10-Q 1 forevrq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2003 ------------------------------------------------ Commission file number 001-14067 -------------------------------------------------------- FOREVER ENTERPRISES, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 36-3427454 ----------------------------------- ---------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 10 S. BRENTWOOD CLAYTON, MISSOURI 63105 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 726-3371 ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes | | No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). | | Yes |X| No Number of shares Title of class outstanding as of October 29, 2003 ------------------------------------ --------------------------------------- Common stock, $0.01 par value 6,936,059 PAGE> FOREVER ENTERPRISES, INC. FORM 10-Q INDEX

- 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOREVER ENTERPRISES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

- 4 - FOREVER ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

- 5 - FOREVER ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

- 6 - FOREVER ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --------- NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Forever Enterprises, Inc. and its direct and indirect wholly-owned subsidiaries, Forever Network, Inc., Memorial Service Life Insurance Company and Lincoln Memorial Life Insurance Company. We account for our fifty-percent investment in Mount Washington Forever, L.L.C. under the equity method. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The accompanying condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2003 and the results of operations and cash flows for the three and nine months ended September 30, 2003. The results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. NOTE 2 -- NOTES PAYABLE As of September 30, 2003 and December 31, 2002, we had a note payable to Allegiant Bank in the amount of $1,887,484 and $1,974,257, respectively, which matures on January 5, 2006. Payments of $19,117 of principal and interest at the "corporate market" interest rate (5.0% per annum at September 30, 2003) are due monthly until the principal balance is paid in full. The "corporate market" interest rate is based upon an index developed by Allegiant Bank. We also have a $250,000 revolving line of credit from Allegiant Bank at rates similar to the primary credit agreement discussed above. The balance outstanding was $250,000 at September 30, 2003 and December 31, 2002. This line of credit is renewable on a yearly basis subject to Allegiant Bank's discretion. We have a $2,000,000 revolving line of credit from Merrill Lynch Business Financial Services, Inc., which matures on March 31, 2004. Interest is due monthly on the unpaid balance equal to the sum of 2.4% and the Dealer Commercial Paper rate for 30-day high-grade unsecured notes (3.46% per annum at September 30, 2003) as published in The Wall Street Journal. The balance outstanding was $2,001,682 and $1,998,959 as of September 30, 2003 and December 31, 2002, respectively. We have a note payable to Employers Reassurance Corporation in the amount of $9,500,000 and $11,500,000 as of September 30, 2003 and December 31, 2002, respectively. Principal payments of varying amounts are due annually on each anniversary date. Interest on this note is payable annually in arrears on each anniversary date at a rate equal to the five-year Treasury note plus 150 basis points (4.35% per annum at September 30, 2003). - 7 - We have a note payable to National Prearranged Services, Inc. in the amount of $6,476,373 and $8,031,272 as of September 30, 2003 and December 31, 2002, respectively (see Note 6). Payments of $246,483 of principal and interest are due monthly until the principal balance of the note is paid in full. This note bears interest at the rate of 8.5% per annum. We have a note payable to Lincoln Memorial Services, Inc. in the amount of $4,153,324 and $4,542,195 as of September 30, 2003 and December 31, 2002, respectively. Payments of $70,528 of principal and interest are due monthly with a final payment due on November 1, 2007. This note bears interest at a rate of 7.5% per annum. We have a term loan credit agreement with Southwest Bank of St. Louis in the principal amount of $2,000,000, of which $953,635 and $85,990 was outstanding as of September 30, 2003 and December 31, 2002, respectively. This agreement bears interest at a floating rate equal to the prime rate of Southwest Bank plus 1.5% (5.5% per annum as of September 30, 2003). Payments of interest are due monthly through May 1, 2004. Beginning June 1, 2004, principal payments are due on the first day of each month based on a ten-year amortization. This note is payable in full on December 6, 2007. We entered into a note payable effective January 1, 2003 with Allegiant Bank, Trustee under Trust for National Prearranged Services, Inc. Pre-Need Plans dated 7/24/89 - Trust IV ("Trust IV"), in the principal amount of $150,000, of which $145,851 was outstanding as of September 30, 2003. Payments of $3,006 of principal and interest are due monthly until the principal balance is paid in full. This note bears interest at the rate of 7.5% per annum. Effective May 15, 2003, we entered into a revolving line of credit with Southwest Bank of St. Louis in the principal amount of $1,000,000, of which $1,000,000 was outstanding as of September 30, 2003. This agreement matures on April 30, 2004, and bears interest at a floating rate equal to the prime rate of Southwest Bank plus 1.0% (5.0% per annum as of September 30, 2003). Payments of interest are due monthly until maturity. NOTE 3 -- INVESTMENTS The cost or amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturity and equity securities available-for-sale as of September 30, 2003 were as follows:

- 8 - NOTE 4 -- SEGMENT INFORMATION We conduct and manage our business through two segments, cemetery/funeral operations and life insurance operations. The following tables summarize the results of our operations by our business segments. Costs and revenues that are not related to operating segments are included in the column "Corporate." NINE MONTHS ENDED SEPTEMBER 30, 2003

NOTE 5 -- COMMITMENTS AND CONTINGENCIES We are party to a guaranty agreement with Commerce Bank, N.A. to secure a $2,000,000 promissory note with and between Mount Washington Forever, L.L.C. and Commerce Bank, N.A. to finance the construction of a new mausoleum at the Mt. Washington Forever Cemetery. The balance of the promissory note was $1,370,783 and $768,081 as of September 30, 2003 and December 31, 2002, respectively. - 9 - On August 26, 2003, we entered into a letter of intent to sell the assets of Forever All Faiths for the price of $350,000. Upon completion of due diligence, we anticipate closing this transaction in the fourth quarter of 2003. NOTE 6 -- RELATED PARTY TRANSACTIONS In 2002 we entered into a Management Agreement with National Prearranged Services, Inc. ("NPS"), whereby we agreed to provide all necessary personnel to supervise NPS' field sales force in return for a monthly management fee equal to a percentage of the net sales revenues of NPS as payment for the services provided. As consideration to NPS for entering into this Management Agreement, we entered into a promissory note in the amount of $10.0 million. The balance of this note was $6,476,373 and $8,031,272 as of September 30, 2003 and December 31, 2002, respectively. Management fees, which have been recorded as "Management fee income" on our consolidated statements of operations, were $1.7 million and $3.4 million for the three- and nine-month periods ended September 30, 2003, respectively, compared to $956,000 and $2.9 million for the same periods in 2002. We entered into agreements in 2002 in connection with our acquisition of a funeral home in Missouri. Payments of $16,667 (of which equal amounts of $4,944 are payable to Messrs. Brent D. Cassity, our chief executive officer, J. Tyler Cassity, our president, and J. Douglas Cassity, the father of Messrs. Brent and Tyler Cassity) are payable monthly until the balance is paid in full. Amounts payable under these agreements were $501,247 and $573,820 as of September 30, 2003 and December 31, 2002, respectively, and are included in "Accounts payable and accrued liabilities" on our consolidated balance sheets. We have a note payable to Lincoln Memorial Services, Inc. in the amount of $4,153,324 and $4,542,195 as of September 30, 2003 and December 31, 2002, respectively. Payments of $70,528 of principal and interest are due monthly with a final payment due on November 1, 2007. This note bears interest at a rate of 7.5% per annum. We also provide and receive administrative and other services to/from related parties. Management fees charged to related parties, which have been recorded as "Management fee income" on our consolidated statements of operations, were $224,000 and $746,000 for the three and nine months ended September 30, 2003, respectively, compared to $332,000 and $925,000 for the corresponding periods in 2002. Management fees incurred with related parties, which are included in "Other expenses" on our consolidated statements of operations, were $122,000 and $365,000 for the three and nine months ended September 30, 2003, respectively, compared to $90,000 and $270,000 for the corresponding periods in 2002. These fees reflect an allocation based on actual costs incurred. Amounts receivable from National Heritage Enterprises and its affiliates, which are included in "Receivable from related party" on our consolidated balance sheets, were $8,286,682 and $8,492,518 as of September 30, 2003 and December 31, 2002, respectively. Amounts payable to National Heritage Enterprises and its affiliates, which are included in "Payable to affiliates" on our consolidated balance sheets, were $6,030,535 and $4,552,570 as of September 30, 2003 and December 31, 2002, respectively. - 10 - NOTE 7 -- NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires, among other things, that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 has not had a significant impact on our financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities that are initiated after December 15, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 has not had a significant impact on our financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB statement No. 123, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal years beginning after December 15, 2003. We adopted SFAS No. 148 on January 1, 2003, which resulted in no effect on our financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had a significant impact on our financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a significant impact on our financial statements. In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, which establishes standards for determining when variable interest entities (VIE) should be consolidated with its primary beneficiary. FIN No. 46 is effective immediately for VIEs created after January 31, 2003 and otherwise is effective for interim periods beginning after June 15, 2003. We adopted FIN No. 46 on July 1, 2003, which resulted in no effect on our financial position, results of operations or cash flows. - 11 - NOTE 8 -- INCOME PER SHARE OF STOCK Income per share of stock is computed using the weighted average number of common shares outstanding during the applicable period. Diluted income per share of stock is computed using the weighted average number of common shares outstanding and dilutive potential common shares (primarily outstanding stock options). Weighted average shares of common stock and dilutive potential common shares used in the calculation of basic and diluted income per share are summarized as follows:

Dilutive potential common shares included in the diluted income per share calculation were determined using the treasury stock method. Under the treasury stock method, outstanding stock options are dilutive when the average market price of a company's common stock exceeds the option price during a period. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period. NOTE 9 -- SUBSEQUENT EVENT On October 7, 2003, we entered into a letter of intent to acquire all the assets, real property, equipment, technology, trademarks and rights in contracts of a cemetery in Mill Valley, California, for the purchase price of $495,000 to be paid in cash at closing. Upon satisfactory completion of our due diligence, we anticipate closing on the cemetery during the fourth quarter of 2003. - 12 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by and information currently available to us at the time such statements were made. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our actual results may differ materially from those indicated by the forward-looking statements. All predictions as to future results contain a measure of uncertainty and, accordingly, actual results could differ materially. The following factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to: general economic conditions and other factors, including prevailing interest rate levels and stock market performance, which may affect our ability to sell our products, the market value of our investments and the lapse rate and profitability of our policies; our ability to achieve anticipated levels of operational efficiencies for acquired companies or properties, as well as through other cost-saving initiatives; mortality, morbidity, and other factors which may affect the profitability of our insurance products; the financial well-being of end consumers of our products; changes in the federal income tax laws and regulations which may affect the cost of or demand for our products; increasing competition in the sale of our products; technological change; regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) sales and underwriting of insurance products to fund obligations under pre-need contracts, regulation of the sale, underwriting and pricing of insurance products and regulation of the sale and pricing of funeral home operations and products; litigation, including its inherent uncertainty; environmental matters; the availability and terms of future acquisitions, if any; changes in accounting principles or new accounting standards; and other unforeseen circumstances. A number of these factors are discussed in this and our other filings with the Securities and Exchange Commission. Additionally, we may not be successful in identifying, acquiring and integrating other companies or their businesses, implementing improved management and accounting information systems and controls and may be dependent upon additional capital and equipment purchases for future growth. There may be other risks and uncertainties that management is not able to predict. When used in this report, the words "projects," "anticipates," "believes," "estimates," "expects," "intends," and similar expressions, as they relate to us are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by those expressions. OVERVIEW We, through our subsidiaries, own and operate combination funeral home and cemetery properties, market and produce multimedia LifeStories(TM), operate an Internet marketing site, and operate life insurance companies that principally issue insurance contracts to fund pre-need funeral contracts. Our life insurance operations are conducted through our wholly-owned life insurance subsidiaries. - 13 - Forever Network, Inc., directly and through its subsidiaries, owns and operates funeral homes and cemetery properties, markets Forever LifeStories(TM) to individuals and groups, and archives the digital interactive LifeStories(TM), which can be viewed at company cemetery/funeral homes or privately in the home and on the Internet at www.forevernetwork.com. In addition, the Internet site provides valuable information to consumers on memorial products and services and markets related merchandise and services to the growing population of visitors to the site. Substantially all of our life insurance policies are issued to fund prearranged funeral contracts sold by National Prearranged Services, Inc. and National Prearranged Services Agency, Inc. National Prearranged Services, Inc. is an affiliated company that collects all payments for prearranged funeral contracts and remits those amounts to our insurance subsidiaries either directly or through assumed reinsurance. In August 2000, we entered into a coinsurance agreement with Employers Reassurance Corporation (ERC) whereby we ceded a significant portion of our in-force policies. This coinsurance agreement includes experience refund provisions whereby we may earn additional ceding commissions in varying amounts each year through 2010, subject to the mortality experience of the policies not exceeding certain levels. This coinsurance agreement does not relieve us from our obligations to our policyholders and, accordingly, the net cost of the coinsurance agreement of approximately $80,000 was deferred and is being amortized over the remaining life of the underlying insurance policies. Approximately $79.9 million of the reinsurance receivable as of September 30, 2003 was related to the agreement with ERC. Experience ratings refunds of approximately $2,000,000 due in August 2003 have not been received from ERC as of the date of this filing due to various issues raised by ERC regarding mortality ratings under this agreement and claims incurred prior to the reinsurance effective date. We are currently discussing and providing ERC with information and answers to their inquiries about the mortality experience under our agreement with ERC. We anticipate receiving the ratings refund in the near term subject to potential ratings adjustments by ERC. As a result of these issues, we have accrued approximately $424,000 in additional claim benefits to be paid to ERC. In November 2000, we entered into various coinsurance agreements with North America Life Insurance Company of Texas ("NAL") whereby we ceded blocks of certain direct written life insurance policies and all of our assumed life insurance and annuity policies. As of September 30, 2003, segregated funds of approximately $65.3 million were in a trust account for the benefit of the reinsurer. The funds withheld are presented net of amounts due from the reinsurer in our consolidated financial statements. We also entered into a 100% coinsurance agreement with NAL in September 2000, whereby substantially all of the policies issued by us that are sold by NPS and NPS Agency are ceded to NAL. This agreement was modified in August 2001, at which time we also entered into a coinsurance agreement with Hannover Life Reassurance Company of America ("Hannover"), whereby all of the policies issued by us that are sold by NPS are ceded to Hannover. These coinsurance agreements do not relieve us from our obligations to our policyholders and, accordingly, the cost of the coinsurance agreements was deferred and is being amortized over the remaining life of the underlying insurance policies. The unamortized deferred cost as of September 30, 2003 was approximately $1.7 million. Approximately $35.4 million of the reinsurance receivable as of September 30, 2003 was related to the agreements with NAL and Hannover. Hannover has notified us of their intent to terminate the coinsurance agreement effective February 1, 2004. We are currently seeking replacement coverage with another reinsurer(s) with similar reinsurance provisions that will replace the existing treaty with Hannover at the notified termination date. The arrangements with Employers Reassurance Corporation, North America Life Insurance Company of Texas and Hannover Reassurance Life Company of America were made to allow us to shift our focus from the insurance operations to the cemetery operations of our company. - 14 - Our business strategy is to develop the Forever Brand as the consumer's first choice for memorialization, through funeral homes, cemeteries and LifeStories(TM) to become the recognized leader in revolutionizing the way we document and remember lives. Our goal is for the Forever Brand to represent unparalleled value, innovation and customer service. We plan to grow our business and our brand by acquiring cemetery/funeral home combination properties in targeted metropolitan areas, aggressively marketing the multimedia LifeStory(TM) product and services, and further developing our Internet marketing business. No assurance can be given that we will be successful in completing any acquisition, or that any acquisition, once completed, will ultimately enhance our results of operations. We will seek to increase the number of quality cemetery/funeral home combination properties we own and operate and to expand our permanent archive of digital LifeStories(TM). Our plan is to acquire properties in or near major metropolitan areas to allow us to advertise and market the Forever products and services to large populations. We seek properties with enough inventory and/or land to accommodate future sales and/or construction of Forever mausoleums/chapels to create inventory and service space. The targeted properties could possibly be distressed in some way. We believe properties that lack an aggressive marketing approach are ideal. Established properties with a large heritage of families will also allow us to market our LifeStory(TM) and other services to existing client family members, expanding our market potential. We also may pursue properties in the form of undeveloped land in a current or developing population center that can support a funeral home/mausoleum structure, and that provide a suitable supply of saleable cemetery land. We plan to increase the scope and awareness of our Forever LifeStory(TM) business through the active marketing of this service to individuals and groups through our company-owned properties and through various other organizations and groups. We believe that acquiring and developing cemetery/funeral home properties in major metropolitan areas will facilitate our LifeStory(TM) and Internet business strategy. Our website stores and displays thousands of individual family archives, or LifeStories(TM), each containing film and video clips, photos, written and spoken words, all collected and preserved permanently. The website also educates consumers about memorial products, services and providers, and markets Forever products and services. We believe that the current environment provides excellent opportunities to acquire cemetery properties at attractive prices due to the financial distress of several large cemetery/funeral home conglomerates. We also believe more properties are available for acquisition, the prices for properties are declining and the competition for acquiring these properties is very small. Management believes that execution of this strategy will allow us to develop further the Forever Brand as a leader in providing unique and valuable memorialization products and services, helping us to achieve the company mission by changing the way we document and remember lives. We believe we are well positioned to enhance the profitability of the businesses and properties we acquire. With respect to our cemetery/funeral home operations, we believe we can apply tested and proven marketing processes to produce significant revenue and market share growth. Efficient management of property operations, combined with aggressive new marketing initiatives, should allow for greatly enhanced profitability on newly acquired properties. The growing interest in organizing and preserving family memories, use of the Internet for information gathering, and commerce on the World Wide Web should provide the platform for successful results on our LifeStory(TM) and Internet strategy. - 15 - RESULTS OF OPERATIONS The following presents management's discussion and analysis of our consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the accompanying notes thereto. Our financial highlights were as follows:

We conduct and manage our business through two segments, cemetery/funeral operations and life insurance operations. The following tables and narratives summarize the results of our operations by our business segments. Costs and revenues that are not related to operating segments are included in the column "Corporate." NINE MONTHS ENDED SEPTEMBER 30, 2003

Cemetery Operations. Cemetery revenues increased approximately $510,000 and $1.2 million, or 19.2% and 15.2%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods of 2002. Sales for the three and nine months ended September 30, 2003 increased due to revenues attributable to new properties, more effective marketing and increased sales of certain cemetery and memorialization products and services. Cost of sales increased $213,000 and $608,000, or 32.8% and 32.5%, from $648,000 and $1.9 million in the three and nine months ended September 30, 2002, respectively, to $861,000 and $2.5 million in the corresponding periods of 2003 due to increased cemetery sales. Cost of sales as a percentage of revenues increased to 27.1% and 27.2% for the three and nine months ended September 30, 2003, respectively, compared to 24.4% and 23.7% for the three and nine months ended September 30, 2002, respectively, due to a higher than expected variance in actual costs. Selling, general and administrative expenses increased $186,000 and $2.1 million, or 8.7% and 39.8%, from $2.1 million and $5.1 million in the three and nine months ended September 30, 2002, respectively, to $2.3 million and $7.2 million, in the corresponding periods of 2003 due to expenses attributable to the start up of new locations and a more aggressive marketing approach. As a percentage of revenues, selling, general and administrative costs decreased to 73.0% and increased to 78.9% in the three and nine months ended September 30, 2003, respectively, from 80.1% and 64.9% in the three and nine months ended September 30, 2002, respectively. Income (loss) before income taxes decreased from a loss of $160,000 and income of $411,000 in the three and nine months ended September 30, 2002, respectively, to losses of $326,000 and $1.5 million in the corresponding periods of 2003. Operating income declined in the three and nine months ended - 17 - September 30, 2003, respectively, compared to the corresponding periods of 2002 due to lower than expected revenues generated coupled with higher operating expenses due to start up costs associated with new locations. Minority Interest Cemetery Operations. Forever Enterprises, Inc. currently has a 50% interest in Mount Washington Forever, L.L.C., and is responsible for all aspects of the cemetery's marketing and operations. We account for our investment in Mount Washington Forever, L.L.C. on the equity method. On June 27, 2003, we contributed an additional $250,000 in capital to Mount Washington Forever, L.L.C. For the nine months ended September 30, 2003, we recognized negative equity in the losses of Mount Washington in the total amount of our capital contribution. Our net equity investment in Mount Washington remains in a deficit position. In conjunction with the construction of a new mausoleum at Mount Washington, we entered into a guaranty agreement with Commerce Bank, N.A. The guaranty agreement is discussed further in Note 5 to the unaudited consolidated financial statements included in this report. Insurance Operations. Insurance revenues increased approximately $136,000 and decreased approximately $432,000, or 1.6% and 1.9%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods in 2002. The increase for the three months ended September 30, 2003 was attributable primarily to an increase in investment income. The decrease for the year-to-date period was primarily attributable to lower premium income as well as losses on sale of investments. Our premium income decreased approximately $901,000 and $359,000, or 29.5% and 5.3%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods of 2002. These decreases were due to the mix of policies written for new business retained. Commission and expense allowances on reinsurance ceded increased approximately $1.3 million and $1.1 million, or 25.7% and 8.0%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods of 2002 due primarily to the mix of products sold. Our net investment income and realized gains decreased approximately $124,000 and $915,000, or 60.8% and 32.4%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods of 2002. The decreases were due to higher than expected trading losses on investments offset by increases in investment income. Our benefit expenses increased approximately $418,000 and decreased approximately $460,000, or 12.1% and 6.7%, in the three-month and nine-month periods ended September 30, 2003, respectively, compared to the corresponding periods of 2002. The increase was due to assumption of claims previously ceded to the reinsurer. The decrease was due to lower than expected mortality experiences in 2003 offset slightly by the prior claims noted above. Income before income taxes decreased $1.9 million and $6.1 million, from income of $1.8 million and $3.3 million, respectively, for the three- and nine-month periods ended September 30, 2002, to losses of $129,000 and $2.8 million for the three- and nine-month periods ended September 30, 2003, due to decreased premium income and higher than expected trading losses. Income before income taxes as a percentage of revenues also declined in the three and nine months ended September 30, 2003, from the corresponding periods of 2002. - 18 - Total assets increased $13.9 million from $214.9 million at September 30, 2002 to $228.8 million at September 30, 2003 due primarily to an increase in the amount due from reinsurers. Corporate. Corporate revenues increased $2.3 million and $1.1 million, or 129.1% and 20.0%, in the three-month and nine-month periods ended September 30, 2003 compared to the corresponding periods of 2002, due to increased revenues generated by the management agreement with National Prearranged Services, Inc. (see Note 6 to the unaudited consolidated financial statements included in this report) and increased investment income. Income before income taxes increased $2.8 million and $5.6 million, in the three-month and nine-month periods ended September 30, 2003 compared to the corresponding periods of 2002, due primarily to increased revenues generated by the management agreement with National Prearranged Services, Inc. and increased investment income. Consolidated. Income before income taxes for the three- and nine-month periods ended September 30, 2003 increased $713,000 and decreased $2.5 million, respectively, compared to the corresponding periods of 2002. Net income per basic share for the three- and nine-month periods ended September 30, 2003, increased to $0.24 and decreased to $0.08, respectively, from $0.19 and $0.52 per share for the corresponding periods of 2002. The increase in operating income for the three months ended September 30, 2003, compared to the corresponding period of 2002, was primarily due to increased revenues from the management agreement with National Prearranged Services. The decrease in operating income for the nine months ended September 30, 2003, compared to the corresponding period of 2002, was due to increased expenses at our cemetery operations combined with decreased investment income and trading losses at our insurance operations. LIQUIDITY AND CAPITAL RESOURCES We expect to secure any significant capital required for acquisition of additional cemetery properties and development of our LifeStory(TM) business and the Internet through debt and/or equity financing. Otherwise, we believe cash generated from our operations and from our management agreement with National Prearranged Services (see Note 6 to the unaudited consolidated financial statements included in this report) will provide working capital for our operations. With new cemetery properties, the initial capital required for the purchase and working capital is anticipated to be sufficient to allow the property to achieve positive cash flow within 12 to 18 months. Because we believe we can significantly increase the volume of pre-need revenues at new properties, and much of those revenues will be financed over time and/or deferred until the time of need (death), we have a natural and budgeted delay in profitability and positive cash flow. Our cemetery property in St. Louis, Missouri, which has been actively marketed since 1997, generates significant positive cash flow from operations and represents the type of relative financial performance expected on our current and future properties. Similar positive trends are being experienced at our cemetery properties in Kansas City, Missouri and Los Angeles, California and we anticipate both properties being able to sustain positive cash flow and contribute to earnings for the remainder of 2003. Financing alternatives related to the build-up of our trade receivables may provide opportunities for "bridge" cash financing until we reach positive sustaining cash flow at certain properties. We believe that any operating cash requirements for our current cemetery properties will be funded through working capital on hand or lines of credit. Capital projects at new cemetery properties for mausoleum/funeral home combination buildings and other saleable inventory features are expected to be funded through use of cash generated from pre-construct sales and/or debt financing and should require little or no additional capital investment. Certain - 19 - other improvements would be accomplished and funded through use of existing personnel and working capital resources and lines of credit. We have invested significant capital to develop and enhance our LifeStory(TM) business and Internet site capabilities at our website www.forevernetwork.com. The LifeStory(TM) program is an important part of our cemetery/funeral home business as well as a central feature to our brand strategy, and is currently contributing to profitability at the cemetery locations and through individual programs. The Forever Network website is currently averaging more than 80,000 hits (visits) per day. Our insurance subsidiaries are restricted by state insurance laws as to the amount of dividends that they may pay to us without prior notice to, or in some cases prior approval from, their respective state insurance departments. These restrictions on dividend distributions are based on statutory capital and surplus and operating earnings. Statutory surplus and statutory operating results are determined according to statutes adopted by each state in which the subsidiaries do business. Statutory surplus bears no direct relationship to equity as determined under accounting principles generally accepted in the United States of America. As of September 30, 2003, no funds were available for transfer to us by our insurance subsidiaries by dividend, loan or advance. Our cash requirements for the remainder of 2003 and in the future will depend upon mortality experience, acquisitions, timing of expansion plans and capital expenditures. Our insurance subsidiaries generally generate sufficient cash receipts from premium collections and investment income to satisfy their obligations. We believe that the investment portfolio of our insurance subsidiaries provides sufficient liquidity to meet their operating cash requirements. We believe that anticipated revenue from operations should be adequate for the working capital requirements of our existing businesses over the next 12 months. We anticipate the management agreement between Forever Enterprises, Inc. and National Prearranged Services, Inc. will provide cash in excess of that necessary to meet our monthly repayment obligations under said agreement. In the event that our plans or assumptions change, or if the resources available to meet unanticipated changes in business conditions prove to be insufficient to fund operations, we could be required to seek additional financing prior to that time, or to curtail certain proposed activities. On August 26, 2003, we entered into a letter of intent to sell the assets of Forever All Faiths for the price of $350,000. Upon completion of due diligence by both parties, we anticipate closing on this transaction in the fourth quarter of 2003. On October 7, 2003, we entered into a letter of intent to purchase a cemetery in California, for the purchase price of $495,000 to be paid in cash at closing. The purchase price and working capital, if agreeable terms are secured, are expected to be funded through debt arrangements with an outside lender. Upon satisfactory completion of our due diligence, we anticipate closing on the cemetery in the fourth quarter of 2003. Changes in our consolidated balance sheet between December 31, 2002 and September 30, 2003 reflect growth through operations, changes in the fair value of actively managed fixed maturity and equity securities, changes in the investment portfolio mix and changes in our insurance business strategy. Due from reinsurer increased approximately $9.5 million due to an increase in new business written in relation to the blocks of business ceded to Employers Reassurance Corporation, Hannover Life Reassurance Company of America and North America Life Insurance Company. - 20 - Total cash and investments decreased $2.4 million from $99.4 million at December 31, 2002 to $97.0 million at September 30, 2003 due to decreased investments held. Changes in the separate components of invested assets were due to the portfolio mix of our invested assets and changes in the fair market value of balances in actively managed fixed maturity and equity securities. Intangible assets decreased approximately $511,000 from $10.9 million at December 31, 2002 to $10.4 million at September 30, 2003. The decrease was due primarily to amortization of the NPS Management Agreement described in Note 6 to the unaudited consolidated financial statements included in this report. Future policy benefits increased approximately $10.0 million from $158.3 million at December 31, 2002 to $168.3 million at September 30, 2003. This increase was due to the growth of our reinsured business. Policyholder deposits decreased approximately $555,000 from $46.6 million at December 31, 2002 to $46.1 million at September 30, 2003, due to withdrawals and surrenders of existing annuity policies and the absence of the issuance of new annuity policies. Policyholder deposits are comprised primarily of annuities acquired with the block of business from Woodmen Accident & Life, World Insurance Company, and Funeral Security Life Insurance Company. Notes payable decreased approximately $3.0 million from $26.1 million at December 31, 2002 to $23.1 million at September 30, 2003 due primarily to the repayment of long-term debt. Working capital from operations is expected to be sufficient to repay loans maturing in the first quarter of 2004. ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires, among other things, that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 has not had a significant impact on our financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities that are initiated after December 15, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 has not had a significant impact on our financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB statement No. 123, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal years beginning after December 15, 2003. We adopted SFAS No. 148 on January 1, 2003, which resulted in no effect on our financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for - 21 - derivative instruments and for hedging activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had a significant impact on our financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a significant impact on our financial statements. In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, which establishes standards for determining when variable interest entities (VIE) should be consolidated with its primary beneficiary. FIN No. 46 is effective immediately for VIEs created after January 31, 2003 and otherwise is effective for interim periods beginning after June 15, 2003. We adopted FIN No. 46 on July 1, 2003, which resulted in no effect on our financial position, results of operations or cash flows. - 22 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, evaluated, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission's rules and forms. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the date of that evaluation. The conclusions of our chief executive officer and chief financial officer from this evaluation were communicated to the audit committee of our board of directors. In connection with this evaluation, there were no breaches of such controls that would require disclosure to the audit committee or our auditors. - 23 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Hollywood Forever Cemetery was named as defendant in a lawsuit filed by a former employee during 2001 in state court in Los Angeles, California, for wrongful discharge. The amount being sought was approximately $300,000. Our motion for summary judgment was granted in December 2002, subsequent to which the plaintiff filed an appeal. There has been no action since the appeal. We deny liability and intend to vigorously defend the appeal. Forever Enterprises, Inc. has been named as defendant in a lawsuit filed in 2003 by a former licensed insurance agent for National Prearranged Services of Texas, Inc. The case was filed in state court in Travis County, Texas, for breach of contract, retaliation and misrepresentation. Forever Enterprises, Inc. maintains it is not a proper party. The amount being sought is undetermined. This case is currently in discovery with no trial date set. We deny liability and intend to vigorously defend the suit. Forever Enterprises, Inc., Forever Network, Inc., Hollywood Forever, Inc. and Forever Memorial, Inc. have been named as defendants in a lawsuit filed in 2003 by a former employee. The case was filed in state court in St. Louis City, Missouri, for breach of contract and fraud. The amount being sought is undetermined. This case is currently in discovery with no trial date set. We deny liability and intend to vigorously defend the suit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended September 30, 2003. - 24 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOREVER ENTERPRISES, INC. (Registrant) Dated: October 30, 2003 By: /s/ Brent D. Cassity ---------------------------------- Brent D. Cassity, Chief Executive Officer Dated: October 30, 2003 By:/s/ J. Tyler Cassity ----------------------------------- J. Tyler Cassity, President Dated: October 30, 2003 By: /s/ Michael R. Butler ---------------------------------- Michael R. Butler, Chief Financial Officer - 25 - EXHIBIT INDEX Ex. No. Description ------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is filed herewith. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is filed herewith. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith. - 26 -

FOREVER ENTERPRISES INC 10-Q