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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
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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