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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File Number: 001-14067
FOREVER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 36-3427454
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10 S. Brentwood,
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 726-3371
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
par value $.01
Name of exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: approximately $3,750,000 as of June 28, 2002.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: As of March 24, 2003, 6,934,934
shares of Common Stock, par value $.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following document (or parts thereof) is incorporated by reference into the
indicated Part of this Report: Certain information required in Part III of this
Form 10-K is incorporated from the Registrant's Proxy Statement for its 2003
Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on the beliefs of our management as well as
on assumptions made by and information currently available to us at the time
such statements were made. We can give no assurance that the expectations
indicated by such forward-looking statements will be realized. If any of
management's assumptions should prove incorrect, or if any of the risks and
uncertainties underlying such expectations should materialize, our actual
results may differ materially from those indicated by the forward-looking
statements.
All predictions as to future results contain a measure of uncertainty and,
accordingly, actual results could differ materially. The following factors that
are not within our control and that may have a direct bearing on operating
results include, but are not limited to: general economic conditions and other
factors, including prevailing interest rate levels and stock market performance,
which may affect our ability to sell our products, the market value of our
investments and the lapse rate and profitability of our policies; our ability to
achieve anticipated levels of operational efficiencies for acquired companies or
properties, as well as through other cost-saving initiatives; mortality,
morbidity, and other factors which may affect the profitability of our insurance
products; the financial well-being of end consumers of the Company's products;
changes in the federal income tax laws and regulations which may affect the cost
of or demand for our products; increasing competition in the sale of our
products; technological change; regulatory changes or actions, including those
relating to regulation of financial services affecting (among other things)
sales and underwriting of insurance products to fund obligations under pre-need
contracts, regulation of the sale, underwriting and pricing of insurance
products and regulation of the sale and pricing of funeral home operations and
products; litigation, including its inherent uncertainty; environmental matters;
the availability and terms of future acquisitions; changes in accounting
principles or new accounting standards; and other unforeseen circumstances. A
number of these factors are discussed in this and other filings with the
Securities and Exchange Commission.
Additionally, we may not be successful in identifying, acquiring, and
integrating other companies or their business, implementing improved management
and accounting information systems and controls and may be dependent upon
additional capital and equipment purchases for future growth. There may be other
risks and uncertainties that management is not able to predict.
When used in this report, the words "projects," "anticipates," "believes,"
"estimates," "expects," "intends," and similar expressions, as they relate to us
are intended to identify forward-looking statements, although there may be
certain forward-looking statements not accompanied by such expressions.
GENERAL
Forever Enterprises, Inc., through its wholly-owned subsidiaries, Forever
Network, Inc., Memorial Service Life Insurance Company and Lincoln Memorial Life
Insurance Company, owns and operates combination funeral home and cemetery
properties, markets and produces multimedia LifeStories(TM), operates an
Internet marketing site, and operates life insurance companies that principally
issue insurance contracts to fund pre-need funeral contracts. We were
incorporated in Texas in 1980.
Forever Network, Inc., directly and through its subsidiaries, owns and operates
funeral home and cemetery properties, markets Forever LifeStories(TM) to
individuals and groups, and archives the digital interactive
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LifeStories(TM), which can be viewed at company cemetery/funeral homes or
privately in the home and on the Internet at www.forevernetwork.com. In
addition, the Internet site provides valuable information to consumers on
memorial products and services and markets related merchandise and services to
the growing population of visitors to the site.
Substantially all of the life insurance policies issued by Memorial Service Life
Insurance Company and Lincoln Memorial Life Insurance Company are to fund
prearranged funeral contracts sold by National Prearranged Services, Inc. and
National Prearranged Services Agency, Inc. National Prearranged Services is an
affiliated company that collects all payments for prearranged funeral contracts
and remits such amounts to us either directly or through assumed reinsurance.
During 2002, we acquired five cemetery/funeral home properties, increasing our
presence in the metropolitan St. Louis, Missouri market and establishing new
business opportunities in the Austin, Texas market. See Note 3 to the
consolidated financial statements for further discussion of all acquisitions and
dispositions during the year.
BUSINESS STRATEGY
Our business strategy is to develop the Forever Brand as the consumer's first
choice for memorialization, through Funeral Homes, Cemeteries and
LifeStories(TM) to become the recognized leader in revolutionizing the way we
document and remember lives. Our goal is for the Forever Brand to represent
unparalleled value, innovation and customer service. We plan to grow our
business and our brand by acquiring cemetery/funeral home combination properties
in targeted metropolitan areas, aggressively marketing the multimedia
LifeStory(TM) product and services, and further developing our Internet
marketing business. No assurance can be given that we will be successful in
completing any acquisition, or that any acquisition, once completed, will
ultimately enhance our results of operations.
We will seek to increase the number of quality cemetery/funeral home combination
properties we own and operate and to expand our permanent archive of digital
LifeStories(TM). Our plan is to acquire properties in or near major metropolitan
areas to allow us to advertise and market Forever products and services to large
populations. We seek properties with enough inventory and/or land to accommodate
future sales and/or construction of Forever mausoleums/chapels to create
inventory and service space. The targeted properties could possibly be
distressed in some way. We believe properties that lack an aggressive marketing
approach are ideal. Established properties with a large heritage of families
will also allow us to market our LifeStory(TM) and other services to existing
client family members, expanding our market potential. We also may pursue
properties in the form of undeveloped land in a current or developing population
center that can support a funeral home/mausoleum structure, and that provide a
suitable supply of saleable cemetery land.
We will increase the scope and awareness of our Forever LifeStory(TM) business
through the active marketing of this service to individuals and groups through
our company-owned properties and through various other organizations and groups.
We believe that acquiring and developing cemetery/funeral home properties in
major metropolitan areas will facilitate our LifeStory(TM) and Internet business
strategy. Our website stores and displays thousands of individual family
archives, or LifeStories(TM), each containing film and video clips, photos,
written and spoken words, all collected and preserved permanently. The website
also educates consumers about memorial products, services and providers, and
markets Forever products and services. We believe that the current environment
provides excellent opportunities to acquire cemetery properties at attractive
prices due to the financial distress of several large cemetery/funeral home
conglomerates. More properties are available for acquisition, the prices for
properties are declining and the competition for acquiring these properties is
very small. Management believes that execution of this strategy will allow us to
develop further the Forever Brand
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as a leader in providing unique and valuable memorialization products and
services, helping us to achieve the company mission by changing the way we
document and remember lives.
We believe we are well positioned to enhance the profitability of the businesses
and properties we acquire. With respect to our cemetery/funeral home operations,
we believe we can apply tested and proven marketing processes to produce
significant revenue and market share growth. Efficient management of property
operations, combined with aggressive new marketing initiatives, should allow for
greatly enhanced profitability on newly acquired properties. The growing
interest in organizing and preserving family memories, use of the Internet for
information gathering, and commerce on the World Wide Web should provide the
platform for successful results on our LifeStory(TM) and Internet strategy.
NATIONAL PREARRANGED SERVICES
National Prearranged Services, an affiliate of our company, has marketed
prearranged funeral contracts since 1979 for funeral homes in Missouri, Texas
and seven other states, and is licensed to expand into an additional 34 states.
In addition to marketing, National Prearranged Services recruits, trains and
manages an agency field force, which is dedicated to selling only the products
of the affiliated group of companies. National Prearranged Services believes
that the market for pre-need products is growing significantly with the aging of
the U.S. population. The market for pre-need products is primarily in the 50 and
older age group. National Prearranged Services' strategy is to continue to
capitalize on the demand for older age products, which management believes, will
continue to present a growing market.
A prearranged funeral contract allows customers to purchase at current prices
services that may not be needed for many years. Under prearrangement, family
members generally are removed from the planning that would otherwise have been
completed at the difficult time of death. Other than those properties owned by
Forever Network, there is no affiliation between National Prearranged Services
and any funeral home for which National Prearranged Services markets prearranged
funeral contracts.
In connection with issuing insurance policies to fund prearranged funeral
contracts, except in Missouri, the individual owner of the policy assigns the
policy to National Prearranged Services and/or National Prearranged Services
Agency. As assignee, National Prearranged Services and/or National Prearranged
Services Agency remit premiums to and receive policy benefits from us. In the
State of Missouri, a trust owns the policies, pays the premiums and receives the
benefits. An independent investment advisor to the trust directs the monies in
the trust as to the purchase of insurance policies.
National Prearranged Services elects to invest in insurance policies as one of
the methods of funding its contractual obligations. National Prearranged
Services could invest in other statutorily appropriate instruments to fund such
obligations but like most other pre-need sellers today, prefers the use of
insurance to do so. National Prearranged Services determines whether to purchase
an insurance policy from us or use its own resources to satisfy its obligations
created under the prearranged funeral contract based on the individual pre-need
laws in existence on the contract date and the underwriting standards as
established by us and the state in which the purchaser resides. For example, in
Missouri, the law requires funding through a trust that may choose to retain the
funds from the prearranged funeral contract instead of purchasing an insurance
policy because of the underwriting standards set by us when compared to the
underwriting characteristics of the prearranged funeral contract purchaser. The
option to not purchase an insurance policy is not available in all states.
Should National Prearranged Services elect to purchase an insurance policy with
a death benefit equal to the current cost of the contracted funeral, the
insurance premiums to be charged are set by us based on actuarial review and
analysis of the underwriting risks being assumed by us and the standardized
rates are provided to National Prearranged Services. In the event a particular
insurance policy has proceeds in excess of
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contracted-for funeral costs at the point of death, National Prearranged
Services retains the proceeds as policyholder. National Prearranged Services is
contractually obligated to provide the contracted-for funeral service at the
point of death. The death benefits provided under the terms of the insurance
policies may be greater or less than the cost of the funeral services due to
excess interest earnings or additional insurance benefits provided under the
terms of the participating policies or from a decline or increase in the funeral
service costs as contracted by National Prearranged Services from the funeral
homes.
On January 1, 2002, we entered into a Management Agreement with National
Prearranged Services whereby, we agreed to provide all necessary personnel to
supervise National Prearranged Services' field sales force in return for a
monthly management fee equal to a percentage of the net sales revenues of
National Prearranged Services as payment for the services provided. As
consideration to National Prearranged Services for entering into this Management
Agreement, we entered into a promissory note in the amount of $10.0 million.
This agreement is effective through December 31, 2005, at which time the
agreement will be re-evaluated by the parties. This agreement was treated as a
purchase of an intangible asset and accounted for under the guidance of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (see Note 13 to the consolidated financial statements).
PRODUCT PROFITABILITY
The profitability of cemetery and memorialization products and services depends
upon several factors, including controlling the costs of our facilities,
supplies and capital expenditures, maintaining competitive pricing of our
products and maximizing the utilization of our sales force. Aggressive pre-need
marketing, value-added products and services, and brand advertising will also
contribute to the business profitability.
Accounting changes implemented under Staff Accounting Bulletin ("SAB") 101,
which was effective January 1, 2000, have negatively impacted the reported
results of operations of our cemetery and memorialization business due to their
high level of pre-need revenues. Under SAB 101, revenue is deferred until
services or merchandise are delivered, usually at the time of death. SAB 101
will have a more significant impact on our newly acquired and developed
properties in their early years until their pre-need contracts begin to turn to
at-need (at the time of the insured's death). The impact of SAB 101 requires
that we defer a large volume of our pre-need revenues until performance or
delivery. Based upon our emphasis on and success in creating pre-need revenues
we have, and expect to continue to accumulate, very large amounts of deferred
revenues that should positively impact operating results and cash flow in the
future.
The long-term profitability of insurance products depends on the accuracy of the
actuarial assumptions that underlie the pricing of such products. Actuarial
calculations for such insurance products, and the ultimate profitability of such
products, are based on four major factors: (1) persistency; (2) mortality (for
life insurance); (3) return on cash invested by the insurer during the life of
the policy; and (4) expenses of acquiring and administering the policies.
OPERATIONS AND ADMINISTRATION
In our cemetery and memorialization business, our key operations and
administrative functions are general property operations and customer service,
property maintenance and financial/accounting. We utilize systems and policies
that are standardized for all of our properties, except for any special
circumstances dictated by the specific property, and share resources where
appropriate to capitalize on geographic synergies. Forever has spent much time
and effort to maximize the value from our operational systems and has documented
procedures, extensive customer evaluations, and regular training to ensure the
systems are followed and producing the desired effect.
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Our office operations are typically led by a location general manager who
oversees all of the daily operational elements, including contract processing,
cash handling, property inventory and procurement of merchandise. The property
maintenance programs are managed by the general manager, and include all burial
and service activity, property beautification and maintenance and capital
projects. Recently, Forever has outsourced some of the cemetery maintenance
responsibilities, mostly related to cutting and trimming of the grass - a large
part of the maintenance effort and expense at each property. This has allowed
Forever to cut overhead, reduce costs and capital investment, and maintain a
more efficient management over the specialized maintenance responsibilities of
our properties. Customer service is a top priority in Forever's "more than
expected" culture and is a large part of each employee's responsibility at every
Forever location. To help achieve that end, each employee is individually
empowered to resolve any customer issue to ensure complete customer satisfaction
as soon as possible.
Forever centralizes certain aspects of our operations supplemented by specific
location resources, where appropriate. For example, we have a centralized call
center which handles the bulk of our inquiry calls, enhancing our ability to use
specifically trained personnel and processes to provide maximum customer service
and achieve operational efficiency. Similarly, our financial accounting
resources are largely centralized helping us to achieve similar efficiencies in
handling location, customer and vendor issues related to finance. Forever has
invested capital in an industry software system that has significantly improved
the timeliness, efficiency and accuracy of operations and of our financial data.
Additionally, we have invested in an upgraded accounting software system which
will merge with the location software system to greatly improve the quality and
speed of financial reports to allow us to more efficiently produce internal and
external financial information to better analyze operations.
Our insurance operations emphasize a high level of service to agents,
policyholders and customers and strive to maintain low overhead costs. The
principal administrative departments of our insurance operations are financial,
policyholder services and data processing departments. The financial department
provides actuarial, accounting and budgeting services and establishes cost
control systems for our company. The policyholder services department reviews
policy applications, issues and administers policies and authorizes
disbursements related to claims. The data processing department oversees and
administers our information processing systems.
We continue to invest in data processing hardware and software and employ our
data processing capacity in all facets of our operations. All of our operations
are processed on a network of personal computers. Our administrative departments
use a common integrated system designed to permit us to function relatively
efficiently, control costs and maintain relatively low overhead. Our system
currently is servicing approximately 125,000 policies. Additional policies can
be added at a relatively low marginal cost, thereby increasing economies of
scale.
Our marketing relationship with National Prearranged Services provides a
pipeline of pre-need policies for our insurance operations and also plays a role
in supporting the sales efforts at our cemetery properties. National Prearranged
Services markets pre-need funerals for our company-owned funeral home
properties, creating a large volume of future revenues and cash and enhancing
our ability to create more cemetery revenues and cash. Forever Network currently
owns and operates eight cemetery/funeral home properties in metropolitan St.
Louis and Kansas City, Missouri, Austin, Texas and Los Angeles, California.
INVESTMENTS
The investment income of our insurance subsidiaries is an important part of our
total revenues. Profitability is significantly affected by spreads between rates
credited on insurance liabilities and interest rates earned on invested assets.
As of December 31, 2002, the average annual interest rate credited on our total
reserve
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liability was approximately 7.7% per annum, and the average yield of our
investment portfolio was approximately 6.5% per annum. The primary cause of the
negative spread was the investment income and capital gains ceded to North
America Life of $3.7 million and $332,000, respectively. After adjustment for
these factors, our average yield on retained assets for the year was 9.9% per
annum. Increases or decreases in interest rates could increase or decrease the
interest rate spread between interest rates credited on insurance liabilities
and investment yields which, in turn, could have a beneficial or adverse effect
on our future profitability. Sales of fixed maturity securities that result in
investment gains also may tend to decrease future interest yields from the
portfolio. State insurance laws and regulations prescribe the types of permitted
investments and limit their concentration in certain classes of investments.
Our investment strategy is to maintain primarily an investment grade, fixed
maturity portfolio, provide adequate liquidity for expected liability durations
and other requirements and maximize total return. Consistent with this strategy,
we invest primarily in securities of the U.S. government and its agencies, and
collateralized mortgage obligations. At December 31, 2002, approximately 98% of
the book value of our fixed maturity investments consisted of investment grade
securities.
We periodically review the existing portfolio of below investment grade
securities and intend to maintain the holdings of such securities at or below
the December 31, 2002 level. However, our ability to dispose of below investment
grade securities is affected by market and other conditions. The markets for
these securities are often less liquid and efficient than the markets for
investment grade securities.
RESERVES
In accordance with applicable insurance laws, our insurance subsidiaries have
established and carry as liabilities in their statutory financial statements
actuarially determined reserves to satisfy their annuity contract and life
insurance policy obligations. Reserves, together with premiums to be received on
outstanding policies and interest thereon at certain assumed rates, are
calculated to be sufficient to satisfy policy and contract obligations. The
actuarial factors used in determining such reserves are based on statutorily
prescribed mortality tables and interest rates.
The reserves recorded in our consolidated financial statements included
elsewhere in this report are calculated based on accounting principles generally
accepted in the United States of America and differ from those specified by the
laws of the various states and recorded in the statutory financial statements of
our insurance subsidiaries. These differences arise from the use of different
mortality and interest rate assumptions, the introduction of lapse assumptions
into the reserve calculation and the use of the net level premium reserve method
on all insurance business.
To determine policy benefit reserves for our life insurance products, we perform
periodic studies to compare current experience for mortality, interest and lapse
rates with projected experience used in calculating the reserves. Differences
are reflected currently in earnings for each period. We historically have not
experienced significant adverse deviations from our assumptions.
REINSURANCE
We enter into funds withheld treaties and reinsurance agreements with reinsurers
to limit exposure on our insurance policies and to increase our statutory
surplus. The cost of the increase in statutory surplus is recognized as
reinsurance premiums ceded. We have reinsured significant blocks of our
insurance products with other insurance companies under agreements of indemnity
reinsurance.
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In December 2000, we entered into an agreement with Employers Reassurance
Corporation in which we ceded a large block of our in-force business with net
reserves of approximately $77 million. Prior to this reinsurance, we recaptured
business previously reinsured to Alabama Reassurance Corporation and London Life
International Reinsurance Corporation.
In December 2000, we completed the sale of our insurance subsidiary, Liberty
Standard Life, to North America Holdings, Ltd. in which we sold all outstanding
shares of Liberty for approximately $900,000. Simultaneous with this
transaction, Lincoln Memorial Life entered into various reinsurance agreements
with North America Life Insurance Company of Texas ("North America Life")
(formerly Liberty Standard Life) involving the cession of several blocks of life
insurance policies with net reserves of approximately $67 million. We also
entered into an agreement with North America Life to cede the majority of new
business generated on an ongoing basis. This agreement was modified in August
2001, at which time we also entered into a coinsurance agreement with Hannover
Life Reassurance Company of America ("Hannover"), whereby all of the policies
issued by us that are sold by National Prearranged Services are ceded to
Hannover.
Indemnity reinsurance agreements are intended to limit a life insurer's maximum
loss on a particular risk or to obtain a greater diversification of risk.
Indemnity reinsurance does not discharge the primary liability of the original
insurer to the insured. The policy risk retention limit on the life of one
individual does not exceed $25,000.
With substantially all of our existing insurance policies covered by reinsurance
agreements, as well as an agreement with North America Life to reinsure the
majority of new policies written, we do not plan to enter into any similar
reinsurance agreements in the future. Essentially, our insurance operations will
now serve as a third-party administrator for the policies reinsured by other
insurance companies.
COMPETITION
The cemetery/funeral industry is highly fragmented, with most of the
approximately 22,000 funeral homes and 10,500 cemeteries in the United States
owned by sole proprietors. These businesses have been passed from generation to
generation and have historically developed a loyal customer base due to
geography and/or name recognition in the community. These properties continue to
be operated much as they have in the past, offering the same services and
products and marketing to the community as they have for years and years prior.
Their treatment of death and memorialization is a result of demand for products
and services that the industry historically has offered. There is little
differentiation and, as a result, little market share change.
Based upon publicly available information, four major consolidators, Service
Corporation International, Alderwoods (formerly The Loewen Group), Stewart
Enterprises, Inc. and Carriage Services, Inc., together own approximately 15% of
the funeral homes and 10% of the commercial cemeteries in the United States.
Until recent years, each of these companies had been heavily involved in
acquisitions of independent funeral homes and some cemeteries. Alderwoods
emerged from Chapter 11 bankruptcy proceedings in 2002 and the others are facing
financial difficulty as they try to manage their high level of debt from very
aggressive and high priced acquisitions and operational problems. These
companies all emphasize their funeral operations as their major business. While
these companies may claim to be different from one another in the way they
operate, we believe that there is really little tangible difference. None of
these competitors has tried to develop a brand, despite their revenues and large
number of locations. We believe this creates an excellent opportunity for us.
Additionally, cremation is becoming a more popular option for families and
individuals in the United States. This usually results in lower revenues but
sometimes higher profitability. Our properties recognize and embrace this trend
and offer a range of products and services to satisfy this segment. We
understand that many of the families opting for cremation have a strong desire
for memorialization, so we provide a range of
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unique offerings, which are intended to focus on the need for memorialization,
including cremation benches, boulders, scattering gardens and Forever digital
LifeStories(TM).
The life insurance industry is highly competitive and consists of a large number
of insurance companies, many of which have substantially greater financial
resources, broader and more diversified product lines and larger staffs than
those possessed by us. We also encounter competition from the expanding number
of banks, securities brokerage firms and other financial intermediaries that are
marketing insurance products and that offer competing products such as savings
accounts and securities. Competition within the life insurance industry occurs
on the basis of, among other things, interest rates, financial stability,
policyholder service and ratings assigned by insurance rating organizations.
DIVIDENDS ON PARTICIPATING POLICIES
The determination of dividends on participating policies is not dependent on any
pre-determined factor and is completely at the discretion of the boards of
directors of the insurance subsidiaries. During 2002 our insurance subsidiaries
declared and paid a 2% terminal dividend on policies issued in the State of
Texas. A terminal dividend is paid at the time of the claim, effectively
providing additional benefits under the policy. Our insurance subsidiaries paid
no dividends in 2001 and 2000 on their direct business. Among other items, low
levels of inflation were a factor for not paying dividends in those years. There
currently are no future dividends declared on our direct business; however,
dividends could be declared should circumstances warrant. The declaration of
policyholder dividends would, through the provision of paid-up additions rather
than cash dividends, provide additional death benefits under the insurance
policies. The increased level of death benefits would contribute to covering the
presumed increase in the cost of funeral services to be provided in the future.
The ability to provide increased benefits under the terms of the insurance
policies issued as a response to increased levels of inflation, which, in turn,
allows us to remain competitive, is the primary reason for the utilization of
participating policies. We pay policyholder dividends on blocks of business that
we acquired from World Insurance Company and Woodmen Accident and Life Company;
however, any such dividends paid in 2002 and 2001 are now fully recovered
through ceding of these polices to North America Life Insurance Company. There
were no such payments in 2002 and 2001, and $76,617 in 2000.
REGULATORY FACTORS
Our funeral homes are regulated by the Federal Trade Commission ("FTC"). The
FTC's funeral industry rules contain minimum guidelines for funeral industry
practices, require price and other affirmative disclosures and impose mandatory
itemization of funeral goods and services. There is some legislative activity
relative to an attempt to incorporate cemeteries under this code, though no
official act is pending. Other cemetery/funeral home regulations vary by state
and are not considered unduly burdensome to our business operations.
Our insurance subsidiaries are subject to regulation by the insurance regulatory
authorities in the states in which they are domiciled and the insurance
regulatory bodies in the other jurisdictions in which they are licensed to sell
insurance. The purpose of such regulation is primarily to provide safeguards for
policyholders rather than to protect the interests of shareholders. The
insurance laws of various jurisdictions grant regulatory agencies broad
administrative powers relating to the licensing of insurers and their agents,
the regulation of trade practices, management agreements, investments, deposits
of securities, the form and content of financial statements, rates charged by
insurance companies, sales literature, terms of insurance policies, accounting
practices and the maintenance of specified reserves, capital and surplus. Our
insurance subsidiaries are required to file detailed periodic financial reports
with supervisory agencies in each of the
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jurisdictions in which they do business. Our life insurance subsidiaries are
licensed in 43 states and the District of Columbia.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles (the "Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, was effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The State of Texas required adoption of the
Codification with certain modifications for the preparation of statutory basis
financial statements effective January 1, 2001. The adoption of the Codification
by our insurance company subsidiaries, Lincoln Memorial Life Insurance Company
and Memorial Service Life Insurance Company, as modified by Texas, increased
Lincoln Memorial Life Insurance Company's statutory capital and surplus as of
January 1, 2001, by approximately $870,000, primarily related to accounting for
income taxes. There was no effect on Memorial Service Life Insurance Company's
capital and surplus.
In December 1992, the National Association of Insurance Commissioners adopted
the Risk-Based Capital for Life and/or Health Insurers Model Act. The model act
provides a tool for insurance regulators to determine the levels of capital and
surplus an insurer must maintain in relation to its insurance and investment
risks and whether there is a need for possible regulatory attention. The model
act (or similar legislation or regulation) has been adopted in states where our
insurance subsidiaries are domiciled. The Texas Department of Insurance has
adopted its own risk-based capital requirements, the stated purpose of which is
to require a minimum level of capital and surplus to absorb the financial,
underwriting and investment risks assumed by an insurer. At December 31, 2002,
the total adjusted capital for each of our subsidiaries met or exceeded the
required levels.
Most states have enacted legislation regulating insurance holding companies. The
insurance holding company laws and regulations vary by state, but generally
require an insurance holding company and its insurance company subsidiaries
licensed to do business in the state to register and file certain reports with
the regulatory authorities, including information concerning capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. State holding company laws also require prior notice or
regulatory agency approval of certain material intercompany transfers of assets
within the holding company structure.
As a holding company, our ability to meet our financial obligations and pay
operating expenses depends on the receipt of sufficient funds, primarily through
dividends and management fees, from our subsidiaries. As Texas-domiciled
insurance companies, Memorial Service Life Insurance Company and Lincoln
Memorial Life Insurance Company may not, without the prior approval of the Texas
Department of Insurance, pay any dividend or distribution which, together with
all other dividends and distributions paid within the preceding 12 months,
exceeds the lesser of: (1) net gain from operations; or (2) 10% of capital and
surplus, in each case as shown in its most recent annual statutory financial
statements.
Under Texas law, Memorial Service Life Insurance Company and Lincoln Memorial
Life Insurance Company may not enter into certain transactions, including
management agreements and service contracts, with members of its insurance
holding company system, including us, unless the insurance companies have
notified the Texas Department of Insurance of their intention to enter into such
transactions and the Texas Department of Insurance has not disapproved of them
within the period specified by Texas law. Among other things, such transactions
are subject to the requirement that their terms be fair and reasonable and that
the charges or fees for services performed be reasonable.
As part of their routine regulatory oversight process, approximately once every
three to five years, state insurance departments conduct periodic detailed
examinations of the books, records and accounts of insurance companies domiciled
in their states. Memorial Service Life Insurance Company and Lincoln Memorial
Life
- 10 -
Insurance Company underwent such an examination during 2002 for the
three-year period ended December 31, 2000. The final reports on the examinations
issued by the Texas Department of Insurance did not raise any significant
issues. The Missouri Department of Insurance also participated in this audit.
EMPLOYEES
At December 31, 2002, we, and our subsidiaries had 232 full-time employees. We
believe that we enjoy good relations with our employees and agents. None of our
employees or the employees of our subsidiaries is subject to a collective
bargaining agreement.
GLOSSARY
The following are definitions of certain terms used in this report. Where
appropriate, in using such terms, the singular includes the plural, masculine
includes feminine and/or neuter, and vice versa.
"Actuarial valuation" means the appraisal of a block of insurance business or an
insurance company using the present value of future profits. The present value
of future profits is calculated by discounting projected earnings using various
actuarial assumptions such as estimations regarding future mortality, expenses,
interest rates, morbidity, cancellation rates, etc.
"Annuity policies" means a form of insurance under which premiums are paid to
purchase an anticipated periodic benefit payment to begin at some date in the
future.
"Blocks of in-force business" means groups of insurance policies in effect.
"Co/modco reinsurance" means a combination of coinsurance and modified
coinsurance under which only a portion of the reserves are transferred to the
reinsurer and the ceding company retains the remaining portion of reserves.
Under most co/modco agreements, the amount of reserves transferred to the
reinsurer is equal to the initial ceding allowance thereby eliminating any
initial transfer of cash.
"Coinsurance" means a form of indemnity reinsurance under which reserves as well
as the risk are transferred to the reinsurer.
"Commissions" means amounts paid to agents under an agency agreement as
compensation for the sale of insurance policies.
"Deferred policy acquisition costs" means expenses that are capitalizable under
accounting principles generally accepted in the United States of America. The
expenses must vary with the production of new business and must be primarily
related to the production of new business. Agents' first year commissions are,
by far, the largest single component of deferred policy acquisition costs.
"EBITDA" means net income before interest, income taxes, depreciation and
amortization.
"Funded pre-need contract" means a pre-need contract or a prearranged funeral
contract that has been fully paid for by the purchaser.
"Funds withheld agreements (treaties)" means reinsurance agreements under which
funds that would normally be paid to a reinsurer are withheld by the ceding
company to permit statutory credit for non-admitted reinsurance, to reduce a
potential credit risk or to retain control over investments. Under certain
conditions, the reinsurer may withhold funds from the ceding company.
- 11 -
"Future policy benefits" means a liability established to provide for the
payment of policy benefits that are to be paid in the future.
"GAAP benefit reserves" means a liability established to provide for the payment
of future policy benefits. The reserves are calculated as the excess of the
present value of future policy benefits over the present value of future net
premium payments. In order to calculate the present value of benefits and net
premiums, certain actuarial assumptions are made regarding various items
(including, without limitation, mortality, expenses, interest rates, lapse and
cancellation rates).
"Indemnity reinsurance" means a form of reinsurance under which insurance risk
is transferred from the ceding company to the reinsurer.
"Lapse and surrender rates" means the rates at which policies do not renew by
paying premiums that are due or by requesting that the policy be cancelled for
its surrender value.
"Lapse of insurance policies" means the non-renewal of an insurance policy due
to not paying the premiums when they come due.
"LifeStory(ies)(TM)" means the digital memorialization product containing film
and video clips, written and spoken words, all collected and preserved
permanently.
"Limited pay policies" means the ordinary life insurance policies for which the
benefit period is longer than the premium paying period.
"Memorialization" means a form of remembrance offered to our customers to
eulogize, honor or otherwise commemorate the life of a loved one.
"Modified coinsurance" means a form of coinsurance under which the reserves are
retained by the ceding company while the risk is transferred to the reinsurer.
The ceding company is required to pay interest to replace that which would have
been earned by the reinsurer if it had held the reserve assets in its own
investment portfolio.
"Morbidity" means the statistical rate at which insureds become sick or have an
accident that results in a health insurance claim.
"Mortality" means the statistical rate at which insureds die.
"Net level premium reserve method" means a reserve calculation method whereby
the net premiums used for reserving purposes bears a constant proportional
relationship to the gross premiums being charged.
"Policy loan" means a loan made by an insurance company using the cash surrender
value of an insurance policy as collateral for the loan. The maximum policy loan
available will always be less than the cash value of the underlying policy.
"Policyholder deposits" means under generally accepted accounting practices and
principles, premiums for annuity policies are classified as "Policyholder
deposits" rather than "Insurance premiums."
"Prearranged funeral contract" means an agreement under which a client purchases
funeral services to be performed at death. The cost of such funeral services are
equal to the cost at the time into which the prearranged funeral contract is
entered and does not change regardless of the date of death or increases in the
cost of funeral services to be provided.
- 12 -
"Preneed contract" means the same as "prearranged funeral contract."
"Reinsurance" means an arrangement under which one insurance company, referred
to as the reinsurer, for consideration, agrees to indemnify another insurance
company, referred to as the ceding company, against all or part of a loss which
the ceding company may incur under certain policies of insurance for which it
has liability.
"Reinsurance agreement" means the agreement used to effect a reinsurance
arrangement.
"Reinsurance treaty" means another term for "reinsurance agreement."
"Reserves" means a liability (or allocation of surplus) established to provide
for a certain level of assurance that enough assets will be available to pay
future policy benefits.
"Reserves for unearned premiums" means a liability established to recognize
portions of premiums that have been received by the insurance company but are
for insurance coverage extending beyond the close of the financial reporting
period.
"Retrocession reinsurance" means the transfer of reinsurance risk from an
assuming reinsurer to another insurance company.
"Single premium policies" means ordinary life insurance policies for which
single, lump-sum premiums are paid.
"Statutory accounting practices" means accounting procedures and practices
prescribed for insurance companies by the National Association of Insurance
Commissioners and as adopted by the various state insurance regulatory bodies.
"Statutory capital and surplus" means shareholders' equity under statutory
accounting practices.
"Statutory financial statements" means financial statements produced under
statutory accounting practices and filed in each state that the insurance
company is licensed to do business.
"Statutory reserves" means reserves calculated according to statutory prescribed
methods using state mandated assumptions with regard to mortality and interest
rates.
"Underwriting standards" means standards set by an insurance company under which
an insurance applicant is reviewed in order for an insurance policy to be
issued.
ITEM 2. PROPERTIES
Forever Network owns and operates eight cemetery/funeral home properties in
metropolitan St. Louis and Kansas City, Missouri, Austin, Texas and Los Angeles,
California, and maintains sales and administrative offices at each of those
sites. Forever Network also operates production facilities for the LifeStory(TM)
biography business at each location with central operations in Hollywood,
California. Our Internet development operation is based at the Hollywood
facility.
Memorial Service Life Insurance Company leases approximately 25,000 square feet
in an office building which houses our executive offices located at 10 S.
Brentwood, St. Louis, Missouri under the terms of a lease that expires in June
2007. Memorial Service Life Insurance Company also leases approximately 3,400
square feet of property at 805 Las Cimas Parkway, Building III, Suite 420,
Austin, Texas under the terms of a lease
- 13 -
that expires in December 2007. Both of the above leases should result in more
efficient, updated office space, while resulting in significant annual savings
in rent expense. As our operations expand, the leasing of additional space in
Austin, Texas and St. Louis, Missouri may be necessary. We currently do not
foresee any material difficulties with leasing additional space that may be
required in the foreseeable future.
Following is a brief description of our cemetery/funeral home properties:
o Forever Bellerive Cemetery, located in St. Louis, Missouri, encompasses
approximately 46 acres, with over 15 acres undeveloped for future use.
This property includes an office building with approximately 3,100 square
feet and a 1,000 crypt white marble mausoleum/chapel facility.
o Hollywood Forever Cemetery, located in Los Angeles, California, is
approximately 65 acres, with three community mausoleums totaling
approximately 40,000 square feet. An additional 4,600 crypts of inventory
are currently under construction, with some already completed. An
additional multi-story, 10,000 crypt building is planned with
construction expected to begin during 2003. This facility also includes
7,500 square feet of funeral home, chapel and flower shop, 10,000 square
feet of office space, and 6,000 square feet of studio production and
editing space for the Forever Memorial LifeStory(TM) and Internet
businesses.
o Mount Washington Forever Cemetery (50% ownership accounted for under the
equity method), located in Kansas City, Missouri, is a combination
cemetery/funeral home property with 229 acres, of which 100 are developed
for current use, including a garden mausoleum. We are in the middle
stages of development of a 1,000 crypt white marble mausoleum/chapel,
including a newly created lake with waterfall, bridge, and natural
memorialization options surrounding it. This property also includes
10,500 square feet of office space and funeral home.
o Forever Oak Hill Cemetery, also located in St. Louis, Missouri,
encompasses approximately 55 acres, of which 43 are dedicated for
cemetery use. This property includes an office building with
approximately 1,100 square feet. A new mausoleum/funeral home facility is
in the beginning phases of construction on this site, and will include
over 1,000 crypts, over 1,000 cremation niches, and several other unique
family memorialization options. It will be situated prominently on the
property and in the community and have family suites and family meeting
rooms to best serve our customers.
o Forever Oak Hill Funeral Home at Pfitzinger is located in St. Louis,
Missouri, and is a full-service funeral home with approximately 8,500
square feet.
o Forever Mt. Hope, located in Belleville, Illinois, encompasses
approximately 120 acres, of which 63 are developed for current use. This
property has recently gone through extensive renovations, including a
newly renovated office building and full service funeral
home/memorialization facility with approximately 4,300 square feet, and a
complete beautification of the property, including new roads, landscaping
and signage. A new mausoleum is planned for this site, with construction
expected to begin in June 2003.
o Forever Valley View, located in Edwardsville, Illinois, is approximately
30 acres, of which eight are available for future development. This
facility has also recently undergone an extensive transformation similar
to the one at Forever Mt. Hope. Future plans also call for the
development of a new mausoleum.
o Forever All Faiths, located in Austin, Texas, performs funeral services
at two separate locations, North and South, with square footage of
approximately 4,800 and 3,600, respectively.
- 14 -
ITEM 3. LEGAL PROCEEDINGS
Forever Enterprises, Inc. was named as defendant in a lawsuit filed by Odessa
L.L.C. during 2001 in state court in Los Angeles, California. The suit involved
a stock buyout provision for shares in Hollywood Forever Cemetery. This suit was
settled on July 26, 2002 in the amount of $130,000 concurrent with the
acquisition of the remaining 10% of ownership in Hollywood Forever, Inc. (see
Note 3 to the consolidated financial statements).
Hollywood Forever Cemetery was named as defendant in a lawsuit filed by a former
employee during 2001 in state court in Los Angeles, California, for wrongful
discharge. The amount being sought was approximately $300,000. Our motion for
summary judgment was granted in December 2002, subsequent to which the plaintiff
filed an appeal. There has been no action since the appeal. The Company denies
liability and intends to vigorously defend the suit.
Forever Enterprises, Inc. has been named as defendant in a lawsuit filed in 2003
by a former licensed insurance agent for National Prearranged Services, Inc. The
case was filed in state court in Travis County, Texas, for breach of contract,
retaliation and misrepresentation. Forever Enterprises, Inc. maintains it is not
a proper party. The amount being sought is undetermined. This case is currently
in discovery with no trial date set. The Company denies liability and intends to
vigorously defend the suit.
We are subject to various other claims and contingencies arising out of the
normal course of business. In the opinion of management, after consultation with
legal counsel, resolution of these matters will not have a material adverse
effect on our financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the quarter ended
December 31, 2002, through the solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list, as of March 31, 2003, of the names and ages of our
executive officers and all positions and offices with us presently held by the
person named. Messrs. Brent D. Cassity and J. Tyler Cassity are brothers.
Brent D. Cassity, 36, has over ten years of experience with the death care
memorialization industry. Mr. Cassity has been chief executive officer of
Forever Network, Inc. since 1991, supervising its cemetery and Internet
divisions. In addition, prior to 1997, Mr. Cassity served as the executive in
charge of marketing operations for National Prearranged Services, Inc.
Mr. Cassity has served as a director of our company since 1996 and served as
chairman of our board of directors from September 1997 until March 2000. In
March 2000, Mr. Cassity was appointed our chief executive officer. Mr. Cassity
also serves as a member of the board of directors of each of Memorial Service
Life Insurance Company and Lincoln Memorial Life Insurance Company.
J. Tyler Cassity, 33, joined us in 1993. Immediately prior to that date,
Mr. Cassity worked in the public relations field with PEN American Center from
1992 until 1993. Mr. Cassity earned a Bachelor of Arts degree from Columbia
University in 1992. Mr. Cassity is responsible for video LifeStory(TM)
production and business development at Forever Memorial and for the management
of Hollywood Forever, Inc. Mr. Cassity was instrumental in the purchase of
Hollywood Forever in April of 1998. Mr. Cassity was elected president of our
company in August 2000 and has served as president of Forever Memorial and
Hollywood Forever since 1998. Mr. Cassity has served as a director of our
company since 2001.
- 15 -
Michael R. Butler, 36, has served as chief financial officer of the Forever
Network companies since he joined us in March 1998. In August 2000, Mr. Butler
was elected chief financial officer of our company. Prior to joining us, Mr.
Butler spent ten years with Monsanto Company in various positions of increasing
responsibility in sales and marketing, manufacturing and business management.
Randall K. Sutton, 57, has served as a member of our board of directors and a
vice president of our company since 1996 and as our chief financial officer from
March 2000 to August 2000. In August 2000, he was elected treasurer of Forever
Enterprises, Inc. Mr. Sutton also serves as president and a member of the board
of directors of Memorial Service Life Insurance Company and Lincoln Memorial
Life Insurance Company. Mr. Sutton also currently is the chief financial officer
of National Prearranged Services, Inc., an affiliate of our company. During his
22-year tenure with National Prearranged Services, Mr. Sutton also has managed
investments for several affiliated companies.
The executive officers were appointed by and serve at the pleasure of our board
of directors.
- 16 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
Our common stock is traded in the "over the counter" Nasdaq Bulletin Board
market under the symbol "FVEN.OB." The following table sets forth the reported
high and low closing sales prices of shares of our common stock by quarter for
the years ended December 31, 2001 and 2002. Such prices reflect interdealer
prices, without retail mark-up, mark-down or commission.
PRICE RANGE
-----------------------
HIGH LOW
Year ended December 31, 2001:
First Quarter $ 6.500 $ 3.531
Second Quarter 7.500 3.075
Third Quarter 8.250 6.500
Fourth Quarter 9.000 3.500
Year Ended December 31, 2002:
First Quarter $ 9.200 $ 5.000
Second Quarter 7.000 4.250
Third Quarter 7.500 4.200
Fourth Quarter 7.500 3.000
As of March 31, 2003, the approximate number of stockholders of record of our
common stock was 450, which included approximately 150 beneficial holders of our
common stock, representing persons whose stock is in nominee or "street name"
accounts through brokers.
DIVIDEND POLICY
We have never declared, nor have we paid, any cash dividends on our common
stock. We currently intend to retain our earnings to finance future growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future. Our board of directors from time to time reviews our
dividend policy.
RECENT SALES OF UNREGISTERED SECURITIES
We did not sell any unregistered securities during the quarter ended December
31, 2002.
EQUITY SECURITIES AUTHORIZED FOR ISSUANCE PURSUANT TO COMPENSATION PLAN
Information regarding equity securities that were authorized for issuance as of
December 31, 2002 with respect to our compensation plans is included in Part
III, Item 12 of this report.
- 17 -
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following historical summary consolidated financial information has been
derived from our consolidated financial statements. This selected financial data
should be read in conjunction with our accompanying consolidated financial
statements and the related notes included herein, and the information set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
(1)(2) (3) (4)
STATEMENT OF OPERATIONS DATA:
Premium income $ 8,294 $ 7,387 $ 36,603 $ 44,606 $ 41,195
Net investment income and realized gains 6,029 3,375 6,236 10,801 12,574
Cemetery revenue 9,683 7,492 6,333 2,794 2,151
Commission and expense allowance 18,052 15,396 - - -
Management fee income 5,401 1,160 74 - -
Other revenue - - 509 1,519 748
Total revenues 47,459 34,810 49,755 59,720 56,668
Benefits incurred 8,937 8,325 31,491 35,842 32,924
Other expenses (5) 34,160 26,153 27,706 26,288 23,481
Income (loss) before federal taxes 4,362 332 (9,442) (2,410) 263
Income tax expense (benefits) 2,526 (106) (1,219) (655) 359
Net income (loss) before extraordinary item and
cumulative effect of accounting change 1,836 438 (8,223) (1,755) (96)
Extraordinary item - 259 - - -
Cumulative effect of accounting change - - (316) - -
---------- ---------- ---------- ----------- ----------
Net income (loss) $ 1,836 $ 697 $ (8,539) $ (1,755) $ (96)
========== ========== ========== =========== ==========
Weighted average shares outstanding
Basic 6,934,934 6,934,367 6,933,477 6,925,812 6,486,667
Diluted 7,358,020 7,451,813 6,933,477 6,925,812 6,486,667
Earnings (loss) per share
Basic $ 0.26 $ 0.10 $ (1.23) $ (0.25) $ (0.01)
Diluted 0.25 0.09 (1.23) (0.25) (0.01)
DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
(1)(2) (3) (4)
BALANCE SHEET DATA:
Invested assets $ 99,455 $ 101,085 $ 90,500 $ 150,272 $ 133,831
Total assets 262,990 237,354 211,120 206,092 164,073
Total policy liabilities 204,920 195,981 191,773 182,783 153,751
Shareholders' equity 4,619 3,794 513 3,953 8,995
Accounts receivable 7,708 5,582 4,225 3,641 2,366
Deferred revenue 7,329 5,575 4,696 3,457 3,294
Cemetery property 3,965 3,558 3,357 3,687 2,160
- 18 -
(1) Comparison of selected consolidated financial data in the table is affected
by the ceding through coinsurance of several blocks of life and annuity
business to Employers Reassurance Corporation and North America Life
Insurance Company effective August 31, 2000 and November 30, 2000,
respectively. Items primarily affected by the ceded blocks include premium
income, investment income and benefits incurred.
(2) Comparison of selected consolidated financial data in the table is affected
by the adoption in 2000 of Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. The cumulative effect of the
accounting change through December 31, 1999 resulted in a charge to net
income of $315,801 recorded on January 1, 2000. This table also reflects
the first year of audit for the cemetery/memorialization business, as well
as the adoption of SAB No. 101.
(3) Comparison of selected consolidated financial data in the table also is
affected by the assumption through coinsurance of a block of life and
annuity business from FSLife effective on October 1, 1999. We received
$30,032 in assets in exchange for assuming $27,701 in insurance
liabilities. During 1999, we retroceded, through a coinsurance agreement,
50% of the life insurance assumed from the purchase of the block of
business that we acquired from FSLife to Alabama Reassurance Company. As of
December 31, 1999, invested and total assets included approximately $28,088
and policy liabilities included approximately $24,782 associated with the
block of business that we acquired from FSLife.
(4) Comparison of selected consolidated financial data in the table also is
affected by the assumption through coinsurance of a block of life and
annuity business from World Insurance Company effective on April 1, 1998.
We received $19,941 in assets in exchange for assuming $21,910 in insurance
liabilities. During 1998, we retroceded, through a coinsurance agreement,
50% of the life insurance assumed from the purchase of the block of
insurance acquired from World Insurance Company to Alabama Reassurance
Company.
(5) Other expenses for the years ended December 31, 2002, 2001 and 2000 are net
of expense reimbursements from National Prearranged Services in the amount
of $2,665, $2,582 and $2,517, respectively.
- 19 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with our consolidated financial
statements and related notes, and other financial information included elsewhere
in this report.
OVERVIEW
Forever Enterprises, Inc., through its subsidiaries, owns and operates
combination funeral home and cemetery properties, produces and markets
multimedia LifeStories(TM), operates an Internet marketing site and operates
life insurance companies that principally issue insurance contracts to fund
pre-need funeral contracts. Our life insurance operations are conducted through
our wholly-owned life insurance subsidiaries.
In connection with our acquisition of Forever Network, Inc. and its subsidiaries
in March 2000, we acquired three cemetery/funeral home combination properties
located in Los Angeles, California and St. Louis and Kansas City, Missouri, a
funeral home located in Kirkwood, Missouri that was leased to Service
Corporation International, the Cremation Society of St. Louis, the Cremation
Specialists of Los Angeles and Forever Cremation Society of Kansas City.
Subsequent acquisitions include the operating assets of another cemetery
property in St. Louis, Missouri in December 2001, the funeral home business of
the funeral home previously leased to Service Corporation International located
in Kirkwood, Missouri in June 2002, the operating assets of two cemetery
properties in Edwardsville and Belleville, Illinois (metropolitan St. Louis) in
June 2002, and the operating assets and business of two funeral home properties
in Austin, Texas in November 2002. In addition, Forever Network offers digital
LifeStories(TM) for sale to individuals and groups, archives and displays these
interactive LifeStories(TM) which can be viewed at Company cemetery/funeral
homes and on the Internet at www.forevernetwork.com. Forever Network currently
maintains more than 9,700 client LifeStories(TM) that are available for viewing
on our Internet site. The Forever Network website is currently averaging more
than 75,000 hits (visits) per day. The acquisition of Forever Network was
accounted for in a manner similar to a pooling-of-interests.
Our revenues from the cemetery and memorialization business are principally
derived from products and services sold in connection with funerals and burials
and revenues derived from LifeStories(TM) sold through our eight properties or
through other marketing programs. Larger contributors to cemetery revenues
include interment rights (grave, entombment and inurnment spaces), grave markers
and monuments, services related to visitation and burial, burial containers
(caskets and burial vaults) and LifeStory(TM) services. Revenues at newly
acquired properties are expected to ramp up to sustainable profitability levels,
and to grow at more normal levels within 12 to 18 months of operations.
Expenses for our cemetery operation include the cost to provide the merchandise
or service pertaining to the funeral, burial or LifeStory(TM). Caskets,
markers/monuments, professional services and editing services are some of the
primary items. Other expenses relate to selling and marketing, such as
commissions and advertising, general and administrative operations wages,
insurance, supplies, utilities, maintenance wages, equipment and interest.
Management's operating plans call for each of these categories to meet certain
budgeted ratios as a percentage of revenues. Certain expenses may carry higher
ratios in the earlier stages of operation under our plan. Our newly acquired
properties' expenses generally are expected to reach normal sustainable levels
within 12 to 18 months.
- 20 -
Our life insurance subsidiaries primarily write policies purchased by our
affiliate, National Prearranged Services, in connection with National
Prearranged Services' sale of prearranged funeral contracts. During 2002 and
2001, we derived revenues primarily from investment income, ceding allowances
and premiums on retained business, compared to 2000, during which we derived
revenues primarily from direct premiums on insurance policies generated by
National Prearranged Services. Looking forward, we expect insurance revenues to
remain relatively level.
Investment income and realized investment gains will continue to contribute
significantly to total revenues in the future. Expenses for our insurance
operation during 2002 and 2001 consisted primarily of administrative costs
associated with life insurance company operations, compared to 1999, in which
expenses consisted principally of benefits paid or accrued, commissions on the
sale of policies and general and administrative costs associated with life
insurance company operations. General and administrative costs have decreased at
a rate slower than the growth in our business, evidencing our belief that our
infrastructure will support increasing levels of internal revenue growth without
the need for general and administrative expenses to increase at a similar rate.
Our insurance subsidiaries are subject to a high degree of regulation from
various state insurance administrators. Such regulation governs (among other
things): investment policies; financial reporting; capital adequacy; terms of
policies; and the ability of our subsidiaries to pay dividends and management
fees to us. In addition, National Prearranged Services' activities in selling
prearranged funeral contracts are highly regulated in the states in which
National Prearranged Services does business. These regulatory aspects and future
changes therein could materially affect our financial condition and results of
operations. See "Business--Regulatory Factors."
Our strategy is to increase shareholder value by growing our
funeral/cemetery/memorialization and insurance business through: (1)
acquisitions and operation of cemetery properties in targeted metropolitan
areas; (2) further development and implementation of new LifeStory(TM) programs;
(3) growth of our LifeStory(TM) and cemetery business through the increased
traffic and brand recognition generated from implementing our marketing and
operational systems; and (4) expense allowance receipts on life insurance
policies ceded to other companies. Our ability to acquire properties and
policies will be dependent upon (among other things) our ability to identify,
negotiate and complete transactions of favorable values, arrange necessary
financing and integrate and manage the acquisitions after completion, including
preserving customer relationships. There can be no assurance that we will
successfully execute our strategy.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2002 and 2001
CEMETERY OPERATIONS
The following comparative financial information reflects the impact of Staff
Accounting Bulletin 101 on the cemetery segment of the business. Under SAB 101,
revenue is deferred until services or merchandise are delivered. As such, SAB
101 will have a more significant impact on our newly acquired properties in
their early years until pre-need contracts begin to turn to at-need. "Deferred
revenue" represents revenue associated with cemetery/funeral home properties
which cannot be recognized as income in the current year. Deferred revenue
represents future streams of income (and cash flow) which will be recognized as
services are completed and/or merchandise delivered.
Cemetery revenues increased approximately $2.2 million, or 29.2%, in the year
ended December 31, 2002 compared to 2001. The increase was attributable to more
effective marketing and increased sales of certain cemetery and memorialization
products and services, as well as the inclusion of revenues from three cemetery
- 21 -
properties acquired since the beginning of 2001. The increase also was due to
the positive effect of deferred revenue being recognized on installment
contracts as they were paid in full and merchandise delivered.
Cost of sales increased approximately $1.2 million, or 54.0%, from $2.1 million
in 2001, to $3.3 million in 2002, due primarily to increased cemetery sales and
the inclusion of new properties. The increase was also attributable to an
adjustment of $731,000 resulting from our periodic analysis of standard costs
versus actual costs. Cost of sales as a percentage of revenues increased to
34.3% for the year ended December 31, 2002 from 28.8% for the previous year.
Selling, general and administrative expenses increased $3.4 million, or
67.8%, from $5.1 million for the year ended December 31, 2001 to $8.5
million in 2002 primarily due to the relatively large startup costs
associated with the acquisition of three cemetery properties. The increase
was also due to an adjustment of $435,000 to increase our reserve for
doubtful accounts. As a percentage of revenues, selling, general and
administrative costs increased to 88.3% for the year ended December 31,
2002, from 68.0% for the year ended December 31, 2001.
Our income (loss) before income taxes decreased from income of $328,000 to a
loss of $1.4 million in the year ended December 31, 2002 compared to 2001. The
operating loss as a percentage of revenues declined from income of 4.4% in 2001
to a loss of 14.6% in 2002. These changes were due to increased expenses
associated with new cemetery properties acquired during 2002 as well as the
year-end adjustments to cost of sales and selling, general and administrative
expenses noted above.
Total assets increased from $14.9 million at December 31, 2001 to $21.4 million
at December 31, 2002 due primarily to the inclusion of acquired cemetery
properties.
Deferred revenue increased from $5.6 million at December 31, 2001 to $7.3
million as of December 31, 2002 due to the increases in sales of pre-need
services and merchandise.
INSURANCE OPERATIONS
Insurance revenues increased approximately $5.3 million, or 19.8%, in the year
ended December 31, 2002 compared to 2001. The increase was attributable to
higher premium income, combined with a higher than expected experience rating
refund.
Our premium income increased approximately $1.3 million, or 16.4%, in the year
ended December 31, 2002 compared to 2001. The increase was primarily
attributable to an increase in the number of policies written from more
profitable lines of business.
Commission and expense allowances on reinsurance ceded increased approximately
$2.7 million, or 17.2%, in the year ended December 31, 2002 compared to 2001,
due to a greater number of monthly pay policies written, combined with an
increase in the number of single premium policies written.
Our net investment income and realized gains was generally unchanged in the year
ended December 31, 2002, versus the previous year. The slight decrease was
attributable to unfavorable market conditions, which was offset by interest
income recognized on our experience rating refund.
- 22 -
Our benefit expenses increased approximately $641,000, or 7.5%, in the year
ended December 31, 2002 compared to 2001. This increase was due to higher than
expected mortality experiences in the first and fourth quarters on retained
business.
Operating income increased $2.7 million in the year ended December 31, 2002
compared to 2001. The change in operating performance was due primarily to
increased premium income and commission and expense allowances, offset by higher
than expected mortality experiences for the year.
Total assets increased $11.9 million from $208.6 million at December 31, 2001 to
$220.5 million at December 31, 2002, due primarily to the growth of our
insurance policies in force during 2002.
MINORITY INTEREST CEMETERY OPERATIONS
Our impact equity in the earnings (losses) of Mount Washington Forever,
L.L.C. ("Mount Washington") for the year ended December 31, 2002 was not
recognized in consolidated earnings because our net equity investment in
Mount Washington remains in a deficit position. We first acquired an
interest in Mount Washington in November 1999, and, therefore, had no share
in its earnings prior to that time. Forever Enterprises, Inc. currently has
a 50% interest in Mount Washington and is responsible for all aspects of the
cemetery's marketing and operations.
In conjunction with the construction of a new mausoleum at Mount Washington,
the Company entered into a guaranty agreement with Commerce Bank, N.A. The
guaranty agreement is discussed further in Note 12 to the consolidated
financial statements which follow this report.
CORPORATE
Corporate revenues increased approximately $5.4 million, or 383%, from $1.4
million for the year ended December 31, 2001 to $6.8 million for the year ended
December 31, 2002, due primarily to revenues associated with the NPS Management
Agreement (see Note 13 to the consolidated financial statements), which is
included in "Management fee income" on our consolidated statements of
operations.
Operating income increased approximately $3.0 million, or 125.8%, from a loss of
$2.4 million for the year ended December 31, 2001 to income of $619,000 in 2002
due primarily to revenue associated with the NPS Management Agreement.
Comparison of the Years Ended December 31, 2001 and 2000
CEMETERY OPERATIONS
The following comparative financial information reflects the impact of Staff
Accounting Bulletin 101 on the cemetery segment of the business. Under SAB 101,
revenue is deferred until services or merchandise are delivered. As such, SAB
101 will have a more significant impact on our newly acquired properties in
their early years until pre-need contracts begin to turn to at-need. "Deferred
revenue" represents revenue associated with cemetery/funeral home properties
which cannot be recognized as income in the current year. Deferred revenue
represents future streams of income (and cash flow) which will be recognized as
services are completed and/or merchandise delivered.
Cemetery revenues increased approximately $1.2 million, or 18.3%, in the year
ended December 31, 2001 compared to 2000. The increase was largely attributable
to more effective marketing and increased sales of certain cemetery and
memorialization products and services. The increase also was due to the positive
effect of deferred revenue being recognized on installment contracts as they
were paid in full and merchandise delivered.
- 23 -
Cost of sales increased approximately $343,000, or 18.9%, from $1.8 million in
2000, to $2.1 million in 2001, due primarily to increased cemetery sales. Cost
of sales as a percentage of revenues increased slightly to 28.8% for the year
ended December 31, 2001 compared to 28.7% for the previous year.
Selling, general and administrative expenses decreased $1.7 million, or 25.0%
from $6.8 million for the year ended December 31, 2000, to $5.1 million, in 2001
due to cost reduction efforts and improved operating efficiencies which required
fewer resources. As a percentage of revenues, selling, general and
administrative costs declined to 68.0% for the year ended December 31, 2001,
from 107.2% for the year ended December 31, 2000 due to more efficient
deployment of company resources and certain economies of scale.
Our income before income taxes increased approximately $2.0 million in the year
ended December 31, 2001 compared to 2000. The operating income/(loss) as a
percentage of revenues improved from a loss of 26.8% in 2000 to income of 4.4%
in 2001. This was due to increased revenues and operating cost containment.
Total assets decreased from $16.1 million at December 31, 2000 to $14.9 million
at December 31, 2001 due largely to the exclusion of certain assets which were
included at December 31, 2000, but were included in the Corporate segment in
2001.
Deferred revenue increased from $4.7 million at December 31, 2000 to $5.6
million at December 31, 2001 due to increased sales of pre-need services and
merchandise.
INSURANCE OPERATIONS
Insurance revenues decreased approximately $17.3 million, or 39.3%, in the year
ended December 31, 2001 compared to 2000. The decrease was attributable to a
shift in the types of insurance products sold (from single premium policies to
limited pay policies) and our reinsurance of significant blocks of our life
insurance policies.
Our premium income decreased approximately $29.2 million, or 79.0%, in the year
ended December 31, 2001 compared to 2000. The decrease was primarily
attributable to reinsurance of significant blocks of our life insurance
policies. It was also impacted by a shift in the relative proportions of
policies sold from single premium policies to limited pay business.
Our net investment income and realized gains decreased approximately $3.0
million, or 45.1%, in the year ended December 31, 2001 versus the previous year.
The decrease was attributable to lower holdings of invested assets due to
reinsurance transactions.
Our benefit expenses decreased approximately $10.4 million, or 55.1%, in the
year ended December 31, 2001 compared to 2000. This decrease was due primarily
to the reinsurance agreements entered into during 2000.
Operating income increased $6.5 million in the year ended December 31, 2001
compared to 2000. The change in operating performance was due primarily to the
effects on revenues and expenses related to reinsurance transactions.
- 24 -
Total assets increased $10.6 million from $198.0 million at December 31, 2000
to $208.6 million at December 31, 2001, due primarily to the growth of our
insurance policies in force during 2000.
MINORITY INTEREST CEMETERY OPERATIONS
Our impact equity in the earnings of Mount Washington for the year ended
December 31, 2001 was not recognized in consolidated earnings because our
net equity investment in Mount Washington remained in a deficit position. We
first acquired an interest in Mount Washington in November 1999 and,
therefore, had no share in its earnings prior to that time. Forever
Enterprises, Inc. currently has a 50% interest in Mount Washington and is
responsible for all aspects of the cemetery's marketing and operations.
CORPORATE
Operating losses decreased approximately $808,000, or 25.2%, from a loss of $3.2
million for the year ended December 31, 2000 to a loss of $2.4 million in 2001
due primarily to an increase in management fees allocated to an affiliated
entity.
LIQUIDITY AND CAPITAL RESOURCES
We expect to secure any significant capital required for acquisition of
additional cemetery properties and development of our LifeStory(TM) business and
the Internet through debt and/or equity financing. Otherwise, cash generated
from our operations and from our management agreement with National Prearranged
Services (see Note 13 to the consolidated financial statements) will provide
working capital for our operations. With new cemetery properties, the initial
capital required for the purchase and working capital is anticipated to be
sufficient to allow the property to achieve positive cash flow within 12 to 18
months. Because we are able to significantly increase the volume of pre-need
revenues at new properties, and much of those revenues are financed over time
and/or deferred until the time of need (death), we have a natural and budgeted
delay in profitability and positive cash flow. Our cemetery property in St.
Louis, Missouri, which has been actively marketed since 1997, generates
significant positive cash flow from operations and represents the type of
relative financial performance expected on our current and future properties.
Similar positive trends are being experienced at our cemetery properties in
Kansas City, Missouri and Los Angeles, California and we anticipate both
properties being able to sustain positive cash flow and contribute to earnings
in 2003. Financing alternatives related to the build-up of our trade accounts
receivable may provide opportunities for "bridge" cash financing until we reach
positive sustaining cash flow at certain properties. We believe that any
operating cash requirements for our current cemetery properties will be funded
through working capital cash on hand or lines of credit. Certain outstanding
lines of credit of our company expire in the first and second quarters of 2003.
Currently, we believe that we will be able to renew these lines of credit on
terms favorable to us. However, if we are unable to renew such lines of credit,
we would be required to seek other sources of funding to satisfy our
obligations. There can be no assurance that such other sources of funding will
be available or available on terms favorable to our company.
Capital projects at new cemetery properties for mausoleum/funeral home
combination buildings and other saleable inventory features are expected to be
funded through use of cash generated from pre-construct sales and/or debt
financing and should require little or no additional capital investment. Certain
other improvements would be accomplished and funded through use of existing
personnel and working capital resources and lines of credit.
We have invested significant capital to develop and enhance our LifeStory(TM)
business and Internet site capabilities at our website www.forevernetwork.com.
The LifeStory(TM) program is an important part of our cemetery/funeral home
business as well as a central feature to our brand strategy, and is currently
contributing to profitability at the cemetery locations and through individual
programs. The Forever Network website is currently averaging more than 75,000
hits (visits) per day.
- 25 -
Our insurance subsidiaries are restricted by state insurance laws as to the
amount of dividends that they may pay to us without prior notice to, or in some
cases prior approval from, their respective state insurance departments. These
restrictions on dividend distributions are based on statutory capital and
surplus and operating earnings. Statutory surplus and statutory operating
results are determined according to statutes adopted by each state in which the
subsidiaries do business. Statutory surplus bears no direct relationship to
equity as determined under accounting principles generally accepted in the
United States of America. No amounts are currently available for transfer to the
parent company by dividend, loan, or advance without prior regulatory approval.
Our cash requirements for 2003 and in the future will depend upon mortality
experience, acquisitions, timing of expansion plans and capital expenditures.
Our insurance subsidiaries generally generate sufficient cash receipts from
premium collections and investment income to satisfy their obligations. We
believe that the diversity of the investment portfolio of our insurance
subsidiaries provides sufficient liquidity to meet their operating cash
requirements. We believe that anticipated revenue from operations should be
adequate for the working capital requirements of our existing businesses over
the next 12 months.
We anticipate the management agreement between Forever Enterprises, Inc. and
National Prearranged Services entered into in January 2002 will provide cash in
excess of that necessary to meet our monthly repayment obligations under said
agreement.
On September 27, 2002, we entered into a letter of intent to purchase a
single-location cemetery property located in the Southwest United States. The
purchase price and working capital, if agreeable terms are secured, are expected
to be funded largely through owner financing with the balance being funded
through additional debt arrangements with an outside lender and additional
equity financing. We are currently performing our due diligence investigation.
If due diligence proves favorable, execution of a definitive agreement and
closing are expected to occur during the second quarter of 2003.
In the event that our plans or assumptions change, or if the resources available
to meet unanticipated changes in business conditions prove to be insufficient to
fund operations, we could be required to seek additional financing prior to that
time, or to curtail certain proposed activities.
Changes in our consolidated balance sheet between December 31, 2002 and December
31, 2001, reflect growth through operations, changes in the fair value of
actively managed fixed maturity and equity securities, changes in the investment
portfolio mix and changes in our insurance business strategy.
Due premiums increased $1.8 million from $6.3 million at December 31, 2001 to
$8.1 million at December 31, 2002 due to increases in the amount of in-force
life insurance policies.
Due from reinsurer increased approximately $13.7 million due to an increase in
funds withheld in relation to the blocks of business ceded to Employers
Reassurance Corp., Hannover Life Reassurance Company of America and North
America Life Insurance Company.
Assets with a fair value of approximately $5.8 million at December 31, 2002 were
on deposit with various state regulatory authorities.
Total cash and investments decreased approximately $1.6 million from $101.1
million at December 31, 2001 to $99.5 million at December 31, 2002, primarily
due to investments sold before year end 2002.
- 26 -
Accounts receivable increased approximately $2.1 million from $5.6 million at
December 31, 2001 to $7.7 million at December 31, 2002 due to increased
cemetery/funeral home sales and the acquisition of new cemetery properties.
Property and equipment increased approximately $2.2 million from $6.3 million at
December 31, 2001 to $8.5 million at December 31, 2002, due primarily to the
acquisition of new properties and new construction at an existing property.
Intangible assets increased approximately $8.8 million from $2.2 million at
December 31, 2001 to $10.9 million at December 31, 2002 due to entering into the
NPS Marketing Agreement, offset by the write off of goodwill associated with
Dartmont Investment, Inc.
Future policy benefits increased approximately $10.6 million from $147.7 million
at December 31, 2001 to $158.3 million at December 31, 2002. This increase was
due to the growth of our reinsured business.
Policyholder deposits decreased approximately $1.7 million from $48.3 million at
December 31, 2001 to $46.6 million at December 31, 2002. The decrease was due to
withdrawals and surrenders of existing annuity policies and the absence of the
issuance of new annuity policies. Policyholder deposits are comprised primarily
of annuities acquired with the block of business from Woodmen Accident & Life,
World Insurance Company and Funeral Security Life Insurance Company.
Deferred pre-need revenues increased approximately $1.7 million from $5.6
million at December 31, 2001 to $7.3 million at December 31, 2002 due to
increased sales of deferred revenue items offset by items being recognized in
current year revenue.
Deferred tax assets decreased approximately $2.9 million from $4.4 million at
December 31, 2001 to $1.5 million at December 31, 2002 due primarily to the
effects of our reinsurance agreements, increase in valuation allowance and
deferred taxes on insurance income and realized gains on fixed maturity and
equity securities.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction, and if it is, the type of hedge transaction. SFAS No. 133 was
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We adopted SFAS No. 133 on January 1, 2001, which resulted in no effect on our
financial position, results of operations or cash flows.
Effective January 1, 2000, we adopted Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, and changed our revenue recognition policy,
as follows: Cemetery interment right sales are recognized as revenue at the time
the contract is signed, the cemetery property is developed and a minimum
percentage of the purchase price has been collected. Sales of merchandise are
recognized at the time the merchandise is delivered or been customized for the
customer. Service fee revenues are recognized in the period the services are
performed. We defer prearranged funeral and pre-need cemetery costs until the
time revenue is recognized. The change in our accounting policies resulting from
implementation of Staff Accounting Bulletin No. 101 has been treated as a change
in accounting principle effective as of January 1, 2000. The cumulative effect
of the accounting change through December 31, 1999 resulted in a charge to net
income of $315,801 (net of a $-0- tax benefit), or $.04 per diluted share
recorded on January 1, 2000.
- 27 -
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and rescinds SFAS No. 127, Deferral
of Effective Date of Certain Provisions of FASB Statement No. 125. It revises
the standards for accounting for securitizations and other transfers of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. This statement was effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
implementation of SFAS No. 140 has had no effect on our financial position,
results of operations or cash flows.
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. We have
determined that the adoption of SFAS No. 141 has not had a significant impact on
our financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which was effective January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 requires a company to
complete a transitional impairment test six months from the date of adoption. We
have completed our initial assessment and have determined that there has been no
impairment of goodwill or other intangible assets and, accordingly, the
implementation of SFAS No. 142 had no material impact on our financial condition
and results of operations for the year ended December 31, 2002. If our estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires, among other things, that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred. We do not believe that the adoption of SFAS No. 143 will have a
significant impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which was effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. SFAS No.
144 establishes a single accounting model for long-lived assets to be disposed
of by sale. We have determined that the adoption of SFAS No. 144 has not had a
significant impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for exit or disposal activities
that are initiated after December 15, 2002. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. We do not believe that the adoption of SFAS No.
146 will have a significant impact on our financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123, which provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 is effective for fiscal years beginning after December 15, 2003. We
do not believe that the adoption of SFAS No. 148 will have a significant impact
on our financial statements since we currently use the fair value based method
of accounting for stock-based employee compensation.
- 28 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices. Our primary market risk exposure is related to our insurance business
and changes in interest rates, although we also have certain exposures to
changes in equity prices. We have no foreign exchange risk and no direct
commodity risk. The active management of market risk is integral to our
operations. To manage exposure to market risk, we may rebalance our existing
asset or liability portfolios, change the character of our existing asset or
liability portfolios, change the character of future investments purchased or
use derivative instruments to modify the market risk characteristics of existing
assets and liabilities or assets expected to be purchased. Our market risk
sensitive instruments are entered into for purposes other than trading.
We have investment guidelines that define the overall framework for managing
market and other investment risks, including the accountability and control over
these activities. In addition, we have specific investment policies for each of
our subsidiaries that delineate the investment limits and strategies that are
appropriate given each entity's liquidity, surplus and regulatory requirements.
INTEREST RATE RISK
Interest rate risk is the risk that we will incur economic losses due to adverse
change in interest rates. This risk arises from many of our primary activities,
as we invest substantial funds in interest-sensitive assets and also have
certain interest sensitive liabilities in our life and annuity operations.
We seek to invest premiums and deposits to create future cash flows that will
fund future claims, benefits and expenses, and earn stable margins across a wide
variety of interest rate and economic scenarios. In order to achieve this
objective and limit our exposure to interest rate risk, we adhere to a
philosophy of managing the duration of assets and related liabilities.
The carrying value of our investment portfolio as of December 31, 2002 was $99.5
million, of which 74.4% was invested in fixed maturity securities. The primary
market risk to the investment portfolio is interest rate risk associated with
investments in fixed maturity securities. A 200 basis point decrease in interest
rates would have decreased anticipated earnings from operations for the year
ended December 31, 2002 by approximately $245,000, which amount represents the
decrease of investment income on our investment portfolio. The effect on the
market value of the portfolio would be to increase the value by approximately
$2.0 million. A 200 basis point increase in interest rates would have increased
anticipated earnings from operations for the year ended December 31, 2002 by
approximately $400,000, which amount represents the increase of investment
income on our investment portfolio. The effect on the market value of the
portfolio would be to decrease the value by approximately $6.5 million.
The impact of a change in interest rates to the fair value of our policyholder
deposits would be immaterial due to our ability to vary credited interest rates
on annuity policies. The liability for future policy benefits of $158.3 million
is affected by anticipated investment earnings, but such liability has been
excluded from our analysis because it is not considered to be a financial
instrument.
EQUITY PRICE RISK
Equity price risk is the risk that we will incur economic losses due to adverse
changes in a particular stock or stock index. At December 31, 2002, we had
equity securities with a market value of approximately $1.1 million,
representing less than 1.5% of our cash and investments. The effect of a ten
percent change in equity prices would not materially impact our financial
position, results of operations or cash flows.
- 29 -
SEASONALITY
There is a small amount of seasonality associated with the cemetery and funeral
businesses associated with the higher mortality rates in the winter months. Our
heavy emphasis on pre-need selling throughout the year, however, minimizes that
seasonality impact.
Historically, our insurance revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including a higher
mortality rate of our insureds during the winter months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements listed under the
heading "(a)1. Consolidated Financial Statements" in Item 15 hereof, which
financial statements are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 30 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is contained under "Election of Directors"
and "Voting Securities and Principal Holders Thereof" included in our Proxy
Statement for the 2003 Annual Meeting of Shareholders, which information is
incorporated herein by reference. Information regarding our executive officers
is contained in this report under Item 4A - "Executive Officers of the
Registrant," which information is incorporated herein by reference.
Information regarding compliance with Section 16 of the Securities Exchange Act
of 1934, as amended, is contained in our Proxy Statement for the 2003 Annual
Meeting of Shareholders under the caption "Section 16(a) Beneficial Ownership
and Reporting Compliance," which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained under the caption
"Compensation of Executive Officers," included in our Proxy Statement for the
2003 Annual Meeting of Shareholders, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management is contained under the caption "Voting Securities and Principal
Holders Thereof," in our Proxy Statement for the 2003 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
The following schedule provides information, with respect to compensation plans,
on equity securities (common shares) that were authorized for issuance as of
December 31, 2002:
NUMBER OF SHARES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SHARES EQUITY COMPENSATION
TO BE ISSUED WEIGHTED-AVERAGE PLANS (EXCLUDING
UPON EXERCISE OF EXERCISE PRICE OF SHARES REFLECTED IN
OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------- ------------------- ------------------- -----------------------
Equity compensation plans approved by security
holders......................................... 932,115 $ 2.36 267,885
Equity compensation plans not approved by security
holders......................................... -- -- --
---------- ----------- ----------
Total.............................................. 932,115 $ 2.36 267,885
========== =========== ==========
Our shareholders previously have approved our compensation plan.
- 31 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained under the caption "Certain Relationships and Related Transactions," in
our Proxy Statement for the 2003 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's certifying officers have established and maintained disclosure
controls and procedures to ensure that material information is made known to
them for purposes of complying with applicable laws and regulations. With the
assistance and periodic review of our outside legal counsel and our independent
auditors, we continually evaluate the effectiveness of the design and operation
of our internal controls and procedures over financial reporting and disclosure
pursuant to Exchange Act Rule 13a-14.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer determined that the Company's current disclosure controls and procedures
are effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation by the Chief Executive Officer and
Chief Financial Officer.
The design of any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
- 32 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements. See Index to Consolidated
---------------------------------
Financial Statements for a list of financial statements included in
this Report, which index and financial statements follow the
signature page hereto.
2. Financial Statement Schedules. The following financial statement
-----------------------------
schedules are included as part of this Report immediately following
the Consolidated Financial Statements.
Schedule II - Condensed Financial Information of Registrant
(Parent Company)
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
All other schedules are omitted, either because they are not
applicable, not required or because the information they contain is included
elsewhere in the consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits filed
--------
with this report.
(b) Reports on Form 8-K.
-------------------
We did not file any Current Report on Form 8-K during the quarter ended
December 31, 2002.
- 33 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 31st day of March
2003.
FOREVER ENTERPRISES, INC.
By: /s/ Brent D. Cassity
------------------------------
Brent D. Cassity, Chief Executive Officer
By: /s/ Michael R. Butler
------------------------------
Michael R. Butler, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 31st day of March 2003.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brent D. Cassity Chief Executive Officer and Director March 31, 2003
- -----------------------------------
Brent D. Cassity
/s/ J. Tyler Cassity President and Director March 31, 2003
- -----------------------------------
J. Tyler Cassity
/s/ Howard A. Wittner Chairman of the Board, Director March 31, 2003
- ----------------------------------- and Secretary
Howard A. Wittner
/s/ Randall K. Sutton Vice President, Director and March 31, 2003
- ----------------------------------- Treasurer
Randall K. Sutton
/s/ Oliver C. Boileau, Jr. Director March 31, 2003
- -----------------------------------
Oliver C. Boileau, Jr.
/s/ Steven M. Zamler Director March 31, 2003
- -----------------------------------
Steven M. Zamler
- 34 -
CERTIFICATIONS
I, Brent D. Cassity, certify that:
(1) I have reviewed this annual report on Form 10-K of Forever
Enterprises, 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 statements, 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 this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls 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 as of the
Effective 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 the registrant's board of directors (or persons
performing the equivalent functions):
(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
weaknesses 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
- 35 -
(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.
March 31, 2003 /s/ Brent D. Cassity
-----------------------
Brent D. Cassity
Chief Executive Officer
- 36 -
I, Michael R. Butler, certify that:
(1) I have reviewed this annual report on Form 10-K of Forever
Enterprises, 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 statements, 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 this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls 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 as of the
Effective 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 the registrant's board of directors (or persons
performing the equivalent functions):
(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
weaknesses 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
- 37 -
(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.
March 31, 2003 /s/ Michael R. Butler
---------------------------
Michael R. Butler
Chief Financial Officer
- 38 -
FOREVER ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
THE COMPANY AND SUBSIDIARIES:
- ----------------------------
Report of Management..................................................... F-1
Independent Auditors' Report - Brown Smith Wallace, LLC.................. F-2
Independent Auditors' Report - Deloitte & Touche LLP..................... F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001............. F-6
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000......................................... F-7
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 2002, 2001 and 2000...............F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000......................................... F-10
Notes to Consolidated Financial Statements .............................. F-12
REPORT OF MANAGEMENT
Management is responsible for preparing the Company's financial statements and
the other information that appears in this annual report. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of operations in conformity with accounting principles generally
accepted in the United States of America. Management has included in the
Company's financial statements amounts that are based on estimates and
judgments, which it believes are reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures, and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Brown Smith Wallace, L.L.C., audits the Company's financial statements in
accordance with generally accepted auditing standards and provides an objective,
independent review of the Company's internal controls and the fairness of its
reported financial condition and results of operations.
The Forever Enterprises, Inc. Board of Directors has an Audit Committee composed
of non-management directors. The Committee meets with financial management and
the independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
Michael R. Butler
Chief Financial Officer
March 28, 2003
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Forever Enterprises, Inc.
10 South Brentwood
St. Louis, Missouri 63105
We have audited the accompanying consolidated balance sheets of Forever
Enterprises, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for the years ended December 31, 2002 and
2001. Our audits also included the financial statement schedules listed at Item
15(a)(2) in this report. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits. The
consolidated financial statements for the year ended December 31, 2000 give
retroactive effect to the acquisition by Forever Enterprises, Inc. and
subsidiaries of Forever Network, Inc. (formerly Forever Enterprises, Inc.),
which has been accounted for like a pooling-of-interests as described in Note 1
to the consolidated financial statements. We did not audit the statements of
operations, stockholders' equity and comprehensive income, and cash flows of
Forever Enterprises, Inc. and subsidiaries for the year ended December 31,
2000, which statement reflects total revenues of $49,754,553 for the year ended
December 31, 2000. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Forever Enterprises, Inc. and subsidiaries for 2000, is based
solely on the report of such other auditors.
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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
F-2
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Forever Enterprises, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Brown Smith Wallace, LLC
St. Louis, Missouri
March 28, 2003
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Forever Enterprises, Inc.
10 South Brentwood
St. Louis, MO 63105
We have audited the consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows of Forever Enterprises, Inc.
(the "Company") and subsidiaries for the year ended December 31, 2000. Our
audits also included the financial statement schedules listed at Item 15(a)(2)
for the year ended December 31, 2000. These financial statements and financial
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits. The consolidated financial
statements give retroactive effect to the acquisition by the Company of Forever
Network, Inc. (formerly Forever Enterprises, Inc.), which has been accounted
for like a pooling-of-interests as described in Note 1 to the consolidated
financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the consolidated financial statements of
the Company and subsidiaries referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedules referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
F-4
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of recognizing revenue to conform to the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements.
Deloitte & Touche, L.L.P.
St. Louis, Missouri
April 16, 2001
F-5
FOREVER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------------
2002 2001
ASSETS
Cash and cash equivalents $ 22,793,038 $ 7,568,099
Fixed maturities available for sale at fair value (amortized cost
$75,597,524 and $92,707,536, respectively) 73,982,062 90,735,727
Equity securities available for sale at fair value (cost $2,966,291
and $2,478,528, respectively) 1,119,705 963,055
Policyholder loans 1,560,215 1,818,550
---------------- ----------------
Total cash and investments 99,455,020 101,085,431
Trade accounts receivable - net 7,707,948 5,582,093
Inventories 190,432 256,564
Cemetery property 3,964,644 3,557,733
Property and equipment - net 8,517,264 6,308,096
Due from reinsurer 105,830,127 92,167,215
Deferred policy acquisition costs - net 1,678,079 1,199,802
Due premium 8,088,002 6,293,127
Intangible assets 10,929,872 2,175,067
Deferred cost of reinsurance 1,776,051 1,874,715
Deferred tax assets - net 1,532,322 4,433,660
Receivable from related party 8,033,095 7,181,207
Other assets 5,286,866 5,239,185
---------------- ----------------
TOTAL ASSETS $ 262,989,722 $ 237,353,895
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Lines of credit $ 2,248,959 $ 2,031,172
Accounts payable and accrued liabilities 13,622,553 8,546,760
Policy liabilities:
Future policy benefits 158,277,834 147,668,986
Policyholder deposits 46,642,051 48,312,002
Deferred pre-need revenues 7,328,554 5,574,815
Payable to related party 4,117,081 3,620,601
Notes payable 26,133,714 17,805,539
---------------- ---------------
Total liabilities 258,370,746 233,559,875
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 1,000,000 shares authorized; none issued) - -
Common stock ($0.01 par value; 30,000,000 shares authorized,
6,934,934 shares issued and outstanding) 69,349 69,349
Additional paid-in capital 8,587,931 10,337,502
Accumulated deficit (3,307,932) (5,143,602)
Accumulated other comprehensive loss (730,372) (1,469,229)
---------------- ----------------
Total shareholders' equity 4,618,976 3,794,020
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 262,989,722 $ 237,353,895
================ ================
See notes to consolidated financial statements.
F-6
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
REVENUES:
Life insurance premiums $ 8,293,688 $ 7,386,753 $ 36,603,227
Investment income - net of expenses 4,546,872 3,958,683 9,127,868
Realized investment gains (losses) - net 1,482,381 (583,698) (2,891,679)
Cemetery revenues 9,683,144 7,492,261 6,333,007
Commission and expense allowance 18,052,027 15,396,454 -
Management fee income 5,401,196 1,160,318 73,616
Other revenue - - 508,514
--------------- -------------- ---------------
Total revenues 47,459,308 34,810,771 49,754,553
--------------- -------------- ---------------
BENEFITS AND EXPENSES:
Policyholder benefits and claims 8,937,533 8,325,173 18,792,942
Increase (decrease) in future policy benefits (1,084,075) (1,931,910) 11,069,707
Interest paid on deposit funds 22,645 4,947 1,628,316
Insurance commissions 15,651,173 13,759,203 11,679,947
Selling, general and administrative 14,247,356 10,674,355 11,951,644
Amortization of cost of policies purchased (478,277) 163,935 207,771
Depreciation and amortization 1,602,437 991,147 1,012,719
Other operating costs 3,323,280 2,158,639 2,775,690
--------------- -------------- ---------------
Total benefits and expenses 42,222,072 34,145,489 59,118,736
--------------- -------------- ---------------
OTHER:
Other income 1,023,007 391,834 335,511
Interest expense (1,898,636) (724,455) (413,625)
--------------- -------------- ---------------
Total other (875,629) (332,621) (78,114)
--------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 4,361,607 332,661 (9,442,297)
INCOME TAXES:
Current 1,832,331 1,575,877 (1,167,493)
Deferred 693,606 (1,681,757) (51,320)
--------------- -------------- ---------------
Provision for income taxes (benefit) 2,525,937 (105,880) (1,218,813)
--------------- -------------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,835,670 438,541 (8,223,484)
Extraordinary item - 258,659 -
Cumulative effect of accounting change - net of taxes of $-0- - - (315,801)
--------------- -------------- ---------------
NET INCOME (LOSS) $ 1,835,670 $ 697,200 $ (8,539,285)
=============== ============== ===============
INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Basic $ 0.26 $ 0.06 $ (1.19)
Diluted 0.25 0.06 (1.19)
NET INCOME (LOSS)
Basic $ 0.26 $ 0.10 $ (1.23)
Diluted 0.25 0.09 (1.23)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,934,934 6,934,367 6,933,477
Diluted 7,358,020 7,451,813 6,933,477
See notes to consolidated financial statements.
F-7
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED RETAINED
TOTAL ADDITIONAL OTHER EARNINGS
SHAREHOLDERS' COMMON PAID-IN COMPREHENSIVE (ACCUMULATED
EQUITY STOCK CAPITAL INCOME (LOSS) DEFICIT)
BALANCE, January 1, 2000 $ 3,953,002 $ 69,333 $ 9,691,588 $ (8,506,402) $ 2,698,483
Effect of stock options compensation
recorded for stock option plans, net
of applicable income tax effect
of $124,512 241,700 241,700
Issuance of shares for stock options 2,493 6 2,487
Capital contributions 108,000 108,000
Comprehensive loss, net of tax:
Net loss (8,539,285) (8,539,285)
Change in unrealized gains (losses)
on available for sale securities,
net of tax of $2,397,725 and
reclassification adjustment of
$(2,891,679) 4,747,234 4,747,234
------------ ---------- ------------ ------------- ------------
Total comprehensive loss (3,792,051) 4,747,234 (8,539,285)
------------ ---------- ------------ ------------- ------------
BALANCE, December 31, 2000 513,144 69,339 10,043,775 (3,759,168) (5,840,802)
Effect of stock options compensation
recorded for stock option plans, net
of applicable income tax effect
of $53,978 291,700 291,700
Issuance of shares for stock options 2,037 10 2,027
Comprehensive income, net of tax:
Net income 697,200 697,200
Change in unrealized gains (losses)
on available for sale securities,
net of tax of $1,179,665 and
reclassification adjustment of $0 2,289,939 2,289,939
------------ ---------- ------------ ------------- ------------
Total comprehensive income 2,987,139 2,289,939 697,200
------------ ---------- ------------ ------------- ------------
BALANCE, December 31, 2001 3,794,020 69,349 10,337,502 (1,469,229) (5,143,602)
(Continued)
F-8
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED RETAINED
TOTAL ADDITIONAL OTHER EARNINGS
SHAREHOLDERS' COMMON PAID-IN COMPREHENSIVE (ACCUMULATED
EQUITY STOCK CAPITAL INCOME (LOSS) DEFICIT)
BALANCE, December 31, 2001 3,794,020 69,349 10,337,502 (1,469,229) (5,143,602)
Effect of stock options compensation
recorded for stock option plans, net
of applicable income tax effect
of $40,150 77,939 77,939
Liquidation effect of subsidiary (1,827,510) (1,827,510)
Comprehensive income, net of tax:
Net income 1,835,670 1,835,670
Change in unrealized gains (losses)
on available for sales securities,
net of tax of $380,623 and
reclassification adjustment of $0 738,857 738,857
------------ ---------- ------------ ------------- ------------
Total comprehensive income 2,574,527 738,857 1,835,670
------------ ---------- ------------ ------------- ------------
BALANCE, December 31, 2002 $ 4,618,976 $ 69,349 $ 8,587,931 $ (730,372) $ (3,307,932)
============ ========== ============ ============= ============
See notes to consolidated financial statements.
F-9
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 1,835,670 $ 697,200 $ (8,539,285)
Adjustments to reconcile net income to
cash from operating activities:
Cumulative effect of accounting change - - 315,801
Extraordinary gain - (258,659) -
Loss in equity investment - - 49,506
Realized investment losses (gains) (990,708) 1,759,453 2,891,679
Amortization of premium (accretion of
discount) on investments 436,956 (913,908) (272,392)
Depreciation and amortization 1,602,437 991,147 1,012,719
Deferred income taxes 2,483,374 (1,749,184) (51,320)
Deferred compensation 115,276 237,722 366,212
Changes in operating assets and liabilities net of effects
of reinsurance, acquisitions and divestitures:
Trade accounts receivable (2,117,305) (1,284,753) (790,029)
Deferred acquisition cost - net (478,277) 163,935 (1,629,244)
Due premiums (189,571) (97,591) (2,583,764)
Cemetery property 288,482 322,248 211,604
Inventories 77,232 60,050 163,185
Other assets (807,461) 344,380 (2,345,008)
Future policy benefits and deposit funds 5,518,516 2,226,274 6,057,952
Funds withheld from reinsurer (11,067,106) (9,676,547) (29,669,652)
Deferred pre-need revenues 1,663,239 601,265 459,603
Other liabilities 2,960,041 (3,127,043) (1,306,920)
-------------- -------------- --------------
Net cash from operating activities 1,330,795 (9,704,011) (35,659,353)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of available
for sale investments 68,722,473 48,224,385 69,080,117
Cost of investments purchased (50,452,222) (59,141,488) (37,707,190)
Purchase of property and equipment (2,869,249) (955,166) (1,341,471)
Acquisitions/dispositions, net of subsidiaries (555,780) (577,081) (482,654)
Purchase of intangible assets (10,400,000) - -
Liquidation of minority interest 1,697,510 - -
Increase in investment in subsidiaries (130,000) - -
Increase in policyholder loans, net of the effects
of reinsurance - - (3,616,476)
Other - net 1,032,960 (1,551,214) (1,721,823)
-------------- -------------- --------------
Net cash from investing activities 7,045,692 (14,000,564) 24,210,503
(Continued)
F-10
FOREVER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of shares for stock options - 2,037 2,493
Proceeds from long-term debt 20,126,609 21,826,336 -
Repayment of long-term debt (11,580,647) (2,590,006) (339,341)
Contribution to (reduction in) paid-in capital (1,697,510) - 108,000
-------------- -------------- --------------
Net cash from financing activities 6,848,452 19,238,367 (228,848)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 15,224,939 (4,466,208) (11,677,698)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 7,568,099 12,034,307 23,712,005
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 22,793,038 $ 7,568,099 $ 12,034,307
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION -
Income taxes paid $ 460,000 $ 257,000 $ 674,735
============== ============== ==============
Interest expense paid $ 1,949,924 $ 377,029 $ 379,240
============== ============== ==============
See notes to consolidated financial statements.
F-11
FOREVER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. BUSINESS
Forever Enterprises, Inc. and its subsidiaries (collectively, the
"Company") own and operate funeral home and cemetery properties; market,
archive and display digital interactive LifeStories(TM) viewed at Company
properties and on the Internet; and issue life insurance contracts to fund
pre-need funeral contracts.
The Company's cemetery/funeral home properties provide cemetery interment
rights, sell cemetery-related merchandise and provide funeral services and
merchandise. The Company sells pre-need and at-need contracts whereby a
customer contractually agrees to purchase internment rights, merchandise,
multimedia biographies and/or burial-related services.
The Company's life insurance operations are conducted through its
wholly-owned life insurance subsidiaries which are subject to regulation
by the state insurance department where they are licensed and where they
undergo periodic examinations by those departments.
The majority of the Company's life insurance premiums are derived from the
issuance of insurance policies to fund prearranged funeral contracts sold
by National Prearranged Services, Inc. ("NPS") and National Prearranged
Services Agency, Inc. ("NPS Agency"), related parties. Funeral
prearrangement is a means through which a customer contractually agrees to
the terms of a funeral to be performed in the future. National Prearranged
Services or National Prearranged Services Agency is the assignee and
beneficiary of substantially all policies issued directly or assumed by
the Company in connection with prearranged funeral contracts.
On March 9, 2000, the shareholders approved a stock acquisition agreement
to acquire all of the issued and outstanding shares of common stock of
Forever Network (formerly Forever Enterprises) from National Heritage
Enterprises, majority shareholder of the Company. Forever Network owns and
operates funeral home and cemetery properties. In exchange for the Forever
Network shares, the Company issued 2.4 million shares of its common stock
with a fair value of approximately $12.0 million. Upon consummation of the
acquisition, National Heritage Enterprises' ownership of the Company's
common stock increased from 4,000,000 shares to 6,400,000 shares, or 92.3%
of the issued and outstanding shares. The acquisition was accounted for in
a manner similar to the pooling-of-interests method of accounting.
Accordingly, the accounts of Forever Network have been included in the
consolidated financial statements for all periods presented. Intercompany
balances have been eliminated for all periods. For the period prior to the
acquisition, revenues and net losses consisted of the following:
FOREVER
ENTERPRISES
(EXCLUDING FOREVER CONSOLIDATED
FOREVER NETWORK) NETWORK ELIMINATIONS TOTAL
Three months ended March 31, 2000:
Revenues $ 15,463,014 $ 1,417,635 $ (262,434) $ 16,618,215
Net loss (599,195) (459,967) (29,582) (1,088,744)
F-12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of the Company and its direct and indirect
wholly-owned subsidiaries. The Company's fifty-percent investment in Mount
Washington Forever, L.L.C. is accounted for under the equity method. These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"), which differ from statutory accounting practices prescribed or
permitted by regulatory authorities. All intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year
amounts have been reclassified to conform with the 2002 and 2001
presentations.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
The estimates susceptible to significant change are those used in
determining accounts receivable allowance, deferred policy acquisition
costs, accrued merchandise costs, and the liabilities for future policy
benefits, policyholder deposits and claims and benefits payable. Although
some variability is inherent in these estimates, management believes the
amounts provided are adequate.
INVESTMENTS - All fixed maturity and equity securities are classified as
available-for-sale and, accordingly, such securities are carried at
estimated fair value. The Company may sell these securities prior to
maturity in response to changes in interest rates, issuer credit quality
or liquidity requirements. Realized gains and losses on the sale of
investments are determined utilizing the specific identification method.
Unrealized gains and losses, net of tax, are recorded as a component of
accumulated other comprehensive income, a separate component of
shareholders' equity. The cost of fixed maturity securities is adjusted
for amortization of premiums and discounts. If the fair value of an
investment security declines for reasons other than temporary market
conditions, the carrying value of such security is written down to fair
value by a charge to operations. Policyholder loans are stated at their
current unpaid principal balance, which approximates fair value.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes investments
readily convertible to cash with remaining maturities at date of purchase
of three months or less. Cash and cash equivalents include commercial
paper and reverse repurchase agreements that are carried at cost, which
approximates the fair value of the underlying securities.
In order to increase the Company's return on investments and improve its
liquidity, the Company enters into overnight reverse repurchase
agreements. The Company purchases U.S. Treasury notes under agreements to
resell such U.S. Treasury notes on a daily basis. The Company does not
take possession of any securities and records such purchases as a book
entry only. The amount at risk on a daily basis, in the event of default
by the counterparty, is minimal as the carrying value of the underlying
securities approximates the fair value of such securities. At December 31,
2002 and 2001, the carrying amount of overnight reverse repurchase
agreements was $3,488,841 and $3,219,747, respectively.
GOODWILL - Goodwill represents the excess of cost over the fair value of
net assets acquired in acquisitions accounted for using the purchase
method. Effective January 1, 2002, we discontinued amortization of
goodwill in accordance with Statement of Financial Accounting Standards
No. 142. In previous years, goodwill was amortized on the straight-line
basis as charges to income over five to 30 years. Amortization expense was
$82,851 and $144,657 for the years ended December 31, 2001 and
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2000, respectively. Accumulated amortization was $79,894 and $201,186
as of December 31, 2002 and 2001, respectively.
The Company periodically evaluates the carrying value of long lived assets
to determine if impairment exists based upon estimated undiscounted future
cash flows. The impairment, if any, is measured by the difference between
net book value and estimated discounted future cash flows, and is charged
to expense in the period identified.
DEFERRED POLICY ACQUISITION COSTS ("DPAC") - The costs of acquiring new
business generally consist of commissions, excluding renewal commissions
(approximately 90% of DPAC is commissions paid to NPS), and other costs of
acquiring new business. Such costs vary with, and are primarily related
to, the production of new business and are capitalized and deferred to the
extent that they are recoverable from future profits. These costs are
amortized over the premium paying periods of the related policies in
proportion to the ratio of the annual premium revenue to the total
anticipated premium revenue. Anticipated premium revenue was estimated
using the same assumptions used for estimating the liabilities for future
policy benefits.
PROPERTY AND EQUIPMENT - Property and equipment are carried at depreciated
cost. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets which range from three to 30 years.
FUTURE POLICY BENEFITS - Future policy benefits are amounts that, when
accumulated with interest and future premiums, will provide for the
payment of benefits arising out of the insurance in-force. The liabilities
for future policy benefits for limited pay life policies are computed
using the net-level premium method which is based upon assumptions as to
investment yields, mortality and withdrawals. Assumptions are based
principally on modifications of the ultimate tables in common usage in the
industry. Current interest assumptions are 6.5% per annum.
PREMIUMS AND EXPENSES - Receipts for annuities are classified as deposits
instead of revenues. Accordingly, annuity premium deposits and annuity
benefit payments are recorded as increases or decreases in a liability
account rather than revenue or expense. Revenues for annuity policies are
recorded for policy administration fees and surrender charges while
expenses are recorded for interest credited to the policy account
balances.
For limited payment contracts, gross premiums are recorded as revenue and
the difference between the gross premium received and the net premium is
included in future policy benefits to provide for profit recognition in a
constant relationship to the insurance in-force.
Benefits and expenses are recognized as a level percentage of earned
premiums by providing for future policy benefits and amortizing deferred
acquisition costs.
REINSURANCE - The Company has reinsured certain direct and assumed life
insurance and annuity contracts with other insurance companies under
various agreements. Amounts due from reinsurers are estimated based upon
assumptions consistent with those used in establishing the future policy
benefits related to the underlying reinsured contracts. Future policy
benefit reserves for both direct and assumed contracts are reported prior
to the effects of reinsurance credits and amounts receivable from the
reinsurers are reported separately as an asset. Deferred policy
acquisition costs and cost of policies acquired are reduced by amounts
recovered under reinsurance contracts. The cost of reinsurance is
amortized over the remaining life of the underlying reinsured contracts in
proportion to the expected future profits of those contracts. Amounts
received from reinsurers for policy administration are reported in other
revenues.
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PARTICIPATING POLICIES - Participating policies represented 98.5% and
99.1% of the life insurance in-force at December 31, 2002 and 2001,
respectively. Determination of dividends on participating policies is not
dependent on any factor and is completely at the discretion of the boards
of directors of the insurance subsidiaries. We pay policyholder dividends
on blocks of business that we acquired from World Insurance Company and
Woodmen Accident and Life Company, however, any such dividends paid in
2002 and 2001 are now fully recovered through ceding of these polices to
North America Life Insurance Company. Policyholder dividends, net of ceded
policies, of $-0-, $-0- and $76,617 were paid for the years ended December
31, 2002, 2001 and 2000, respectively.
INCOME TAXES - Deferred tax assets and liabilities are established for
temporary differences between the financial reporting bases and the tax
bases of assets and liabilities at the enacted tax rates expected to be in
effect when the temporary differences are expected to be recovered or
settled. A valuation allowance is provided if it is more likely than not
that some portion of the deferred tax asset may not be realized. An
increase or decrease in the valuation allowance is included in income. In
assessing the realization of deferred income taxes, consideration is given
as to whether it is more likely than not the deferred tax assets will be
realized. The ultimate realization of deferred tax assets depends
primarily upon generating future taxable income during the periods in
which the temporary differences become deductible.
The parent company, Forever Enterprises, Inc. is included in the National
Heritage Enterprises tax return. The insurance companies file a separate
consolidated tax return. Taxes are accounted for as if each company filed
on a stand-alone basis.
ACCOUNTS RECEIVABLE - Accounts receivable consist of receivables from
cemetery customers who pre-purchase cemetery property and merchandise and
are paying the balance on an installment basis. Customers who purchase
cemetery property and merchandise on an at-need basis must pay the entire
purchase amount at the time of sale. Trade accounts receivable are stated
at the amount management expects to collect from outstanding balances.
Management provides for probable uncollectible amounts through a charge to
earnings and a credit to a valuation allowance based on its assessment of
the current status of individual accounts. Balances which are still
outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to
trade accounts receivable.
CEMETERY PROPERTY - Cemetery property consists of developed and
undeveloped cemetery property and is valued at cost. Repairs and
maintenance are charged to expense as incurred, whereas major improvements
are capitalized. Cemetery property is expensed as sales of cemetery plots
occur. Mausoleum inventory is the cost of unsold mausoleum crypts and
niches. Mausoleum inventories are expensed as sales of crypts and niches
occur. A portion of the cost of the mausoleum is included in property on
the accompanying consolidated balance sheets and is being depreciated over
the useful life of the mausoleum.
DEFERRED PRE-NEED REVENUE - As each pre-need funeral contract is entered
into, the face amount of certain items is recorded as deferred revenue. At
the time of need (fulfillment of the contract), revenue is recognized for
the full amount of the contract. See "Revenue/Expense Recognition for
Cemetery Operations" below for further explanation.
REVENUE/EXPENSE RECOGNITION FOR CEMETERY OPERATIONS - Effective January 1,
2000, the Company adopted Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, and changed its revenue recognition
policy, as follows: Cemetery interment right sales are recognized as
revenue at the time the contract is signed, the cemetery property is
developed and a minimum percentage of the purchase price has been
collected. Sales of merchandise are recognized at the time the merchandise
is delivered or has been customized for the customer. Service fee revenues
are recognized in the period the services are performed. The Company
defers certain prearranged funeral and pre-need cemetery costs
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until the time revenue is recognized. The change in the Company's
accounting policies resulting from implementation of Staff Accounting
Bulletin No. 101 was treated as a change in accounting principle
effective as of January 1, 2000. The cumulative effect of the
accounting change through December 31, 1999 resulted in a charge to
net income of $315,801 (net of a $-0- tax benefit), or $.04 per share
(basic and diluted) recorded on January 1, 2000.
OTHER INCOME - Other income includes rental income from leased property,
interest income from certain trust accounts, miscellaneous income and
Forever Network's 50% share of earnings from its investment in Mount
Washington Forever, L.L.C. Our share of equity was not recognized in
consolidated earnings since our net equity investment in Mount Washington
Forever, L.L.C. remains in a deficit position.
PERPETUAL CARE - A portion of the proceeds from sales of cemetery property
is required by state law to be paid into perpetual care trust funds. In
accordance with state laws, the Company remits amounts to the perpetual
care trust after the sale is paid in full. Therefore, the Company records
a liability for amounts to be remitted when contracts are paid in full.
Such amounts are recorded in other liabilities in the accompanying
consolidated financial statements. Interest income from such perpetual
care trust funds is included in other income in the accompanying
consolidated financial statements and is intended to defray ongoing
maintenance costs. The principal of the trust cannot be withdrawn and,
accordingly, is not included in the accompanying consolidated financial
statements.
NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of
shares outstanding. Diluted net income (loss) per share includes the
impact of potential common shares, unless the inclusion of such shares
would have an anti-dilutive effect. For 2002 and 2001, potential common
shares of 438,534 and 517,446, respectively, were considered to be
dilutive and were included in the calculation of diluted net income per
share. For 2000, potential common shares of 1,061,638 were considered to
be anti-dilutive and were excluded from the calculation of diluted net
loss per share.
STOCK-BASED COMPENSATION - The Company has elected to follow the
accounting guidance of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees for measurement and recognition
of stock-based transactions with employees. No compensation cost is
recognized for options issued when the exercise price of the options is at
least equal to the fair market value of the common stock at the date of
grant. Consistent with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company discloses the pro forma effect on net income and earnings per
share as if the Company had adopted SFAS No. 123.
For all options granted to individuals that are not employees of the
Company, the Company follows the requirements of SFAS No. 123.
Accordingly, the option exercise price will be compared to the fair value
of the option at the date of grant and, to the extent that the fair value
exceeds the option exercise price, compensation will be recognized in the
consolidated financial statements of the Company.
NEW ACCOUNTING STANDARDS - In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction, and if so, the type of hedge transaction.
SFAS No. 133 was effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We adopted SFAS No. 133 on January 1, 2001,
which resulted in no effect on our financial position, results of
operations or cash flows.
F-16
Effective January 1, 2000, we adopted Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, and changed our revenue
recognition policy. See "Revenue/Expense Recognition for Cemetery
Operations" described earlier in this section.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
statement replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and rescinds SFAS No.
127, Deferral of Effective Date of Certain Provisions of FASB Statement
No. 125. It revises the standards for accounting for securitizations and
other transfers of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. This statement was
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
implementation of SFAS No. 140 has had no effect on our financial
position, results of operations or cash flows.
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. We have determined that the adoption of SFAS
No. 141 has not had a significant impact on our financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which is effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 requires a company to complete a transitional
impairment test six months from the date of adoption. We have completed
our initial assessment and have determined that there has been no
impairment of goodwill or other intangible assets, and accordingly the
implementation of SFAS No. 142 had no material impact on our financial
condition and results of operations for the year ended December 31, 2002.
If our estimates or their related assumptions change in the future, we may
be required to record impairment charges for these assets.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 requires, among other things, that the
fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred. We do not believe that the adoption
of SFAS No. 143 will have a significant impact on our financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which was effective for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale. We have determined that the
adoption of SFAS No. 144 will not have a significant impact on our
financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which is effective for exit
or disposal activities that are initiated after December 15, 2002. SFAS
No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. We do not
believe that the adoption of SFAS No. 146 will have a significant impact
on our financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123, which provides alternative
F-17
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No.
148 is effective for fiscal years beginning after December 15, 2003.
We do not believe that the adoption of SFAS No. 148 will have a
significant impact on our financial statements since we currently use
the fair value based method of accounting for stock-based employee
compensation. See "Stock-Based Compensation" described earlier in this
section.
NAIC CODIFICATION - In March 1998, the National Association of Insurance
Commissioners ("NAIC") adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance
industry, is effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state laws and
permitted practices. The Company's insurance subsidiaries are domiciled in
the State of Texas. The State of Texas required adoption of the
Codification with certain modifications for the preparation of statutory
basis financial statements effective January 1, 2001. The adoption of the
Codification, as modified by Texas, by our insurance company subsidiaries,
Lincoln Memorial Life Insurance Company ("LMLIC") and Memorial Service
Life Insurance Company ("MSLIC"), increased LMLIC's statutory capital and
surplus as of January 1, 2001, by approximately $870,000, primarily
related to accounting for income taxes. There was no effect on MSLIC's
capital and surplus.
3. ACQUISITIONS AND DISPOSITIONS
On December 8, 1999, the Company indirectly increased its ownership in
Hollywood Forever, Inc. from 45% to 90% for a purchase price of
approximately $2,900,000. In connection with the acquisition, the Company
recorded approximately $1,800,000 in goodwill which was amortized on the
straight-line basis over 30 years through the year ended December 31,
2001. Effective January 1, 2002, we discontinued our amortization of
goodwill in accordance with SFAS No. 142. On July 26, 2002, the Company
increased its ownership in Hollywood Forever, Inc. to 100% in settlement
of a claim with Odessa Group, L.L.C. for $130,000. In connection with the
increase in ownership, the Company liquidated its investment in Dartmont
Investment, Inc., eliminating the remaining goodwill associated with the
purchase of Hollywood Forever, Inc. at no gain or loss.
In November 1999, Mount Washington Forever, Inc. (now known as Mount
Washington Forever, L.L.C.) was created and acquired a cemetery
property located in Kansas City, Missouri known as Mount Washington
Cemetery for $1,200,000 in the form of debt. Effective January 1,
2000, 50% of the interest in Mount Washington Forever, L.L.C. was sold
to an unaffiliated company for a capital contribution of $50,000
without gain or loss. Beginning in 2000, the accounts of Mount
Washington Forever, L.L.C. have been accounted for using the equity
method.
On May 15, 2000, the Company purchased all the outstanding shares of
capital stock of Liberty Standard Life Insurance Company ("LSLife") for
$1.1 million. As of that date, LSLife had approximately $3.9 million in
assets and $4.1 million in liabilities. The excess of the purchase price
over the net assets acquired was recorded as goodwill. The Company then
executed a reinsurance agreement between MSLIC and LSLife whereby all
of LSLife's insurance policies in force were reinsured by MSLIC. On
December 18, 2000, the Company sold all of the outstanding capital stock
of LSLife (subsequently renamed North America Life Insurance Company of
Texas ("NAL")) to a company controlled by a former officer of the Company
concurrent with the execution of several reinsurance agreements (see Note
6). The Company recognized a loss of approximately $200,000 on the sale of
LSLife.
On December 21, 2001, we acquired from ECI Services of Missouri, Inc. all
of the operating assets of Oak Hill Cemetery located in Kirkwood, Missouri
for a purchase price of $550,000.
On February 21, 2002, we acquired an online interactive memorial product
and concept from Family Tree Memorials, together with all technology and
intellectual property associated with the product,
F-18
along with all contract rights to the distribution and marketing
agreement dated August 23, 2001, by and between Matthews International
Corporation and Heavenly Door Corporation, for a purchase price of
$400,000.
On June 3, 2002, we acquired from the court-appointed receiver, all of the
operating assets of Mt. Hope Cemetery located in Belleville, Illinois, and
Valley View Cemetery located in Edwardsville, Illinois, for a purchase
price of $455,780 in the form of debt.
On June 5, 2002, we acquired from SCI Missouri Funeral Services, Inc. all
of the operating assets and business of a funeral home located in
Kirkwood, Missouri, for a purchase price of $654,057.
On September 27, 2002, we entered into a letter of intent to purchase a
single-location cemetery property located in the Southwest United States.
The purchase price and working capital, if agreeable terms are secured,
are expected to be funded largely through owner financing with the balance
to be funded through additional debt arrangements with an outside lender
and additional equity financing. We are currently performing our due
diligence investigation. If due diligence proves favorable, execution of a
definitive agreement and closing are expected to occur during the second
quarter of 2003.
On November 26, 2002, we acquired from Perches-Falcon Group, Inc.
substantially all the personal property and certain rights located at,
used in connection with, or arising out of two funeral home locations in
Austin, Texas, for a cash price of $100,000.
All acquisitions described above were accounted for by the purchase method
of accounting. The results of operations have been included in our
consolidated financial statements from their respective dates of purchase.
4. INVESTMENTS
The cost or amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities available for
sale at December 31, 2002 were as follows:
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Fixed maturity securities:
Corporate bonds $ 27,093,572 $ 431,788 $ (3,741,028) $ 23,784,332
Mortgage backed securities 39,596,237 1,595,086 (102,650) 41,088,673
U.S. government 8,907,715 217,065 (15,723) 9,109,057
--------------- --------------- -------------- --------------
Total fixed maturity
securities 75,597,524 2,243,939 (3,859,401) 73,982,062
Equity securities:
Preferred stock 1,023,074 85,415 (110,256) 998,233
Common stock 1,943,217 - (1,821,745) 121,472
--------------- --------------- -------------- --------------
Total equity securities 2,966,291 85,415 (1,932,001) 1,119,705
--------------- --------------- -------------- --------------
Total $ 78,563,815 $ 2,329,354 $ (5,791,402) $ 75,101,767
=============== =============== ============== ==============
F-19
The cost or amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities available for
sale at December 31, 2001 were as follows:
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Fixed maturity securities:
Corporate bonds $ 33,780,105 $ 517,883 $ (2,607,791) $ 31,690,197
Mortgage backed securities 50,428,638 1,164,294 (682,751) 50,910,181
U.S. government 8,498,793 142,800 (506,244) 8,135,349
--------------- --------------- -------------- --------------
Total fixed maturity
securities 92,707,536 1,824,977 (3,796,786) 90,735,727
Equity securities:
Preferred stock 711,628 36,880 (52,883) 695,625
Common stock 1,766,900 - (1,499,470) 267,430
--------------- --------------- -------------- --------------
Total equity securities 2,478,528 36,880 (1,552,353) 963,055
--------------- --------------- -------------- --------------
Total $ 95,186,064 $ 1,861,857 $ (5,349,139) $ 91,698,782
=============== =============== ============== ==============
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 2002, by contractual maturity date are shown
below. Expected maturities may differ from contractual maturities since
certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
In one year or less $ 2,126,696 $ 2,083,925
In years two through five 3,927,815 3,701,194
In years six through ten 6,005,705 5,183,066
After ten years 23,941,071 21,925,204
Mortgage backed securities 39,596,237 41,088,673
--------------- ---------------
Total $ 75,597,524 $ 73,982,062
=============== ===============
The Company did not have any investments in fixed maturities or equity
securities in any single entity with unrealized losses of more than 10% of
shareholders' equity at December 31, 2002, other than investments issued
or guaranteed by the U.S. government or a U.S. government agency.
The Company invests in both investment grade and below investment grade
fixed maturity securities. At December 31, 2002, less than 2% of the book
value of the Company's fixed maturity investments consisted of below
investment grade securities.
Assets with a fair value of $5,827,927 at December 31, 2002 were on
deposit with various state regulatory authorities. Assets with a fair
value of $28,758,885 at December 31, 2002 were restricted as to use for
the acquired Woodmen Block, World Block, the FSLife Block and other
assumed business.
F-20
Major categories of investment income (loss) consisted of the following:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
Fixed maturities $ 7,422,751 $ 7,780,957 $ 6,811,924
Equities 62,369 32,186 180,726
Policyholder loans 156,639 132,702 1,445,944
Short-term investments (2,941,801) (3,849,861) 1,042,822
--------------- --------------- ---------------
Gross investment income 4,699,958 4,095,984 9,481,416
Investment expenses 153,086 137,301 353,548
--------------- --------------- ---------------
Net investment income $ 4,546,872 $ 3,958,683 $ 9,127,868
=============== =============== ===============
Gross realized investment gains (losses) consisted of the following:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
Gross realized gains $ 3,001,133 $ 386,593 $ 2,954,530
Gross realized losses (1,518,752) (970,291) (5,846,209)
--------------- --------------- ---------------
Net realized investment gains (losses) $ 1,482,381 $ (583,698) $ (2,891,679)
=============== =============== ===============
Proceeds from disposals of investments in fixed maturity and equity
securities during the years ended December 31, 2002, 2001 and 2000 were
$68,722,473, $48,062,634 and $65,550,586, respectively.
5. RECEIVABLES
Trade accounts receivable at December 31 consisted of the following:
2002 2001
Installment contracts $ 8,281,249 $ 5,648,784
Allowance for sales cancellations and doubtful accounts (573,301) (66,691)
-------------- --------------
Total $ 7,707,948 $ 5,582,093
============== ==============
6. REINSURANCE
The Company's insurance subsidiaries enter into coinsurance and modified
coinsurance agreements with reinsurers for the purposes of recovering
policy acquisition costs and increasing their statutory surplus for
regulatory purposes. The terms of the reinsurance agreements provide for
all of the insurance risk associated with the business ceded to be
transferred to the reinsurer. Since the primary obligations of the Company
to the insureds have not been discharged through these agreements, the
future policy benefits are presented in the consolidated financial
statements prior to the effect of reinsurance and estimated amounts
receivable from the reinsurers are reported separately as an asset.
F-21
In August 2000, the Company entered into a coinsurance agreement with
Employers Reassurance Corporation ("ERC") whereby the Company ceded
certain life insurance policies with approximately $72.4 million of net
policy liabilities. The Company transferred funds of approximately $29.7
million and policy loans of $23.0 million net of a $15 million ceding
commission to the reinsurer in connection with this coinsurance agreement.
The Company also recovered $19.6 million of deferred policy acquisition
costs. This coinsurance agreement includes experience refund provisions
whereby the Company may earn up to an additional $16 million of ceding
commissions in varying amounts each year through 2010 subject to the
mortality experience of the policies not exceeding certain levels. This
coinsurance agreement does not relieve the Company from its obligations to
its policyholders and accordingly, the net cost of the coinsurance
agreement of approximately $80,000 was deferred and is being amortized
over the remaining life of the underlying insurance policies.
Approximately $82.8 million of the reinsurance receivable as of December
31, 2002 was related to the agreement with ERC.
In November 2000, the Company entered into various coinsurance agreements
with North America Life Insurance Company of Texas ("NAL") whereby the
Company ceded blocks of certain direct written life insurance policies and
all of its assumed life insurance and annuity policies with approximately
$64.8 million of policy liabilities net of related cost of policies
acquired of $4.1 million and deferred policy acquisition costs of $1.0
million. The Company segregated funds of approximately $61.2 million in a
trust account for the benefit of the reinsurer and transferred funds of
approximately $400,000. The segregated funds were approximately $64.7
million as of December 31, 2002. The funds withheld are presented net of
amounts due from the reinsurer in the Company's consolidated financial
statements. The Company also entered into a 100% coinsurance agreement
with NAL effective September 1, 2000, whereby substantially all of the
policies issued by the Company that are sold by NPS and NPS Agency are
ceded to NAL. This agreement was modified in August 2001, at which time we
also entered into a coinsurance agreement with Hannover Life Reassurance
Company of America ("Hannover"), whereby all of the policies issued by us
that are sold by NPS are ceded to Hannover. These coinsurance agreements
do not relieve the Company from its obligations to its policyholders and
accordingly, the cost of the coinsurance agreements of approximately $1.9
million was deferred and is being amortized over the remaining life of the
underlying insurance policies. Approximately $22.8 million of the
reinsurance receivable as of December 31, 2002 was related to the
agreements with NAL and Hannover.
Since the Company's reinsurance contracts do not relieve the Company from
its obligation to its policyholders, failure of reinsurers to honor their
obligations could result in losses to the Company. Consequently,
allowances are established for amounts due from reinsurers that are deemed
uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurance insolvencies. Future
amounts due from reinsurers were approximately $105.8 million and $92.2
million at December 31, 2002 and 2001, respectively. Reinsurance
receivables were $3.7 million and $669,000 at December 31, 2002 and 2001,
respectively. Reinsurance payables were $2.1 million and $448,000 at
December 31, 2002 and 2001, respectively.
The effects of reinsurance on premiums earned were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
Direct $ 49,738,288 $ 49,363,165 $ 48,397,420
Reinsurance assumed 22,943,258 19,818,088 17,244,899
Reinsurance ceded (64,387,858) (61,794,500) (29,039,092)
--------------- -------------- --------------
Life premiums earned $ 8,293,688 $ 7,386,753 $ 36,603,227
=============== ============== ==============
F-22
Death benefits incurred on the business assumed were $13,650,340,
$15,106,661 and $16,377,951 for the years ended December 31, 2002, 2001
and 2000, respectively. Recoveries of death benefits under reinsurance
agreements were $36,485,574, $32,642,698 and $10,638,750 during 2002,
2001 and 2000, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance sheet financial instruments. The following estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
(i) The carrying value of cash and cash equivalents approximates
fair value due to the short maturities of these investments;
(ii) Fair values of fixed maturities and equity securities with
active markets are based on quoted market prices. For
investments not actively traded, fair values were estimated
using values obtained from independent pricing services;
(iii) The carrying value of accounts receivable and payable and
premiums received in advance approximates fair value due to
their relatively short maturities;
(iv) The carrying amount of policyholder deposits approximates
their fair value due to the Company's ability to adjust the
rate at which interest is credited to the accounts; and
(v) The carrying amount of the notes payable approximates fair
value because of the use of variable rates on some debt and
the consistency of current rates compared to fixed rates and
relatively near term maturity dates.
Policyholder loans had an interest rate of 7.4% and 8% as of December 31,
2002 and 2001, respectively, and had no specified maturity dates. These
loans are an integral part of the life insurance policies which the
Company has in force and cannot be valued separately.
The fair value and carrying amount of the Company's financial instruments
are presented as follows:
DECEMBER 31,
2002 2001
-------------------------------- --------------------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
Cash and cash equivalents $ 22,793,038 $ 22,793,038 $ 7,568,099 $ 7,568,099
Fixed maturity securities 73,982,062 73,982,062 90,735,727 90,735,727
Equity securities 1,119,705 1,119,705 963,055 963,055
Accounts receivable 7,707,948 7,707,948 5,582,093 5,582,093
Policyholder loans 1,560,215 1,560,215 1,818,550 1,818,550
Policyholder deposits 46,642,051 46,642,051 48,312,002 48,312,002
Premiums received in advance 1,247,465 1,247,465 1,283,359 1,283,359
Notes payable and lines of credit 28,382,673 28,382,673 19,836,711 19,836,711
F-23
8. LINES OF CREDIT AND NOTES PAYABLE
Debt at December 31 consisted of the following:
2002 2001
Line of credit - payable to bank $ 250,000 $ 220,000
Line of credit - payable to Merrill Lynch 1,998,959 1,811,172
-------------- --------------
Total lines of credit 2,248,959 2,031,172
-------------- --------------
Notes payable to bank 2,060,247 2,030,340
Notes payable related to Hollywood Forever - 1,597,335
Notes payable related to Forever Oak Hill - 577,864
Notes payable related to Employers Reassurance 11,500,000 13,600,000
Notes payable related to NPS Marketing Agreement 8,031,272 -
Notes payable related to Lincoln Memorial Service 4,542,195 -
-------------- --------------
Total notes payable 26,133,714 17,805,539
-------------- --------------
Total $ 28,382,673 $ 19,836,711
============== ==============
The Company has a line of credit of $250,000, of which $250,000 and
$220,000 was outstanding at December 31, 2002 and 2001, respectively. The
facility expires on April 30, 2003 (the line of credit is renewable on a
yearly basis subject to the discretion of Allegiant Bank) and incurs
interest at the lender's corporate market rate of interest plus .25%. This
rate was 5.25% at December 31, 2002. The Company also has a note payable
to the same financial institution for an initial amount of $2,250,000, of
which $1,974,257 and $2,030,340 was outstanding at December 31, 2002 and
2001, respectively. Payments of $19,117 of principal and interest at the
lender's corporate market rate of interest (5.0% at December 31, 2002) are
due monthly, with a final payment due on January 5, 2006.
On March 6, 2001, the Company entered into a line of credit agreement for
$2,000,000, of which $1,998,959 and $1,811,172 was outstanding at December
31, 2002 and 2001, respectively. The facility expires on March 31, 2003
(we anticipate the line of credit will be renewed effective April 1, 2003)
and incurs interest monthly on the unpaid balance equal to the sum of
2.40% and the Dealer Commercial Paper rate for 30-day high-grade unsecured
notes (3.69% at December 31, 2002) as published in The Wall Street
Journal.
The Company has a loan agreement with a reinsurer whereby the Company may
borrow varying amounts which decline each year until the agreement expires
in 2009. On July 18, 2001, we borrowed $13.6 million from Employers
Reassurance Corporation ("ERC") pursuant to the terms of the reinsurance
agreement with ERC, of which $11.5 million and $13.6 million was
outstanding at December 31, 2002 and 2001, respectively. Principal
payments of varying amounts are due annually on each anniversary date
along with interest at a rate equal to the five-year Treasury note plus
150 basis points (4.28% at December 31, 2002). We anticipate using the
ceding commissions generated by the experience refunds provisions
mentioned in Note 6 to meet our annual repayment obligation. The Company
has pledged all of its stock in Memorial Service Life Insurance Company as
security for any advances under this agreement.
Various notes payable to companies owned by the previous investment
partners in Hollywood Forever incurred in connection with the purchase of
an additional 45% interest in Hollywood Forever, Inc. on
F-24
December 8, 1999 were settled in full for $1,653,988 on June 5, 2001,
resulting in an extraordinary gain of $258,659 ($.04 per basic and
diluted share).
The Company has a note payable to National Prearranged Services, Inc. in
conjunction with the Management Agreement entered into on January 1, 2002
in the initial amount of $10 million (see Note 13). As of December 31,
2002, the balance of this note was $8,031,272. Payments of $246,483 of
principal and interest are due monthly until the principal balance of the
note is paid in full. The interest rate on this note is 8.5% per annum.
In conjunction with the consolidation of notes previously entered into
with Allegiant Bank, Trustee under Trust for National Prearranged
Services, Inc. Pre-Need Plans dated 7/24/98 - Trust IV, the Company
entered into a note payable with Lincoln Memorial Services, Inc. on
November 1, 2002 in the amount of $4,550,219, of which $4,542,195 was
outstanding as of December 31, 2002. Payments of $70,528 of principal and
interest are due monthly with a final payment due on November 1, 2007.
This note bears interest at a rate equal to 7.5% per annum.
On December 6, 2002, the Company entered into a term loan credit agreement
with Southwest Bank of St. Louis in the principal amount of $2.5 million,
of which $85,990 was outstanding as of December 31, 2002. This agreement
bears interest at a floating rate equal to the Prime Rate of Bank plus 1
1/2% per annum (5.75% as of December 31, 2002). Effective January 1, 2003,
payments of interest are due on the first day of each month. Beginning
June 1, 2004, principal payments are due on the first day of each month
based on a ten-year amortization. This note is payable in full on December
6, 2007.
Aggregate debt maturities for the years ending December 31 are as follows:
2003 $ 5,010,571
2004 5,163,467
2005 5,256,320
2006 4,211,493
2007 3,691,863
------------
Total $ 23,333,714
============
9. DEFERRED POLICY ACQUISITION COSTS AND COSTS OF POLICIES ACQUIRED
DEFERRED POLICY ACQUISITION COSTS - Deferred policy acquisition costs
("DPAC") and the components of the change in DPAC were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
Balance, beginning of year $ 1,199,802 $ 1,363,737 $ 20,337,571
Change in balance:
Deferrals 9,721,493 7,155,967 4,634,512
Amortization (382,885) (671,444) (3,004,476)
Recovered under reinsurance contracts (8,860,331) (6,648,458) (20,603,870)
--------------- -------------- ---------------
Net change 478,277 (163,935) (18,973,834)
--------------- -------------- ---------------
Balance, end of year $ 1,678,079 $ 1,199,802 $ 1,363,737
=============== ============== ===============
F-25
Approximately 90% of deferred costs are commissions paid to NPS, NPS
Agency, or other related parties. Other costs include expenses related to
the acquisition and issuance of new policies, such as the printing of
policy forms and underwriting expenses.
COST OF POLICIES ACQUIRED - The cost of policies acquired ("CPA") and the
components of the changes were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
Balance, beginning of year $ - $ - $ 4,348,375
Gross amortization - - (513,632)
Interest - - 305,861
Recovered under reinsurance contracts - - (4,140,604)
-------------- ------------- --------------
Balance, end of year $ - $ - $ -
============== ============= ==============
10. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
---------------------------------------
2002 2001
Land and land improvements $ 656,952 $ 543,695
Buildings and improvements 3,488,115 2,534,312
Mausoleums 2,082,473 1,195,946
Furniture and equipment 1,576,540 1,100,393
Data processing equipment 1,728,767 1,357,654
Software 2,408,439 2,218,153
Vehicles 195,989 76,323
-------------- --------------
12,137,275 9,026,476
Accumulated depreciation (3,620,011) (2,718,380)
-------------- --------------
Total $ 8,517,264 $ 6,308,096
============== ==============
Depreciation expense was approximately $902,000, $808,000 and $721,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
F-26
11. INCOME TAXES
The provision for income taxes (benefits) gives effect to permanent
differences between income for financial reporting purposes and taxable
income. Accordingly, the effective income tax rate is less than the
statutory federal corporate rate. A reconciliation of the statutory income
tax rate to the effective tax rate is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
Tax (benefit) at statutory rate $ 1,657,411 $ 224,686 $ (3,317,753)
Loss on reinsurance - - (173,400)
Change in valuation allowance 1,030,309 (1,003,793) 2,446,601
Other (161,783) 673,227 (174,261)
------------ ------------- -------------
Total tax expense (benefit) $ 2,525,937 $ (105,880) $ (1,218,813)
============ ============= =============
The tax effects of temporary differences at December 31 that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities were as follows:
2002 2001
Deferred tax assets:
Net operating loss $ 3,806,077 $ 4,672,565
Impairment of investment security 428,801 428,801
Deferred policy acquisition costs 26,080 197,489
Net unrealized losses on available for sale securities 248,326 499,538
Policy reserves and policy funds 1,759,889 2,354,019
-------------- --------------
Total 6,269,173 8,152,412
Valuation allowance (3,970,625) (2,940,316)
-------------- --------------
Total deferred tax assets, net of valuation allowance 2,298,548 5,212,096
-------------- --------------
Deferred tax liabilities:
Other assets 162,369 141,033
Deferred cost of reinsurance 603,857 637,403
-------------- --------------
Deferred tax liabilities 766,226 778,436
-------------- --------------
Net deferred tax assets $ 1,532,322 $ 4,433,660
============== ==============
The Company has net operating loss carryforwards of approximately
$7,500,000 that expire beginning in 2013. The valuation allowance has been
provided to reduce deferred tax assets to an amount that management
believes is more likely than not recoverable.
F-27
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases office space under two
non-cancelable lease agreements accounted for as operating leases. The
Company also has another operating lease for office space and funeral home
operations in Austin, Texas. Rental expense on operating leases (exclusive
of other expenses payable under the leases) was approximately $852,000,
$848,000 and $843,000 for the years ended December 31, 2002, 2001 and
2000, respectively. Future minimum lease payments under the terms of these
operating leases at December 31, 2002 were as follows:
YEAR ENDED DECEMBER 31 AMOUNT
2003 $ 760,001
2004 688,415
2005 702,345
2006 716,276
2007 395,392
-------------
Total $ 3,262,429
=============
CAPITAL LEASES - The Company leases equipment under a series of
non-cancelable lease agreements accounted for as capital leases.
Following is a summary of property held under capital leases as of
December 31:
2002 2001
Data processing equipment $ 157,523 $ -
Less: Accumulated depreciation (7,278) -
-------------- --------------
$ 150,245 $ -
============== ==============
Minimum future lease payments under capital leases as of December 31, 2002
for each of the next five years and in the aggregate were:
YEAR ENDED DECEMBER 31 AMOUNT
2003 $ 53,597
2004 53,597
2005 37,193
2006 -
2007 -
-------------
Total minimum lease payments 144,387
Less: Amount representing interest (11,555)
-------------
Present value of net minimum lease payment $ 132,832
=============
F-28
COMMITMENTS - Effective August 2, 2002, the Company entered into a
guaranty agreement with Commerce Bank N.A. to secure a $2,000,000
promissory note with and between Mount Washington Forever, L.L.C. and
Commerce Bank N.A. to finance the construction of a new mausoleum at
the Mt. Washington Forever Cemetery. As of December 31, 2002, the
balance of the promissory note was $768,081.
LEGAL AND OTHER PROCEEDINGS - Forever Enterprises, Inc. was named as
defendant in a lawsuit filed by Odessa L.L.C. during 2001 in state court
in Los Angeles, California. The suit involves a stock buyout provision for
shares in Hollywood Forever Cemetery. This lawsuit was settled on July 26,
2002 for $130,000 (see Note 3 above).
Hollywood Forever Cemetery was named as defendant in a lawsuit filed by a
former employee during 2001 in state court in Los Angeles, California, for
wrongful discharge. The amount being sought was approximately $300,000.
Our motion for summary judgment was granted in December 2002 subsequent to
which the plaintiff filed an appeal. There has been no action since the
appeal. The Company denies liability and intends to defend this suit
vigorously.
Forever Enterprises, Inc. has been named as defendant in a lawsuit filed
in 2003 by a former licensed insurance agent for National Prearranged
Services, Inc. The case was filed in state court in Travis County, Texas,
for breach of contract, retaliation, and misrepresentation. Forever
Enterprises, Inc. maintains it is not a proper party. The amount being
sought is undetermined. This case is currently in discovery with no trial
date set. The Company denies liability and intends to defend this suit
vigorously.
The Company is subject to various other claims and contingencies arising
out of the normal course of business. The Company believes, after
consultation with counsel, that resolution of these matters will not have
a material adverse effect on its financial condition, results of
operations or cash flows.
13. RELATED PARTY TRANSACTIONS
Substantially all of the Company's life insurance policies are issued to
fund prearranged funeral contracts that are sold by National Prearranged
Services, Inc. ("NPS") and National Prearranged Services Agency, Inc.
("NPS Agency"). NPS is a wholly-owned subsidiary of National Heritage
Enterprises ("NHE") which owns 92.3% of the outstanding stock of the
Company. NPS collects all payments for prearranged funeral contracts and
remits such amounts to the Company either directly or through assumed
reinsurance.
In connection with issuing insurance policies to fund prearranged funeral
contracts, except in Missouri, the individual owner of the policy assigns
the policy to NPS and/or NPS Agency. As assignee, NPS and/or NPS Agency
remit premiums to and receive policy benefits from the Company. In the
State of Missouri, a trust (the "Trust") owns the policies, pays the
premiums and receives the benefits. An independent investment advisor to
the Trust directs the monies in the Trust as to the purchase of insurance
policies. The policy benefits that are paid in the ordinary course of
business include death benefits, surrender benefits and policy loans. The
Company is not subject to significant credit risk on the policy loans,
since the Company makes no policy loans which exceed the reserves held on
the policy securing the loan and the Company has the right to deduct the
loan amount from the death benefit payment or from the cash surrender
value. Substantially all premiums, death benefits and surrender benefits
during the years ended December 31, 2002, 2001 and 2000 were received from
or paid to NPS, NPS Agency, other related parties or the Trust.
The Company's insurance subsidiaries previously had a contract (the
"Contract") with NPS and NPS Agency that obligated the Company to pay
first-year and renewal commissions on policies written by NPS and NPS
Agency. This Contract was terminated in September 2000. In 2001 and 2002,
no commissions were paid under this agreement. Substantially all
commissions incurred during the year
F-29
ended December 31, 2000 were paid to NPS or NPS Agency. Such amount
was $985,000 for the year ended December 31, 2000.
The Company has a cost sharing agreement with NPS whereby NPS will
reimburse the Company for a portion of certain general and administrative
costs paid for by the Company for the benefit of NPS. Costs reimbursed
under the agreement were $2,665,316, $2,581,764 and $2,516,986 for the
years ended December 31, 2002, 2001 and 2000, respectively.
On January 1, 2002, the Company entered into a Management Agreement with
National Prearranged Services whereby, the Company agreed to provide all
necessary personnel to supervise National Prearranged Services field sales
force in return for a monthly management fee equal to a percentage of the
net sales revenues of National Prearranged Services as payment for the
services provided. As consideration to National Prearranged Services for
entering into this Management Agreement, the Company entered into a
promissory note in the amount of $10.0 million. Due to the nature of the
agreement and the relationship of the parties involved, this agreement has
an estimated useful life of 20 years, although the agreement will be
re-evaluated by the parties every five years (December 31, 2005 will be
the first evaluation date). This agreement was treated as a purchase of an
intangible asset and will be accounted for under the guidance of Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. Management fees related to this agreement, which have been
recorded as "Management fee income" on our consolidated statements of
operations, were $3.9 million at December 31, 2002.
We also provide and receive administrative and other services to/from
related parties. Management fees charged to related parties, which have
been recorded as "Management fee income" on our consolidated statements of
operations, were $1.3 million and $977,000 for 2002 and 2001,
respectively. Management fees incurred with related parties, which are
included in "Selling, general and administrative expenses" on our
consolidated statements of operations, were $360,000 and $152,000 for 2002
and 2001, respectively. These fees reflect an allocation based on actual
costs incurred.
On June 5, 2002, we entered into agreements in connection with the
acquisition of the business of a funeral home in Missouri. Payments of
$16,667 (of which equal amounts of $4,944 are payable to Messrs. Brent D.
Cassity, our chief executive office, J. Tyler Cassity, our president, and
J. Douglas Cassity, the father of Messrs. Brent and Tyler Cassity) are
payable monthly until the balance is paid in full. Amounts payable under
these agreements as of December 31, 2002 were $573,820 and are included in
"Accrued liabilities" on our consolidated balance sheet.
Amounts receivable from National Heritage Enterprises and its affiliates,
which are included in "Receivable from related party" on our consolidated
balance sheets were $8,492,518 and $6,226,702 as of December 31, 2002 and
2001, respectively. Amounts payable to National Heritage Enterprises and
its affiliates, which are included in "Payable to related party" on our
consolidated balance sheets, were $4,552,570 and $3,129,154 as of December
31, 2002 and 2001, respectively. Notes payable to National Prearranged
Services, Inc., which is included in "Notes payable" on our consolidated
balance sheets, were $8,031,272 and $0 as of December 31, 2002 and 2001,
respectively (see Note 8 above).
The majority shareholder of the Company has the right to cause the Company
to register the majority shareholder's shares of common stock under the
Securities Act of 1933, for resale, at the expense of the Company.
F-30
14. EMPLOYEE BENEFIT PLAN
The Company offers all of its employees who meet certain eligibility
requirements a savings plan (the "401K Plan") under Section 401(k) of the
Internal Revenue Code. Each employee may elect to enter into a written
salary deferral agreement under which an employee makes contributions to
the 401K Plan. The Company currently matches 50% of the employees'
contribution up to 6% of their salary. For the years ended December 31,
2002, 2001 and 2000, the Company contributed $170,211, $102,891 and
$50,296, respectively, to the 401K Plan.
15. CONCENTRATIONS OF RISK
At December 31, 2002 and 2001, the Company had significant investments in
fixed maturity and short-term securities that were either direct
obligations of the U.S. Government or an agency authorized by the U.S.
Government. The Company periodically has significant investments in demand
deposits in banks and other financial institutions that exceed federally
insured amounts. The Company had accounts receivable from NPS of
$8,492,518 and $6,226,702 at December 31, 2002 and 2001, respectively.
The Company also has significant amounts due from ERC and Hannover as a
result of the reinsurance agreements. The amounts due from ERC and
Hannover are primarily based on estimates of future policy benefits for
policies ceded to ERC and Hannover. The assumptions used in our estimates
of amounts due from reinsurers are consistent with those used in
establishing the future policy benefits of the underlying reinsured
contracts. The reinsurance agreements with NAL do not result in a
concentration of risk for the Company since substantially all amounts were
withheld by the Company in connection with those agreements.
16. STATUTORY ACCOUNTING INFORMATION
The Company's life insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on the statutory
basis of accounting. Statutory accounting practices prescribed or
permitted by insurance regulatory authorities for the Company's insurance
subsidiaries differ from GAAP. The statutory net income and shareholders'
equity reported to regulatory authorities as of and for the periods ended
December 31 were as follows:
2002 2001 2000
Net income (loss) $ 11,828,419 $ 10,697,117 $ (4,127,402)
Shareholders' equity 6,163,696 6,940,408 3,818,727
The ability of the life insurance subsidiaries to pay dividends or make
other distributions is restricted by state insurance laws. Determining
factors include, but are not limited to, net income after tax and
shareholders' equity as reported on a statutory basis. Effective March 31,
2002, our subsidiary Memorial Service Life Insurance Company declared a
dividend payable to Forever Enterprises, Inc. for the full available
amount of $4.3 million. We received the dividend in two equal payments of
$2.15 million on May 8, 2002 and May 17, 2002. As of December 31, 2002, no
additional funds were available for transfer to the Company by our
insurance subsidiaries by dividend, loan or advance, without prior
regulatory approval.
F-31
17. STOCK OPTIONS
Effective April 6, 1998, the Company adopted the Forever Enterprises, Inc.
(formerly known as Lincoln Heritage Corporation) 1998 Long-Term Incentive
Plan (the "Plan"). The Plan allows for the issuance of (1) stock options,
(2) stock appreciation rights, (3) restricted shares of common stock, and
(4) performance awards. A total of 1,200,000 shares of common stock have
been reserved for issuance under the Plan. Options may be exercised only
if the optionholder remains continuously associated with the Company from
the date of grant to the date of exercise, subject to certain conditions
as specified in the Plan. An option granted under the Plan cannot be
exercised later than ten years from the date of the grant. Any options
that expire unexercised or that terminate upon an optionee's ceasing his
or her association with the Company become available once again for
issuance. Options vest over four years in 25% increments commencing one
year from date of grant.
The Company recognizes compensation expense for stock options granted to
employees following the guidance of APB No. 25 and recognizes compensation
expense for stock options granted to non-employees in accordance with SFAS
No. 123. The Company recognized compensation expense (contra-expense) of
approximately $67,000, $(153,000) and $221,000 for the years ended
December 31, 2002, 2001 and 2000, respectively, related to awards for
employees, and $51,000, $144,000 and $145,000 for the years ended December
31, 2002, 2001 and 2000, respectively, related to awards to non-employees.
The amount of contra-expense for the year ended December 31, 2001 is a
result of forfeitures of options expensed in previous years.
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
the fair market value of the options granted to non-employees prior to the
Company's initial public offering was estimated on the date of grant using
the minimum value approach. The fair value of all other options granted to
non-employees is estimated on the grant date using the Black-Scholes
option pricing model. The weighted-average fair value of options granted
during the year ended December 31, 2000 was $1.13 compared to $3.15 for
options granted in 1998. There were no options granted in 2002 and 2001.
The following assumptions were used for options granted in 2000 and 1998,
respectively: expected life of 7.5 years and 7.5 years, risk-free interest
rate of 6.4% and 6% and volatility rate of 121% and 0% and dividend yield
of $0 for both years. The effect of applying SFAS No. 123 is not
necessarily indicative of the effects on future years due to, among other
things, the vesting period of the stock options.
Had the Company measured compensation expenses for employees in accordance
with SFAS No. 123, the Company's pro forma net income, and earnings per
share for the years ended December 31 would have been as follows:
2002 2001 2000
Net income (loss) $ 1,782,709 $ 770,215 $ (8,657,260)
Net income (loss) per share:
Basic 0.26 0.11 (1.25)
Diluted 0.24 0.10 (1.25)
F-32
A summary of the Company's stock option activity is as follows:
WEIGHTED
AVERAGE
NUMBER OPTION
OF PRICE
SHARES PER SHARE
Balance at January 1, 2000 331,616 $ 3.75
Granted 884,000 2.01
Forfeited (98,688) 3.08
Exercised (665) 3.75
-----------
Balance at January 1, 2001 1,116,263 2.43
Granted -
Forfeited (128,463) 2.76
Exercised (1,010) 2.02
-----------
Balance at January 1, 2002 986,790 2.40
Granted -
Forfeited (54,675) 2.90
Exercised -
-----------
Outstanding at December 31, 2002 932,115 $ 2.36
===========
Options exercisable at December 31,
2002 645,181
===========
2001 493,378
===========
2000 306,952
===========
Available for future grant 267,885
===========
F-33
18. SEGMENT REPORTING
The Company operates under two segments, cemetery/funeral operations and
life insurance operations. Cemetery/funeral operations purchase life
insurance policies from the insurance operations to provide for pre-need
contracts when they become at-need.
The table below presents information about reported segments for the years
ended December 31, 2002, 2001 and 2000:
CEMETERY INSURANCE CORP. INTERSEGMENT TOTAL
Revenues
2002 $ 9,683,144 $ 32,072,672 $ 6,810,570 $ (1,107,078) $ 47,459,308
2001 7,492,261 26,773,694 1,409,111 (864,295) 34,810,771
2000 6,333,007 44,087,822 306,617 (767,086) 49,960,360
Income (loss)
before taxes*
2002 (1,409,653) 5,151,902 619,358 - 4,361,607
2001 328,307 2,409,416 (2,405,062) - 332,661
2000 (1,698,796) (4,130,159) (3,613,342) - (9,442,297)
Depreciation and
amortization
expense
2002 444,486 570,676 587,275 - 1,602,437
2001 408,458 582,689 - - 991,147
2000 356,121 656,598 - - 1,012,719
Total assets
2002 21,381,611 218,980,008 27,966,090 (5,337,987) 262,989,722
2001 14,917,739 208,612,767 18,623,598 (4,800,209) 237,353,895
*NOTE: Some corporate revenues are classified as other income on the
consolidated statements of operations. Therefore, segment revenues
are reconciled to reported revenue as follows:
2002 2001 2000
Segment revenue $ 47,459,308 $ 34,810,771 $ 49,960,360
Reclass - - (205,807)
------------ ------------ -------------
Revenue as reported $ 47,459,308 $ 34,810,771 $ 49,754,553
============ ============ =============
As disclosed in Note 13, substantially all of the Company's life insurance
policies are issued to fund prearranged funeral contracts that are sold by
related parties.
F-34
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The table below presents selected quarterly information for the year
ended December 31, 2002 and 2001.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
Revenues:
2002 $ 9,350,145 $ 13,263,477 $ 12,319,697 $ 12,525,989 $ 47,459,308
2001 8,604,735 7,838,563 8,270,615 10,096,858 34,810,771
Income (loss) before
extraordinary item:
2002 406,137 1,846,591 1,319,642 (1,736,700) 1,835,670
2001 281,845 (122,519) (665,111) 944,326 438,541
Net income (loss):
2002 406,137 1,846,591 1,319,642 (1,736,700) 1,835,670
2001 281,845 136,140 (665,111) 944,326 697,200
Basic earnings (loss)
per share before
extraordinary item:
2002 0.06 0.27 0.19 (0.25) 0.26
2001 0.04 (0.02) (0.10) 0.14 0.06
Diluted earnings (loss)
per share before
extraordinary item:
2002 0.06 0.25 0.18 (0.24) 0.25
2001 0.04 (0.02) (0.09) 0.13 0.06
Basic earnings (loss)
per share:
2002 0.06 0.27 0.19 (0.25) 0.26
2001 0.04 (0.02) (0.10) 0.14 0.10
Diluted earnings (loss)
per share:
2002 0.06 0.25 0.18 (0.24) 0.25
2001 0.04 0.02 (0.09) 0.13 0.09
F-35
SCHEDULE II
FOREVER ENTERPRISES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------------------------------------------
2002 2001
ASSETS
Cash and cash equivalents $ 661,541 $ 3,050
Marketable securities 8,236,591 10,726,143
Accounts receivable from related party 5,891,481 3,199,066
Investment in subsidiaries 4,607,798 8,533,736
Deferred tax assets, net (207,970) 36,963
Other assets 31,902 31,902
------------ ------------
TOTAL $ 19,221,343 $ 22,530,860
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses $ 37,588 $ 361,813
Accounts payable to related party 3,064,779 4,775,027
Notes payable 11,500,000 13,600,000
------------ ------------
Total liabilities 14,602,367 18,736,840
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 1,000,000 shares authorized,
none issued) - -
Common stock ($.01 par value; 30,000,000 shares authorized;
6,934,934 shares issued and outstanding, respectively) 69,349 69,349
Additional paid-in capital 8,587,931 10,337,502
Retained earnings (3,307,932) (5,143,602)
Accumulated other comprehensive loss (730,372) (1,469,229)
------------ ------------
Total shareholders' equity 4,618,976 3,794,020
------------ ------------
TOTAL $ 19,221,343 $ 22,530,860
============ ============
F-36
SCHEDULE II
FOREVER ENTERPRISES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
REVENUES - Net investment income $ 5,709,374 $ 248,793 $ 27,194
EXPENSES - General expenses 988,331 822,984 1,813,265
------------ ------------ ------------
Income (loss) before income taxes and equity in
undistributed net income (loss) of subsidiaries 4,721,043 (574,191) (1,786,071)
------------ ------------ ------------
INCOME TAXES:
Current (240,298) 2,961,048 -
Deferred 391,805 (1,628,431) 599,158
------------ ------------ ------------
Total income tax expense 151,507 1,332,617 599,158
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME (LOSS) OF SUBSIDIARIES 4,569,536 (1,906,808) (2,385,229)
EQUITY IN UNDISTRIBUTED NET
INCOME (LOSS) OF SUBSIDIARIES (2,733,866) 2,604,008 (6,154,056)
------------ ------------ ------------
NET INCOME (LOSS) 1,835,670 697,200 (8,539,285)
CHANGE IN ACCUMULATED OTHER
COMPREHENSIVE INCOME OF SUBSIDIARIES 738,857 2,289,939 4,747,234
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 2,574,527 $ 2,987,139 $ (3,792,051)
============ ============ ============
F-37
SCHEDULE II
FOREVER ENTERPRISES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,835,670 $ 697,200 $ (8,539,285)
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment gains (110,622) - -
Accretion of discount on investments (3,766) (268) -
Deferred income taxes (95,540) 4,501 599,158
Stock options issued 37,789 237,722 241,700
Decrease in accounts receivable - 3,175 31,825
(Increase) decrease in other assets - - 158,417
(Increase) decrease in accounts receivable
and payable to related party (4,402,663) (3,196,585) 1,261,497
Increase (decrease) in accrued liabilities (324,225) 361,658 155
Equity in undistributed net (income) loss of subsidiaries 4,888,721 (1,521,998) 6,154,056
------------ ------------- ------------
Net cash from operating activities 1,825,364 (3,414,595) (92,477)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Proceeds from sales and maturities of available
for sale investments 7,608,460 84,987 -
Cost of investments purchased (4,847,823) (10,774,056) -
Liquidation of minority interest (1,827,510) - -
------------ ------------- ------------
Net cash from investing activities 933,127 (10,689,069) -
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 13,600,000 -
Repayment of long-term debt (2,100,000) - -
Issuance of shares for stock options - 2,037 110,493
------------ ------------- ------------
Net cash from financing activities (2,100,000) 13,602,037 110,493
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 658,491 (501,627) 18,016
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,050 504,677 486,661
------------ ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 661,541 $ 3,050 $ 504,677
============ ============= ============
F-38
FOREVER ENTERPRISES, INC. (PARENT COMPANY)
NOTE TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Forever
Enterprises, Inc. and subsidiaries.
F-39
FOREVER ENTERPRISES, INC. SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------------
BENEFITS,
DEFERRED FUTURE POLICY CLAIMS, AMORTIZATION
POLICY BENEFITS AND NET LOSSES AND OF DEFERRED OTHER
ACQUISITION POLICYHOLDER UNEARNED PREMIUM INVESTMENT SETTLEMENT POLICY OPERATING
SEGMENT COSTS DEPOSITS PREMIUMS REVENUE INCOME EXPENSES ACQUISITION EXPENSES
Life insurance:
Year ended
December 31, 2002 $1,678,079 $204,919,885 $1,247,465 $ 8,293,688 $4,546,872 $ 7,876,103 $ 382,885 $18,527,978
Year ended
December 31, 2001 1,199,802 195,980,988 1,283,359 7,386,753 3,958,683 6,398,210 671,444 18,022,325
Year ended
December 31, 2000 1,363,737 191,973,250 1,860,338 36,603,227 9,127,868 30,439,516 3,004,476 16,948,792
F-40
FOREVER ENTERPRISES, INC. SCHEDULE IV
REINSURANCE
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
2002
Life insurance in-force $ 327,966,870 $ (421,964,086) $ 143,202,468 $ 49,205,252 291 %
Premiums 49,738,288 (64,387,858) 22,943,258 8,293,688 277 %
2001
Life insurance in-force $ 297,467,559 $ (388,026,301) $ 160,485,072 $ 69,926,330 230 %
Premiums 49,363,165 (61,794,500) 19,818,088 7,386,753 268 %
2000
Life insurance in-force $ 291,472,398 $ (392,346,499) $ 174,603,434 $ 73,729,333 237 %
Premiums 48,397,420 (29,039,092) 17,244,899 36,603,227 47 %
F-41
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1(a) Amended and Restated Articles of Incorporation of the Company, filed
as Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-50525), are hereby incorporated by reference.
3.1(b) Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company, filed as Exhibit 3.1(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is
hereby incorporated by reference.
3.1(c) Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company, filed as Exhibit 3.1(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, is hereby incorporated by reference.
3.2 By-laws of the Company, filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), are hereby
incorporated by reference.
4.1 Form of Stock Certificate for Common Stock, filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (Reg. No. 333-50525),
is hereby incorporated by reference.
4.2 Registration Rights Agreement dated as of April 6, 1998 by and between
the Company and National Heritage Enterprises, Inc, filed as Exhibit
4.2 to the Company's Registration Statement on Form S-1 (Reg. No.
333-50525), is hereby incorporated by reference.
4.3 Form of Warrant Agreement between the Company and Tejas Securities
Group, Inc, filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), is hereby incorporated by
reference.
10.1 Lincoln Heritage Corporation 1998 Long-Term Incentive Plan, filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Reg.
No. 333-50525), is hereby incorporated by reference.
10.2 Cost Sharing Agreement dated as of March 31, 1997 by and among
Memorial, Lincoln and NPS, filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), is hereby
incorporated by reference.
10.3 Cost Sharing Agreement dated as of June 1, 1998 by and between the
Company and NPS, filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-50525), is hereby incorporated by
reference.
10.4 Award Agreement dated as of August 18, 1998 by and between the Company
and Brent D. Cassity, filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-50525), is hereby
incorporated by reference.*
10.5 General Agent Contract dated May 12, 1992 and Addendum dated February
19, 1998 by and between the Company and NPS, filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (Reg. No. 333-50525),
is hereby incorporated by reference.
10.6 Coinsurance Life Reinsurance Agreement (PreNeed Plans), dated December
1, 2000, between Lincoln Memorial Life Insurance Company and Employers
Reassurance Corporation, filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, is hereby
incorporated by reference.
10.7 Amendment No. 1 to Coinsurance Life Reinsurance Agreement (PreNeed
Plans), dated December 12, 2000, between Lincoln Memorial Life
Insurance Company and Employers Reassurance Corporation, filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, is hereby incorporated by reference.
10.8 Reinsurance Agreement, dated December 18, 2000, between Memorial
Service Life Insurance Company, Lincoln Memorial Life Insurance
Company and North American Life Insurance Company of Texas, filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, is hereby incorporated by reference.
10.9
Amendment No. 1 to Reinsurance Agreement, dated January 5, 2001,
between Memorial Service Life Insurance Company, Lincoln Memorial Life
Insurance Company and North American Life Insurance Company of Texas,
filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, is hereby incorporated by reference.
F-42
Exhibit
Number Description
- ------ -----------
10.10 Amendment No. 2 to Reinsurance Agreement, dated August 1, 2001,
between Memorial Service Life Insurance Company, Lincoln Memorial Life
Insurance Company and North American Life Insurance Company of Texas,
filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, is hereby incorporated by reference.
10.11 Reinsurance Agreement, dated August 1, 2001, between Lincoln Memorial
Life Insurance Company and Hannover Life Reassurance Company of
America, filed as Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, is hereby incorporated by
reference.
10.12 Management Agreement, dated January 1, 2002, between National
Prearranged Services, Inc. and BDC Properties, Inc., filed as Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, is hereby incorporated by reference.
10.13 Cemetery Accounts Receivable Purchase Agreement, dated November 29,
2001, by and between Hollywood Forever, Inc. and Allegiant Bank,
Trustee Under Trust for National Prearranged Services, Inc. Pre-Need
Plans, dated July 24, 1998 - Trust IV, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, is hereby incorporated by reference.
10.14 Agreement, dated June 5, 2002, between Forever Network, Inc. and Brent
D. Cassity, filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, is hereby incorporated
by reference.
10.15 Agreement, dated June 5, 2002, between Forever Network, Inc. and J.
Tyler Cassity, filed as Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002, is hereby
incorporated by reference.
21.1 Subsidiaries of the Company, is filed herewith.
23.1 Consent of Brown Smith Wallace, L.L.C., is filed herewith.
23.2 Consent of Deloitte & Touche, L.L.P., is filed herewith.
99.1 Chief Executive Officer Certification pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
is filed herewith.
99.2 Chief Financial Officer Certification pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, is filed herewith.
*Management contract or compensatory plan or arrangement.
F-43