the
agreement.
F-22
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued
(c) 13.75% mandatory convertible debenture
In 2002 the Company issued face value $1,071,653 of 13.75% convertible
debentures in consideration for cash (including satisfaction of an
outstanding note payable of $800,000) of $1,000,000 and settlement of
$71,653 of accrued interest payable to a debenture holder holding
certain pre-emptive rights to all corporate financings.
The debenture holders may exercise their rights to acquire common
shares at the price of $1.20 per share at any time prior to March 31,
2004, at which date the debentures automatically convert to common
shares.
The Company may retire the debentures for cash prior to conversion by
paying the debenture holders a premium of 50% on the face value of the
debt.
The Company is to issue 83,333 shares as a loan fee valued at
$107,000. The loan fee, together with the amount of $173,000 allocated
to the conversion feature, are being accreted as interest and finance
expense on a straight line basis over the term to maturity of the
debenture. At December 31, 2002, the unaccreted amount of $175,000 has
been recorded as a reduction of the carrying value of the debt.
(d) Professional services debt
In November 2001, the Company issued non-interest bearing notes
payable of $360,000 and $70,000, due November 2003 and February 2004,
respectively, in payment of professional fees due. The $360,000 note
is amortizing at $15,000 per month. The Company also issued 25,000
shares valued at $72,000 in connection with the debt settlement. 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. To the extent
the Company complies with the terms of the notes, the note holder has
agreed to forgive the $70,000 obligation. The notes are collateralized
by certain assets of the Company.
At December 31, 2002, the carrying value of the debt is net of
unamortized discount of $30,658 (2001: $60,090).
F-23
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(5) Notes Payable, Continued
(e) 12% convertible debenture
In August 2001, the Company borrowed $1,575,000 at 12% interest per
annum, payable monthly, maturing January 2, 2002. Of the principal
amount, $75,000 represented 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 (subsequently adjusted to $3.00 per share). The value of the
shares, warrants and cash loan fees was amortized to interest expense
over the life of the note. The debt was collateralized by certain
assets of the Company's Portland, Oregon business.
In December 2001, as a condition of the sale of these assets, the
Company entered into an agreement to restructure and extend the due
date of the debt to July, 2002. Under the agreement, $1,500,000 of the
$1,575,000 note payable and a $1,000,000 convertible debenture, 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 $0.33 per share maturing July 2002. 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 was amortized to interest
expense over the life of the debenture. The debenture was converted to
225,000 shares on maturity.
(f) On December 28, 2001, the Company issued a 19.98% non-amortizing note
payable of $800,000 due December 28, 2002. The note payable was
retired during the year by the issuance of $800,000 in face value of
13.75% mandatory convertible debentures (See c above).
(g) On March 31, 2002, financing costs of 3,000 common shares valued at
$150,000 were paid in connection with this loan and were amortized to
interest expense over the life of the loan. This loan was repaid in
2002.
(h) In November 2001, the Company issued a 10% interest, amortizing note
payable for $120,000 due July 31, 2002 for professional services
rendered. The debt was collateralized by certain assets of the
Company.
(i) The aggregate maturities of long-term debt at December 31, 2002 are as
follows:
Year Ended December 31,
2003 $ 2,357,265
2004 966,763
2005 5,788,202
----------------
$ 9,112,230
F-24
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(6) Stockholders' Equity, Continued
Common Stock
------------
Effective March 22, 2002, the Company completed a reverse split of its
common stock on the basis of one share for each four shares previously
issued. All references in these financial statements to share numbers and
per share amounts give retroactive effect to the reverse stock split.
In January 2000, the Company sold the remaining 2,084 shares of common
stock under its private placement agency agreement entered into in July
1999 for gross proceeds of $100,000.
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.
On May 31, 2002, the authorized capital of the Company was increased to
75,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares
of preferred stock, $0.001 par value.
Liabilities To Be Settled By Issue Of Shares
--------------------------------------------
December 31, 2002 December 31, 2001
--------------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------ ----------- ------------ -----------
Deferred compensation to executives 400,807 $ 260,525 - $ -
Restructuring fees on long-term debt - - 327,083 390,000
Settlement of accrued liabilities - - 21,250 406,342
------------ ----------- ------------ -----------
400,807 $ 260,525 348,333 $ 796,342
============ =========== ============ ===========
Employee 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), non-qualified stock options, 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.
During the year ended December 31, 2001, 484,296 options to acquire common
stock were granted at an exercise price of $3.64 to $56.08 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.
Effective April 12, 2002, the Board of Directors of the Company adopted the
2002 Stock Incentive Plan (2002 Plan) for the grant of qualified incentive
stock options (ISO), non-qualified stock options, 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 2002 Plan, 750,000 shares are reserved for issuance.
Executive Stock Options
-----------------------
Under the terms of five year employment agreements commencing January 1,
2001, each of three Executive officers were granted options to acquire
130,682 shares at a price of $4.40 per share annually for the term of their
contracts. One executive terminated his employment in 2002 and options
granted to him in 2001 and 2002 were cancelled. At December 31, 2002, stock
options representing 522,728 shares have vested and are unexercised (2001:
392,046), all at the exercise price of $4.40 per share.
F-25
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(6) Stockholders' Equity
Stock Compensation
------------------
The following table is a summary of the Company's stock options outstanding
as of December 31, 2002, 2001 and 2000 and the changes during the years
then ended.
2002 2001 2000
---------------------------------------------------------------------------------
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning of year 607,296 $ 14.52 158,438 $ 39.08 106,688 $ 47.00
Granted 392,046 $ 4.40 484,296 $ 5.40 87,500 $ 51.28
Cancelled and expired (390,614) $ - (35,438) $ - (35,750) $ -
---------------------------------------------------------------------------------
Outstanding, end of year 608,728 $ 7.19 607,296 $ 14.52 158,438 $ 49.28
---------------------------------------------------------------------------------
Exercisable end of year 608,728 $ 7.19 275,256 $ 24.20 64,438 $ 47.00
=================================================================================
The following table further describes the Company's stock options
outstanding as of December 31, 2002:
Number of Weighted Weighted
Options average remaining average Number
Outstanding life (years) exercise price exercisable
56,875 1.5 $ 10.00 56,875
9,125 0.2 $ 48.50 9,125
18,750 0.5 $ 53.00 18,750
1,250 0.5 $ 55.72 1,250
522,728 3.0 $ 4.40 522,728
------------ -------------
608,728 608,728
============ =============
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.
F-26
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(6) Stockholders' Equity, Continued
Stock Compensation, Continued
-----------------------------
No expense was recorded under the intrinsic value method during any of the
reporting periods. 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, 2002, 2001 and 2000
would have been as follows:
2002 2001 2000
---- ---- ----
Net loss as reported $ (6,705,576) $ (10,151,168) $ (8,839,166)
Compensation cost measured by fair
value method 447,775 635,998 1,556,834
-------------- -------------- --------------
Pro-forma net loss $ (7,150,351) $ (10,787,166) $ (10,396,000)
============== ============== ==============
Basic and diluted loss per common share:
as reported $ (1.88) $ (5.09) $ (4.98)
============== ============== ==============
pro forma $ (2.00) $ (5.41) $ (5.85)
============== ============== ==============
Stock Compensation
------------------
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; dividend
yield nil, expected volatility 32%, risk free interest rate 6.0%, and
expected life of 3 years.
The weighted-average fair value of options granted during December 31,
2002, 2001 and 2000 was $4.40, $5.00 and $11.36 per share, respectively.
Warrants and conversion rights outstanding
------------------------------------------
The following stock purchase warrants and conversion rights are outstanding
at December 31, 2002:
Number of shares
Expiration subject to warrants
Granted in connection with: Date Price and conversion rights
---- ----- ---------------------
13.0% Convertible Debenture February 24, 2005 $3.00 1,666,667
13.0% Convertible Debenture December 24, 2004 $3.00 50,000
13.75% Mandatory Convertible Debenture March 31, 2004 $1.20 893,044
12.0% Convertible Debenture December 21, 2005 $3.00 7,500
------------
2,617,211
============
F-27
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(7) Commitments and Contingencies
Employment Agreements
---------------------
The Company entered into employment agreements with both its President and
its Chief Financial Officer in 2001 for a five year period ending December
31, 2005. Each officer receives an annual base salary of $200,000, a
minimum annual bonus of $100,000, stock options to purchase 130,682 shares
at a price of $4.40 annually, and automobile, business and entertainment
allowances of a minimum of $24,000 annually. The agreements also provide
that where one executive receives benefits in excess of the base salary the
other executive will receive payment to equalize.
In the event of termination by the Company without cause, or by the
executive with cause, the agreements provide for a lump sum payment to the
executive equal to three times the annual base salary, plus the greater of
$500,000 or three times the highest annual bonus paid.
Consultants Agreements
----------------------
The services of the Chief Operating Officer are retained under a consulting
agreement entered into during 2002, expiring June 30, 2005. The Company is
obligated to pay $144,000 annually and issue stock options for the purchase
of 50,000 shares.
The Company has retained the services of its former President and Chief
Operating Officer under an agreement dated 2002 expiring no earlier than
January 31, 2004, in consideration for annual fees of $85,200.
Leases
------
The Company leases facilities under operating lease agreements expiring
through July 2009. The Company also leases certain equipment and
automobiles under operating lease agreements expiring at various dates.
Rent expense for the years ended December 31, 2002, 2001 and 2000 were
$710,000, $645,000, and $515,000 respectively.
Future minimum lease payments for the upcoming five years under
non-cancelable operating leases in effect December 31, 2002 are as follows:
Year ending December 31,
2003 $ 736,890
2004 739,042
2005 689,257
2006 620,184
2007 516,506
F-28
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(7) Commitments and Contingencies, Continued:
Earn out Provisions
-------------------
In connection with the acquisition of a business in Washington State in
1999, the Company is required to pay additional purchase consideration of
1% of gross revenue and 7.5% of net income related to the acquired
business, annually, to December 31, 2003.
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.
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 entered into an arrangement with Leneda whereby Leneda would
perform at-need services for certain of the pre-need contracts sold within
Leneda's territories by the Company. 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 Alternative, 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 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.
F-29
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(7) Commitments and Contingencies, Continued:
Leneda Litigation, Continued
----------------------------
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 under these
contracts 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 Neptune Society's obligations under the
Services 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.
Other Litigation
----------------
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.
(8) Comparative Figures:
Certain of the amounts for the 2001 comparative year have been reclassified
to conform to the presentation adopted for 2002.
F-30
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(9) Income Taxes:
Income tax expense for the years ended December 31, 2002, 2001 and 2000 is
summarized below.
2002 2001 2000
---- ---- ----
Current expense:
Federal $ - $ - $ -
State - - 800
-------------- ------------- --------------
Total current - - 800
-------------- ------------- --------------
Deferred expense:
Federal - - 217,629
State - - 35,699
-------------- ------------- --------------
Total deferred - - 253,328
-------------- ------------- --------------
Income tax expense $ - $ - $ 254,128
============== ============= ==============
Income tax (benefit) differs from the expected statutory amount as follows:
2002 2001 2000
---- ---- ----
Expected income tax expense
(benefit) $ (2,347,000) $ (3,451,937) $ (2,781,578)
State income tax, net of federal benefit (382,000) (600,701) (477,319)
Nondeductible goodwill - 832,602 592,632
Change in valuation allowance 2,136,000 2,780,000 2,822,093
Other 593,000 440,036 98,300
------------- ------------- -------------
$ - $ - $ 254,128
============= ============= =============
F-31
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(9) Income Taxes, Continued:
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities is presented
below:
2002 2001
---- ----
Deferred tax assets:
Deferred revenue $ 6,896,000 $ 3,976,400
Net operating loss 3,764,000 3,350,600
Other 64,000 84,600
------------- -------------
Total gross deferred tax assets 10,724,000 7,411,600
Valuation allowance (7,939,000) (5,802,600)
------------- -------------
Net deferred tax assets 2,785,000 1,609,000
Deferred tax liability -
deferred commissions (2,785,000) (1,609,000)
------------- -------------
Net deferred taxes $ - $ -
============= =============
The Company's deferred tax asset is partially 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 $9,410,000 start to expire in the year 2019. State income tax
loss carryforwards of approximately $6,762,000 start to expire in the year
2006.
F-32
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(10) Selected Quarterly Financial Data (Unaudited)
The quarterly results of operations for fiscal 2002 and 2001 were as
follows:
In Thousands, Except Per Share Data
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
Fiscal 2002:
Net revenues $ 2,777 $ 3,115 $ 2,778 $ 3,112
Gross profit 1,388 1,687 1,258 1,075
Operating loss (689) (755) (1,301) (1,309)
Loss before cumulative effect of
change in accounting principle (1,188) (1,371) (1,833) (2,314)
Net loss (1,188) (1,371) (1,833) (2,314)
Basic loss per share before
cumulative effect of change in
accounting principle $ (0.54) (0.35) (0.45) (0.66)
Basic net loss per share (1) $ (0.54) (0.35) (0.45) (0.66)
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 before
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)
F-33
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(11) Subsequent Events:
New Sales Policy For Merchandise
--------------------------------
On January 1, 2003 the Company implemented a full merchandise delivery
policy under all new pre-need contracts sold in all locations except in 3
states where merchandise delivery under pre-need contracts is not
permitted. The effect of this revised business practice is that all
merchandise sold and delivered and administrative fees charged will be
recognized as revenue at the time the pre-need contract is sold in all
locations except in 3 states where merchandise delivery under pre-need
contracts is not permitted. For the 2002 and 2000 years, as well as for
most of the 2001 year, the Company's merchandise sales did not meet the
revenue recognition criteria under generally accepted accounting
principles, and accordingly merchandise sales revenue was deferred together
with the related sales commission until the cremation service was provided.
Revenue for pre-need cremation services ("fulfillments") will continue to
be received from trusted funds. Trusted funds are not recognized in the
Company's accounts until released to the Company on provision of services.
Private Placement
-----------------
In February, 2003 the Company completed a private placement of 307,692
units at a price of $0.65 per unit for proceeds of $200,000. Each unit
comprises one share and a warrant for the purchase of an additional share
at a price of $0.72 per share within one year, and $0.79 per share in the
second year.
F-34
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(12) New Accounting Pronouncements
In October 2001, the FASB 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 on the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived
assets. The statement provides a single accounting model for long-lived
assets to be disposed of. New criteria must be met to classify the asset as
an asset held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This statement is
effective for fiscal years beginning after December 15, 2001. The Company
does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Issued 4/02)" which the Company does not believe will
materially affect the financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan, as previously required under Emerging Issues Task Force
("EITF") Issue 94-3. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this statement
are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that this SFAS will not have a
significant impact on the results of operations or financial position of
the Company.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions--an amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." These
pronouncements will not affect the Company because they are either not
relevant to the business, or the Company will not adopt their elective
provisions.
F-35
THE NEPTUNE SOCIETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(12) New Accounting Pronouncements, Continued:
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected
to change to the fair value based method of accounting for stock-based
employee compensation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Among other things, the
Interpretation requires guarantors to recognize, at fair value, their
obligations to stand ready to perform under certain guarantees.
Interpretation 45 is effective for guarantees issued or modified on or
after January 1, 2003. The Company does not expect the adoption of this
pronouncement to have a material impact to the Company's financial position
or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by
which one company includes another entity in its consolidated financial
statements. Previously, the criteria were based on control through voting
interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. A company that
consolidates a variable interest entity is called the primary beneficiary
of that entity. The consolidation requirements of Interpretation 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
F-36
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 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
29
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, 2002.
- -------------------------------------------------------------------------------------------------------------------
| | | Director/ | Age |
|Name | Position | Officer Since | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Marco P. Markin | CEO and Director of each of Neptune Society, | June 1999 | 38 |
| | Neptune of America, (since October), Neptune | | |
| | Management (since June 1999) President of | | |
| | Heritage Alternatives, Inc. (since October | | |
| | 2002) | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Douglas J. Irving | COO of each of Neptune Society, Neptune of | May 2002 | 52 |
| | America and Neptune Management | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Rodney M. Bagley (1) | Chief Financial Officer, Treasurer, | November 2000 | 42 |
| | Secretary and Director of each of Neptune | | |
| | Society, Neptune of America, Neptune | | |
| | Management and Heritage Alternatives | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Matthew J. Hoogendoorn | Senior Vice President - Finance of Neptune | February 2003 | 50 |
| | Society, Inc. | | |
| | | | |
| | Acting Chief Financial Officer | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Gary I. Harris | National Sales Manager | | 62 |
|------------------------------|-----------------------------------------------|----------------------|------------|
|David Schroeder (2) | Consultant, Senior Vice President of | November 2000 | 55 |
| | Operations and Development | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Barry Maynes | Chief Information Officer | March 2003 | 49 |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Bryan G. Symington Smith | Director of Neptune Society | March, 2002 | 61 |
| | | | |
|------------------------------|-----------------------------------------------|----------------------|------------|
|Anthony George | Director of Neptune Society | March, 2002 | 38 |
- -------------------------------------------------------------------------------------------------------------------
(1) Mr. Bagley was on medical leave from November 2002 to March 2003. On
February 1, 2003, we appointed Matthew Hoogendoorn as our Senior Vice
President of Finance to handle Mr. Bagley's responsibilities as our
principal financial officer during his absence. Mr. Bagley resigned as
a director and our Chief Financial Officer in April 2003.
(2) Mr. Schroeder served as the President, Chief Operating Officer
Secretary and Director of each of Neptune Society, Neptune of America
and Neptune Management and President of Heritage Alternatives until
October 1, 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
30
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.
Douglas J. Irving - Mr. Irving joined Neptune as its Chief Operating
Officer in May 2002. Prior to joining Neptune, Mr. Irving had his own management
consulting business. From 1997-1998, he served as Vice President of Operations
for Service Corporation International, and from 1988-1996 Mr. Irving had several
positions including Operations Controller for The Loewen Group, Inc. Mr. Irving
is also a Licensed Funeral Director, holds a Bachelor of Commerce Degree from
the University of British Columbia and is a Professional Accountant.
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. Mr. Bagley resigned as a director and our Chief Financial Officer in April
2003.
Gary I. Harris - Mr. Harris is the National Sales Manager of Neptune
Society. Prior to joining Neptune Society 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 worked since 1985.
He attended both the University of Toledo and New York University.
David L. Schroeder - Mr. Schroeder served as Chief Operating Officer of
Neptune Society from June 2000 to May 2002, as a Director and Secretary of
Neptune Society from November 2000 to September 2002, and as President of all
Neptune companies from January 2001 to September 2002. On October 1, 2002, David
Schroeder resigned as a director of The Neptune Society, Inc. and on October 21,
2002, Mr. Schroeder resigned as president of The Neptune Society, Inc. and
entered into a consulting agreement to provide services as our Senior Vice
President of Operations and Development. 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.
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.
Subsequent to December 31, 2002, the following officers were appointed:
Barry Maynes - Mr. Maynes was appointed as Chief Information Officer (CIO)
of Neptune on March 1, 2003. Mr. Maynes joined Neptune in March, 2002 as Vice
President-Technical Services and Administration. Prior to joining Neptune, Mr.
Maynes was employed by Bowne Global Solutions as Central Services Manager,
Americas, where his responsibilities included all aspects of Finance,
Information Technology, Human Resources and
31
Administration. From 1975 to 1997 he was employed by the Origin Group, the
consulting arm of Phillips Industries, in progressively responsible positions to
Technical Support Manager.
Matthew Hoogendoorn - Mr. Hoogendoorn was appointed as Senior Vice
President of Finance on February 1, 2003. Mr. Hoogendoorn is a Chartered
Accountant in Canada and a Certified Public Accountant in the United States
(Illinois). He has operated his own Chartered Accountancy practice continually
from 1980 through the present. Mr. Hoogendoorn graduated from Simon Fraser
University in Burnaby, BC in 1976.
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
members: Marco Markin (director), Bryan G. Symington Smith (director) and
Kathryn Witter. 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.
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 2002, the Board of Directors met 2 times including participants by
telephone, and approved actions by written consent 11 times.
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
Section 16(a) of the Securities and Exchange Act of 1934 requires any
person who is our director or executive officer or who beneficially holds more
than 10% of any class of our securities which have been registered with the
Securities and Exchange Commission, to file reports of initial ownership and
changes in ownership with the Securities and Exchange Commission. These persons
are also required under the regulations of the Securities and Exchange
Commission to furnish us with copies of all Section 16(a) reports they file.
To our knowledge, based solely on our review of the copies of the Section
16(a) reports furnished to us, all Section 16(a) filing requirements applicable
to our directors, executive officers and holders of more than 10% of any class
of our registered securities were timely complied with, except that Douglas J.
Irving, Bryan G. Symington Smith, Anthony George and Matthew Markin failed to
file their initial reports on Form 3.
32
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, 2000, 2001 and 2002. 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 |
|-------------------------------------------------------------------------------------------------------------------------------|
| | | | | |
| | | ANNUAL COMPENSATION | LONG-TERM COMPENSATION | |
| | |----------------------------------|-------------------------------------------| |
| | | | | | AWARDS | | |
| Name & | Year | Salary | Bonus | Other | Deferred | Securities | LTIP | All |
| Principal | | | | Annual | Compensation | Underlying | Payouts | Other |
| Position | | | | Compensation | | Options/SAR's | | Compensation |
| | | ($) | ($) | ($) | ($) | (#) | | ($) |
|-------------------------|-------|---------|--------|---------------|----------------|----------------|---------|--------------|
|Marco Markin (1) | 2002| 174,616 | | 105,750 | 125,384 | 130,682 | | |
|President, CEO and | | | | | | | | |
|Director of Neptune | 2001| 145,233 | | 98,287 | 154,767 | 130,682 | | |
|Society | | | | | | | | |
| | 2000| 120,000 | | 83,000 | | 28,750 | | |
| | | | | | | | | |
|-------------------------|-------|---------|--------|---------------|----------------|----------------|---------|--------------|
|David Schroeder (2) | 2002| 128,738 | | | | | | |
|Consultant, Senior Vice | | | | | | | | |
|President of Operations | 2001| 134,616 | | 21,355 | 138,263 | 149,432 | | |
|and Development | | | | | | | | |
| | 2000| 120,000 | | | | 18,750 | | |
| | | | | | | | | |
|-------------------------|-------|---------|--------|---------------|----------------|----------------|---------|--------------|
|Gary Harris (3) | 2002| 75,000 | | 140,769 | 15,000 | 11,250 | | |
|National Sales Manager | | | | | | | | |
|Neptune Management | 2001| 75,000 | | 134,619 | | 7,500 | | |
| | | | | | | | | |
| | 2000| 75,000 | | 78,000 | | 3,125 | | |
| | | | | | | | | |
|-------------------------|-------|---------|--------|---------------|----------------|----------------|---------|--------------|
|Rodney Bagley (4) | 2002| 175,270 | | 24,000 124,730 | 130,682 | | |
|Chief Financial Officer, | | | | | | | | |
|Secretary and Director | 2001| 161,737 | | 23,355 | 138,263 | 149,432 | | |
|of Neptune Society | | | | | | | | |
| | 2000| 51,000 | | | | 18,750 | | |
| | | | | | | | | |
|-------------------------|-------|---------|--------|---------------|----------------|----------------|---------|--------------|
|Douglas J. Irving | 2002| 74,160 | | | 26,125 | | | |
|Chief Operating Officer | | | | | | | | |
|of Neptune Society | | | | | | | | |
================================================================================================================================
(1) Mr. Markin was appointed as an Officer and Director of our subsidiary
companies in April 1999. He was appointed as Neptune Society's
President and CEO in October 1999. Other compensation represents lease
33
payments on Mr. Markin's home and for personal use of an automobile.
(See "Employment Arrangements," section).
(2) Mr. Schroeder has served as our Chief Operating Officer from June 1,
2000 to October 2002. In 2002, we paid Mr. Schroeder for lease
payments for personal use of an automobile. Effective October 2002, he
entered into a Consulting Agreement to provide services as our Senior
Vice President of Operations and Development. (See "Employment
Arrangements").
(3) Messrs. Markin, Harris and Irving have agreed to accept payment of
this deferred compensation in stock.
(4) Mr. Bagley was appointed Chief Financial Officer of Neptune Society in
November 2000. Mr. Bagley resigned as a director and our Chief
Financial Officer in 2003.
(5) The services of Mr. Irving are provided through DSI Holdings Ltd., his
private company.
Director and Officer Stock Option/Stock Appreciation Rights ("SARs") Grants
The following table sets forth information regarding stock option grants to our
officers and directors as of December 31, 2002:
Potential Realized
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options Exercise or
Underlying Granted (1) Base Price
Options ($/Sh)(2) Expiration Date
Name Granted (#) 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------------
Marco Markin 130,682 50% $4.40 Dec. 31, 2005 $195,555 $351,043
Rodney Bagley(3) 130,682 50% $4.40 Dec. 31, 2005 $195,555 $351,043
(1) Based on options exercisable to acquire a total shares to executive
officers, directors and employees during the year ended December 31,
2002.
(2) Under the terms of Employment Agreements with Mr. Markin and Mr.
Bagley, we granted to each officer options to acquire 130,682 shares
at a price of $4.40 per share expiring December 31, 2005.
(3) Mr. Bagley resigned as a director and our Chief Financial Officer in
April 2003.
The potential realizable value is calculated based on the assumption that the
common stock appreciates at the annual rate shown, compounded annually, from the
date of grant until the expiry of the term of the option. These numbers are
calculated based on SEC requirements and do not reflect our projection or
estimate of future stock price growth. Potential realizable values are computed
by:
o multiplying the number of shares of common stock subject to a given
option by the exercise price;
o assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the
entire term of the option; and
o subtracting from that result the aggregate option exercise price.
34
Subsequent to December 31, 2002, we granted options to named executive
officers under the terms of their employment agreements. See "Employment
Agreements Subsequent to December 31, 2002," below.
35
Aggregated Option/SAR Exercises in Last Fiscal Year- and Fiscal Year-End
Option/SAR Values
The table below sets forth information on the aggregated option/SAR exercises
during our fiscal year end December 31, 2002 and option/SAR values related to
options/SARS outstanding as of December 31, 2002.
- -------------------------------------------------------------------------------------------------------------------------------
| | | | Unexercised Options | |
| | | | At FY-End (#) | Value of Unexercised in the |
| | Securities | Aggregate | Exercisable/ | Money-Options at FY-End |
| | Acquired on | Value Realized | Unexercisable | ($) Exercisable/ |
| Name | Exercise (#) | ($) | | Unexercisable (1) |
|============================|===================|==================|=========================|================================|
|Marco Markin | Nil | Nil | 290,114 (exercisable) | $ nil (exercisable) |
|CEO and | | | nil (unexercisable) | $ nil (unexercisable) |
|Director of Neptune | | | | |
|Society | | | | |
|----------------------------|-------------------|------------------|-------------------------|--------------------------------|
|David Schroeder | Nil | Nil | nil (exercisable) | $ nil(exercisable) |
|Consultant, Senior Vice | | | nil (unexercisable) | $ nil (unexercisable) |
|President of Operations | | | | |
|and Development | | | | |
|----------------------------|-------------------|------------------|-------------------------|--------------------------------|
|Gary Harris | Nil | Nil | 11,250 (exercisable) | $ nil (exercisable) |
|National Sales Manager | | | nil (unexercisable) | $ nil (unexercisable) |
|Neptune Management | | | | |
|----------------------------|-------------------|------------------|-------------------------|--------------------------------|
|Rodney Bagley (1) | Nil | Nil | 298,864 (exercisable) | $ nil (exercisable) |
|Chief Financial Officer, | | | nil (unexercisable) | $ nil (unexercisable) |
|Secretary and Director | | | | |
|of Neptune Society | | | | |
|----------------------------|-------------------|------------------|-------------------------|--------------------------------|
|Douglas J. Irving (2) | Nil | Nil | nil (exercisable) | $ nil (exercisable) |
|Chief Operating Officer | | | nil (unexercisable) | $ nil (unexercisable) |
|of Neptune Society | | | | |
|----------------------------|-------------------|------------------|-------------------------|--------------------------------|
===============================================================================================================================
(1) Mr. Bagley resigned as a director and our Chief Financial Officer in
April 2003.
(2) Under an employment agreement dated July 1, 2002, we agreed to grant
Mr. Irving options exercisable to purchase 50,000 shares of common
stock. No options were granted under the agreement, and the agreement
was superceded by an employment agreement dated March 1, 2003.
Long Term Incentive Plans
No long-term incentive awards have been made by the Company to date.
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 year ended December 31, 2002, except for our independent
directors: Mr. Smith who received 30,000 shares for Directors fees in 2002 and
Mr. George who received 10,000 shares for Directors fees in 2002.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
We have the following employment and consulting arrangements with our
executive officers:
Executive Employment Agreements
On June 6, 2001, the Company entered into employment agreements
("Agreement(s)") with Mr. Marco Markin, the Chairman of the Board and Chief
Executive Officer, Mr. Rodney M. Bagley, Executive Vice President-Finance and
Chief Financial Officer, and Mr. David Schroeder, Chief Operating 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.
36
Under the terms of the Agreements, each respective Officer receives an
annual base salary of $200,000 ($30,000 deferred subject to the Compensation
Committee), a minimum of 130,682 share options annually exercisable at $4.40 per
share, vesting over the employment period, and a minimum annual bonus of
$100,000, and automobile, business and entertainment allowances of a minimum of
$24,000 annually.
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.
On October 1, 2002 the Company and Mr. Schroeder agreed to terminate the
Employment Agreement and the services of Mr. Schroeder were retained under a
Consultant Agreement as described under "Consulting Agreements" below.
On April 18, 2003, we entered into a separation agreement with Mr. Bagley,
under which his employment agreement was canceled. Mr. Bagley resigned as our
Chief Financial Officer and as a director. We agreed to pay Mr. Bagley severance
pay in the amount of $600,000, payable in equal monthly installments over a five
year period beginning on April 18, 2003. We also agreed to pay Mr. Bagley a
final conditional payment of $100,000 if we have net free cash of at least
$1,000,000 after all of our normal operating expenses for the final year. We
agreed to pay Mr. Bagley for certain insurance costs until Mr. Bagley becomes
covered under another health insurance program or our obligations under the
separation agreement are satisfied. The separation agreement contains provision
for the acceleration of payments in the event of certain specified events, such
as a change of control, sale of substantially all of our assets, sale of a
location, or payment of dividends to stockholders. We will make provision for
this settlement by a charge to operations of $195,000 in the fiscal quarter
ended March 31, 2003. The balance of the settlement, being approximately
$405,000, will be allocated to payment of deferred remuneration previously
recorded for the 2001 and 2002 years.
In February, 2003, our board of directors approved amendments to Mr.
Markin's Agreement that extended his employment through December 31, 2007. In
addition, the board of directors approved a deferred compensation plan under
which Mr. Markin could elect to convert deferred compensation into shares of
common stock at a price equal to fair market value less 10%.
On July 1, 2002, we entered into an agreement for Doug Irving to act as our
Chief Operating Officer. Mr. Irving's annual base compensation is $144,000 per
annum, and a bonus of no less than 25% of base compensation upon successful
performance as defined by us. We are obligated to grant stock options to
purchase 50,000 shares of our common share at $2.00 per share. Such stock
options shall vest June 30, 2003. The term of the agreement extends to June 30,
2005, unless terminated prior to that date. We may terminate the agreement upon
written notice
37
and payment of any and all balances due. Mr. Irving may terminate the agreement
upon four weeks written notice. This Agreement was superceded by an agreement
dated March 1, 2003. See "Employment Agreements Subsequent to December 31,
2002."
Consulting Agreements
By an Agreement dated October 1, 2002, David Schroeder, the Company and
Western Management Services, LLC entered into a Consultant Agreement for the
services of Mr. Schroeder for the period from October 1, 2002 to November 1,
2004. Mr. Schroeder is retained to assist the Company with the continuing
development of suitable operating, administrative, industry compliance reporting
systems and new market research. Consulting fees of $7,100 per month are payable
under the Agreement. Mr. Schroeder and the Company also agreed to terminate the
June 6, 2001 Employment Agreement, and the Company was released from all
obligations to pay previously deferred compensation. Stock options previously
granted under the terms of the Employment Agreement were cancelled.
Employment and Consulting Agreements Subsequent to December 31, 2002
Subsequent to December 31, 2002, we entered into the following employment
and consulting agreements with executive officers:
On March 1, 2003, we entered into an agreement with Doug Irving to act as
our Chief Operating Officer. Mr. Irving's annual base compensation is $146,000
per annum, subject to annual adjustment, and an annual bonus of no less than 25%
of base compensation, payable in cash or shares of our common stock, as
determined by the board of directors. Mr. Irving will have a car and expense
allowance and standard employee benefits. We also agreed to issue 30,000 shares
of our common share as a signing bonus and to grant Mr. Irving options to
acquire 50,000 shares of common stock at $0.70 per share, subject to adjustment,
vesting March 1, 2004. Mr. Irving agreed to defer $2,000 per month of his salary
until August 31, 2003, at which time the deferred salary shall be paid in cash
or shares of our common stock, as determined by the board of directors. The term
of the agreement extends to January 31, 2006, unless terminated prior to that
date. We may terminate the agreement upon written notice and the accrued
salaries due under the agreement and, provided that there has not been a breach
of the agreement, a lump sum payment of six months salary in full satisfaction
of all claims Mr. Irving may have under the agreement. Mr. Irving may terminate
the agreement upon four weeks written notice. This agreement supercedes the
employment agreement dated July 1, 2002.
On March 1, 2003, we entered into an agreement with Barry Maynes to act as
our Chief Information Officer. Mr. Maynes' annual base compensation is $98,000
per annum for the first twelve months, $103,000 during the second year and
$108,000 during the third year. Mr. Maynes will have a car and expense allowance
and standard employee benefits. We agreed to issue 15,000 shares of our common
share as a signing bonus. We also agreed to grant options under our stock option
plan to purchase 20,000 shares of common stock at $0.70 per share, subject to
adjustment, vesting on March 1, 2004. Mr. Maynes will be entitled to a yearly
bonus of no less than 15% of his annual salary, payable in cash or shares of our
common stock, as determined by the board of directors, subject to certain
performance criteria. The term of the agreement extends to February 28, 2006,
unless terminated prior to that date. We may terminate the agreement upon
written notice and the accrued salaries due under the agreement and, provided
that there has not been a breach of the agreement, a lump sum payment of four
months salary in full satisfaction of all claims Mr. Maynes may have under the
agreement. Mr. Maynes may terminate the agreement upon four weeks written
notice.
On February 1, 2003, we entered into an agreement with Gary Harris to act
as our National Sales Manager. Mr. Harris' annual base compensation is $75,000
per annum plus an override of $10 on each pre-need contract sold. Mr. Harris
will have a car and expense allowance and standard employee benefits. We agreed
to issue 30,000 shares of our common share as a signing bonus. We also agreed to
grant options under our stock option plan to purchase 30,000 shares of common
stock at $0.70 per share, subject to adjustment, vesting on February 1, 2004.
Mr. Harris will be entitled to a yearly bonus of no less than 10% of his annual
salary, net of reimbursement and car expenses, upon satisfaction of certain
performance criteria, payable in cash or shares of our common stock, as
determined by the board of directors. Mr. Harris agreed to defer $2,000 per
month of his salary under August 31, 2003, at which time the deferred salary
shall be paid in cash or shares of our common stock, as determined by the board
of directors. The term of the agreement extends to January 31, 2006, unless
terminated prior to that date. We may terminate the agreement upon written
notice and the accrued salaries due under the agreement and, provided that there
has not been a breach of the agreement, a lump sum payment of six months salary
in full satisfaction of all
38
claims Mr. Harris may have under the agreement. Mr. Harris may terminate the
agreement upon four weeks written notice.
On March 1, 2003, we entered into an agreement with Matthew Markin to act
as our Vice President of Operations and Real Estate. Mr. Markin is the brother
of Marco Markin, our Chief Executive Officer. Mr. Markin's annual base
compensation is $116,000 per annum for the first twelve months, $124,000 during
the second year and $132,000 during the third year. Mr. Markin will have a car
and expense allowance and standard employee benefits. We agreed to issue 20,000
shares of our common share as a signing bonus. We also agreed to grant options
under our stock option plan to purchase 30,000 shares of common stock at $0.70
per share, subject to adjustment, vesting on March 1, 2004. Mr. Markin will be
entitled to a yearly bonus of no less than 25% of his annual salary, payable in
cash or shares of our common stock, as determined by the board of directors. Mr.
Markin agreed to defer $2,666 per month of his salary until August 31, 2003, at
which time the deferred salary shall be paid in cash or shares of our common
stock, as determined by the board of directors. The term of the agreement
extends to February 28, 2006, unless terminated prior to that date. We may
terminate the agreement upon written notice and the accrued salaries due under
the agreement and, provided that there has not been a breach of the agreement, a
lump sum payment of six months salary in full satisfaction of all claims Mr.
Markin may have under the agreement. Mr. Markin may terminate the agreement upon
four weeks written notice.
On February1, 2003, we entered into an agreement with Matthew Hoogendoorn
to act as our Senior Vice President of Finance. Mr. Hoogendoorn's annual base
compensation is $146,000 per annum. Mr. Hoogendoorn will have a car and expense
allowance and standard employee benefits. We agreed to issue 30,000 shares of
our common share as a signing bonus. We also agreed to grant options under our
stock option plan to purchase 50,000 shares of common stock at $0.70 per share,
subject to adjustment, vesting on February 1, 2004. Mr. Hoogendoorn will be
entitled to a yearly bonus of no less than 25% of his annual salary payable in
cash or shares of our common stock, as determined by the board of directors. The
term of the agreement extends to January 31, 2006, unless terminated prior to
that date. We may terminate the agreement upon written notice and, provided that
there has not been a breach of the agreement, a lump sum payment of six months
salary in full satisfaction of all claims Mr. Hoogendoorn may have under the
agreement. Mr. Hoogendoorn may terminate the agreement upon four weeks written
notice.
Report on Repricing of Options/SARs
We did not reprice any options or SARs outstanding during the most recently
completed fiscal year ended December 31, 2002.
Additional Information with Respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
The Compensation Committee consists of three members: Marco Markin
(director), Bryan G. Symington Smith (director) and Kathryn Witter. 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.
Except as otherwise disclosed under Item 14, below, none of the members of
our Compensation Committee had any relationship requiring disclosure under Item
404 of Regulation S-K.
Board Compensation Committee Report on Executive Compensation
The primary objectives of the Company's executive compensation program are
to enable the Company to attract, motivate and retain outstanding individuals
and to align their success with that of the Company's shareholders through the
achievement of strategic corporate objectives and creation of shareholder value.
The level of compensation paid to an individual is based on the individual's
overall experience, responsibility and performance. The Company's executive
compensation program consists of a base salary, performance bonuses and stock
options. The Company furnishes other benefits to certain of its officers and
other employees.
The Compensation Committee determined the compensation paid to its
executive officers based on several factors, including the compensation paid to
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 capital obligations and our financial
performance. The Compensation Committee determined the compensation paid
39
to Marco Markin, our Chief Executive Officer. Mr. Markin did not participate in
the determination of his compensation.
Incentive Stock Option Plans
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.
Effective April 12, 2002, our Board unanimously approved the 2002 Stock
Plan of The Neptune Society (the "2002 Plan"). The 2002 Plan provides for the
grant of incentive and non-qualified options to purchase up to 750,000 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 2002
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. The 2002 Plan was
ratified by our Board of Directors on May 22, 2002.
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.
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, 2001 and 2002.
[Performance Graph]
March 31, December 31, December 31, December 31,
2000 2000 2001 2002
The Neptune Society, Inc. $100 $84.11 $1.60 $0.35
Nasdaq Composite Index $100 $87.24 $76.01 $58.67
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.
40
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.
The following table sets forth the ownership interest, direct and indirect,
of our directors, named executive officers and beneficial owners of 5% of more
of our common stock as of March 31, 2003:
- ----------------------------------------------------------------------------------------------------------------------
| | | Number of | |
| | | Common | |
|Name of Shareholder | Address | Shares Owned | Percent of Class (1) |
|---------------------------------------------------------------------------------------------------------------------|
|5% or greater shareholders |
|---------------------------------------------------------------------------------------------------------------------|
|CapEx, L.P. | 518 17th Street, Suite 1700 | 1,238,910(2) | 21.62%(2) |
| | Denver, CO 80202 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|D.H. Blair Investment Banking | 44 Wall Street, 2nd Floor | 858,690(3) | 15.99%(3) |
|Corp. | New York, NY 10005 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Greenleaf Investors I, L.L.C. | c/o The Apogee Companies | 311,448(4) | 6.69%(4) |
| | 4444 Lakeside Drive, Suite 340, | | |
| | Burbank, California 91505 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|The Apogee Companies, Inc. | c/o The Apogee Companies | 485,750(4) | 10.34%(4) |
| | 4444 Lakeside Drive, Suite 340, | | |
| | Burbank, California 91505 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|CCD Consulting Commerce | Glockengasse 4, Postfach 1220 | 1,091,203(5) | 19.90%(5) |
|Distribution AG | CH-4001 Basel, Switzerland | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
| | | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
| | | | |
|---------------------------------------------------------------------------------------------------------------------|
|Directors and Named Executive Officers |
|---------------------------------------------------------------------------------------------------------------------|
|Marco P. Markin | 4312 Woodman Avenue, 3rd Floor | 1,337,040(6) | 23.36%(6) |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Douglas J. Irving | 4312 Woodman Avenue, 3rd Floor | 120,305(7) | 2.52%(7) |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Rodney M. Bagley | 4312 Woodman Avenue, 3rd Floor | 298,864(8) | 6.04%(8) |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Gary Harris | 4312 Woodman Avenue, 3rd Floor | 94,327(9) | 1.99%(9) |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Bryan G. Symington Smith | 4312 Woodman Avenue, 3rd Floor | 30,000 | * |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Anthony George | 4312 Woodman Avenue, 3rd Floor | 10,000 | * |
| | Sherman Oaks, CA 91423 | | |
|-------------------------------|---------------------------------------|----------------------|----------------------|
|Officers and Directors | | 1,830,616(10) | |
| as a group | | | |
|(includes 6 persons) | | | |
| | | | |
- ----------------------------------------------------------------------------------------------------------------------
41
*Less than one percent (1%).
(1) Based on 4,651,332 shares issued and outstanding as of April 7, 2003.
(2) Includes (i) 203,797 shares of common stock owned directly, (ii)
44,286 shares underlying warrants which are immediately exercisable,
and (ii) 1,035,827 shares issuable upon conversion of a convertible
debenture which is immediately convertible.
(3) Includes (i) 138,615 Shares of common stock owned directly by the
Reporting Person, (ii) 29,525 shares underlying Warrants which are
immediately exercisable, (iii) 23,884 shares issuable upon conversion
of a debenture which is immediately convertible, and (iv) 666,666
shares issuable upon conversion of a convertible debenture which is
immediately convertible (although the debenture provides that until
the occurence of certain events, in no event will the person convert
in one or more transactions which would cause the issuer to issue to
the reporting person an aggregate number of shares that would exceed
8% of the outstanding shares after such conversion).
(4) The Apogee Management Company, Inc., the manager of Green Leaf
Investors I, LLC, has ultimate voting power and control over these
shares. Includes of 303,948 shares of common stock and 7,500 shares
acquirable upon the exercise of warrants. The Apogee Management
Company, Inc. owns 174,302 share directly and is deemed to
beneficially own the shares beneficially owned by Green Leaf Investors
I, LLC.
(5) Includes of 257,870 shares of common stock and 833,333 shares of
common stock acquirable upon conversion of convertible debentures
which is immediately convertible.
(6) Consists of 28,750 shares of common stock immediately acquirable upon
exercise of options under 1999 Stock Option Plan, 261,364 shares
immediately acquirable upon exercise of options granted to December
31, 2002 under employment agreement, 431,002 shares to be issued
pursuant to an election to convert deferred compensation into shares
of common stock under a deferred compensation stock plan approved by
the board of directors in February 2003. Also includes 307,962 shares
and 307,962 shares immediately acquirable upon exercise of warrants
held by 570421 B.C Ltd., a company controlled by his family.
(7) Includes of 40,385 shares of common stock to be issued pursuant to an
election to convert deferred compensation into shares of common stock
under a deferred compensation stock plan approved by the board of
directors in February 2003, 50,000 shares of common stock acquirable
upon exercise of stock options that are immediately exercisable and
30,000 shares of common stock to be issued as a signing bonus under
his employment agreement.
(8) Includes of 37,500 shares of common stock immediately acquirable upon
exercise of options under 1999 Stock Option Plan and 261,364 shares
immediately acquirable upon exercise of options granted to December
31, 2002 under employment agreement. Mr. Bagley resigned as our Chief
Financial Officer and a director in April 2003.
(9) Includes of 23,077 shares of common stock to be issued pursuant to an
election to convert deferred compensation into shares of common stock
under a deferred compensation stock plan approved by the board of
directors in February 2003, and 41,250 shares of common stock
acquirable upon exercise of stock options that are immediately
exercisable and 30,000 shares of common stock to be issued as a
signing bonus under his employment agreement.
(10) Includes of 336,712 shares of common stock, 494,464 shares to be
issued pursuant to an election to convert deferred compensation into
shares of common stock under a deferred compensation stock plan
approved by the board of directors in February 2003, 680,228 shares of
common stock acquirable upon exercise of stock options that are
immediately exercisable and 307,962 shares of common stock immediately
acquirable upon exercise of warrants.
42
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.
Equity Compensation Plan Information
The following table sets forth information related to our equity
compensation plans as of December 31, 2002.
- --------------------------------------------------------------------------------------------------------------------
| Plan Category | Number of Securities | Weighted average | Number of securities remaining |
| | to be issued upon | exercise price of | available for future issuance under|
| | exercise of | outstanding options, | equity compensation plans |
| | outstanding options, | warrants and rights | (excluding securities reflected in |
| | warrants and rights | | column (a)) |
| | (a) | (b) | (c) |
|--------------------------|------------------------|-------------------------|------------------------------------|
|Equity Compensation | 86,000(1) | $24.12 | 889,000 |
|Plans approved by | | | |
|security holders | | | |
|--------------------------|------------------------|-------------------------|------------------------------------|
|Equity Compensation | 8(2) | $4.40 | - |
|Plans not approved by | | | |
|Security Holders | | | |
|--------------------------|------------------------|-------------------------|------------------------------------|
|Total | 975 | | 889,000 |
- --------------------------------------------------------------------------------------------------------------------
(1) Stock Options approving the issuance by our shareholders under our 1999
stock option plan and 2002 stock option plan.
(2) Stock Options issued under employment agreements. See "Employment Contracts
and Termination of Employment and Change-in-Control Arrangements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the transactions described below and under "Item 11. Executive
Compensation," 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, since the beginning the fiscal year ended December
31, 2002, or in any proposed transaction which has materially affected or will
materially affect us.
In connection with our sale of our Portland business, we entered into a
note extension and assumption agreement with Green Leaf Investors I, L.L.C.,
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. This debenture was converted into 225,000 shares of the Company in
the year ended December 31, 2002.
CapEx, L.P. received 101,250 shares as a debt restructuring fee, exercised
its pre-emptive rights to acquire 64,448 shares at a price of $1.08 per share,
and exercised its pre-emptive rights to purchase a $35,826 in convertible
debentures.
D.H. Blair Investment Banking Corp. received 67,500 shares as a debt
restructuring fee, exercised its pre-emptive rights to acquire 42,992 shares at
a price of $1.08 per share, and exercised its pre-emptive rights to purchase a
$23,884 in convertible debentures.
43
CCD Consulting Commerce Distribution AG converted debt of $800,000 to
13.75% convertible debentures. In connection with the conversion, the company
agreed to issue 83,333 shares as a loan conversion fee.
In February, 2003 we issued 307,962 units, each unit consisting of one
share of common stock and one warrant to acquire an additional share of common
stock to 570421 BC, Ltd., a private Company controlled by the spouse of an
executive officer and director. The units were issued at $0.65 per unit, and the
proceeds of $200,000 we received were used for working capital purposes. The
warrants are exercisable at the price of $0.72 per share by February 19, 2004
and thereafter until February 19, 2005 at the price of $0.79 per share.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings and Form 8-K
reports.
There were no significant changes made in the Company's internal controls during
the period covered by this Annual Report on Form 10-K or, to the Company's
knowledge, in other factors that could significantly affect these controls
subsequent to the date of their execution.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that its disclosure controls and procedures
or internal controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Incorporated by Reference
The following items are hereby incorporated by reference in this annual report
on Form 10-K in the sections specifically referencing such items.
"Item 1. Business - Neptune Society Acquisitions - Neptune Group
Acquisition" in our annual report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on April 1,
2002.
"Item 1. Business - Neptune Society Acquisitions - Spokane, Washington
Acquisition" in our annual report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on April 1,
2002.
44
"Item 1. Business - Neptune Society Acquisitions - Iowa Acquisition" in our
annual report on Form 10-K for the year ended December 31, 2001 filed with
the Securities and Exchange Commission on April 1, 2002.
"Item 1. Business - Neptune Society Acquisitions - Oregon Acquisition" in
our annual report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 1, 2002.
"Item 1. Business - Neptune Society Acquisitions - Disposition of Portland
Assets and Related Transactions" in our annual report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission on April 1, 2002.
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year Ended December 31, 2001 Compared with Year
Ended December 31, 2000" in our annual report on Form 10-K/A for the year
ended December 31, 2001 filed with the Securities and Exchange Commission
on September 9, 2002.
(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
3.4(1) Articles of Amendment of The Neptune Society, Inc. filed May 9, 2000, effecting a
combination of the Corporation's shares of common stock
3.5(1) Articles of Amendment of The Neptune Society, Inc. effective as of March 22, 2002,
related to a combination of the Corporation's shares of common stock
3.6(6) Articles of Amendment of The Neptune Society, Inc.
3.7(1) Bylaws of Neptune Society (previously filed as Exhibit 3.6)
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.
45
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
10.27(1) Agency Agreement dated for reference July 31, 2000 by and between Neptune Society and
Standard Securities Capital Corporation
10.28(2) Employment Agreement by and between the Company and Marco Markin
10.29(2) Employment Agreement by and between the Company and David Schroeder
10.30(2) Employment Agreement by and between the Company and Rodney M. Bagley
10.31(2) Memorandum of Understanding by and between the Company and Private Investment Company
10.32(2) Loan Agreement dated August 8, 2001 with Green Leaf Investors I, LLC, a California
limited liability company
10.33(2) Warrant issued to Green Leaf
10.34(2) Guaranty issued to Green Leaf
10.35(3) Second Debt Restructuring Agreement
10.36(3) Third Debt Restructuring Agreement
10.37(4) Asset Purchase Agreement effective as of January 31, 2002 by and between Western
Management Services, L.L.C., an Oregon limited liability company, Wilhelm Mortuary,
Inc., a corporation incorporated under the laws of the State of Oregon, and The Neptune
Society, Inc., a Florida corporation, and Neptune Society of America, Inc., a California
corporation.
10.38(4) Service Agreement effective as of March 8, 2002, by and between Western Management
Services, L.L.C., an Oregon limited liability company, and The Neptune Society, Inc., a
Florida Corporation.
46
Exhibit
Number Description
--------------------------------------------------------------------------------------------------------
10.39(4) 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.
10.40(4) 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.
10.41(4) 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.
10.42(4) Form of CapEx, L.P. Debenture Amendment
10.43(4) Form of D.H. Blair Investment Banking Corp. Debenture Amendment
10.44(4) Form of Warrant Amendment
10.45(5) Form of Debenture
10.46(7) Employment Agreement by and between the Company and Douglas Irving
10.47 Employment Agreement by and between the Company and Doug Irving
10.48 Employment Agreement by and between the Company and Barry Maynes
10.49 Employment Agreement by and between the Company and Gary Harris
10.50 Employment Agreement by and between the Company and Matthew Markin
10.51 Employment Agreement by and between the Company and Matthew Hoogendoorn
10.52 Amendment to Employment Agreement by and between the Company and Marco Markin
99.1 Section 906 Certificate of Chief Executive Officer
99.2 Section 906 Certificate of Chief Financial Officer
_____________________
(1) Previously filed on February 12, 2001.
(2) Previously filed as an exhibit to Form 10-Q (for the Period ended June 30,
2001) on August 14, 2001.
(3) Previously filed as an exhibit to Form 10-Q/A (for the Period ended June
30, 2001) on August 20, 2001.
(4) Previously filed as an exhibit to Form 10-K (for the period ended December
31, 2001) on April 2, 2002.
(5) Previously filed on Form 10-Q (for the period ended March 31, 2002) on May
15, 2002.
(6) Previously filed on Form 8-K on June 3, 2002.
(7) Previously filed on Form 10-Q (for the period ended September 30, 2002) on
November 14, 2002
_____________________
(b) Reports on Form 8-K
None
47
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
- --------- ----- ----
Chief Executive Officer and
Director
/s/ Marco Markin (principal executive officer) April 30, 2003
- -------------------------
Marco Markin
Chief Operating Officer
/s/ Douglas J. Irving April 30, 2003
- -------------------------
Douglas J. Irving
Senior Vice President of
Finance and Secretary
/s/ Matthew Hoogendoorn (Acting Chief Financial Officer) April 30, 2003
- -------------------------
Matthew Hoogendoorn
Director
/s/ Bryan G. Symington Smith April 30, 2003
- ----------------------------
Bryan G. Symington Smith
Director
/s/ Anthony George April 30, 2003
- -------------------------
Anthony George
48
SECTION 302 CERTIFICATION
I, Marco Markin, certify that:
1. I have reviewed this annual report on Form 10-K of THE NEPTUNE SOCIETY,
INC.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statement, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Marco Markin Date: April 30, 2003
- --------------------------
Marco Markin
Chief Executive Officer
49
SECTION 302 CERTIFICATION
I, Matthew Hoogendoorn, certify that:
1. I have reviewed this annual report on Form 10-K of THE NEPTUNE SOCIETY,
INC.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statement, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Matthew Hoogendoorn Date: April 30, 2003
- -------------------------------
Matthew Hoogendoorn
Acting Chief Financial Officer
50