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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2003
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Commission file number 001-14067
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FOREVER ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 36-3427454
- ----------------------------------- ----------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
10 S. BRENTWOOD
CLAYTON, MISSOURI 63105
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(Address of principal executive offices)
(Zip Code)
(314) 726-3371
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. |X| Yes | | No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). | | Yes |X| No
Number of shares
Title of class outstanding as of October 29, 2003
- ------------------------------------ ---------------------------------------
Common stock, $0.01 par value 6,936,059
PAGE>
FOREVER ENTERPRISES, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION...........................................................................3
Item 1. Financial Statements............................................................................3
Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited)
and December 31, 2002...........................................................................3
Condensed Consolidated Statements of Operations (Unaudited) - Three
Months and Nine Months Ended September 30, 2003 and 2002........................................5
Condensed Consolidated Statements of Cash Flow (Unaudited) - Nine Months
Ended September 30, 2003 and 2002...............................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................13
Cautionary Statement Regarding Forward-Looking Statements......................................13
Overview.......................................................................................13
Results of Operations..........................................................................16
Liquidity and Capital Resources................................................................19
Accounting Standards...........................................................................21
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................23
Item 4. Controls and Procedures........................................................................23
PART II. OTHER INFORMATION..............................................................................24
Item 1. Legal Proceedings..............................................................................24
Item 6. Exhibits and Reports on Form 8-K...............................................................24
SIGNATURES.......................................................................................................25
EXHIBIT INDEX....................................................................................................26
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Cash and cash equivalents $ 23,979,082 $ 22,793,038
Fixed maturity securities 67,826,664 73,982,062
Equity securities 2,523,385 1,119,705
Policyholder loans 2,704,503 1,560,215
------------- -------------
Total cash and investments 97,033,634 99,455,020
------------- -------------
Trade accounts receivable, net 7,692,730 7,707,948
Inventories 206,525 190,432
Cemetery property, net 3,865,738 3,964,644
Fixed assets, net 9,493,386 8,517,264
Due from reinsurer 115,306,076 105,830,127
Deferred policy acquisition costs, net 1,915,539 1,678,079
Due premium 8,932,651 8,088,002
Intangible assets 10,418,893 10,929,872
Deferred cost of reinsurance 1,702,053 1,776,051
Deferred tax assets, net 43,858 1,532,322
Receivable from related party 8,408,657 8,033,095
Other assets 7,887,289 5,286,866
------------- -------------
Total assets $ 272,907,029 $ 262,989,722
============= =============
(continued on next page)
- 3 -
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
LIABILITIES:
Lines of credit $ 3,251,682 $ 2,248,959
Accounts payable and accrued liabilities 12,494,703 13,622,553
Policy liabilities:
Future policy benefits 168,290,295 158,277,834
Policyholder deposits 46,087,462 46,642,051
Deferred preneed revenues 8,769,349 7,328,554
Payable to affiliates 4,771,100 4,117,081
Notes payable 23,116,667 26,133,714
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Total liabilities 266,781,258 258,370,746
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SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 1,000,000 shares authorized;
none issued) -- --
Common stock ($.01 par value; 30,000,000 shares authorized;
6,936,059 and 6,934,934 issued and outstanding, respectively) 69,360 69,349
Additional paid-in capital 8,642,515 8,587,931
Accumulated deficit (2,753,540) (3,307,932)
Accumulated other comprehensive income (loss) 167,436 (730,372)
------------- -------------
Total shareholders' equity 6,125,771 4,618,976
------------- -------------
Total liabilities and shareholders' equity $ 272,907,029 $ 262,989,722
============= =============
The accompanying notes are an integral
part of the unaudited condensed
consolidated financial statements.
- 4 -
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- ---------------- ---------------
Premium income $ 2,044,235 $ 2,855,511 $ 5,719,727 $ 6,214,720
Net investment income and
realized gains 2,169,792 499,931 4,211,922 3,984,923
Cemetery revenue 2,895,262 2,631,175 8,367,150 7,339,378
Commission and expense allowance 6,266,614 4,985,260 14,452,387 13,380,259
Management fee income 1,922,165 1,347,820 4,274,003 4,014,039
Other revenue 275,560 249,773 501,526 737,898
--------------- --------------- ---------------- ---------------
Total revenues 15,573,628 12,569,470 37,526,715 35,671,217
--------------- --------------- ---------------- ---------------
Benefits incurred 2,215,861 1,967,574 6,192,957 6,696,606
Insurance commissions 5,602,226 3,937,436 12,772,832 11,582,430
Cost of cemetery revenue 860,711 647,989 2,480,742 1,872,859
Selling, general and administrative 3,654,065 3,752,128 11,523,583 9,574,382
Depreciation and amortization 467,953 412,014 1,396,799 1,154,909
Other expense (income) 122,123 (168,763) (39,675) (1,002,578)
Interest expense 388,848 472,915 1,313,746 1,436,058
--------------- --------------- ---------------- ---------------
Income before income taxes 2,261,841 1,548,177 1,885,731 4,356,551
Income tax expense 597,055 228,535 1,331,339 784,181
--------------- --------------- ---------------- ---------------
Net income $ 1,664,786 $ 1,319,642 $ 554,392 $ 3,572,370
=============== =============== ================ ===============
Net income per share
Basic $ 0.24 $ 0.19 $ 0.08 $ 0.52
Diluted 0.23 0.18 0.08 0.49
Weighted average shares outstanding
Basic 6,936,059 6,934,934 6,935,419 6,934,934
Diluted 7,379,723 7,358,020 7,380,208 7,358,020
The accompanying notes are an integral
part of the unaudited condensed
consolidated financial statements.
- 5 -
FOREVER ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2003 2002
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ (408,981) $ 3,726,347
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale investments 93,251,296 36,846,238
Cost of investments purchased (87,886,883) (26,664,044)
Purchase of fixed assets (1,782,445) (1,798,284)
Purchase of intangible assets (5,500) (10,400,000)
Purchase of cemetery properties -- (455,780)
Increase in investment in subsidiary -- (130,000)
Other, net 28,661 1,019,196
------------ -------------
Net cash provided by (used in) investing activities 3,605,129 (1,582,674)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares for stock options 4,219 --
Proceeds from long-term debt 1,017,644 10,835,780
Repayment of long-term debt (4,034,691) (3,672,841)
Credit line proceeds 1,997,497 2,652,258
Repayment of credit line (994,773) (2,440,318)
------------ -------------
Net cash provided by (used in) financing activities (2,010,104) 7,374,879
------------ -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,186,044 9,518,552
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 22,793,038 7,568,099
------------ -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 23,979,082 $ 17,086,651
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 550,000 $ 215,285
============ =============
Interest paid $ 1,707,977 $ 1,653,874
============ =============
The accompanying notes are an integral
part of the unaudited condensed
consolidated financial statements.
- 6 -
FOREVER ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
---------
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements
include the accounts of Forever Enterprises, Inc. and its direct and
indirect wholly-owned subsidiaries, Forever Network, Inc., Memorial Service
Life Insurance Company and Lincoln Memorial Life Insurance Company. We
account for our fifty-percent investment in Mount Washington Forever, L.L.C.
under the equity method. These condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by accounting
principles generally accepted in the United States for complete financial
statements. All intercompany accounts and transactions have been eliminated
in consolidation. Certain prior period amounts have been reclassified to
conform with the current period presentation.
The accompanying condensed consolidated financial statements and
notes thereto are unaudited and should be read in conjunction with our
audited financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2002 filed with the Securities and Exchange
Commission. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly our financial position as of September 30, 2003 and the
results of operations and cash flows for the three and nine months ended
September 30, 2003. The results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results to be
expected for the year ending December 31, 2003.
NOTE 2 -- NOTES PAYABLE
As of September 30, 2003 and December 31, 2002, we had a note
payable to Allegiant Bank in the amount of $1,887,484 and $1,974,257,
respectively, which matures on January 5, 2006. Payments of $19,117 of
principal and interest at the "corporate market" interest rate (5.0% per
annum at September 30, 2003) are due monthly until the principal balance is
paid in full. The "corporate market" interest rate is based upon an index
developed by Allegiant Bank.
We also have a $250,000 revolving line of credit from Allegiant
Bank at rates similar to the primary credit agreement discussed above. The
balance outstanding was $250,000 at September 30, 2003 and December 31,
2002. This line of credit is renewable on a yearly basis subject to
Allegiant Bank's discretion.
We have a $2,000,000 revolving line of credit from Merrill Lynch
Business Financial Services, Inc., which matures on March 31, 2004. Interest
is due monthly on the unpaid balance equal to the sum of 2.4% and the Dealer
Commercial Paper rate for 30-day high-grade unsecured notes (3.46% per annum
at September 30, 2003) as published in The Wall Street Journal. The balance
outstanding was $2,001,682 and $1,998,959 as of September 30, 2003 and
December 31, 2002, respectively.
We have a note payable to Employers Reassurance Corporation in the
amount of $9,500,000 and $11,500,000 as of September 30, 2003 and December
31, 2002, respectively. Principal payments of varying amounts are due
annually on each anniversary date. Interest on this note is payable annually
in arrears on each anniversary date at a rate equal to the five-year
Treasury note plus 150 basis points (4.35% per annum at September 30, 2003).
- 7 -
We have a note payable to National Prearranged Services, Inc. in
the amount of $6,476,373 and $8,031,272 as of September 30, 2003 and
December 31, 2002, respectively (see Note 6). Payments of $246,483 of
principal and interest are due monthly until the principal balance of the
note is paid in full. This note bears interest at the rate of 8.5% per
annum.
We have a note payable to Lincoln Memorial Services, Inc. in the
amount of $4,153,324 and $4,542,195 as of September 30, 2003 and December
31, 2002, respectively. 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 of 7.5% per annum.
We have a term loan credit agreement with Southwest Bank of St.
Louis in the principal amount of $2,000,000, of which $953,635 and $85,990
was outstanding as of September 30, 2003 and December 31, 2002,
respectively. This agreement bears interest at a floating rate equal to the
prime rate of Southwest Bank plus 1.5% (5.5% per annum as of September 30,
2003). Payments of interest are due monthly through May 1, 2004. 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.
We entered into a note payable effective January 1, 2003 with
Allegiant Bank, Trustee under Trust for National Prearranged Services, Inc.
Pre-Need Plans dated 7/24/89 - Trust IV ("Trust IV"), in the principal
amount of $150,000, of which $145,851 was outstanding as of September 30,
2003. Payments of $3,006 of principal and interest are due monthly until the
principal balance is paid in full. This note bears interest at the rate of
7.5% per annum.
Effective May 15, 2003, we entered into a revolving line of credit
with Southwest Bank of St. Louis in the principal amount of $1,000,000, of
which $1,000,000 was outstanding as of September 30, 2003. This agreement
matures on April 30, 2004, and bears interest at a floating rate equal to
the prime rate of Southwest Bank plus 1.0% (5.0% per annum as of September
30, 2003). Payments of interest are due monthly until maturity.
NOTE 3 -- INVESTMENTS
The cost or amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturity and equity securities
available-for-sale as of September 30, 2003 were as follows:
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ------------- -------------
Fixed maturity securities:
Corporate bonds $ 12,046,528 $ 251,570 $ (524,714) $ 11,773,384
Mortgage backed securities 38,866,575 694,555 (116,991) 39,444,139
U.S. government 16,443,785 359,324 (193,968) 16,609,141
-------------- ----------- ------------- -------------
Total fixed maturity securities 67,356,888 1,305,449 (835,673) 67,826,664
-------------- ----------- ------------- -------------
Equity securities:
Preferred stock 1,820,366 28,240 (109,649) 1,738,957
Common stock 919,104 166,765 (301,441) 784,428
-------------- ----------- ------------- -------------
Total equity securities 2,739,470 195,005 (411,090) 2,523,385
-------------- ----------- ------------- -------------
Total $ 70,096,358 $ 1,500,454 $ (1,246,763) $ 70,350,049
============== =========== ============= =============
- 8 -
NOTE 4 -- SEGMENT INFORMATION
We conduct and manage our business through two segments,
cemetery/funeral operations and life insurance operations. The following
tables summarize the results of our operations by our business segments.
Costs and revenues that are not related to operating segments are included
in the column "Corporate."
NINE MONTHS ENDED SEPTEMBER 30, 2003
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 9,118,006 $ 22,713,077 $ 6,489,836 $ (794,204) $ 37,526,715
Income (loss) before income taxes (1,546,912) (2,765,444) 6,198,087 -- 1,885,731
Total assets at period-end 21,749,227 228,790,782 29,357,336 (6,990,316) 272,907,029
THREE MONTHS ENDED SEPTEMBER 30, 2003
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 3,170,441 $ 8,560,319 $ 4,009,192 $ (166,324) $ 15,573,628
Income (loss) before income taxes (325,920) (129,014) 2,716,775 -- 2,261,841
NINE MONTHS ENDED SEPTEMBER 30, 2002
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 7,916,683 $ 23,144,579 $ 5,410,247 $ (800,292) $ 35,671,217
Income before income taxes 410,784 3,340,639 605,128 -- 4,356,551
Total assets at period-end 21,471,986 214,887,140 28,931,467 (5,158,779) 260,131,814
THREE MONTHS ENDED SEPTEMBER 30, 2002
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 2,660,438 $ 8,424,056 $ 1,749,774 $ (264,798) $ 12,569,470
Income (loss) before income taxes (160,054) 1,772,215 (63,984) -- 1,548,177
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
We are party to 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. The balance of the
promissory note was $1,370,783 and $768,081 as of September 30, 2003 and
December 31, 2002, respectively.
- 9 -
On August 26, 2003, we entered into a letter of intent to sell the
assets of Forever All Faiths for the price of $350,000. Upon completion of
due diligence, we anticipate closing this transaction in the fourth quarter
of 2003.
NOTE 6 -- RELATED PARTY TRANSACTIONS
In 2002 we entered into a Management Agreement with National
Prearranged Services, Inc. ("NPS"), whereby we agreed to provide all
necessary personnel to supervise NPS' field sales force in return for a
monthly management fee equal to a percentage of the net sales revenues of
NPS as payment for the services provided. As consideration to NPS for
entering into this Management Agreement, we entered into a promissory note
in the amount of $10.0 million. The balance of this note was $6,476,373 and
$8,031,272 as of September 30, 2003 and December 31, 2002, respectively.
Management fees, which have been recorded as "Management fee income" on our
consolidated statements of operations, were $1.7 million and $3.4 million
for the three- and nine-month periods ended September 30, 2003,
respectively, compared to $956,000 and $2.9 million for the same periods in
2002.
We entered into agreements in 2002 in connection with our
acquisition 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 officer, 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 were
$501,247 and $573,820 as of September 30, 2003 and December 31, 2002,
respectively, and are included in "Accounts payable and accrued liabilities"
on our consolidated balance sheets.
We have a note payable to Lincoln Memorial Services, Inc. in the
amount of $4,153,324 and $4,542,195 as of September 30, 2003 and December
31, 2002, respectively. 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 of 7.5% per annum.
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 $224,000 and $746,000 for the three and nine months
ended September 30, 2003, respectively, compared to $332,000 and $925,000
for the corresponding periods in 2002. Management fees incurred with related
parties, which are included in "Other expenses" on our consolidated
statements of operations, were $122,000 and $365,000 for the three and nine
months ended September 30, 2003, respectively, compared to $90,000 and
$270,000 for the corresponding periods in 2002. These fees reflect an
allocation based on actual costs incurred.
Amounts receivable from National Heritage Enterprises and its
affiliates, which are included in "Receivable from related party" on our
consolidated balance sheets, were $8,286,682 and $8,492,518 as of September
30, 2003 and December 31, 2002, respectively. Amounts payable to National
Heritage Enterprises and its affiliates, which are included in "Payable to
affiliates" on our consolidated balance sheets, were $6,030,535 and
$4,552,570 as of September 30, 2003 and December 31, 2002, respectively.
- 10 -
NOTE 7 -- NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 adopted
SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 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 adopted SFAS No.
146 on January 1, 2003. The adoption of SFAS No. 146 has not had 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 adopted SFAS No. 148 on January
1, 2003, which resulted in no effect on our financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments and
for hedging activities. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 has not had a significant
impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a
significant impact on our financial statements.
In January 2003, the FASB issued Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, which establishes standards for
determining when variable interest entities (VIE) should be consolidated
with its primary beneficiary. FIN No. 46 is effective immediately for VIEs
created after January 31, 2003 and otherwise is effective for interim
periods beginning after June 15, 2003. We adopted FIN No. 46 on July 1,
2003, which resulted in no effect on our financial position, results of
operations or cash flows.
- 11 -
NOTE 8 -- INCOME PER SHARE OF STOCK
Income per share of stock is computed using the weighted average
number of common shares outstanding during the applicable period. Diluted
income per share of stock is computed using the weighted average number of
common shares outstanding and dilutive potential common shares (primarily
outstanding stock options). Weighted average shares of common stock and
dilutive potential common shares used in the calculation of basic and
diluted income per share are summarized as follows:
QUARTER ENDED
-------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Weighted average shares outstanding (basic EPS) 6,935,419 6,934,934
Dilutive potential common shares 444,789 423,086
Weighted average shares outstanding and
dilutive potential common shares (diluted EPS) 7,380,208 7,358,020
Dilutive potential common shares included in the diluted income per share
calculation were determined using the treasury stock method. Under the
treasury stock method, outstanding stock options are dilutive when the
average market price of a company's common stock exceeds the option price
during a period. In addition, proceeds from the assumed exercise of dilutive
options along with the related tax benefit are assumed to be used to
repurchase common shares at the average market price of such stock during
the period.
NOTE 9 -- SUBSEQUENT EVENT
On October 7, 2003, we entered into a letter of intent to acquire
all the assets, real property, equipment, technology, trademarks and rights
in contracts of a cemetery in Mill Valley, California, for the purchase
price of $495,000 to be paid in cash at closing. Upon satisfactory
completion of our due diligence, we anticipate closing on the cemetery
during the fourth quarter of 2003.
- 12 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING 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 our 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, if
any; changes in accounting principles or new accounting standards; and other
unforeseen circumstances. A number of these factors are discussed in this
and our other filings with the Securities and Exchange Commission.
Additionally, we may not be successful in identifying, acquiring
and integrating other companies or their businesses, 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
those expressions.
OVERVIEW
We, through our subsidiaries, own and operate combination funeral
home and cemetery properties, market and produce multimedia LifeStories(TM),
operate an Internet marketing site, and operate 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.
- 13 -
Forever Network, Inc., directly and through its subsidiaries, owns
and operates funeral homes and cemetery properties, markets Forever
LifeStories(TM) to individuals and groups, and archives the digital
interactive 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 our life insurance policies are issued to fund
prearranged funeral contracts sold by National Prearranged Services, Inc.
and National Prearranged Services Agency, Inc. National Prearranged
Services, Inc. is an affiliated company that collects all payments for
prearranged funeral contracts and remits those amounts to our insurance
subsidiaries either directly or through assumed reinsurance.
In August 2000, we entered into a coinsurance agreement with
Employers Reassurance Corporation (ERC) whereby we ceded a significant
portion of our in-force policies. This coinsurance agreement includes
experience refund provisions whereby we may earn additional 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 us from our obligations to our
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 $79.9 million of
the reinsurance receivable as of September 30, 2003 was related to the
agreement with ERC. Experience ratings refunds of approximately $2,000,000
due in August 2003 have not been received from ERC as of the date of this
filing due to various issues raised by ERC regarding mortality ratings under
this agreement and claims incurred prior to the reinsurance effective date.
We are currently discussing and providing ERC with information and answers
to their inquiries about the mortality experience under our agreement with
ERC. We anticipate receiving the ratings refund in the near term subject to
potential ratings adjustments by ERC. As a result of these issues, we have
accrued approximately $424,000 in additional claim benefits to be paid to
ERC.
In November 2000, we entered into various coinsurance agreements
with North America Life Insurance Company of Texas ("NAL") whereby we ceded
blocks of certain direct written life insurance policies and all of our
assumed life insurance and annuity policies. As of September 30, 2003,
segregated funds of approximately $65.3 million were in a trust account for
the benefit of the reinsurer. The funds withheld are presented net of
amounts due from the reinsurer in our consolidated financial statements. We
also entered into a 100% coinsurance agreement with NAL in September 2000,
whereby substantially all of the policies issued by us 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 us from our obligations to our
policyholders and, accordingly, the cost of the coinsurance agreements was
deferred and is being amortized over the remaining life of the underlying
insurance policies. The unamortized deferred cost as of September 30, 2003
was approximately $1.7 million. Approximately $35.4 million of the
reinsurance receivable as of September 30, 2003 was related to the
agreements with NAL and Hannover. Hannover has notified us of their intent
to terminate the coinsurance agreement effective February 1, 2004. We are
currently seeking replacement coverage with another reinsurer(s) with
similar reinsurance provisions that will replace the existing treaty with
Hannover at the notified termination date.
The arrangements with Employers Reassurance Corporation, North
America Life Insurance Company of Texas and Hannover Reassurance Life
Company of America were made to allow us to shift our focus from the
insurance operations to the cemetery operations of our company.
- 14 -
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 the
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 plan to 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. We also
believe 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 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.
- 15 -
RESULTS OF OPERATIONS
The following presents management's discussion and analysis of our
consolidated financial condition and results of operations as of the dates
and for the periods indicated. This discussion should be read in conjunction
with the other information set forth in this Quarterly Report on Form 10-Q,
including our unaudited condensed consolidated financial statements and the
accompanying notes thereto.
Our financial highlights were as follows:
NINE MONTHS ENDED
STATEMENTS OF OPERATIONS DATA: SEPTEMBER 30,
---------------------------------------
2003 2002
------------- ------------
Premium income $ 5,719,727 $ 6,214,720
Net investment income and realized gains 4,211,922 3,984,923
Cemetery revenue 8,367,150 7,339,378
Commission and expense allowance 14,452,387 13,380,259
Management fee income 4,274,003 4,014,039
Other revenue 501,526 737,898
------------- ------------
Total revenues 37,526,715 35,671,217
------------- ------------
Benefits incurred 6,192,957 6,696,606
Insurance commissions 12,772,832 11,582,430
Cost of cemetery revenues 2,480,742 1,872,859
Selling, general and administrative expenses 11,523,583 9,574,382
Amortization and depreciation 1,396,799 1,154,909
Other income (39,675) (1,002,578)
Interest expense 1,313,746 1,436,058
------------- ------------
Income before income taxes 1,885,731 4,356,551
Income tax expense 1,331,339 784,181
------------- ------------
Net income $ 554,392 $ 3,572,370
============= ============
Income per share
Basic $ 0.08 $ 0.52
Diluted 0.08 0.49
BALANCE SHEETS DATA: SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Trade accounts receivable, net $ 7,692,730 $ 7,707,948
Cemetery property, net 3,865,738 3,964,644
Total assets 272,907,029 262,989,722
Total policy liabilities 214,377,757 204,919,885
Deferred preneed revenues 8,769,349 7,328,554
Shareholders' equity 6,125,771 4,618,976
We conduct and manage our business through two segments,
cemetery/funeral operations and life insurance operations. The following
tables and narratives summarize the results of our operations by our
business segments. Costs and revenues that are not related to operating
segments are included in the column "Corporate."
NINE MONTHS ENDED SEPTEMBER 30, 2003
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 9,118,006 $ 22,713,077 $ 6,489,836 $ (794,204) $ 37,526,715
Income (loss) before income taxes (1,546,912) (2,765,444) 6,198,087 -- 1,885,731
Total assets at period-end 21,749,227 228,790,782 29,357,336 (6,990,316) 272,907,029
- 16 -
THREE MONTHS ENDED SEPTEMBER 30, 2003
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 3,170,441 $ 8,560,319 $ 4,009,192 $ (166,324) $ 15,573,628
Income (loss) before income taxes (325,920) (129,014) 2,716,775 -- 2,261,841
NINE MONTHS ENDED SEPTEMBER 30, 2002
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 7,916,683 $ 23,144,579 $ 5,410,247 $ (800,292) $ 35,671,217
Income before income taxes 410,784 3,340,639 605,128 -- 4,356,551
Total assets at period-end 21,471,986 214,887,140 28,931,467 (5,158,779) 260,131,814
THREE MONTHS ENDED SEPTEMBER 30, 2002
CEMETERY INSURANCE CORPORATE INTERSEGMENT TOTAL
-------- --------- --------- ------------ -----
Revenues $ 2,660,438 $ 8,424,056 $ 1,749,774 $ (264,798) $ 12,569,470
Income (loss) before income taxes (160,054) 1,772,215 (63,984) -- 1,548,177
Cemetery Operations. Cemetery revenues increased approximately
$510,000 and $1.2 million, or 19.2% and 15.2%, in the three-month and
nine-month periods ended September 30, 2003, respectively, compared to the
corresponding periods of 2002. Sales for the three and nine months ended
September 30, 2003 increased due to revenues attributable to new properties,
more effective marketing and increased sales of certain cemetery and
memorialization products and services.
Cost of sales increased $213,000 and $608,000, or 32.8% and 32.5%,
from $648,000 and $1.9 million in the three and nine months ended September
30, 2002, respectively, to $861,000 and $2.5 million in the corresponding
periods of 2003 due to increased cemetery sales. Cost of sales as a
percentage of revenues increased to 27.1% and 27.2% for the three and nine
months ended September 30, 2003, respectively, compared to 24.4% and 23.7%
for the three and nine months ended September 30, 2002, respectively, due to
a higher than expected variance in actual costs.
Selling, general and administrative expenses increased $186,000 and
$2.1 million, or 8.7% and 39.8%, from $2.1 million and $5.1 million in the
three and nine months ended September 30, 2002, respectively, to $2.3
million and $7.2 million, in the corresponding periods of 2003 due to
expenses attributable to the start up of new locations and a more aggressive
marketing approach. As a percentage of revenues, selling, general and
administrative costs decreased to 73.0% and increased to 78.9% in the three
and nine months ended September 30, 2003, respectively, from 80.1% and 64.9%
in the three and nine months ended September 30, 2002, respectively.
Income (loss) before income taxes decreased from a loss of $160,000
and income of $411,000 in the three and nine months ended September 30,
2002, respectively, to losses of $326,000 and $1.5 million in the
corresponding periods of 2003. Operating income declined in the three and
nine months ended
- 17 -
September 30, 2003, respectively, compared to the corresponding periods of
2002 due to lower than expected revenues generated coupled with higher
operating expenses due to start up costs associated with new locations.
Minority Interest Cemetery Operations. Forever Enterprises, Inc.
currently has a 50% interest in Mount Washington Forever, L.L.C., and is
responsible for all aspects of the cemetery's marketing and operations. We
account for our investment in Mount Washington Forever, L.L.C. on the equity
method. On June 27, 2003, we contributed an additional $250,000 in capital
to Mount Washington Forever, L.L.C. For the nine months ended September 30,
2003, we recognized negative equity in the losses of Mount Washington in the
total amount of our capital contribution. Our net equity investment in Mount
Washington remains in a deficit position.
In conjunction with the construction of a new mausoleum at Mount
Washington, we entered into a guaranty agreement with Commerce Bank, N.A.
The guaranty agreement is discussed further in Note 5 to the unaudited
consolidated financial statements included in this report.
Insurance Operations. Insurance revenues increased approximately
$136,000 and decreased approximately $432,000, or 1.6% and 1.9%, in the
three-month and nine-month periods ended September 30, 2003, respectively,
compared to the corresponding periods in 2002. The increase for the three
months ended September 30, 2003 was attributable primarily to an increase in
investment income. The decrease for the year-to-date period was primarily
attributable to lower premium income as well as losses on sale of
investments.
Our premium income decreased approximately $901,000 and $359,000,
or 29.5% and 5.3%, in the three-month and nine-month periods ended September
30, 2003, respectively, compared to the corresponding periods of 2002. These
decreases were due to the mix of policies written for new business retained.
Commission and expense allowances on reinsurance ceded increased
approximately $1.3 million and $1.1 million, or 25.7% and 8.0%, in the
three-month and nine-month periods ended September 30, 2003, respectively,
compared to the corresponding periods of 2002 due primarily to the mix of
products sold.
Our net investment income and realized gains decreased
approximately $124,000 and $915,000, or 60.8% and 32.4%, in the three-month
and nine-month periods ended September 30, 2003, respectively, compared to
the corresponding periods of 2002. The decreases were due to higher than
expected trading losses on investments offset by increases in investment
income.
Our benefit expenses increased approximately $418,000 and decreased
approximately $460,000, or 12.1% and 6.7%, in the three-month and nine-month
periods ended September 30, 2003, respectively, compared to the
corresponding periods of 2002. The increase was due to assumption of claims
previously ceded to the reinsurer. The decrease was due to lower than
expected mortality experiences in 2003 offset slightly by the prior claims
noted above.
Income before income taxes decreased $1.9 million and $6.1 million,
from income of $1.8 million and $3.3 million, respectively, for the three-
and nine-month periods ended September 30, 2002, to losses of $129,000 and
$2.8 million for the three- and nine-month periods ended September 30, 2003,
due to decreased premium income and higher than expected trading losses.
Income before income taxes as a percentage of revenues also declined in the
three and nine months ended September 30, 2003, from the corresponding
periods of 2002.
- 18 -
Total assets increased $13.9 million from $214.9 million at
September 30, 2002 to $228.8 million at September 30, 2003 due primarily to
an increase in the amount due from reinsurers.
Corporate. Corporate revenues increased $2.3 million and $1.1
million, or 129.1% and 20.0%, in the three-month and nine-month periods
ended September 30, 2003 compared to the corresponding periods of 2002, due
to increased revenues generated by the management agreement with National
Prearranged Services, Inc. (see Note 6 to the unaudited consolidated
financial statements included in this report) and increased investment
income.
Income before income taxes increased $2.8 million and $5.6 million,
in the three-month and nine-month periods ended September 30, 2003 compared
to the corresponding periods of 2002, due primarily to increased revenues
generated by the management agreement with National Prearranged Services,
Inc. and increased investment income.
Consolidated. Income before income taxes for the three- and
nine-month periods ended September 30, 2003 increased $713,000 and decreased
$2.5 million, respectively, compared to the corresponding periods of 2002.
Net income per basic share for the three- and nine-month periods ended
September 30, 2003, increased to $0.24 and decreased to $0.08, respectively,
from $0.19 and $0.52 per share for the corresponding periods of 2002. The
increase in operating income for the three months ended September 30, 2003,
compared to the corresponding period of 2002, was primarily due to increased
revenues from the management agreement with National Prearranged Services.
The decrease in operating income for the nine months ended September 30,
2003, compared to the corresponding period of 2002, was due to increased
expenses at our cemetery operations combined with decreased investment
income and trading losses at our insurance operations.
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, we believe cash generated from our operations and from
our management agreement with National Prearranged Services (see Note 6 to
the unaudited consolidated financial statements included in this report)
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 believe we can
significantly increase the volume of pre-need revenues at new properties,
and much of those revenues will be 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 for the
remainder of 2003. Financing alternatives related to the build-up of our
trade receivables 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 on hand or lines of
credit.
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
- 19 -
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 80,000 hits (visits) per day.
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. As of September 30,
2003, no funds were available for transfer to us by our insurance
subsidiaries by dividend, loan or advance.
Our cash requirements for the remainder of 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 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, Inc. will provide cash in excess of
that necessary to meet our monthly repayment obligations under said
agreement.
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.
On August 26, 2003, we entered into a letter of intent to sell the
assets of Forever All Faiths for the price of $350,000. Upon completion of
due diligence by both parties, we anticipate closing on this transaction in
the fourth quarter of 2003.
On October 7, 2003, we entered into a letter of intent to purchase
a cemetery in California, for the purchase price of $495,000 to be paid in
cash at closing. The purchase price and working capital, if agreeable terms
are secured, are expected to be funded through debt arrangements with an
outside lender. Upon satisfactory completion of our due diligence, we
anticipate closing on the cemetery in the fourth quarter of 2003.
Changes in our consolidated balance sheet between December 31, 2002
and September 30, 2003 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 from reinsurer increased approximately $9.5 million due to an
increase in new business written in relation to the blocks of business ceded
to Employers Reassurance Corporation, Hannover Life Reassurance Company of
America and North America Life Insurance Company.
- 20 -
Total cash and investments decreased $2.4 million from $99.4
million at December 31, 2002 to $97.0 million at September 30, 2003 due to
decreased investments held. Changes in the separate components of invested
assets were due to the portfolio mix of our invested assets and changes in
the fair market value of balances in actively managed fixed maturity and
equity securities.
Intangible assets decreased approximately $511,000 from $10.9
million at December 31, 2002 to $10.4 million at September 30, 2003. The
decrease was due primarily to amortization of the NPS Management Agreement
described in Note 6 to the unaudited consolidated financial statements
included in this report.
Future policy benefits increased approximately $10.0 million from
$158.3 million at December 31, 2002 to $168.3 million at September 30, 2003.
This increase was due to the growth of our reinsured business.
Policyholder deposits decreased approximately $555,000 from $46.6
million at December 31, 2002 to $46.1 million at September 30, 2003, 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.
Notes payable decreased approximately $3.0 million from $26.1
million at December 31, 2002 to $23.1 million at September 30, 2003 due
primarily to the repayment of long-term debt. Working capital from
operations is expected to be sufficient to repay loans maturing in the first
quarter of 2004.
ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 adopted
SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 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 adopted SFAS No.
146 on January 1, 2003. The adoption of SFAS No. 146 has not had 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 adopted SFAS No. 148 on January
1, 2003, which resulted in no effect on our financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for
- 21 -
derivative instruments and for hedging activities. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149
has not had a significant impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a
significant impact on our financial statements.
In January 2003, the FASB issued Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, which establishes standards for
determining when variable interest entities (VIE) should be consolidated
with its primary beneficiary. FIN No. 46 is effective immediately for VIEs
created after January 31, 2003 and otherwise is effective for interim
periods beginning after June 15, 2003. We adopted FIN No. 46 on July 1,
2003, which resulted in no effect on our financial position, results of
operations or cash flows.
- 22 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes from the information provided
in our Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed,
evaluated, summarized and reported accurately within the time periods
specified in the Securities and Exchange Commission's rules and forms. As of
the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of management, including
our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (pursuant to Exchange Act Rule 13a-15). Based upon that
evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of
the date of that evaluation. The conclusions of our chief executive officer
and chief financial officer from this evaluation were communicated to the
audit committee of our board of directors. In connection with this
evaluation, there were no breaches of such controls that would require
disclosure to the audit committee or our auditors.
- 23 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. We deny liability and intend to vigorously
defend the appeal.
Forever Enterprises, Inc. has been named as defendant in a lawsuit
filed in 2003 by a former licensed insurance agent for National Prearranged
Services of Texas, 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. We deny liability and intend to vigorously defend the suit.
Forever Enterprises, Inc., Forever Network, Inc., Hollywood
Forever, Inc. and Forever Memorial, Inc. have been named as defendants in a
lawsuit filed in 2003 by a former employee. The case was filed in state
court in St. Louis City, Missouri, for breach of contract and fraud. The
amount being sought is undetermined. This case is currently in discovery
with no trial date set. We deny liability and intend to vigorously defend
the suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the
quarter ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements 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.
FOREVER ENTERPRISES, INC.
(Registrant)
Dated: October 30, 2003 By: /s/ Brent D. Cassity
----------------------------------
Brent D. Cassity, Chief Executive
Officer
Dated: October 30, 2003 By:/s/ J. Tyler Cassity
-----------------------------------
J. Tyler Cassity, President
Dated: October 30, 2003 By: /s/ Michael R. Butler
----------------------------------
Michael R. Butler, Chief Financial
Officer
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EXHIBIT INDEX
Ex. No. Description
------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, is filed
herewith.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, is filed
herewith.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, is filed herewith.
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