UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Act of 1934
The Neptune Society, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-2492929
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3500 W. Olive, Suite 1430,
Burbank, California 91505
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 953-9995
Securities to be registered pursuant to Section 12(b) of the Act:
None None
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Title of each class to be so registered Name of each exchange on which
each class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Shares, Par Value of $0.002 per Share
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(Title of Class)
Not Applicable
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(Title of Class)
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TABLE OF CONTENTS
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ITEM 1. BUSINESS........................................................................................2
ITEM 2. SELECTED FINANCIAL INFORMATION.................................................................31
ITEM 3. PROPERTIES.....................................................................................42
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................44
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS...............................................................45
ITEM 6. EXECUTIVE COMPENSATION.........................................................................47
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................50
ITEM 8. LEGAL PROCEEDINGS..............................................................................52
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................................................53
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES........................................................54
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED........................................58
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................................58
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................59
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........59
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS..............................................................60
SIGNATURES................................................................................................82
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FORWARD-LOOKING STATEMENTS
This Registration Statement contains forward-looking statements, including
without limitation, statements that include the words "anticipates," "believes,"
"estimates" and "expects" and similar expressions and statements relating to our
strategic plans, capital expenditures, industry trends and our financial
position. Such forward-looking statements reflect our current views with respect
to future events and are subject to certain risks, uncertainties and
assumptions, including competition for and availability of crematory
acquisitions, our ability to manage an increasing number of sales offices and
crematories, our ability to retain key management personnel and to continue to
attract and retain skilled funeral home and crematory management personnel,
state and federal regulations, changes in the death rate or deceleration of the
trend towards cremation, availability and cost of capital and general industry
and economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. We
do not intend to update these forward-looking statements and information.
Our management has included projections and estimates in this Registration
Statement, which are based primarily on management's experience in the industry,
assessments of our results of operations, discussions and negotiations with
third parties and a review of information filed by its competitors with the
Securities and Exchange Commission. Investors are cautioned against attributing
undue certainty to management's projections.
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ITEM 1. BUSINESS
Overview
The Registrant was incorporated in the State of Florida on January 4, 1985
under the name "L R Associates, Inc.", and subsequently changed its name to
"Lari Corp." on August 3, 1998. On March 31, 1999, Lari Corp., paid $1,000,000
cash, $310,000 in transaction costs, 500,000 shares of common stock and
$21,000,000 of promissory notes valued at $19,968,529 (for total consideration
of $26,278,529), to acquire a group of privately held companies and limited
partnerships that were engaged in the business of marketing and administering
Pre-Need and At-Need (at the time of death) cremation services under the name
the "Neptune Society". See "History of the Neptune Society - Neptune Group
Acquisition." At the time of the acquisition, Lari Corp. was not actively
engaged in any business. On April 26, 1999, Lari Corp. changed its name to
"Neptune Society, Inc.", and undertook the management of the Neptune Society
business.
The Neptune Society, Inc., is the holding company for the Neptune Society
of America, Inc., a California corporation. Neptune Society of America, Inc. is
the holding company for Neptune Management Corp. and Heritage Alternatives,
Inc., which are engaged in marketing and administering Pre-Need and At-Need
cremation services in California, Florida, Iowa, New York, Oregon and
Washington. Neptune Society also operates crematories in Los Angeles,
California, Ankeny, Iowa, Portland, Oregon, and Spokane, Washington. Our
crematories service our pre-need programs in the areas in which such crematories
are located. Neptune Society uses the services of third-party crematories in
other areas of the United States. See "History of the Neptune Society."
Unless the context otherwise requires, (i) "Neptune Society" and the
"Registrant" refers to The Neptune Society, Inc., (ii) "Neptune of America"
refers to Neptune Society of America, Inc., (iii) "Neptune Management" refers to
Neptune Management Corp., Inc. (iv) "Heritage Alternatives" refers to Heritage
Alternatives, Inc. The Neptune Group refers to the privately held group of
companies acquired by the Registrant on March 31, 1999. "We," "us," and "our"
refers to Neptune Society, and its subsidiaries and associated entities.
Our principal executive offices are located at 3500 W. Olive, Suite 1430,
Burbank, California 91505. Neptune Society maintains corporate offices at 102
N.E. 2nd Street, Suite 777, Boca Raton, Florida 33432.
All dollar amounts are in United States dollars unless otherwise indicated.
The Neptune Society Business
Our business strategy is to pursue revenue and growth opportunities in the
cremation sector of the death care service industry. We operate all our
locations under one nationally branded name, "The Neptune Society," and offer
only cremation services and products related to cremation services. We do not
intend to evolve into a traditional funeral burial services company and do not
intend to compete directly with the larger corporate consolidators in the death
care service industry by providing burial services.
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Neptune Society Services
Our primary business is marketing and administering Pre-Need and At-Need
cremation services in the states of California, Florida, Iowa, New York, Oregon
and Washington. We also operate a telemarketing center in Tempe, Arizona.
The Neptune Society Pre-Need Program
The Neptune Group started our Pre-Need program in 1988. Our Pre-Need
program is designed to eliminate as much of the emotional and financial burden
as possible for the individuals' heirs and successors. Our Pre-Need Program
allows individuals to pre-arrange cremation funeral services at a guaranteed
fixed price by entering into a Pre-Need contract.
Regulations governing the sale of Pre-Need contracts vary from state to
state. The following is a brief description of the regulatory requirements
related to the sale of Pre-Need contracts in the states where we currently
operate:
California
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of California. Our California Pre-Need cremation service business is
subject to the regulatory requirements of the California Business and
Professions Code. We are required to file reports on an annual basis with the
California Department of Consumer Affairs Cemetery Board. We were also required
to obtain Cemetery Board approval for our California Pre-Need contracts. Our
California Pre-Need contracts must contain certain disclosures and terms to
comply with state regulatory requirements. Our California Pre-Need contract has
been approved for use in California.
Trust Fund Deposits Requirements: We are required to include in our
California Pre-Need contracts an agreement to hold or put the money we receive
for the cremation services in trust until the contract is fulfilled and the
cremation services are delivered. Our California Pre-Need Plans consist of a
contract related to the Pre-Need cremation service, which is 60% of the cost of
a Pre-Need Plan, and an agreement to purchase merchandise, which is 40% of the
cost of a Pre-Need Plan. Under the California regulatory requirements, the
purchase price for merchandise that is delivered at the time a Pre-Need Plan is
sold is excluded from the requirement to hold funds in trust. We deliver
merchandise related to the Pre-Need Plan as soon as payment is received under
the agreement. We place 60% of the funds related to the cost of a Pre-Need Plan
into a Pre-Need trust fund in accordance with our standard Pre-Need services
contract.
Cancellation: If the California Pre-Need plan is cancelled, we are
permitted to charge a revocation fee equal to 10% of the trust fund balance
related to such Plan, which may be collected only from the income earned by the
trust, if any.
Florida
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Florida. Our Florida Pre-Need cremation service business is subject to
the regulatory requirements of Florida Funeral and Cemetery Services Act. We are
required to file reports on an annual basis with the Florida Cemetery Board.
Florida Cemetery Board approval is required for our Pre-Need
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contracts, which must contain certain disclosures and terms. Our Florida
Pre-Need contracts are approved for use in Florida.
Trust Fund Deposits: The Florida Funeral and Cemetery Services Act requires
us to place into a trust fund an amount at least equal to the sum of 70% of the
purchase price collected for all services sold; 100% of the purchase price for
all cash advance items sold; and 30% of the purchase price collected or 110% of
the wholesale cost, whichever is greater, for each item of merchandise sold. Our
Florida Pre-Need Plans consist of a contract related to the Pre-Need cremation
service, which is 70% of the cost of a Pre-Need Plan, and an agreement to
purchase merchandise, which is 30% of the cost of a Pre-Need Plan. Under the
terms of our Florida Pre-Need contracts, we deposit 70% of the funds we receive
for Pre-Need services into trust and 30% of the funds we receive for merchandise
into trust.
Cancellation: Under the Florida Funeral and Cemetery Services Act, a
purchaser may, in writing, cancel a Pre-Need Plan as follows:
o within 30 days of the date the contract is entered into, the purchaser
may cancel the entire contract receive all of the payments made,
provided that the services have not been provided;
o anytime after 30 days, the purchaser may cancel the services portion
of the contract provided that the services have not been provided, and
receive a full refund of all of the amounts deposited into trust that
are related to the services; and
o anytime after 30 days, a purchaser may cancel the merchandise portion
of a Pre-Need plan and shall be entitled to a full refund of the
purchase price allocable to the specific item or items of merchandise
that we cannot or do not deliver in accordance with the agreement.
Iowa
Licensing: We are a licensed provider of pre-need cremation services in the
State of Iowa. Our Iowa Pre-Need cremation service business is subject to the
regulatory requirements of the Iowa Administrative Code. We are required to file
reports on an annual basis with the Iowa Mortuary Board. Iowa Mortuary Board
approval is required for our Iowa Pre-Need contracts, which must contain certain
disclosures and terms. Our Iowa Pre-Need contracts have been approved for use in
Iowa.
Trust Fund Deposits: The Iowa Administrative Code requires us to place at
least 80% of the total purchase price collected for our Pre-Need plans into a
trust fund. Under the terms of our Iowa Pre-Need contracts, we place 80% of the
amount collected for the Pre-Need services and merchandise into trust.
Cancellation: If an Iowa Pre-Need Plan is cancelled, all monies must be
refunded without penalty within 10 days after cancellation.
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Oregon
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Oregon. Our Pre-Need cremation service business is subject to the
regulatory requirements of the Oregon Revised Statute - Funerals, Cemeteries and
Crematoriums Act and the Uniform Trustees' Powers Act. We are required to file
reports on an annual basis with the Oregon Cemetery Board. Oregon Cemetery Board
approval is required for our Oregon Pre-Need contracts, which must contain
certain disclosures and terms. Our Oregon Pre-Need contracts are approved for
use in Oregon.
Trust Fund Deposits: The Oregon Uniform Trustees' Powers Act requires us to
place at least 90% of the purchase price collected for Pre-Need services into a
trust fund. Our Oregon Pre-Need Plans consist of a contract related to the
Pre-Need cremation service at a guaranteed price, which is 60% of the cost of a
Pre-Need Plan, and an agreement to purchase merchandise, which is 40% of the
cost of a Pre-Need Plan. Under the Oregon regulatory requirements, the purchase
price for merchandise that is delivered at the time a Pre-Need Plan is sold is
excluded from the requirement to hold funds in trust. We deliver merchandise
related to the Pre-Need Plan upon receipt of payment. Under the terms of our
Oregon Pre-Need contract, we place 90% of the amount collected for the Pre-Need
services into trust.
Cancellation: If the guaranteed price Pre-Need plan is cancelled, we are
permitted to retain 10% of the amount collected for Pre-Need services and are
not required to refund any amounts related to merchandise sold.
Washington
Licensing: We are a licensed provider of Pre-Need cremation services in the
State of Washington. Our Washington Pre-Need cremation service business is
subject to the regulatory requirements of the Revised Code of Washington
regulating embalmer and funeral directors. We are required to file reports on an
annual basis with the Washington Cemetery Board. Washington Cemetery Board
approval is required for our Washington Pre-Need contracts, which must contain
certain disclosures and terms. Our Washington Pre-Need contracts are approved
for use in Washington.
Trust Fund Deposits: Washington law requires us to place at least 80% of
the purchase price collected for Pre-Need services into a trust fund. Our
Washington Pre-Need Plans consist of a contract related to the Pre-Need
cremation service, which is 60% of the cost of a Pre-Need Plan at a guaranteed
price, and an agreement to purchase merchandise, which is 40% of the cost of a
Pre-Need Plan. Under the Washington regulatory requirements, the purchase price
for merchandise that is delivered at the time a Pre-Need Plan is sold is
excluded from the requirement to hold funds in trust. We deliver merchandise
related to our Pre-Need Plans at the time a Pre-Need Plan is sold. Under the
terms of our Washington Pre-Need contracts, we place 80% of the amount collected
for the Pre-Need services into trust.
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Cancellation: If the guaranteed price Pre-Need Plan is cancelled, we are
permitted to retain 10% of the amount collected for the Pre-Need services and
are not required to refund amounts related to merchandise sold.
Under Washington law, a purchaser may, in writing, cancel a Pre-Need plan
as follows:
o within 30 days of the date the contract is entered into and receive
all of the payments made, provided that the services have not been
used; and
o anytime after 30 days, if cancelled in writing, provided that the
services have not been provided, and receive a full refund of all
amounts deposited into trust that are related to services, less 10%
for costs associated with selling and setting up the contract.
Trust Fund Administration
We administer our Pre-Need trust funds in accordance with applicable state
regulation, and funds related to each Pre-Need contract are released when we
perform the crematory service or the contract is cancelled. See "Industry
Regulation - Pre-Need Trust Fund."
Approximately 82,000 individuals have become members of our Pre-Need
programs since 1988, some of whom have since died or cancelled their membership.
Since 1988, the cancellation rate of active Pre-Need Contracts has been
approximately 1% on an annual basis. As of August 31, 2000, we had approximately
56,000 active Pre-Need members.
The Neptune Society At-Need Programs
We also provide cremation services on an At-Need basis (at the time of
death). We provide a full range of cremation services and merchandise and handle
all aspects of the deceased's cremation needs according to the decisions and
plans of the decedent's heirs, including service planning, optional services for
scattering remains, and delivery of remains to family members. These services
are generally less expensive than burials.
The Neptune Society Registration Service
We offer a registration service that allows individuals to record and
register their request to be cremated, and we maintain a record of information
necessary for us to provide cremation services at the time of death.
Crematory Services
We operate crematories in California, Iowa, Oregon, and Washington. Our
crematories provide cremation services in the areas where we market and
administer Pre-Need programs. We also use the services of third-party
crematories to service our Pre-Need and At-Need programs in those areas where we
do not operate crematories.
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Other Services and Products
We offer premium, upgraded services and products, including higher quality
urns, and memorialization options. Our offices in Miami, Fort Lauderdale,
Ankeny, Portland, and Spokane have chapels for cremation memorial services.
Pricing
We define our pricing strategy as a simple, dignified and economical
alternative to traditionally more expensive and elaborate funerals and burials.
Our strategy is to maintain a simple product and pricing structure to assist
customer decision-making. For example:
o We charge a one time $50 registration fee for customers who chose only
to register their cremation wishes;
o Our current basic Pre-Need cremation program sells for approximately
$1,500, including approximately $620 for merchandise and $880 for
cremation services;
o We currently charge 8% interest on outstanding amounts under our
extended payment plans; and
o We offer a travel plan to Pre-Need members for $200 - $300, which
guarantees service coverage throughout the continental United States.
Our standard Pre-Need service program includes services, such as burial at
sea, rose garden scattering and delivery of remains to family members.
Our cremation services are generally less expensive than traditional
funeral services.
Existing Facilities
Our offices are generally located in clusters within the geographic areas
we service. We believe that clustering offices in the geographic areas may
provide us with opportunities to share personnel, vehicles and other resources,
reduce per location operating and administrative costs, and implement integrated
marketing programs.
We currently have locations in the states of California, Florida, Iowa, New
York, Oregon, and Washington. Our telemarketing center is located in Tempe,
Arizona. See "Properties."
Expansion
Our growth strategy is to expand our operations through acquisitions of
existing cremation service providers with established market presence and
through establishing new offices. Since March 31, 1999, we have acquired
cremation service providers or established new offices in Iowa, Oregon and
Washington.
The cremation segment within the death care industry is highly fragmented,
and we believe there are many small owner-manager operations throughout North
America that are possible acquisition targets. Our strategy is to acquire
cremation services companies with
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existing operational licenses, staff and offices with At-Need operations in
states with large population centers where cremation rates are 15% to 50%. Based
on our experience, we anticipate that few acquisition targets will have
established effective prearranged sales programs, thus enabling us to implement
our Pre-Need program. We also intend to grow by establishing new offices.
We apply specific selection criteria when evaluating new geographic
locations for expansion, including:
o death and cremation rates for the area;
o existing market area competition;
o forecasted growth in cremation rates for the area; and
o trust laws and regulatory requirements.
Our management is currently exploring expansion opportunities in the states
of Arizona, California, Colorado, Florida, Idaho, Illinois, Massachusetts, Ohio,
Oregon, and Texas. We believe these States present growth opportunities based on
their population and current cremation rates that range between 15% to 50%.
We cannot assure you that we will acquire any additional death care service
providers or that acquisitions, if any, will result in increased operating
efficiencies or revenues to us.
We may also acquire or construct additional crematories if we determine
that the demand for cremation services in a particular geographic region
warrants expansion. We anticipate that our crematories have the capacity to
service our cremation service needs.
Marketing
We currently market our services in all our locations under the name "The
Neptune Society." Our marketing strategy is focused on maintaining and further
developing the strength of our brand name and creating consumer awareness of our
death care services and products. We promote our death care services and
products using targeted advertising campaigns, including, for example:
o advertisements in the Yellow Pages;
o local television and radio advertisements; and
o a Web site providing up-to-date, on-line information related to our
death care services and products.
We market our Pre-Need programs using a combination of sales and direct
marketing programs to generate sales.
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Direct Mail
We use a monthly direct mail campaign to generate leads. We currently mail
approximately 3.7 million pieces of direct mail marketing materials per year in
the geographic areas we serve. Our marketing materials provide information
related to our Pre-Need programs, including a description of the services,
pricing information, our toll free phone number, and a business reply card to
obtain additional information or to make an appointment with one of our area
sales representatives. We have historically received a response rate of
approximately .8% from our direct mail campaigns. We anticipate we can sell
Pre-Need plans to approximately 26% of these leads through our direct sales
efforts.
Telemarketing
On November 15, 1999, we established a telemarketing center in Tempe,
Arizona. As of August 31, 2000, we employed 49 telemarketers. Our current
telemarketing program is primarily designed to generate leads from people who
have responded to our direct mail marketing campaigns. We anticipate that
telemarketing will allow us to increase the number of Pre-Need plans we sell to
leads generated by our direct mail marketing campaign.
The goal of our telemarketing strategy is to increase the sales of our
Pre-Need plans resulting from direct mail leads, which is currently
approximately 7,000 Pre-Need plan sales per annum. Based on our research of the
telemarketing industry, we believe we can achieve this goal by using our call
center as a convenient forum for providing information to potential members and
for setting appointments for our area sales representatives. Our call center is
anticipated to allow us to consolidate our telemarketing efforts and to schedule
appointments for our area sales representatives in one centralized location. We
believe this will allow us to implement a uniform telemarketing and promotional
strategy using professional telemarketers. We anticipate this will relieve our
area sales representatives of some of their prior administrative duties, which
may facilitate an increased number of sales calls and increase our sales
productivity. We cannot assure you that we will successfully implement our
telemarketing programs or that the number of Pre-Need plans we sell or leads
generated by our direct mail marketing campaign will increase as a result of our
call center.
Personal Sales
We use commissioned area sales representatives to sell Pre-Need contracts.
As of August 31, 2000, we had approximately 92 commissioned area sales
representatives, including 26 in California, 33 in Florida, 5 in Iowa, and 28 in
Washington. These area sales representatives are provided leads generated from
our direct mail campaigns and telemarketing efforts, and they meet with
potential clients individually to determine the service needs of the individual.
The area sales representatives are paid on a commission basis according to the
type of plan sold and the method of payment selected by the customer. A majority
of our area sales representatives are in California and Florida and have worked
with our subsidiaries for over four years. Each of our Pre-Need sales offices
has a sales manager who recruits, trains and engages area sales representatives.
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Internet Web Site
We developed and operate a fully integrated and comprehensive web site
located at www.neptunesociety.com, targeted at the baby boomer generation. We
believe that the aging of the baby boomers, represents an opportunity to expand
our business by marketing our Pre-Need Programs on the Internet. Baby boomers
represent one of the fasting growing segments of Internet users. Consumers may
purchase Pre-Need plans on-line at our web site.
On May 8, 2000, we entered into an agreement with eglobalmedia.com, a
company that specializes in developing internet marketing strategies targeted at
senior citizens, for e-marketing services and an internet marketing program for
our web site. In the future, we plan to develop other services and content for
our web site to enhance our on-line offerings.
Death Care Industry
According to statistics provided in the National Vital Statistics Reports,
Vol. 48, No. 11, the number of deaths in North America has risen by 1% annually
between 1980 and 1998, and is expected to continue to grow at a similar rate
over the next 10-15 years. The growth in death rates results not only from an
increase in the overall population, but also from the demographics of an aging
population as the baby boomer generation matures.
According to information available on the National Funeral Directors
Association's web site located at www.nfda.org:
o There are more than 22,100 funeral homes in the United States
employing approximately 35,000 licensed funeral directors/embalmers
and 89,000 additional funeral service and crematory personnel;
o There were 2,338,078 deaths in the United States during the 12-month
period ending December 1998, or 8.65 deaths per thousand population.
(source: U.S. Department of Health & Human Services, 1998);
o In 1999, the average cost of an adult funeral, not including cemetery
expenses, was approximately $5,000; and
o Death rates are projected to rise to:
o 8.82 deaths per thousand in 2000;
o 9.32 deaths per thousand in 2010; and
o 10.24 deaths per thousand in 2020.
We believe that the popularity of cremation services will increase in the
future as a result of the differences in costs between traditional burial
funerals and cremations and as a result of a consumer shift in attitude towards
cremation and perception of value. According to a survey of crematory
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operations conducted by Smith, Bucklin & Associates, Market Research and
Statistics Division on behalf of the Cremation Association of North America:
o The popularity of cremation varies by geographic location in the
United States, ranging from a low of 5.1% in Mississippi to a high of
58% in Hawaii;
o In 1998, cremation services were chosen for approximately 23.75% of
total deaths in the United States, representing approximately 550,000
cremations;
o The demand for cremation services as a percentage of death services
grew on average approximately 5% over the last ten years from 1989 to
1998 and approximately 3.8% over the last five years from 1994 to
1998; and
o Cremation services are expected to account for approximately 26.01% of
death services in 2000 and approximately 38.18% of death services in
2010 (based on a 5 year compound average growth rate).
We cannot assure you that the trend towards cremation will continue or that
we will benefit from the growth demand for cremation services, if any. Our
business strategy is to provide Pre-Need and At-Need cremation services. A
decline in the demand for such services may have a material adverse affect on
our business and our results of operations.
Competition
The death care industry in general is fragmented, comprised of mostly
family-owned businesses and small independently-owned chains of death care
service providers. Currently, there are publicly traded companies in the death
care services industry that in the past have pursued consolidation and
aggressive growth strategies. The major corporate competitors in the death care
industry include Service Corporation International, Loewen Group Inc., Stewart
Enterprises, Inc., Carriage Services, Inc., Hamilton Group and Keystone Group.
The competitive factors in the death care service industry include, among
other things:
o inter-family loyalty to established, local death care service
providers;
o consumer price sensitivity for death care services;
o consumer demand for personalized service;
o demand for qualified personnel and management;
o consolidation in the industry;
o high fixed costs for facilities; and
o regulatory compliance costs.
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Generally, existing death care service providers may, on a local community
level, have competitive advantages based on established local reputations, local
ownership and management, brand loyalty and existing capital facilities. The
larger publicly traded death care service providers generally compete on the
basis of price and service, and dedicate a significant amount of their resources
to acquiring established death care service providers in local and regional
markets. They are generally well capitalized and can achieve certain
efficiencies through their integrated marketing, management and administration
structures.
We intend to compete by focusing on the Pre-Need cremation segment of the
death care industry. We believe that we can effectively market cremation
services on a Pre-Need basis by offering a lower cost alternative to burial
funerals.
We cannot assure you that we will effectively compete against existing
local death care service providers or corporate consolidators. Many of these
competitors offer a full range of death care services, including cremation
services and Pre-Need service plans. Several of these competitors also have
significantly greater financial and other resources than us and have long
established reputations in the markets they serve.
Industry Regulation
Death Care Service Industry Regulation
The funeral service industry is regulated primarily on a State by State
basis with all jurisdictions requiring licensing and supervision of individuals
who provide funeral-related services. All jurisdictions also regulate the sale
of Pre-Need services and the administration of any resulting trust funds or
insurance contracts. See "Business - The Neptune Society Pre-Need Program." In
addition, concerns regarding lack of competition have led a few jurisdictions to
enact legislation designed to encourage competition by restricting the common
ownership of funeral homes, cemeteries and related operations within a specific
geographic region.
Our operations must also comply with federal legislation, including the
laws administered by the Occupational Safety and Health Administration, the
Americans with Disabilities Act and the Federal Trade Commission ("FTC")
regulations. The FTC administers the Trade Regulation Rule on Funeral Industry
Practices, the purpose of which is to prevent unfair or deceptive acts or
practices in connection with the provision of funeral goods or services.
On February 25, 1998, the State of California issued an interim suspension
order against the Neptune Group's California operations under California's
Business and Profession Code for failure to comply with appropriate storage
procedures. On May 6, 1998, the Neptune Group entered into a Stipulation and
Settlement and Decision, which required the Neptune Group's controlling
shareholder, Emanuel Weintraub, to sell his interests in the Neptune Group and
cease all management or control, directly or indirectly, of any funeral or
cremation activities licensed by the State. In addition, the Neptune Group was
ordered to demonstrate compliance with the requirements for storage facilities
under the State's Business and Professions Code and to be subject to random
inspections.
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In compliance with the stipulation, Mr. Weintraub, among others, sold the
Neptune Group of companies to Neptune of America, the Registrant's wholly owned
subsidiary, and on April 9, 1999, we applied for an assignment of licenses in
connection with the closing of the sale of the business. California approved the
assignment, subject to amending the Stipulation and Settlement and Decision to
incorporate a requirement for us to complete audits of the Pre-Need trust funds
under the Business and Profession Code, to comply with all other requirements
for licensure, and to be placed on probation for a period of three years. If we
fail to comply with the terms and conditions of the Stipulation and Settlement
and Decision and the amendments thereto, the State of California retains the
right to remove the stay on the prosecution under the interim order rendered on
February 25, 1998. On July 21, 2000, the State of California officially assigned
all three California funeral establishment licenses to us. The State of
California required us to submit a zoning letter from the City of Los Angeles
prior to assigning us the crematory license. We submitted the zoning letter from
the City of Los Angeles on September 6, 2000, and we anticipate that we will
receive the crematory license in the fourth quarter of 2000.
Pre-Need Trust Funds
We are required to deposit a portion of the funds we receive from the sale
of a Pre-Need plan into trust for the benefit of the subscriber. See Item 1.
"Business - The Neptune Society Business - Neptune Society Services." Each
Pre-Need Plan is a contract for the sale of cremation services at the time of
death and for merchandise. The payments we receive for the services portion of
Pre-Need Plans are held in trust. The trust funds are maintained by financial
institutions in accordance with the laws of the state in which the Pre-Need Plan
is sold. At August 31, 2000, the balance of the Pre-Need trust fund was
approximately $40 million and we had over 56,000 active members. We anticipate
that the Pre-Need trust funds may increase to approximately $110 million by 2004
if the trend toward cremation services continues and we successfully implement
our growth strategy as planned. We cannot assure you that we will successfully
increase our Pre-Need membership to levels that would result in growth of the
Pre-Need trust or that the Pre-Need trust will not decline as a result of
increased death rates of our membership. However, in states that allow us to
withdraw trust earnings prior to providing cremation services, we recognize
revenue on such amounts as we become entitled to receive such funds.
Although applicable laws vary from state to state, typically we are not
required to trust money for the purchase of merchandise that we immediately
deliver at the time of sale. In all states except California, we are allowed to
retain a percentage of the costs related to the sale of the Pre-Need Plan.
In most states, we are not permitted to withdraw principal or investment
income from trust funds until the time the cremation service is performed.
Earnings on the trust funds increase the amount of cash received by us at the
time the cremation service is performed and, historically, have allowed us to
adequately cover the inflationary increase in costs of performing cremation
services. However, in states that allow us to withdraw trust earnings prior to
providing cremation services, we recognize revenue on such amounts as we become
entitled to receive such funds.
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Sales commissions applicable to pre-need cremation service and merchandise
sales are deferred and amortized over the expected timing of the performance of
the services covered by pre-need arrangements.
Personnel
At August 31, 2000, we employed approximately 209 personnel, including 92
commission sales people, 52 full time counselors and mortuary personnel, 49
telemarketers, and 16 administrative personnel. Management believes that our
relationship with our employees is good. None of our employees are members of
collective bargaining units.
We anticipate that we will hire an additional 40 personnel during the
second half of 2000 and the first half of 2001. We anticipate we may hire 18
commission sales people, 10 counselors and mortuary personnel, 9 telemarketers
and 3 administrative personnel.
The Neptune Society, Inc. Acquisitions
Neptune Group Acquisition
On March 31, 1999, Lari Corp. (subsequently renamed The Neptune Society,
Inc.) acquired a group of companies engaged in the business of marketing and
administering Pre-Need and At-Need cremation services in California, Florida and
New York under the name the "Neptune Society." The acquisitions were completed
pursuant to the following agreements:
Stock Purchase Agreement dated March 26, 1999 among Lari Corp., its
subsidiary, Lari Acquisition Corp., and the Emanuel Weintraub Inter Vivos
Trust, Emanuel Weintraub, Neptune Management Corp., Heritage Alternatives,
Inc., and Neptune Pre-Need Plan, Inc. (the "Weintraub Agreement").
Interest Purchase Agreement dated March 31, 1999 among Lari Corp., its
subsidiary Lari Acquisition Corp., Neptune Management Corp. and the limited
partners of various limited partnerships, which formed part of the Neptune
Society group of companies (the "Neptune L.P. Interest Purchase
Agreement").
Interest Purchase Agreement dated March 31, 1999 among Lari Corp., its
subsidiary Lari Acquisition Corp., Neptune Management Corp. and the limited
partners of Heritage Alternatives, L.P. (the "Heritage L.P. Interest
Purchase Agreement").
Stock Purchase Agreement dated March 31, 1999 among Lari Corp., its
subsidiary, Lari Acquisition Corp., and Stanley Zicklin (the "Zicklin
Agreement").
Stock Purchase Agreement dated March 31, 1999 among Lari Corp., its
subsidiary, Lari Acquisition Corp., and Jill Shuman (the "Schulman
Agreement").
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Under the terms of these agreements, Lari Corp. paid the owners of the
Neptune Group a total of $1,000,000 in cash and issued them a total of 500,000
shares of its common stock valued at $5,000,000. In addition, Neptune Society of
America, a subsidiary of Lari Corp., issued the former owners two promissory
notes in the amounts of $19,000,000 and $2,000,000. The notes were guaranteed by
Lari Corp. and secured by the assets and business of Neptune Management and
Heritage Alternatives. Repayment of the $19,000,000 note was subject to the
terms of the following agreements: Weintraub Agreement, Neptune L.P. Interest
Purchase Agreement, Heritage L.P. Interest Purchase Agreement, Zicklin
Agreement, and Schulman Agreement. The terms of these agreements are described
below. The $19,000,000 note was interest free until July 31, 1999 when interest
at the rate of 9% per annum was to accrue until the note was fully paid. The
note was originally due as follows: $19,000,000 on or before July 31, 1999 or
$9,000,000 on or before July 31, 1999 and $10,000,000, together with all accrued
and unpaid interest, payable on or before July 31, 2000. The $2,000,000 note was
interest free and was payable in equal monthly installments commencing April 30,
1999 until fully paid with the last payment due March 31, 2002.
On July 31, 1999, the monthly payments due under the $2,000,000 note were
reduced from $55,555 per month to $40,000 per month with the $15,555 of deferred
principal earning 9% simple interest, due on a monthly basis until March 31,
2001, at which time the final payment of $596,742 is due.
On August 1, 1999, the $19,000,000 note was amended as follows: in exchange
for $76,000 in cash and 137,500 warrants to acquire common shares at $12.00 per
share, $9,625,088 of the note due to Emanuel Weintraub Intervivos Trust became
interest free with payments and due dates of $386,776 on August 11, 1999,
$4,172,476 on January 3, 2000, and $5,065,836 on July 31, 2000. The remaining
$9,374,912 due under the $19,000,000 note retained a 9% interest rate with
maturities of $3,739,008 due on August 11, 1999, $701,740 due on January 3,
2000, and $4,934,166 due on July 31, 2000.
On July 31, 2000, the balance due under the $19,000,000 note to the
Weintraub Trust was $5,065,836. The Company paid $341,396 on the principal
balance. In exchange for releasing the Weintraub Trust from liability for loss
of revenue or loss of projected revenue as a result of the pending Leneda legal
proceeding (See "Item 8 Legal Proceedings"), the due date on the remaining
$4,724,440 was extended for twelve months to July 31, 2001. The Company agreed
to guarantee the Weintraub Trust a selling price of $14.00 per share for 3,375
common shares per month for shares currently owned by the Weintraub Trust by
agreeing to repurchase treasury stock from the shareholder, up to $45,000 per
month, during each of the months in the twelve month period ending July 31,
2001, if the shareholder exhausts all good faith efforts to liquidate the stock
through conventional means. In addition, the Company agreed to repay the balance
of $1,297,778 owed under the terms of the $2,000,000 note.
Set forth below is a general description of the terms of the agreements
related to the Neptune Group acquisition.
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Weintraub Agreement
Under the terms of the Weintraub Agreement, Lari Corp. acquired all of the
interests held by Emanuel Weintraub, the founder of the Neptune Group of
companies, directly or indirectly through the Emanuel Weintraub Inter Vivos
Trust, in Neptune Management Corp., Heritage Alternatives, Inc., and Neptune
Pre-Need Plan, Inc. At the time of the acquisition, the interests were held as
follows:
Neptune Management Corp. was the general partner and a 50% owner of each of
Neptune-Los Angeles, Ltd., Neptune-Santa Barbara, Ltd., Neptune-Miami,
Ltd., Neptune-St. Petersburg, Ltd., Neptune-Ft. Lauderdale, Ltd.,
Neptune-Nassau, Ltd., and Neptune-Westchester, Ltd.;
Heritage Alternatives, Inc. was the general partner and a 50% owner of
Heritage Alternatives, L.P.; and
Emanuel Weintraub Inter Vivos Trust owned (i) 82 Series A shares of Neptune
Management Corp.; (ii) 95 shares of Heritage Alternatives, Inc.; and (iii)
all of the issued and outstanding shares of Neptune Pre-Need Plan, Inc.
Lari Corp. agreed to purchase the shares held by the Emanuel Weintraub
Inter Vivos Trust for the following consideration:
$506,583 in cash;
256,637 shares of Lari Corp. common stock valued at $2,566,370;
an undivided interest of $9,625,069 in a promissory note in the principal
amount of $19,000,000, interest free until July 31, 1999 when interest at
the rate of 9% per annum began accruing until the note was fully paid; and
a promissory note in the principal amount of $2,000,000, non-interest
bearing, to the Emanuel Weintraub Inter Vivos Trust.
In connection with the acquisition, Lari Corp. entered into a three-year
consulting agreement with Emanuel Weintraub. Pursuant to the terms of the
consulting agreement, Lari Corp. agreed to pay Mr. Weintraub $1,000,000 over the
three-year term of the agreement. See "Certain Relationships and Related
Transactions."
Neptune L.P. Interest Purchase Agreement
Under the terms of the Neptune L.P. Interest Purchase Agreement, Lari Corp.
agreed to purchase the limited partnership interests held by the limited
partners of each of Neptune-Los Angeles, Ltd., Neptune-Santa Barbara, Ltd.,
Neptune-Miami, Ltd., Neptune-St. Petersburg, Ltd., Neptune-Ft. Lauderdale, Ltd.,
Neptune-Nassau, Ltd., and Neptune-Westchester, Ltd. Lari Corp. agreed to
purchase the limited partnership interests for the following consideration:
$361,874 in cash;
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178,512 shares of Lari Corp. common stock valued at $1,785,120;
an undivided interest of $6,875,627 in a promissory note in the principal
amount of $19,000,000, interest free until July 31, 1999 when interest at
the rate of 9% per annum began accruing until the note was fully paid, to
each limited partner holding an undivided interest.
Heritage L.P. Interest Purchase Agreement
Under the terms of the Heritage L.P. Interest Purchase Agreement, Lari
Corp. agreed to purchase the limited partnership interests held by the limited
partners of Heritage Alternatives, L.P. Lari Corp. agreed to purchase the
limited partnership interests for the following consideration:
$ 27,439 in cash;
11,488 shares of Lari Corp. common stock valued at $114,880;
an undivided interest of $521,329, in a promissory note in the principal
amount of $19,000,000, interest free until July 31, 1999 when interest at
the rate of 9% per annum began accruing until the note was fully paid, to
each limited partner holding an undivided interest.
Zicklin Agreement
Under the terms of the Zicklin Agreement, Lari Corp. acquired all of the
interests held by Samuel Zicklin in Neptune Management Corp., consisting of 18
Series B shares. Lari agreed to purchase the shares held by the Samuel Zicklin
for the following consideration:
$101,866 in cash;
52,426 shares of Lari Corp. common stock valued at $524,260; and
an undivided interest of $1,935,446 in a promissory note in the principal
amount of $19,000,000, interest free until July 31, 1999 when interest at
the rate of 9% per annum began accruing until the note was fully paid.
Schulman Agreement
Under the terms of the Schulman Agreement, Lari Corp. acquired all of the
interests held by Jill Schulman in Heritage Alternatives, Inc., consisting of 5
common shares. Lari agreed to purchase the shares for the following
consideration:
$2,238 in cash;
937 shares of Lari Corp. common stock valued at $9,370; and
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an undivided interest of $42,529 in a promissory note in the principal
amount of $19,000,000, interest free until July 31, 1999 when interest at
the rate of 9% per annum began accruing until the note was fully paid.
After giving effect to the transactions under the Weintraub Agreement, the
Neptune L.P. Interest Purchase Agreement, the Heritage L.P. Interest Purchase
Agreement, the Zicklin Agreement and the Shuman Agreement, Lari Corp.
beneficially owned all of the Neptune Group companies.
Spokane, Washington Acquisition
On December 31, 1999, we acquired all of the assets of the business of
Cremation Society of Washington, Inc. in Spokane, Washington, pursuant to the
terms of an asset purchase agreement and a non-compete agreement. Under the
terms of the agreements, we paid Cremation Society of Washington, $500,000 in
cash and issued it 22,727 shares of Neptune Society common stock valued at
$250,000. In addition, we agreed to pay Cremation Society of Washington the
following amounts:
o on or before March 2, 2001, (i) 3% of gross revenues and (ii) 12.5% of
the earnings before income tax, depreciation and amortization
("EBITDA") of the Cremation Society of Washington during the twelve
month period ending December 31, 2000;
o on or before March 2, 2002, (i) 2.75% of gross revenues and (ii) 12.5%
of EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2001;
o on or before March 2, 2003, (i) 1% of gross revenues and (ii) 7.5% of
EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2002;
and
o on or before March 1, 2004, (i) 1% of gross revenues and (ii) 7.5% of
EBITDA of the business operations of the Cremation Society of
Washington during the twelve month period ending December 31, 2003.
We agreed to pay an additional $125,000 in cash or additional shares of
Neptune Society common stock, at our option, if the average trading price of our
shares for the 30 day period from December 1 to December 31, 2000 declines below
$11.00 per share. For periods subsequent to December 31, 2004, we have agreed to
pay a bonus equal to 10% of EBITDA of Cremation Society of Washington provided
that John C. Ayres, the founder and sole shareholder of Cremation Society of
Washington, and/or Charles S. Wetmore, the general business manager of Cremation
Society of Washington, continue to be employed by us.
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Iowa Acquisition
On March 28, 2000, we acquired all of the assets of the business of
Cremation Society of Iowa, Inc. in Ankeny, Iowa pursuant to the terms of an
asset purchase agreement. Under the terms of the agreement, we paid Cremation
Society of Iowa $110,000 cash and issued it 80,516 shares of Neptune Society
common stock valued at $1,000,000. In addition, we agreed to make certain
payments to Cremation Society of Iowa based on the gross revenues from the Iowa
operations. We also agreed to pay a bonus equal to 10% of EBITDA of the
Cremation Society of Iowa to Cremation Society of Iowa during each of the twelve
month periods ending December 31 after the year December 31, 2004, provided that
John Bethel and David Noftsger, the co-founders and shareholders of Cremation
Society of Iowa, continue to be employed by us.
Renegotiation of Iowa Acquistion
On August 1, 2000, we and the Cremation Society of Iowa amended the asset
purchase agreement. Under the amended terms, the issuance of shares was reduced
to 48,309 shares of Neptune Society. In addition, we agreed to pay Cremation
Society of Iowa, so long as the Cremation Society of Iowa's gross revenues equal
or exceed $750,000 and EBITDA equals or exceeds $175,000 for each twelve month
period of time, the following amounts:
- in the event the average closing price of the common stock issued is
less than $8.00 per share for the 5 day period preceding the 120th day
following August 1, 2000, the Company, at its option, shall issue
additional shares or cash or a combination of shares and cash which
when added to the 48,309 shares will equal $600,000.
- on or before August 1, 2001, 3% of gross revenues of the business
operations of Cremation Society of Iowa during the twelve month period
ending August 1, 2001; and
- on or before August 1, 2002, 19% of gross revenues of the business
operations of the Cremation Society of Iowa during the twelve month
period ending August 1, 2002
In connection with our acquisition of Cremation Society of Iowa, we entered
into employment and non-competition agreements with Mr. Noftsger and Mr. Bethel.
On March 28, 2000 we also granted Mr. Noftsger and Mr. Bethel each options
exercisable to purchase 10,000 shares of The Neptune Society, Inc. common stock
at an exercise price of $12.12 to fully vest one year from the date of the
option grant.
Portland Acquisition
Effective July 5, 2000, we purchased a funeral, burial and cremation
business in Portland Oregon known as Heritage Memorial, Heritage Memorial
Society, Heritage Memorial Cremation
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Society, The Heritage Society, Wilhelm Funeral Home, Wilhelm Crematory, Oregon
Cremation Company, Oregon Cremation & Burial Company and AAA Cremation Company
(the "Portland Business"). This purchase was completed through the acquisition
of the assets of Heritage Memorial Society, L.L.C. and Community Memorial
Centers, L.L.C., the merger of the shares of Wilhelm Mortuary, Inc. with Neptune
Acquisition, Inc., a newly formed subsidiary of Neptune Society, and three
non-compete agreements with David Schroeder, Michael Ashe, and The Apogee
Company, Inc., the principals of the Portland Business.
Under the terms of the purchase, we paid the owners of the Portland
Business $500,000 in cash, issued a three year $1,000,000 convertible debenture
with a conversion rate at $12.00 per share and issued 313,308 shares of Neptune
Society common stock. We also agreed that if the value of the shares issued,
based on the average trading price of the common stock of Neptune Society for
the 60 day period preceding the first trading day following July 5, 2001, was
less than $3,885,007, we would pay the owners of the Portland Business the
difference between $3,885,007 and the value of the shares in cash or common
stock, at our option, of Neptune Society.
In connection with the acquisition of the Portland Business, on July 5,
2000 we entered into employment agreements with David Schroeder and Michael Ashe
and granted them options exercisable to purchase a total of 85,000 shares of
Neptune Society, at an exercise price of $13.25, to fully vest one year from the
date of the option grant.
Capital Transactions of the Neptune Society
The Registrant was incorporated in the State of Florida on January 4, 1985
under the name "L R Associates, Inc.", with $1,000 and a capital structure of 50
shares authorized and issued with a par value of $10.00 per share.
On August 3, 1998, L R Associates, Inc. amended its Articles of
Incorporation to change its name to "Lari Corp." and increase its authorized
capital to 50,000,000 shares of common stock with a par value of $0.001 per
share. Concurrent with the amendment of its Articles of Incorporation, Lari
Corp. forward split its issued and outstanding share capital on a 10,000 for 1
share basis. At the time of the forward split, Lari Corp. had 50 shares issued
and outstanding, and after giving effect to the forward split, Lari Corp. had
500,000 shares issued and outstanding.
On January 19, 1999, Lari Corp. issued 1,000,000 shares of its common stock
at $0.20 per share in a private placement for gross proceeds of $200,000. Each
subscriber was also issued four share purchase warrants for each share
purchased, for an aggregate of 4,000,000 share purchase warrants. Each share
purchase warrant was exercisable to acquire one common share at $0.20 per share.
All of the share purchase warrants were exercised on April 7, 1999, for gross
proceeds of $800,000.
On March 31, 1999, Lari Corp. entered into agreements to acquire the
Neptune Group, a group of privately-held companies which were engaged in the
business of marketing and administering Pre-Need and At-Need cremation services
under the name "Neptune Society." See "Neptune Group Acquisition." Under the
terms of the purchase agreement, Lari Corp.
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acquired the following privately held entities in exchange for $1,000,000 of
cash, 500,000 shares of its common stock valued at $5,000,000, and promissory
notes in the aggregate amount of $21,000,000 valued at $19,968,529, interest
free until July 31, 1999 and interest accruing at the rate of 9% per annum from
August 1, 1999 until fully paid.
Neptune Management Corp.
Neptune Pre-Need Plan, Inc.
Heritage Alternatives, Inc.
Heritage Alternatives, L.P.
Neptune Funeral Services, Inc.
Neptune Funeral Services of Westchester, Inc.
Neptune-Los Angeles, Ltd.
Neptune-Santa Barbara, Ltd.
Neptune-Ft. Lauderdale, Ltd.
Neptune-St. Petersburg, Ltd.
Neptune-Miami, Ltd.
Neptune-Westchester, Ltd.
Neptune-Nassau, Ltd.
At the time of the Neptune Group acquisition, Lari Corp. was not actively
engaged in any business. On April 26, 1999, Lari Corp. changed its name to "The
Neptune Society, Inc.
On July 22, 1999, Neptune Society entered into a private placement Agency
Agreement with Standard Securities Capital Corporation for the sale of 583,334
shares of our common stock at $12.00 per share. Neptune Society issued 333,333
common shares for gross proceeds of $4,000,000 on August 9, 1999; 111,667 common
shares for gross proceeds of $1,340,000 on October 12, 1999; 130,000 shares for
gross proceeds of $1,560,000 on December 30, 1999; and 8,334 for gross proceeds
of $100,002 on January 31, 2000. Neptune Society paid Standard Securities
Capital Corporation an agency fee of $420,000 in connection with the transaction
in addition to $53,690 of other offering costs. Neptune Society initially agreed
to provide the subscribers with certain rights with respect to these securities,
including registration and reset rights, which were subsequently waived by the
subscribers. Neptune Society used $4,500,000 of the proceeds to repay part of
the promissory notes issued in connection with the Neptune Group acquisition and
the balance for working capital purposes and the acquisition of our Spokane,
Washington operations. See "Spokane, Washington Acquisition."
On August 11, 1999, Neptune Society made a $4,125,784 repayment on the
promissory notes related to the Lari acquisition of the Neptune Group. A portion
of the debt owed under the promissory notes, in the amount of $4,874,000, was
amended to extend the due date to January 3, 2000.
On August 11, 1999, Neptune Society obtained $250,000 from Private
Investment Company, Ltd. in connection with a short-term interest-free,
non-amortizing promissory note payable on demand.
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On December 30, 1999, Neptune Society issued $5,000,000 of convertible
debentures at an interest rate of 13.0%, of which 6.5% is payable in arrears in
monthly installments on the first day of each month until the principal amount
and all accrued and unpaid interest is paid in full and the remaining 6.5% is
payable on the due date, February 24, 2005. The debenture is convertible into
500,000 shares of Neptune Society common stock upon the election of the investor
at any time after nine months from issuance to February 24, 2005. The debentures
were issued with detachable warrants to acquire 100,000 common shares at $10.42
per share and 100,000 common shares at $12.50 per share. These warrants expire
on December 24, 2004. The fair value of the warrants, $670,409, was recorded as
a credit to additional paid-in-capital and a discount to the carrying value of
the debentures. The discount related to the warrants is being accreted to the
redemption price of the debentures and results in an effective interest rate of
15.8%. In addition, the debentures are convertible to common stock at an initial
conversion ratio of 10:1, or a total of 500,000 common shares. The intrinsic
value of the beneficial conversion feature, $562,000, has been credited to
additional paid-in-capital and recorded as a deferred financing cost in the
consolidated balance sheet. Such amount is being recognized as interest expense
over the period up to the initial conversion date, September 30, 2000.
We have the following obligations under the debenture purchase agreement
and the convertible debentures:
o We granted demand registration rights pursuant to which we agreed to
file a registration statement, at our expense, on a Form S-1, Form S-3
or other similar form upon the demand of the purchaser to register the
resale of the common stock issued or issuable upon the conversion or
exercise of the debenture, the warrant, options or other of our
securities owned by the purchaser or any transferee of the purchaser;
o We granted the purchaser piggy-back registration rights pursuant to
which we agreed to register the purchasers' common stock in the event
we filed a registration statement, at our expense, to register any of
our securities for our own account or for the account of other
security holders; and
o We agreed to adjust the number of shares issuable under the
convertible debentures and warrants if we issue additional shares of
our common stock if (i) we issue shares for less than $10.00 in cash,
in which case the debenture shall be convertible at the lower price or
(ii) if we issued shares without consideration in a transaction that
results in the issuance of shares for consideration of less than
$10.00 per share, in which case the debenture shall be convertible at
a price adjusted to give effect to the lower value of the share
issuance.
We paid loan origination fees of $168,000 in connection with the issuance.
We used the proceeds of the financing to make the $4,874,000 payment due on
January 3, 2000 related to the promissory notes issued to the former owners of
the Neptune Group of companies.
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On March 31, 2000, Neptune Society obtained an additional $750,000 from
Private Investment Company, Ltd., bringing the total of the promissory note to
$1,000,000. The note is an interest-free, non-amortizing, promissory note to be
repaid no later than September 30, 2001. Financing costs of 12,000 common shares
valued at $12.50 per share were paid in connection with this loan.
On May 19, 2000, Neptune Society amended its Articles of Incorporation to
effect a reverse-split of its common stock on a one for two share basis. After
giving effect to the reverse-split, the authorized share capital of Neptune
Society was reduced from 50,000,000 shares of common stock, with $0.001 par
value per share, to 25,000,000 shares of common stock, with $0.002 par value per
share, and the issued and outstanding common shares were reduced from 13,437,152
to 6,718,576 shares. All common share information referred to in this document
have been adjusted to reflect the reverse split.
On July 31, 2000, we entered into a private placement Agency Agreement with
Standard Securities Capital Corporation for the sale of 500,000 shares of
Neptune Society common stock at $14.00 per share for total gross proceeds of
$7,000,000. The private placement closed on August 9, 2000. In connection with
the transaction, we paid Standard Securities Capital Corporation an agency fee
of $75,000, we paid legal fees of $8,000 and Systematic Investments
Establishment a finder's fee of 150,000 common shares of Neptune Society. We
used $6,917,000 of the net proceeds to repay part of the promissory notes issued
in connection with the Neptune Group acquisition and used the remainder of the
proceeds for working capital purposes.
On August 10, 2000, Neptune Society paid $6,573,374 under the promissory
notes related to the Neptune Group acquisition. A portion of the debt, in the
amount of $4,715,862, was restructured and the due date deferred to July 31,
2001.
RISK FACTORS
We have included information in this Registration Statement that contains
"forward looking statements." Our actual results may materially differ from
those projected in the forward looking statements as a result of risks and
uncertainties. Although we believe that the assumptions made and expectations
reflected in the forward looking statements are reasonable, we cannot assure you
that the underlying assumptions will, in fact, prove to be correct or that
actual future results will not be different from the expectations expressed in
this report. An investment in our securities is speculative in nature and
involves a high degree of risk. You should read this Registration Statement
carefully and consider the following risk factors.
We have a history of losses and anticipate that we may continue to experience
losses in the future.
Since our acquisition of the Neptune Group of companies, we have had a
history of losses. We incurred losses of $1,890,000 during the nine-month period
ended December 31, 1999 and $2,633,000 during the six months ended June 30,
2000. We had an accumulated deficit
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of $ 1,890,000 at December 31, 1999 and $ 4,522,000 at June 30, 2000. We
anticipate that we will incur losses for the foreseeable future until we
successfully integrate our Spokane, Washington, Iowa and Portland, Oregon
operations and achieve operating efficiencies in our business. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
In addition, the operations that we acquire in the future, even if
profitable when acquired, may incur operating losses pending their integration
into our business. Accordingly, there can be no assurance that we will not
continue to incur losses. Failure to achieve profitability could have a material
adverse effect on our business, results of operations and financial condition.
We have a limited operating history as a stand-alone company in the death care
industry.
Although our predecessors, the Neptune Group of companies, have operated
Pre-Need and At-Need cremation businesses, we have operated the Neptune Society
only since April 1999. See "History of our Company." Prior to our acquisition of
the Neptune Group of companies, we had no operating business. Accordingly, we
have only a limited operating history upon which an evaluation of our business
and its prospects may be based. Although we have experienced revenue and net
income growth in recent periods, there can be no assurance that our operations
will be profitable in the future or that we will be able to successfully
integrate and oversee the Neptune Group of companies and our acquisitions.
Failure to successfully integrate the operations of our offices and cremation
facilities and to implement our operating and growth strategy could have a
material adverse effect on our net revenue and earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We will not be able to execute our business strategy to acquire existing
crematory service providers unless we obtain additional financing.
Our business strategy is to grow through acquisitions of cremation service
providers, open new offices and increase the performance of our existing
operations. To date, we have financed the acquisitions of the Neptune Group of
companies and our Spokane, Washington, Ankeny, Iowa, and Portland, Oregon
acquisitions through a combination of $2,110,000 in cash, 884,344 shares of The
Neptune Society common stock, $21,000,000 in promissory notes, and $1,000,000 in
a convertible debenture. We may finance future acquisitions through bank
indebtedness, cash from operations, issuing common stock or other securities, or
any combination of these. In the event that our common stock does not maintain a
sufficient market value, or potential acquisition candidates are otherwise
unwilling to accept our common stock or other securities as part of the
consideration for the sale of their businesses, we may be required to use more
of our cash resources or incur substantial debt in order to finance future
acquisitions. If we do not have sufficient cash resources, our ability to make
acquisitions could be limited unless we are able to obtain additional capital
through debt or equity financings. We cannot assure you that we will be able to
obtain the financing we will need in the future on terms we deem acceptable, if
at all.
We will not be able to execute our business strategy to acquire existing
crematory service providers unless we are able to effectively target
acquisitions in a competing environment.
We cannot assure you that our current management, personnel and other
corporate infrastructure will be adequate to effectively target acquisitions and
then integrate them into our business without substantial costs, delays or other
operational or financial problems. In connection with certain acquisitions, we
may need certain licenses and approvals. Obtaining such licenses and approvals
could delay the closing of an acquisition.
24
<PAGE>
Even though several major death care companies appear to have reduced their
ongoing acquisition activities, we may be competing with several publicly held
North American death care companies, including Service Corporation
International, Stewart Enterprises, Inc. and Carriage Services, Inc. to acquire
death care service providers. Each of these other companies has greater
financial and other resources than us and have, in the past, actively engaged in
acquiring death care service providers in a number of markets. Because we are
seeking to acquire only cremation service providers, we limit the number of
potential acquisition targets available to us and consequently may not be able
to execute our business acquisition strategy.
The success of our acquisition plans depends on several factors, including:
- our ability to identify suitable acquisition opportunities;
- our ability to obtain a license to operate the target
acquisition;
- the level of competition for an acquisition target;
- the purchase price for acquisitions;
- the financial performance of facilities after acquisition; and
- our ability to effectively integrate the acquired facilities'
operations.
If we fail to achieve our acquisition plans or to operate acquired
facilities and integrate them into our operations, such failure could materially
and adversely affect our business, financial condition and results of
operations.
We may not be a profitable business unless we are able to fully integrate our
business acquisitions into our existing infrastructure.
Assuming that we are successful in completing acquisitions, we may not be
able to effectively integrate them into our business due to the geographic
disparity of management personnel and the cost of centralizing operations in our
California head office. Part of our acquisition strategy will be to retain key
employees at locations acquired and our failure to do so may result in a decline
in the performance of the continuing operations at those newly acquired
locations. We may also experience increased costs related to the hiring and
training of new personnel, which may adversely affect our ability to operate our
newly acquired locations on a cost-effective basis.
A decline in death rates may impair our ability to be profitable in the future.
As we continue to see improvements in technology related to health care
that may prolong life expectancy, we may experience a decline in expected death
rates. Such a decline, coupled with our current business strategy to expand
through acquisitions and increased performance of our existing operations, may
result in a decrease in the demand for our cremation services and adversely
affect our ability to maintain profitability. A decline in demand and revenues
together with increased costs resulting from our acquisitions may result in
declines in profitability or losses.
25
<PAGE>
A decline in the choice of cremation rather than burial services may impair our
ability to be profitable in the future.
Our business strategy is premised on the current trend in the death care
industry where consumers are selecting cremation services over the more
traditional burial services. We may be unable to achieve the growth in our
revenues necessary to operate profitably as we expand our operations and
increase our marketing and sales efforts. Our acquisition strategy is expected
to increase our costs of operations and a decline in the number of cremation
services may result in a decrease in our revenues, which may result in a decline
in our profitability and losses.
Our ability to execute our business plan is predicated on our ability to retain
key personnel with experience in the death care industry and in business
acquisitions.
We depend to a large extent upon the abilities and continued efforts of
Marco Markin, our President and a director, Gary Loffredo who is a director and
the President of Heritage Alternatives, Inc., and David Schroeder who is the
Chief Operating Officer, to provide overall decision making in developing and
implementing our business strategy and identifying and acquiring death care
providers. We may incur additional acquisition costs and delays in our expected
growth should we lose these key personnel. In addition, our success is also
determined by offering quality Pre-Need and At-Need cremation services, which
are supervised by our senior management team. The loss of the services of the
key members of our senior management could have a material adverse effect on our
continued ability to compete in the death care industry through delivery of
quality services to consumers.
In the event that we are not able to comply with the substantial regulations
under which we operate, we may be subject to business operation closures, fines
and penalties.
The death care industry is subject to regulation, supervision and licensing
under numerous federal, state and local laws, ordinances and regulations,
including extensive regulations concerning trust funds, Pre-Need sales of
cremation products and services, and various other aspects of our business. The
impact of such regulations varies depending on the location of our offices and
facilities and failure to comply with such regulations may result in business
closures, fines and penalties; all of which may affect the profitability of our
business.
From time to time, states and other regulatory agencies have considered and
may enact additional legislation or regulations that could affect the death care
industry and in particular our ability to be profitable. For example, some
states and regulatory agencies have considered or are considering regulations
that could require more liberal refund and cancellation policies for Pre-Need
sales of products and services, prohibit door-to-door or telephone solicitation
of potential customers, increase trust requirements and prohibit the common
ownership of funeral homes and crematoriums in the same market. If adopted in
the states in which we operate, these and other possible proposals could have a
material adverse effect on our profitability.
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<PAGE>
Any substantial sale of our common stock or even the possibility of such sales
may decrease the market price of our common stock due to the insufficient demand
for the common stock being or proposed to be sold.
As of June 30, 2000, we had 6,718,657 shares of common stock issued and
outstanding. Any substantial sale of our common stock or even the possibility of
such sales occurring may have an adverse effect on the market price of our
common stock should the corresponding demand for the common stock be limited.
Your investment in our shares may be diluted in the event that we may be
required to sell additional common stock or parties may exercise options and
warrants.
We have issued warrants exercisable to acquire up to 337,500 shares of our
common stock at a price between $10.42 and $12.50 per share. We have an
aggregate of 900,000 shares of our common stock reserved for issuance to our
employees, directors and consultants under our option plan. Of those 900,000
shares, we have granted options exercisable to acquire up to 426,750 shares of
our common stock at $11.75 per share, 154,000 shares of our common stock at
$12.12 per share, 15,000 shares of our common stock at $14.00 per share, 85,000
shares of our common stock at $13.25 per share, and 1,000 shares of our common
stock at $14.25 per share to our employees, officers, directors, trustees, and
area sales representatives. Holders of the options and warrants are likely to
exercise them when, in all likelihood, we could obtain additional capital on
terms more favorable than those provided by the options. This will increase the
supply of common stock and dilute your investment in our shares. However, we
cannot make assurances that such options will be exercised. Further, while the
options are outstanding, our ability to obtain additional financing on favorable
terms may be adversely affected as investors may not invest given the
possibility of dilution through exercise of options.
We have issued securities that have certain anti-dilution rights, which could
require us to issue the holders of such securities additional shares, causing
dilution to shares held by you.
In connection with our acquisition of Spokane, Washington operations, we
agreed to pay Cremation Society of Washington an additional $125,000 in cash or
additional common stock, at our option, if the average trading price of the
common stock of The Neptune Society, Inc. was below $11.00 per share during the
30-day period from December 1 to December 31, 2000.
In connection with the acquisition of our Ankeny, Iowa operations, we have
guaranteed the value of the stock purchase price as follows: in the event the
average closing price of the common stock issued is less than $8.00 per share
for the 5 day period preceding the 120th day following August 1, 2000, the
Company, at its option, shall issue additional shares or cash or a combination
of shares and cash which when added to the 48,309 shares will equal $600,000.
In connection with our acquisition of the Portland operations, if the
average trading price of the common stock of The Neptune Society, Inc. is below
$12.00, we have agreed to issue additional common stock, cash, or a combination
of both, at our option, to bring the average aggregate closing price up to
$3,885,007.
We also provided anti-dilution rights in connection with the issuance of a
13% convertible debenture on December 30, 1999. In the past, we have granted
similar anti-dilution rights and
27
<PAGE>
we may grant similar rights in the future. To the extent we are required to
issue additional securities as a result of these rights, it will increase the
supply of common stock and dilute your investment in our shares.
We have agreed to pay certain persons a percentage of the revenues from the
operations of our Spokane, Washington and Ankeny, Iowa operations, which will
affect the profitability of these operations.
In connection with our acquisitions of Spokane, Washington, and Ankeny,
Iowa operations, we agreed to pay the former owners of these businesses a
percentage of the gross revenues and/or earnings before income tax, depreciation
and amortization ("EBITDA") as follows:
to the former owners of our Spokane, Washington operations 3% of gross
revenues and 12.5% of the EBITDA for the twelve month period ending
December 31, 2000; 2.75% of gross revenues and 12.5% of EBITDA for the
twelve month period ending December 31, 2001; 1% of gross revenues and 7.5%
of EBITDA for the twelve month periods ending December 31, 2002 and 2003,
from our Spokane, Washington operations; and provided that John C. Ayres
and/or Charles S. Wetmore continue to be employed by us, 10% of EBITDA
during each year ending December 31 commencing after January 1, 2005; and
to the former owners of our Iowa operations 3% of gross revenues for the
twelve month period ending August 1, 2001; 19% of gross revenues for the
twelve month period ending August 1, 2002, provided that gross revenues
equal or exceed $750,000 and EBITDA equals or exceeds $175,000 for each
twelve month period of time.
Our agreements to pay a percentage of our revenues and/or profits from our
Spokane, Washington and Ankeny, Iowa operations to the former owners will have a
material affect on our profitability. In the future, we may negotiate additional
acquisitions where we agree to share our revenues and/or profits. We cannot
assure you that we will generate sufficient profits from our operations to meet
these obligations and achieve profitability.
We have substantial debt obligations that may affect our future profitability
At June 30, 2000, we had outstanding approximately $16,611,000 principal
amount of debt, excluding accrued interest of $162,000, at an average interest
rate of 10.4% per annum. Subsequent to June 30, 2000, we issued a three-year
convertible debenture in the principal amount of $1,000,000 to the former owners
of the Portland Business. Such debenture has an interest rate of 8% per annum
and matures on July 17, 2003. Of the principal amount of our total debt,
$5,400,000 becomes due in the fiscal year ending December 31, 2000; $4,000,000
becomes due in the year ending December 31, 2001; and $1,100,000 becomes due in
the year ending December 31, 2002. During the nine month fiscal period ended
December 31, 1999 and the six months ended June 30, 2000, total interest expense
was approximately $1,184,000 and $1,405,000, respectively.
On July 18, 2000, under the terms of a Debt Restructuring Agreement with
the Weintraub Trust and the other members of Neptune Group who received the
promissory note in the aggregate amount of $19,000,000 and the promissory note
in the amount of $2,000,000 issued
28
<PAGE>
under the Neptune Acquisition Agreements, repayments on the $19,000,000 note
were deferred for a twelve-month period. As of July 31, 2000, the outstanding
balance due under the notes due to the Weintraub Trust was $5,065,836 and the
outstanding balance due under the note to all other creditors (other than the
Weintraub Trust) was $4,934,164. On August 19, 2000, the Company paid $341,396
on the principal balance owed to the Weintraub Trust. In exchange for releasing
the Weintraub Trust from liability for loss of revenue or loss of projected
revenue as a result of the pending Leneda legal proceeding (See "Item 8 Legal
Proceedings"), the due date on the remaining $4,724,440 was extended for twelve
months. The Company agreed to guarantee the Weintraub Trust a selling price of
$14.00 per share for 3,375 common shares per month for shares currently owned by
the Weintraub Trust by agreeing to repurchase treasury stock from the
shareholder, up to $45,000 per month, if the shareholder exhausts all good faith
efforts to liquidate the stock through conventional means. The Company paid in
full the balance due under the note to the creditors other than the Weintraub
Trust. In addition, the Company agreed to repay the balance of $1,297,778 owed
under the terms of the $2,000,000 note.
We anticipate that we may increase our debt as we acquire additional death
care service operations and open new offices. In the future, we may issue
additional notes or convertible debentures. There can be no assurance that we
will generate sufficient cash flow or obtain sufficient financing to satisfy
these obligations. If we are unable to satisfy these obligations as they become
due, there can be no assurance that we will be able to obtain extensions on the
maturity dates of the notes or of the convertible debenture.
Cancellations of existing Pre-Need contracts may have a material adverse effect
on our future profitability.
We anticipate that a significant portion of our future revenues will be
derived when we perform services under our Pre-Need contracts. We are required
to hold a percentage of the funds we receive from the sale of our Pre-Need
programs in trust until we perform the cremation service. At that time, we are
able to recognize revenue from the sale of the Pre-Need service. Currently, we
hold approximately $40 million in trust funds for the benefit of our members.
Although each state has different regulatory requirements regarding the trust
funds, the states in which we conduct business, California, Iowa, Florida,
Oregon and Washington, require us to refund all or a portion of trust monies to
our members that cancel their Pre-Need contracts. See "Government Regulation."
Historically, our cancellation rate has been approximately 1% on an annual
basis. Any substantial increase in cancellations may have a material adverse
affect on our future revenues and results of operations.
In the event that your investment in our shares is for the purpose of deriving
dividend income or in expectation of an increase in market price of our shares
from the declaration and payment of dividends, your investment will be
compromised because we do not intend to pay dividends.
We have never paid a dividend to our shareholders and we intend to retain
our cash for the continued development of our business. We do not intend to pay
cash dividends on the common stock in the foreseeable future. As a result, your
return on investment will be solely determined by your ability to sell your
shares in a secondary market.
29
<PAGE>
You may not be able to attract broker-dealers willing to effect transactions in
our shares because our shares are considered penny stocks and are subject to the
penny stock rules.
The additional sales practice and disclosure requirements imposed upon
broker-dealers pursuant to penny stock regulations under the Securities Exchange
Act of 1934, as amended, may discourage broker-dealers from effecting
transactions in our shares, which could severely limit the market liquidity of
the shares and impede the sale of our shares in the secondary market. These
regulations impose substantial requirements on broker-dealers and effect
transactions in penny stocks (non-NASDAQ shares with a market price of less than
$5.00) including requirements to assess the suitability of the purchaser and to
make monthly disclosures to the purchaser.
Our ability to be profitable is premised on our ability to compete effectively
in a highly competitive industry.
The death care service industry is intensely competitive and rapidly
evolving with the consolidation efforts of our competitors. Unless we can be
competitive, we will lose revenue to our competitors and will not be able to be
profitable. Our competitors are small independent death care service providers
and large publicly traded companies, including Carriage Services which owns or
operates more than 176 funeral homes and over 38 cemeteries in the United
States, Service Corporation International, which operates more than 3,700
funeral service locations worldwide, and Stewart Enterprises, Inc., which owns
and operates over 700 funeral homes and cemeteries worldwide. These competitors
also offer cremation services that compete directly with our services and
products. We also compete on a local basis to provide services in communities
with service providers that have established reputations and long histories of
operations.
ITEM 2. SELECTED FINANCIAL INFORMATION
The selected financial information presented below as of December 31, 1998
and 1999 and for the years ended December 31, 1997, and 1998, the three months
ended March 31, 1999 and the nine months ended December 31, 1999, are derived
from the consolidated financial statements of the Company. See Item 15
"Financial Statements and Exhibits". The selected financial information
presented below for the three months ended June 30, 1999 and the six months
ended June 30, 2000, are derived from the unaudited consolidated financial
statements of The Neptune Society, Inc., and in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000.
On March 31, 1999, the Registrant, The Neptune Society, Inc. (formerly
known as, Lari Corp.), acquired a group of corporations and limited liability
partnerships, which marketed and administered Pre-Need and At-Need cremation
services under the name "Neptune Society" (the "Neptune Group"). The business
combination was accounted for using the purchase method of accounting, and the
excess of the purchase price over the fair value of identifiable net tangible
assets acquired has been recorded as names and reputations. The financial
information for The Neptune Society, Inc. prior to April 1, 1999 has not been
included as it is not material to the
30
<PAGE>
Neptune Group financial statements. The financial data as of and prior to March
31, 1999 is the combined financial information of the Neptune Group. Since
purchase accounting was reflected on the opening balance sheet of the Successor
Company on April 1, 1999, the financial information of the Successor Company are
not comparable to the financial information of the Predecessor Company.
Accordingly, a vertical black line is shown to separate Successor Company
financial information from those of the Predecessor Company for periods ended
prior to April 1, 1999.
<TABLE>
Predecessor Company Successor Company
Three Three Nine Months
Year Ended December 31, Months Months Ended Six Months
--------------------------------- Ended March Ended June December Ended June
1996 1997 1998 31, 1999 30, 1999 31, 1999 30, 2000
----------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(000's, except per share amounts) | (000's, except per share amounts)
INCOME STATEMENT DATA: |
Total Revenue 8,532 8,956 7,865 2,962 | 1,778 5,688 3,448
Gross Profit 3,201 5,304 4,107 1,763 | 962 3,436 1,542
General and Administrative Expenses - 2,907 2,847 748 | 557 3,032 2,110
Compensation to Principal Shareholder - 1,841 2,200 430 | - - -
Professional Fees - 245 669 536 | 169 340 463
Amortization Expense - - - - | 341 1,024 732
Interest Expense - - - - | 506 1,184 1,405
Net Income/(loss) 720 311 (1,609) 49 | (526) (1,890) (2,633)
Earnings (loss) per share | (0.09) (0.31) (0.39)
|
BALANCE SHEET DATA: |
Current Assets 1,518 2,008 835 1,172 | 358 7,046 3,068
Current Liabilities 335 491 647 916 | 10,788 11,730 7,905
Long Term Debt - - - - | 10,786 5,722 6,298
Convertible Debentures | - 4,330 4,396
Shareholders Equity 2,305 2,578 808 792 | 5,469 12,385 11,260
|
OTHER FINANCIAL DATA: |
Number of Offices 10 10 10 10 | 11 13 16
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the consolidated financial
statements and accompanying notes.
Overview
The Company is the largest provider of pure cremation services in North
America. As of August 31, 2000, the Company operated out of 18 locations serving
California, Florida, Iowa, Oregon, New York, and Washington.
The death care industry has a number of attractive business characteristics
as described below. According to statistics provided by the National Funeral
Directors' Association, the number of deaths in North America has risen by 1%
annually between 1980 and 1998, and is expected to continue to grow at a similar
rate over the next 10-15 years. The same Association published the average cost
of an adult funeral in 1999 as $5,000. We currently sell cremation services for
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approximately $1,500. In a study conducted by Smith, Bucklin & Associates, it
was determined that the demand for cremation services as a percentage of death
services grew on average approximately 5% over the last ten years from 1989 to
1998. The funeral service industry in North America is highly fragmented,
consisting primarily of small, stable, family-owned businesses. Neptune
estimates only approximately 25% of the funeral businesses are currently owned
or operated by the five largest publicly traded North American funeral service
companies.
The Company capitalizes on these favorable industry fundamentals through a
growth strategy that emphasizes: (i) acquiring a significant number of small,
family-owned cremation service providers strategically located across North
America; (ii) initiating start up operations to be associated with key
acquisitions; (iii) operating all locations under one nationally branded name,
"The Neptune Society"; (iv) avoiding competition with corporate consolidators by
concentrating solely on cremation services and cremation products; and (v)
improving revenue and profitability of newly acquired operations. These factors
are critical to profitability and will continue to be the most important
responsibilities and challenges facing the Company.
<TABLE>
Year ended Year ended Six Months Year ended Six Months
December 31, December 31, ended June 30, December 31, ended June 30,
1997 1998 1999 1999 2000
------------ ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Services 89.8 87.7 86.6 83.8 78.6
Management and finance fees 10.2 12.3 13.4 16.2 21.4
------------ ------------ -------------- ------------ -------------
Total revenues 100.0 100.0 100.0 100.0 100.0
Costs and Expenses 40.8 47.8 42.5 39.9 55.3
------------ ------------ -------------- ------------ -------------
Gross profit 59.2 52.2 57.5 60.1 44.7
General and administrative expenses 32.3 36.3 27.5 43.7 61.2
Compensation to principal shareholder 20.5 27.9 9.1 5.0 -
Amortization expenses - - 7.2 11.8 21.2
Professional fees 2.7 8.5 14.9 10.1 13.4
------------ ------------ -------------- ------------ -------------
Total G&A Expenses 55.7 72.7 58.7 70.6 95.8
Income (loss) from operations 3.5 (20.4) (1.2) (10.5) (51.1)
Interest expense - - 10.7 13.7 40.7
------------ ------------ -------------- ------------ -------------
Income (loss) before income taxes 3.5 (20.4) (11.9) (24.2) (91.8)
Income tax benefit - - 1.8 2.9 15.5
------------ ------------ -------------- ------------ -------------
Net income (loss) 3.5% (20.4)% (10.1)% (21.3)% (76.3)%
------------ ------------ -------------- ------------ -------------
</TABLE>
32
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 (SUCCESSOR COMPANY) COMPARED WITH SIX MONTHS
ENDED JUNE 30, 1999 (PREDECESSOR/SUCCESSOR COMPANY COMBINED):
Results of Operations
Revenues
Cremation service revenues for the successor company were $2,710,000 for
the six months ended June 30, 2000 compared to $4,106,000 for the same period in
1999. Included in cremation service revenues in the first half of 1999 are
revenues for merchandise delivered on Pre-Need contracts. No such revenue was
included in subsequent periods as we did not purchase sufficient inventory
quantities to support such sales levels. Revenue deferred for the six months
ended June 30, 2000 was $1,219,000 and $261,000 for the three months ended June
30, 1999. Subsequent to June 30, 2000, we implemented delivery procedures to
allow us to recognize revenues on merchandise prior to performance of cremation
services in all states except Florida and New York, and we expect to begin
recognizing revenue related to delivered merchandise in states other than
Florida and New York starting in the third quarter of 2000.
Additionally, in the first quarter of 1999, we recognized approximately
$525,000 of revenue from a one-time liquidation of amounts trusted in 1996. The
trust was created as a result of a change in California trusting requirements
that required the Company to trust 100% of Pre-Need sales during an approximate
two month period of 1996. The Company was allowed to withdraw the remainder of
the trust during 1999 as part of the settlement with the State of California
relating to the action brought by the State in 1998.
Costs and Expenses and Gross Profit
Direct costs and expenses were $1,906,000 for the six months ended June 30,
2000 compared to $2,014,000 for the same combined period in 1999. The increase
is attributable to the addition of the Cremation Society of Washington and the
Cremation Society of Iowa that amounted to $185,000 in additional costs offset
by a reduction in cost of merchandise associated with deferred Pre-Need revenue.
The gross profit during the six months ended June 30, 2000 was $1,542,000
compared to $2,725,000 for the same period in 1999. Excluding the non-recurring
revenues from the trust liquidation, gross profit for the combined six months
ended June 30, 1999 would have been $2,200,000 or 46.4% of total revenues. Had
we purchased sufficient inventory quantities to support sales levels of Pre-Need
contracts, the gross profit for the six month period ended June, 2000 would have
been approximately $2,577,000 or 55.2% of total revenues.
General and Administrative Expenses
General and administrative expenses were $2,110,000 for the six months
ended June 30, 2000 compared to $1,305,000 for the corresponding period in 1999.
Due to the change in the growth strategy of the business at March 31, 1999, the
Company incurred additional lease costs and increased payroll costs for
executive and management positions. Additionally, the Company added a
telemarketing office with 24 employees to generate sales leads. The Company
expanded its operations by acquiring two new entities and opening an additional
office.
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Compensation to Principal Shareholder
Compensation to principal shareholder for the combined six months ended
June 30, 1999 was $430,000. This shareholder is now a consultant to the Company
and received consulting fees of $167,000 during the six months ended June 30,
2000. This amount is included in Professional Fees.
Amortization Expense
Amortization Expense for the combined six months ended June 30, 1999
amounted to $341,000 compared to $732,000 for the same period in 2000. The
increase in amortization expense resulted from the amortization of intangible
assets that were acquired during the March, 1999 Lari acquisition of The Neptune
Group of companies. Therefore, only three months of amortization expenses are
included in the 1999 figures. Additional intangibles of $637,000 and $1,018,000
were acquired at December 31, 1999 with the acquisition of Cremation Society of
Washington and at March 15, 2000 with the acquisition of Cremation Society of
Iowa, respectively, resulting in additional amortization of $49,000 during the
six months ended June 30, 2000.
Professional Fees
Professional fees for the six months ended June 30, 2000 were $463,000
compared to $705,000 for the combined six months ended June 30, 1999.
Professional fees incurred in 2000 include $167,000 of consulting fees paid by
the Company to the former principal shareholder. These fees are offset by a
decline in legal expenses.
Interest Expense
Interest expense for the six months ended June 30, 2000 was $1,405,000
compared to $506,000 in the combined six months ended June 30, 1999. The
increase is due to interest incurred for six months in 2000 as opposed to three
months in 1999 on promissory notes issued for the acquisition of the Company on
April 1, 1999. Additionally, in December, 1999, the Company issued a $5,000,000
of 13% convertible debenture at an effective interest rate of 15.8%.
Net Income
Net loss for the six months ended June 30, 2000 was $2,633,000 of total
revenues as compared to a net loss of $477,000 for the same period in 1999. The
increased loss is the result the reasons described above.
34
<PAGE>
1999 (SUCCESSOR COMPANY/PREDECESSOR COMPANY COMBINED) COMPARED WITH 1998
(PREDECESSOR COMPANY):
Results of Operations
Revenues
Service and merchandise revenues were $7,249,000 for the combined year
ended December 31, 1999 compared to $6,896,000 for the year ended December 31,
1998. The increase is a result of increased At-Need business partially offset by
a decrease in recognized Pre-Need revenue. In 1999, we increased our At-Need
business for cremation services by 900 cremations, resulting in an increase in
revenue of approximately $1,000,000. Our renewed marketing efforts through
mailers, public contact through our sales representatives, along with increased
activity in our preneed sales, contributed to generating increased At-Need
sales.
In 1999, we recognized Pre-Need service revenue of $950,000, representing
1,205 cremations as opposed to $2,966,000 in Pre-Need revenue in 1998. Had we
purchased sufficient inventory quantities to support sales levels of Pre-Need
contracts, we would have recognized additional revenues on 3,400 Pre-Need
contracts of approximately $2,000,000. The unrecognized revenue has been
deferred on the balance sheet and will be recognized upon product delivery.
Additionally, in the first quarter of 1999 we recognized approximately
$525,000 of revenue from a one-time liquidation of amounts trusted in 1996. The
trust was created as a result of a change in California trusting requirements
that required the Company to trust 100% of Pre-Need sales during an approximate
two month period of 1996. The Company was allowed to withdraw the remainder of
the trust during 1999 as part of the settlement with the State of California
relating to the action brought by the State in 1998.
Costs and Expenses and Gross Profit
Direct costs and expenses were $3,450,000 for the combined year ended
December 31, 1999 as opposed to $3,758,000 in 1998. The decrease is due to
savings inherent in performing the cremations in our facilities. In 1998, the
cost of performing cremations increased as the Company was required to
subcontract cremation and removal services at a higher rate to third party
providers.
General and Administrative Expenses
General and administrative expenses were $3,780,000 for the combined year
ended December 31, 1999 compared to $2,847,000 for the prior year. Included in
general and administrative expenses are advertising, indirect employee and
occupancy costs, direct marketing costs, and insurance. The increase is
attributable to the transition of the business from limited partnerships to a
corporate structure as described above. The increase is offset somewhat by
penalties in the amount of $340,000 which were incurred and paid in 1998 as a
result of the legal action brought by the State of California.
35
<PAGE>
Amortization Expense
Amortization expense of intangible assets amounted to $1,024,000 for the
combined year ended December 31, 1999 compared to nil in 1998. The increase in
amortization of purchased intangibles resulted from the acquisition of The
Neptune Group by Lari in April 1999.
Compensation to Principal Shareholder
Compensation to the principal shareholder in 1998 was $2,200,000 declining
to $430,000 for the combined year ended December 31,1999. The decline is due to
the change in ownership of the Company on March 31, 1999. During the years ended
December 31, 1998 and 1997, the business of the Neptune Society was operated as
private companies and partnerships. As such, the compensation of the principal
shareholder and partner was discretionary. Currently, this principal shareholder
is a consultant to the Company and was paid $263,000 as consulting fees for the
year ended December 31, 1999. This amount is included in Professional Fees.
Professional Fees
Professional fees in the combined year ended December 31, 1999 were
$876,000 compared to $669,000 in 1998. While our legal fees declined in 1999
related to our defense of the State initiated action in California, we continued
to incur legal fees related to licensing issues and lawsuits that arose prior to
the Lari acquisition of the Neptune Group. Additionally, we incurred
professional fees related to our securities filings.
Interest Expense
Interest expense for the combined year ended December 31, 1999 amounted to
$1,184,000 and was related to interest incurred on promissory notes related to
the Lari acquisition of the Neptune Group. There was no interest expense in
1998.
Net Loss
The net loss for the combined year ended December 31, 1999 was $1,841,000
compared to a net loss of $1,609,000 for the year ended December 31, 1998. The
net loss in 1999 differed from the net loss in 1998 for the reasons described
above.
36
<PAGE>
1998 PREDECESSOR COMPANY COMPARED TO 1997 PREDECESSOR COMPANY:
Results of Operations
Revenues
Cremation service revenues were $6,896,000 for the year ended December 31,
1998 compared to $8,048,000 in 1997, a 14% reduction. The reduction in revenues
was primarily due to California locations being closed by The Department of
Consumer Affairs, Funeral and Cemetery Division during March and April of 1998
pending an administrative proceeding. See Item 1 "Death Care Service Industry
Regulation." This closure caused a loss in revenues as the Predecessor was not
able to operate for two months, temporarily eliminating its ability to sell new
business and provide cremation services to previously enrolled members. In 1998,
The Neptune Group performed approximately 835 less cremation services as
compared to 1997 resulting in an estimated $500,000 reduction in revenue at our
California operations. The remaining decrease is a result of the temporary loss
of preneed revenue from our California operations. The effect of the shutdown
and its negative publicity resulted in an estimated decrease of approximately
2,500 preneed merchandise sales. Revenues earned from Trust Fund management fees
were $969,000 in 1998 compared to $918,000 in 1997, a 5.6% increase. The
increase is attributable to the increase in the value of the trust funds.
Costs and Expenses and Gross Profit
Direct costs and expenses were $3,758,000 for the year ended December 31,
1998, compared to $3,662,000 for the same period in 1997, an 3% increase.
Despite the fact that the operations were suspended by the State of California
during March and April of 1998, the Company continued to incur costs to maintain
its offices and retain employees. Additionally, the cost of performing first
calls (removal of the deceased body from the place of death) and cremations
increased as the Company was required to subcontract cremation and removal
services at a higher rate to third party providers.
General and Administrative Expenses
General and administrative expenses were $2,847,000 for the year ended
December 31, 1998, compared to $2,907,000 for the same period in 1997, a 2%
decrease. The decrease is attributable to a reduction in costs of advertising
and direct marketing expenses as the California operations were shut down for a
two month period in 1998 and were unable to generate sales.
Professional Fees
Professional fees were comprised of $490,000 in legal fees in the year
ended December 31, 1998 and $225,000 in legal fees in the year ended December
31, 1997. These legal fees were incurred as a result of the predecessor
company's legal defense related to proceedings brought by the Department of
Consumer Affairs, Funeral and Cemetery Division.
37
<PAGE>
In connection with the above proceeding, the company paid fines of $340,000
in 1998, which are included in General and Administrative Expenses.
Compensation to Principal Shareholder
During the years ended December 31, 1998 and 1997, the businesses of the
Neptune Society were operated as private companies and partnerships. As such,
the compensation of the principal shareholder and partner was discretionary.
These costs amounted to $2,200,473 and $1,840,984 in 1998 and 1997,
respectively.
Net Income
The loss for the year ended December 31, 1998 was $1,609,000 compared to
net income of $311,000 for the year ended December 31, 1997. The decline in net
income for the year ended December 31, 1998 was a result of the reasons
described above.
Liquidity and Capital Resources
At June 30, 2000, we had current assets of $3,068,000, which is comprised
of cash, accounts receivable and prepaid expenses. Our total current liabilities
were $7,905,000, comprised mainly of accounts payable, accrued liabilities, and
the current portion of long term debt. We had long term debt of $10,694,000 and
deferred revenue arising from the sale of pre-need merchandise of $3,457,000.
The current portion of long term debt was due on July 31, 2000. The company paid
the current portion of long term debt and an additional $1,100,000 of long term
debt in August 2000 with capital raised through a private equity placement of
$7,000,000. The remainder of the current debt of $4,700,000 was renegotiated
with the former owner and extended until July 2001.
We had net cash outflows from operating activities of $224,000 for the six
month period ended June 30, 2000. Interest paid for the six month period ended
June 30, 2000 and for the nine month period ended December 31, 1999 were
$383,000 and $186,000 respectively.
Cash flows from financing activities during the year ended December 31,
1999, and through July 31, 2000 were as follows:
Equity Financings
On January 19, 1999, Lari Corp. (renamed Neptune Society, Inc.) issued
1,000,000 shares of its common stock at a price of $0.20 per share in a private
placement. In addition, four share purchase warrants were issued with each share
purchased, each share purchase warrant was exercisable into one common share at
a price of $0.20 per share. On April 7, 1999, we received total gross proceeds
of $800,000 from the exercise of the share purchase warrants.
On July 22, 1999, we entered into a private placement Agency Agreement with
Standard Securities Capital Corporation for the sale of 583,334 shares of our
common stock at $12.00 per share. We issued 333,333 common shares for gross
proceeds of $4,000,000 on August 9, 1999; 111,667 common shares for gross
proceeds of $1,340,000 on October 12, 1999; 130,000 shares for gross proceeds of
$1,560,000 on December 30, 1999; and 8,334 shares for gross proceeds of
38
<PAGE>
$100,002 on January 31, 2000. We paid Standard Securities Capital Corporation an
agency fee of $420,000 in connection with the transaction. We initially agreed
to provide the subscribers with certain rights with respect to these securities,
including registration and reset rights, which were subsequently waived by the
subscribers.
On July 31, 2000, we entered into a private placement Agency Agreement with
Standard Securities Capital Corporation for the sale of 500,000 shares of our
common stock at $14.00 per share for total gross proceeds of $7,000,000. On
August 9, 2000, the private placement was closed and we paid Standard Securities
Capital Corporation an agency fee of $75,000 and a finder's fee to Systematic
Investments Establishment of 150,000 common shares.
Other Financings
In consideration for the acquisition of the Neptune Group of companies, we
issued two promissory notes totaling $21,000,000, the terms of repayment of
which is disclosed in the notes to the financial statements. We repaid
$4,125,784 of these notes on August 11, 1999, and $4.9 million on January 3,
2000. We were obligated to make a payment of $10,000,000 on July 31, 2000 in
connection with the promissory notes. On July 18, 2000, we entered into a debt
restructuring agreement with Emanuel Weintraub. In exchange for a 12-month
deferment of $4,724,440 of the $5,065,836 payment due Emanuel Weintraub, the
Company agreed to release Mr. Weintraub from liability for loss of revenue or
projected revenue as a result of the Leneda legal proceedings. See "Legal
Proceedings". We repaid an additional $6.68 million of these notes from the
proceeds of the private placement closed on August 9, 2000.
On August 11, 1999, the Company obtained $250,000 from Private Investment
Company in connection with a short-term interest free, non-amortizing,
promissory note payable on demand.
On December 30, 1999, the Company issued $5,000,000 of convertible
debentures at an interest rate of 13%, of which 6.5% is payable in arrears in
monthly installments on the first day of each month in each and every calendar
year until the principal amount and all accrued and unpaid interest is paid in
full and the remaining 6.5% is payable on the due date, February 24, 2005. The
debenture is convertible into 500,000 shares of our common stock upon the
election of the investor at any time after nine months from issuance to February
24, 2005. The debentures were issued with detachable warrants to acquire 100,000
common shares at $10.42 per share and 100,000 common shares at $12.50 per share.
These warrants expire on December 24, 2004. The fair value of the warrants,
$670,409, was recorded as a credit to additional paid-in-capital and a discount
to the carrying value of the debentures. The discount is being accreted to the
redemption price of the debentures and results in an effective interest rate of
15.8%. In addition, the debentures are convertible to common stock at an initial
conversion ratio of 10:1, or a total of 500,000 common shares. The intrinsic
value of the conversion feature, $562,000, has been credited to additional
paid-in-capital and recorded as a deferred financing cost in the consolidated
balance sheet. Such amount is being recognized as interest expense over the
period up to the initial conversion date, September 30, 2000.
We have the following obligations under the debenture purchase agreement
and the convertible debentures:
39
<PAGE>
o We granted demand registration rights pursuant to which we agreed to
file a registration statement, at our expense, on a Form S-1, Form S-3
or other similar form upon the demand of the purchaser to register the
resale of the common stock issued or issuable upon the conversion or
exercise of the debenture, the warrant, options or other of our
securities owned by the purchaser or any transferee of the purchaser;
o We granted the purchaser piggy-back registration rights pursuant to
which we agreed to register the purchasers' common stock in the event
we filed a registration statement, at our expense, to register any of
our securities for our own account or for the account of other
security holders;
o We agreed to adjust the number of shares issuable under the
convertible debentures and warrants if we issue additional shares of
our common stock if (i) we issue shares for less than $10.00 in cash,
in which case the debenture shall be convertible at the lower price or
(ii) if we issued shares without consideration in a transaction that
results in the issuance of shares for consideration of less than
$10.00 per share, in which case the debenture shall be convertible at
a price adjusted to give effect to the lower value of the share
issuance.
We paid loan origination fees of $168,000 in connection with the issuance.
We used the proceeds of the financings to make the $4,874,000 payment due on
January 3, 2000 related to the promissory notes issued to the former owners of
the Neptune Group of companies.
On March 31, 2000, we received $750,000 additional financing from Private
Investment Company, bringing the total value of the promissory note to
$1,000,000. The note is non-amortizing, interest free and becomes due on
September 30, 2001. Financing costs of 12,000 common shares valued at $12.50 per
share were paid in connection with this loan. The proceeds from this note were
used to finance the acquisitions of the Ankeny, Iowa and Portland, Oregon
operations.
We expect adequate sources of funds to be available to finance our future
operations through internally generated funds. We anticipate that we will
finance additional acquisitions and growth, in part, by issuing equity and debt
securities.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the Commission)
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, which is to be applied beginning with the fourth fiscal quarter of
fiscal years beginning after December 15, 1999, to provide guidance related to
recognizing revenue in circumstances in which no specific authoritative
literature exists. The Company is reviewing the application of the Staff
Accounting Bulletin to the Company's financial statements, however, any
potential accounting changes are not expected to result in a material change in
the amount of revenues we ultimately expect to realize.
In March, 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions
Involving Stock Compensation". Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under APB Opinion
40
<PAGE>
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to
have an impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
Upon adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company is evaluating its expected adoption date and currently
expects to comply with the requirements of SFAS 133 in fiscal year 2001. The
Company does not expect the adoption will be material to the Company's financial
position or results of operations since the Company does not believe it
participates in such activities.
Quantitative and qualitative disclosures about market risk
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential change arising from increases or decreases in the
prices of interest rates as discussed below. The Company's exposure to market
risk as discussed below includes "forward-looking statements" and represents an
estimate of possible changes in fair value or future earnings that would occur
assuming hypothetical future movements in interest rates. The Company's views on
market risk are not necessarily indicative of actual results that may occur and
do not represent the maximum possible gains and losses that may occur, since
actual gains and losses will differ from those estimated, based upon actual
fluctuations in interest rates and the timing of transactions.
The Company has entered into various fixed rate debt obligations, which are
detailed in Note 4 to the Company's consolidated financial statements included
in Item 15.
As of December 31, 1999, the carrying value of the Company's long term
fixed rate debt was approximately $10,402,000, which approximated fair value.
Fair value was determined using discounted future cash flows based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. If these instruments are held to maturity, no change in fair value
will be realized.
ITEM 3. PROPERTIES
We lease properties in eighteen locations in Arizona, California, Florida,
Iowa, New York, Oregon and Washington. There are three sales offices in
California, three in Florida, one in Iowa, two in New York, one in Oregon and
two in Washington. Two of the offices in Florida and the office in Iowa have
chapels for funeral services. We lease two properties for holding facilities,
one of which also stores merchandise inventory and the other has the crematory.
We also lease our corporate offices in Florida and Los Angeles. We lease a call
center in Tempe,
41
<PAGE>
Arizona. All of our leases are on standard terms and conditions, and we do not
rely on any one lease for its continuing operations. The operations are
currently concentrated at the following locations:
Summary of our operational locations
------------------------------------
<TABLE>
Location Operation
-------------------------------------- -------------------------------------------------------------
<S> <C>
Arizona
Tempe Telemarketing center
-------------------------------------- -------------------------------------------------------------
California
Burbank -Corporate Administration and operations headquarters
Burbank sales and administrative office
San Pedro Pre-Need/At-Need sales and administrative office
Santa Barbara Pre-Need/At-Need sales and administrative office
Los Angeles - Heritage Holding facility, crematory and viewing room
Santa Barbara/Ventura Holding facility and inventory warehouse
Canoga Park Inventory warehouse
-------------------------------------- -------------------------------------------------------------
Florida
Miami Pre-Need/At-Need sales and administrative office and chapel
Fort Lauderdale Pre-Need/At-Need sales and administrative office and chapel
St. Petersburg Pre-Need/At-Need sales and administrative office
-------------------------------------- -------------------------------------------------------------
Iowa
Ankeny (2 locations) Pre-Need/At-Need sales and administrative office and chapel
-------------------------------------- -------------------------------------------------------------
Oregon
Portland Pre-Need/At-Need sales and administrative office and chapel
-------------------------------------- -------------------------------------------------------------
New York
Long Island At-Need sales and administrative office
Yonkers At-Need sales and administrative office
-------------------------------------- -------------------------------------------------------------
Washington
Spokane Pre-Need/At-Need sales and administrative office,
holding facility, crematory and viewing room
Everett Pre-Need/At-Need sales and administrative office
</TABLE>
42
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are not, to the best of our knowledge, directly or indirectly owned or
controlled by another corporation or foreign government.
The following table sets forth our principal (more than 5%) stockholders as
of June 30, 2000:
<TABLE>
Identity of Number of Percent of
Title of Class Person or Group Addresses Shares Owned Class(1)
-------------- --------------- --------- ------------ --------
<S> <C> <C> <C> <C>
Common CCD Commerce Consulting Glockegasse 4 595,001 7.7%
4001 Basel
Switzerland
Common Officers and Directors 234,990(2) 3.4%
</TABLE>
(1) Based on 6,718,657 issued and outstanding shares.
(2) Directors and named executive officers, as a group, as of June 30, 2000.
The following table sets forth the stockholdings, direct and indirect, of
our directors and named executive officers as of June 30, 2000:
Number of Common
Name of Director/Officer Address Shares Owned
--------------------------------------------------------------------------------
Gary R. Loffredo 102 NE 2nd St, Suite 777 None
Director Boca Raton, FL 33432
Gary I. Harris 102 NE 2nd St, Suite 777 None
Director Boca Raton, FL 33432
Marco P. Markin 3500 W. Olive, Suite 1430 62,500
CEO, Director Burbank, CA 91505
Thomas J. Soucy 3500 W. Olive, Suite 1430 None
CFO, Director Burbank, CA 91505
David Schroeder 3500 W. Olive, Suite 1430 86,245
COO, Neptune Management Burbank, CA 91505
Corp., Inc.
Michael Ashe 86,245
VP Operations - 6637 SE Milwaukee Ave., #1
Oregon Portland, OR 97202
Teresa Fourticq 3500 W. Olive Suite 1430 None
Director Burbank, CA 91505
43
<PAGE>
We have no knowledge of any arrangements, including any pledge by any
person of securities of the Neptune Society, the operation of which may at a
subsequent date result in a change in our control.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
current directors, executive officers and key employees. The term for each
director and officer expires in October 2000. The ages of the directors,
executive officers and key employees are shown as of August 31, 2000.
<TABLE>
Director/
Name Position Officer Since Age
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marco P. Markin President, CEO and Director of each of The June 1999 36
Neptune Society, Inc., Neptune Society of
America, Inc. (since October) and Neptune
Management Corp. (since June 1999)
Thomas J. Soucy Chief Financial Officer, Secretary, and March 2000 42
Director of each of The Neptune Society,
Inc., Neptune Society of America, Inc.,
Neptune Management Corp., Inc., and Heritage
Alternatives, Inc.
Gary R. Loffredo Director of both The Neptune Society, Inc. April 1999 38
(since October 1999) and Neptune Management
Corp. (since April 1999); President and
Director of Heritage Alternatives Inc.
(since April 1999)
Teresa Fourticq Director of The Neptune Society, Inc. May 2000 28
David Schroeder Chief Operating Officer of Neptune June, 2000 53
Gary I. Harris Director of The Neptune Society, Inc. October 1999 58
</TABLE>
Marco P. Markin - Mr. Markin joined The Neptune Society full time as our
President and CEO in September 1999. From November 1994 to September 1999, Mr.
Markin was the Executive Vice President of TPP Management Inc., a private
investment company, having a diverse portfolio consisting of
residential/commercial real estate, merchant banking, and securities. Expertise
included corporate management, and corporate development, research and
marketing. From January 1991 to November 1995, Mr. Markin was the founder and
CEO of a commercial real estate company, which secured and managed a portfolio
of 400,000 square feet of real estate. He was also the co-founder of one of the
largest direct marketing companies in Canada, which was subsequently sold to the
Financial Post. From 1985 - 1990, Mr. Markin was the founder and CEO of Markin
Development Group, a growing development company focusing on
44
<PAGE>
construction of multi-family apartment buildings and commercial offices. Mr.
Markin graduated from Bishop College in Montreal in 1982. He also attended the
University of British Columbia's Science Program from 1982 - 1985.
David L. Schroeder - Mr. Schroeder was appointed Chief Operating Officer of
Neptune on June 1, 2000. Prior to his work with Neptune, Mr. Schroeder worked as
the CEO of Community Memorial Centers, LLC, an Oregon cremation services company
from May 1998 to July 2000. He has served on the board of directors for The
Loewen Group, Inc., from August 15, 1990 to May 1, 1993, he was president of
Universal Memorial Centers from 1984 to 1993, president and COO of Skyline
Memorial Gardens & Crematory, and he worked for 27 years as a licensed funeral
director and embalmer. Mr. Schroeder has served on the board and as an officer
of the Oregon State Funeral Directors Association and as Chairman of the Oregon
State Mortuary-Cemetery Licensing Board.
Thomas J. Soucy - Mr. Soucy is the Chief Financial Officer for The Neptune
Society. Mr. Soucy has worked as an accounting supervisor for Hughes Aircraft
Company from June, 1979 to June, 1984, progressed to the position of audit
manager for Deloitte & Touche from June, 1984 to September, 1990, and as CFO of
Englewood Park Cemetery and Green Hills Memorial Park from September, 1990 to
January, 2000. Mr. Soucy is a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants, the State Society of
Certified Public Accountants, he has served on various boards of nonprofit
organizations. He is also a member of the Internment Association of California
and a past member of the International Cemetery and Funeral Association.
Gary I. Harris - Mr. Harris is the National Sales Manager of Neptune and a
Director. Prior to joining Neptune in March, 2000, Mr. Harris was the Senior
Vice-President in charge of the print division at T.V. Fanfare Publication, an
international advertising company, where he worked since 1985. He attended both
the University of Toledo and New York University.
Gary R. Loffredo - Since November 1998, Mr. Loffredo has been Vice
President of Investment Banking for BG Capital Group. BG Capital Group is a
venture capital and merchant banking firm with offices in Florida and Canada.
Prior to joining BG Capital, Mr. Loffredo began his career at Lehman Brothers in
New York and Miami where he worked for 12 years. In April 1997, he founded and
served as President for a construction company based in Florida. Mr. Loffredo
majored in finance, graduating from the University of South Carolina with a
Bachelor of Science Degree in 1984.
Teresa Fourticq - Ms. Fourticq has been a member of the Board of Directors
of The Neptune Society since March, 2000. She is a Certified Public Accountant
and holds a bachelor's degree from University of California at Los Angeles. From
1992 to 1998, Ms. Fourticq was employed by Deloitte & Touche LLP for six years
progressing to audit manager. During her tenure with Deloitte & Touche, Ms.
Fourticq worked on audits of various death care companies In September, 1999,
Ms. Fourticq joined Bancroft Capital Advisors, Inc. and was responsible for all
financial matters of the organization. Ms. Fourticq was employed with Oaktree
Capital Management, LLC, as assistant vice president in charge of accounting and
operations for Oaktree's marketable securities funds from July, 1998 to
September, 1999. Ms. Fourticq
45
<PAGE>
currently works for Bancroft Capital Advisors, Inc., a real estate investment
firm that invests in commercial and industrial properties
None of our executive officers or key employees are related by blood,
marriage or adoption to any director or other executive officer.
To our knowledge, there are no arrangements or understanding between any of
our executive officers of Neptune Society and any other person pursuant to which
the executive officer was selected to serve as an executive officer.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation paid to each of the individuals
who served as our Chief Executive Officer and our other most highly compensated
executive officers (the "named executives officers") for the fiscal year ended
December 31, 1999 and the estimated compensation to be paid to such named
executive officers for the fiscal year ended December 31, 2000. The
determination as to which executive officers were most highly compensated was
made with reference to the amounts required to be disclosed under the "Salary"
and "Bonus" columns in the table
<TABLE>
Name and Principal Position Other Annual
Position Year Salary Bonus Compensation
-------------------------- -------------- -------------- ------------- --------------------
<S> <C> <C> <C> <C>
Marco Markin(1) 1999 $40,000 - -
President, CEO and 2000 $120,000 $83,000
Director of The Neptune
Society, Inc.
Emanuel Weintraub,(2) 1999 - - $771,000
Consultant to Neptune 2000 - - $240,000
Society of America, Inc.
Jill Schulman(3) 2000 - - -
Former Vice President, 1999 $92,000 - -
Secretary and Director
Neptune Management Corp.
</TABLE>
46
<PAGE>
<TABLE>
Name and Principal Position Other Annual
Position Year Salary Bonus Compensation
-------------------------- -------------- -------------- ------------- --------------------
<S> <C> <C> <C> <C>
Larry Miller(4) 2000 - - -
Former Senior Vice 1999 $144,000 - -
President of Sales Neptune
Management Corp.
Thomas J. Soucy(5)
Chief Financial Officer, 2000 $105,000 - $24,000
Secretary and Director 1999 - - -
David Schroeder
Chief Operating Officer of 2000 $120,000 - -
Neptune Management Corp. 1999 - - -
Gary Harris(6)
National Sales Manager of
Neptune Management Corp. 2000 $75,000 - $78,000
and Director Neptune 1999 - - -
Society
</TABLE>
(1) Mr. Markin was appointed as an Officer and Director of our subsidiary
companies in April 1999. He was appointed as Neptune Society's President
and CEO in October 1999 at an annual salary of $120,000 per year. In 2000,
we expect to pay Mr. Markin $83,000 for lease payments on his z home and
for personal use of automobile.
(2) Mr. Weintraub is a former President and CEO of the Neptune Management and
Heritage Alternatives prior to the acquisition by the Neptune Society (see
Item 1 "History of the Neptune Society"). In 1999, Mr. Weintraub was paid
approximately $513,000 for management fees, $250,000 for preneed marketing
consulting services, and $8,400 for personal use of an automobile. Of the
total $513,000 in fees paid to Mr. Weintraub in 1999, $460,190 were paid
prior to the Lari acquisition of the Neptune Group. In 2000, we expect to
pay Mr. Weintraub $240,000 in consulting fees.
(3) Ms. Schulman resigned on December 31, 1999.
(4) Mr. Miller retired on January 4, 2000.
(5) In 2000, we expect to pay Mr. Soucy $24,000 for personal use of automobile.
(6) In 2000, we expect to pay Mr. Harris $78,000 commission overrides based on
$10 per contract.
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Stock Appreciation Rights ("SARs")
We did not grant any SARs during the most recently completed fiscal year.
Incentive Stock Option Plan
On October 8, 1999, shareholders of The Neptune Society, Inc. approved the
1999 Stock Option Plan (the "Option Plan"), as approved by the Board of
Directors on June 1, 1999. The Option Plan provides for the grant of incentive
and non-qualified options to purchase up to 900,000 shares of The Neptune
Society, Inc. common stock to our employees and such other persons as the Plan
Administrator (which currently is the Board of Directors) may select. The Plan
is intended to help attract and retain key employees and such other persons as
the Plan Administrator may select and to give such persons an equity incentive
to achieve the objectives of our shareholders.
Incentive stock options may be granted to any individual who, at the time
the option is granted, is an employee of The Neptune Society, Inc. or any
related corporation. Non-qualified stock options may be granted to employees and
to such other persons as the Plan Administrator may select. The Plan
Administrator fixes the exercise price for options in the exercise of its sole
discretion, subject to certain minimum exercise prices in the case of Incentive
Stock Options. The exercise price may be paid in cash, certified check or
cashier's check. Options will not be exercisable until they vest according to a
vesting schedule specified by the Plan Administrator at the time of grant of the
option.
Options are non-transferable except by will or the laws of descent and
distribution. Except as otherwise specified by the Plan Administrator or the
employee's stock option agreement, vested but unexercised options terminate upon
the earlier of: (i) the expiration of the option term specified by the Plan
Administrator at the date of grant (generally ten years; or, with respect to
Incentive Stock options granted to greater-than ten percent shareholders, a
maximum of five years); or (ii) the expiration of ninety (90) days from the date
of an employee optionee's termination of employment with The Neptune Society,
Inc. or any related corporation for any reason whatsoever. Unless accelerated in
accordance with the Plan, unvested options terminate immediately upon
termination of employment of the optionee by us for any reason whatsoever,
including death or disability.
On December 31, 1999, we granted stock options under the Option Plan
exercisable to acquire a total of 426,750 shares of The Neptune Society, Inc.
common stock. All of these options are exercisable at $11.75 per share and
expire on December 31, 2002. Of these stock options, we granted a total of
101,750 shares to 44 sales representatives and 325,000 shares to employees and
trustees. Subsequent to December 31, 1999, options to purchase 61,500 shares of
the Neptune Society, Inc. common stock were cancelled as a result of employee
terminations.
On March 2, 2000, we granted stock options to employees exercisable to
acquire a total of 154,000 shares of the Neptune Society, Inc. common stock at
$12.12 per share. On May 22, 2000, we granted stock options to sales
representatives exercisable to acquire a total of 1,000 shares of our common
stock at $14.25 per share. On May 31, 2000, we granted stock options to
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trustees exercisable to acquire a total of 15,000 shares of our common stock at
$14.00 per share. On July 5, 2000, we granted stock options to employees
exercisable to acquire a total of 85,000 shares of our common stock at $13.25
per share.
Aggregated Option/SAR Exercises in Last Fiscal Year- and Fiscal Year-End
Option/SAR Values
There were no stock options or SARs exercised during the last fiscal
year-end, and there were no vested options or SARs at August 31, 2000.
Long Term Incentive Plans
No long-term incentive awards were made during the most recently completed
fiscal year ended December 31, 1999.
Defined Benefit or Actuarial Plan Disclosure
We do not provide retirement benefits for the directors or officers.
Compensation of Directors
None of our Directors received compensation for the fiscal year ended
December 31, 1999; however Teresa Fourticq will be compensated in the amount of
$5,000 for the year ending December 31, 2000.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
We currently do not have any employment contracts with any of the named
executive officers.
Report on Repricing of Options/SARs
We did not reprice any options or SARs outstanding during the most recently
completed fiscal year ended December 31, 1999.
Compensation Committee
The entire board of directors, elected in October 1999, acted as the
compensation committee for the fiscal year 1999. The board will continue to act
as compensation committee for the fiscal year 2000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the transactions described below, none of our directors, senior
officers or principal shareholders, nor any associate or affiliate of the
foregoing have any interest, direct or
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indirect, in any transaction, from January 1, 1999 to date of this Form 10, or
in any proposed transaction which has materially affected or will materially
affect us.
Reginald Duran, Secretary and Director of Heritage Alternatives, Inc. is
the owner of D&B Provisions, Inc., a company that is in the business of selling
cremation products to mortuaries and crematoriums. From January 1, 2000 to
August 31, 2000, we have made $710 in purchases from D&B Provisions, Inc. From
January 1, 1999 to November 1, 1999, we made purchases of $2,886 from D&B
Provisions, Inc. ($0 in 1998). From January 1, 2000 to August 31, 2000, we have
made maintenance purchases of $22,148 from All Furnace Corporation, a company
controlled by Mr. Duran's brother. During 1999, we made purchases of $17,384
from All Furnace Corporation. ($0 in 1998).
On January 19, 1999, Suzanne Wood, one of our former directors and our
former President, purchased on a private placement basis, a total of 7,500
common shares and 30,000 share purchase warrants for $1,500. Ms. Wood
subsequently disposed of the 30,000 share purchase warrants.
Also on January 19, 1999, Gary Loffredo, one of our directors and the
President of Heritage Alternatives Corp., purchased on a private placement
basis, a total of 50,000 shares and 200,000 share purchase warrants for $10,000.
Mr. Loffredo subsequently disposed of all of the 50,000 common shares and all of
the 200,000 share purchase warrants.
On January 19, 1999, Marco Markin, our President, CEO and a director,
purchased, directly or indirectly, on a private placement basis, a total of
62,500 common shares for $25,000.
Effective March 31, 1999, we acquired the Neptune Group of companies from
its owners, including Emanuel Weintraub, one of our pre-need marketing
consultants. In connection with the acquisition, we issued 500,000 shares of The
Neptune Society, Inc. common stock to the following persons: Emanuel Weintraub
Inter Vivos Trust, Jill Schulman, Stanley Zicklin, Marvin Falikoff, Helen
Kramer, Milton Kramer, Paul Shields, Nancy Leferman, Norman Leferman, Sam
Perlow, Joan Perlow, Stuart Solomon, Marilyn Tenzer, Arlene Zicklin, Linda
Stark, Ted Boock, Marlene Burdman, James Freedman, Freedman Family Trust, Dennis
Family Trust-Leo Robert and Lorraine Dennis, Leo Robert Dennis-IRA Smith Barney,
Dennis Family Trust-Ron Dennis, Dennis Family Trust-Richard and Jessica Dennis,
JPS Associates, Marcia Deifik, Connie King, Herm Warme, Jon Warme, Judith
Glaser, Steve Brown, Irving Steinfield, Steve Schwartz, Zorinee Schwartz Mervyn
Kalman, Jerry Lertzman, and RER. Of these shares, Mr. Weintraub received,
directly and indirectly, a total of 294,213 shares of common stock. Mr.
Weintraub also received, directly and indirectly, a total of $583,132 in cash
and a promissory note in the amount of $11,079,514, of which $656,531 was paid
on August 7, 1999 and $4,172,475.64 was paid on January 5, 2000.
In addition, we issued The Emanuel Weintraub Intervivos Trust a promissory
note in the amount of $2,000,000 on March 31, 1999, of which $55,555.55 was paid
monthly from and including August to October 1999. We continued to pay Mr.
Weintraub $40,000 per month until July 31, 2000 when the note was paid in full.
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Ms. Jill Schulman, Mr. Weintraub's daughter and former Vice President of
Neptune Management received, in connection with our acquisition of the Neptune
Group, a total of $19,652; 9,552 common shares of The Neptune Society, Inc.
valued at $95.520, and $373,391 by way of promissory note of which $176,865 was
paid on August 7, 1999.
On August 1, 1999, we renegotiated the payment terms of the promissory
notes we issued to the former owners of Neptune Group of companies. In
consideration for extending the time for repayment, we issued share purchase
warrants exercisable to acquire up to 125,000 shares of The Neptune Society,
Inc. common stock at $12.00 per share to holders of the notes. The share
purchase warrants were issued to Mr. Weintraub's daughters, including Ms. Jill
Schulman, the Vice President of Neptune Management, who received share purchase
warrants exercisable to acquire 31,250 shares.
Also in connection with our acquisition of the Neptune Group, we entered
into a consulting agreement with Mr. Weintraub for three years for a fee of
$333,333 per year. See "History of the Neptune Society."
On July 17, 2000, we entered into a Debt Restructuring Agreement with Mr.
Weintraub for a 12-month extension of time to repay the balance due under a
$19,000,000 promissory note in the amount of $5,065,835.80 in exchange for our
agreement to release Mr. Weintraub from liability for any loss of revenue since
March 31, 1999 or projected revenue as it relates to the ongoing litigation with
Leneda, Inc . See "Legal Proceedings".
ITEM 8. LEGAL PROCEEDINGS
On May 15, 2000, Leneda, Inc. dba Neptune Society of San Diego County, San
Bernardino County, Riverside County, Imperial County filed a Complaint for
service mark infringement, breach of contract, unfair business practices, and
interference with prospective economic advantage in the United States District
Court in and for the Central District of California (Honorable Gary A. Feess).
Both we and Leneda operate under the service mark "Neptune Society", and the
concurrent use of that mark was the subject of a lawsuit before the U.S. Patent
and Trademark Office which stretched from 1986 to 1995. We and Leneda were
parties to that lawsuit, which was resolved through a settlement agreement that,
in essence, divided up the territories in which the parties could use the mark.
Leneda received exclusive rights in four southern California counties and we
received rights for use in some limited areas in the Los Angeles, California
area and outside of California. Subsequent to the settlement, we had an
arrangement with Leneda whereby Leneda would perform at-need services for
certain of the pre-need contracts sold within Leneda's territories. Leneda's law
suit alleges that we unlawfully used a trademark, "Neptune Society", for certain
services in a prohibited geographic area defined by the settlement agreement.
Thus far, we have answered the complaint and asserted affirmative defenses. We
have also counterclaimed for breach of contract and breach of implied covenants
of good faith and fair dealing. Leneda filed a motion for preliminary injunction
that sought to prohibit Neptune's use of the mark pending resolution of the
litigation and a freeze of assets. We opposed this motion, which the Court
granted in part (regarding the temporary prohibition on using the mark) and
denied in part (regarding the asset freeze) on July 31, 2000. Leneda is seeking
monetary damages in an unspecified amount. We believe that the lawsuit is
without merit and intend to defend this case vigorously.
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Our operations may be subject to numerous environmental laws, regulations
and guidelines adopted by various governmental authorities in the jurisdictions
in which we operate. Liabilities are recorded when environmental liabilities are
either known or considered probable and can be reasonably estimated. Our
policies are designed to control environmental risk upon acquisition through
extensive due diligence and corrective measures taken prior to acquisition. We
believe environmental liabilities to be immaterial individually and in the
aggregate.
We may become a party to other legal proceedings in the ordinary course of
its business. We do not expect the outcome of any of the above or other
proceedings, individually or in the aggregate, to have a material adverse effect
on our financial statements taken as a whole or our liquidity.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
On August 26, 1998, the common shares of the Neptune Society were listed
under its former name Lari Corp. on the NASD OTC Bulletin Board under the symbol
"LREE". On May 3, 1999, Lari Corp. changed its name to The Neptune Society, Inc.
and on May 4, 1999, the symbol was changed to "NPTN". In March, 2000, the common
stock of the Neptune Society was de-listed from the NASD OTCBB, and began
quotation on the National Quotation Bureau's pink sheets. On May 19, 2000, after
effecting a reverse stock split, the symbol for The Neptune Society, Inc.'s
common stock was changed to "NTUN".
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The high and low bid quotations of our common stock on the NASD OTC
Bulletin Board as reported by the NASD for each of the quarterly periods from
August 26, 1998 through June 30, 2000, and the National Quotation Bureau's pink
sheets for the second quarter of 2000 were as follows:
Period High(1) Low(1)
------ ------- ------
1998
Third Quarter - -
Fourth Quarter $12.28 $12.28
1999
First Quarter $12.13 $12.13
Second Quarter $14.00 $12.87
Third Quarter $14.25 $12.00
Fourth Quarter $13.25 $10.12
2000
First Quarter $13.25 $10.25
Second Quarter(2) $14.50 $13.50
(1) Gives effect to the two-share for one-share reverse split that occurred on
May 19, 2000.
(2) Based on National Quotation Bureau pink sheet quotation.
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
As of August 31, 2000, the high and low bid quotation for our common shares
was $14.00 and $13.75, respectively.
As of August, 2000, we had 83 registered shareholders.
The declaration of dividends on our shares is within the discretion of our
board of directors and will depend upon the assessment of, among other factors,
earnings, capital requirements and the operating and financial condition of The
Neptune Society. At the present time, we anticipate that all available funds
will be invested to finance the growth of our business.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On January 19, 1999, The Neptune Society, Inc. issued 1,000,000 shares of
its common stock at $0.20 per share and share purchase warrants exercisable to
acquire 4,000,000 shares at $0.20 per share. The shares were issued to the
following private investors: BG International
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Capital Group Inc., Muir Woods Investments Group IBC, Suzanne L. Wood, Robert D.
Genovese, Vancouver International Polo Inc., Rodney L. Lozinski, Michele N.
Marrandino, Gary Loffredo, Igor J. Otetchestvennyi, Carolyn D. Keene, Bang Mui
Tran, Richard A. Achron, J. Keith Thompson, Coreena L. Hansen, Janis D.
Douville, Gloria M. Lozinski, Cynthia F. Clagget, TPP Management Inc., Michael
A. Kirsh, Michael W. Robison, Brian D. Gruson, Columbia Pacific Ventures Inc.,
and KM Lifestyles Enterprise Inc. The offering was not underwritten. This sale
was exempt from registration in reliance upon Rule 504 under Regulation D
promulgated under the Securities Act. The aggregate offering price did not
exceed $1,000,000, and the offering was otherwise in compliance with Rules 501
and 502 promulgated under the Securities Act.
On April 7, 1999, The Neptune Society, Inc. issued 4,000,000 shares of its
common stock for $0.20 per share to raise $800,000 pursuant to the exercise of
the 4,000,000 share purchase warrants issued on January 19, 1999. Each share
purchase warrant was exercisable to acquire one share of common stock at $0.20
per share. These warrants were exercised on April 7, 1999. The shares were
issued to the following private investors: Swiss Overseas Finance Company Ltd.,
Turf Holdings Ltd., CCD Commerce Consulting, Hapi Handels-und, Partner Marketing
AG, Seloz Gestion & Finance SA, Otto Zimmerli, Noreldin Siam, UK Menon, and Muir
Woods Investment Group IBC. The offering was not underwritten. This sale was
exempt from registration in reliance upon Rule 504 under Regulation D
promulgated under the Securities Act. The offering was made in compliance with
the definitions set forth in Rule 501 and certain applicable general conditions
set forth in Rule 502, including (i) limiting the aggregate amount of all
offerings made within six months before the start of the offering and six months
after the completion of the offering to $1,000,000 and (ii) taking reasonable
measures to assure that the purchasers were not underwriters by making
reasonable inquiry to determine that the investor was acquiring the securities
for his or her own account without a view towards distribution. We filed a Form
D notice of sale with the Securities and Exchange Commission within 15 days
after the first sale.
On May 7, 1999, The Neptune Society, Inc. issued 500,000 shares of its
common stock at $10.00 per share in consideration of all the issued and
outstanding shares and limited partnership units of certain of our operating
subsidiaries. We issued these shares to Emanuel Weintraub Inter Vivos Trust,
Jill Schulman, Stanley Zicklin, Marvin Falikoff, Helen Kramer, Milton Kramer,
Paul Shields, Nancy Leferman, Norman Leferman, Sam Perlow, Joan Perlow, Stuart
Solomon, Marilyn Tenzer, Arlene Zicklin, Linda Stark, Ted Boock, Marlene
Burdman, James Freedman, Freedman Family Trust, Dennis Family Trust-Leo Robert
and Lorraine Dennis, Leo Robert Dennis-IRA Smith Barney, Dennis Family Trust-Ron
Dennis, Dennis Family Turst-Richard and Jessica Dennis, JPS Associates, Marcia
Deifik, Connie King, Herm Warme, Jon Warme, Judith Glaser, Steve Brown, Irving
Steinfield, Steve Schwartz, Zorinee Schwartz Mervyn Kalman, Jerry Lertzman, and
RER. See "Item 1. Description of Business - History of the Neptune Society." The
shares were issued in reliance upon an exemption from registration under Rule
506 of Regulation D promulgated under the Securities Act. The offering was made
in compliance with the definitions set forth in Rule 501 and certain applicable
general conditions set forth in Rule 502. We filed a Form D notice of sale with
the Securities and Exchange Commission within 15 days after the first sale.
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On May 7, 1999, The Neptune Society, Inc. issued a non-interest bearing
promissory note in the amount of $2,000,000 due March 31, 2002 to Emanuel
Weintraub Inter Vivos Trust. The promissory note was issued in consideration of
all the issued and outstanding shares of Neptune Management and Heritage
Alternatives. See "Item 1. Description of Business - History of the Neptune
Society." The promissory note was issued in reliance upon an exemption from
registration under Rule 506 of Regulation D promulgated under the Securities
Act. The offering was made in compliance with the definitions set forth in Rule
501 and certain applicable general conditions set forth in Rule 502. We filed a
Form D notice of sale with the Securities and Exchange Commission within 15 days
after the sale.
On May 7, 1999, The Neptune Society, Inc. issued a promissory note in the
amount of $19,000,000 of which $9,374,931 carries a 9% interest due July 31,
2000 and the remaining $9,625,069 is non-interest bearing and is due July 31,
2001. The promissory note was issued in consideration of all the issued and
outstanding shares and limited partnership units of certain of our operating
subsidiaries. See "Item 1. Description of Business History of the Neptune
Society." The note issued in reliance upon an exemption from registration under
Rule 506 of Regulation D promulgated under the Securities Act. The offering was
made in compliance with the definitions set forth in Rule 501 and certain
applicable general conditions set forth in Rule 502. We filed a Form D notice of
sale with the Securities and Exchange Commission within 15 days after the sale.
Pursuant to an Agency Agreement with Standard Securities Capital
Corporation dated July 22, 1999, The Neptune Society issued 583,334 shares of
its common stock at $12.00 per share for total proceeds of $7,000,000. Under
this agreement, The Neptune Society issued 333,334 shares of its common stock at
$12.00 per share to raise $4,000,000 on August 9, 1999; 111,667 shares at $12.00
per share for gross proceeds of $1,340,000 on October 12, 1999; and 130,000
shares at $12.00 per share for gross proceeds of $1,560,000 on December 30,
1999. This offering was made to the following non-U.S. Persons, outside the
United States: Private Investments Company Ltd., Turf Holding Ltd., CCD Commerce
Consulting, Partner Marketing AG, Otto Zimmerli, and UK Menon. The shares were
issued in reliance upon an exemption from registration pursuant to Regulation S
promulgated under the Securities Act. We paid Standard Securities Capital
Corporation an agency fee of $140,000 on October 12, 1999, and $270,000 on
December 30, 1999. We paid an additional agency fee of $10,000 upon the final
issuance of 8,333 shares at $12.00 per share on January 12, 2000. We also paid
offering costs of $53,690.
On August 18, 1999, The Neptune Society, Inc. issued warrants exercisable
to acquire 137,500 shares of its common stock at $12.00 per share. We issued the
warrants to certain debt holders in consideration for amending the terms of
repayment of debt and interest. We issued the warrants to the following
accredited investors: Jill Schulman, Linda Stark, Nancy Leferman and Stanley
Zicklin. The warrants were issued in reliance upon an exemption from
registration under Rule 506 of Regulation D promulgated under the Securities
Act. The offering was made in compliance with the definitions set forth in Rule
501 and certain applicable general conditions set forth in Rule 502. We filed a
Form D notice of sale with the Securities and Exchange Commission within 15 days
after the first sale.
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On December 31, 1999, The Neptune Society, Inc. issued a total of
$5,000,000 of convertible debentures to Capex, L.P. and to D.H. Blair Investment
Banking Corp. The debentures are convertible into 500,000 shares of our common
stock upon the election of the holders. The debentures were issued in reliance
upon an exemption from registration under Rule 506 of Regulation D promulgated
under the Securities Act. In addition, we issued warrants exercisable for five
years to purchase 100,000 shares of our common stock at an exercise price of
$10.42 per share and 100,000 shares of our common stock at an exercise price of
$12.50 per share. The offering was made in compliance with definitions set forth
in Rule 501 and certain applicable general conditions set forth in Rule 502. We
filed a Form D notice of sale with the Securities and Exchange Commission within
15 days after the first sale.
On December 31, 1999, The Neptune Society, Inc. issued 11,364 shares of its
common stock at $11.75 per share in consideration for all the assets of
Crematory Society of Washington. See "Item 1. Description of Business - History
of the Neptune Society." The shares were issued to Crematory Society of
Washington, Inc., a Washington corporation whose sole shareholder is John C.
Ayres, in reliance upon an exemption from registration under Rule 506 of
Regulation D promulgated under the Securities Act. The offering was made in
compliance with the definitions set forth in Rule 501 and certain applicable
general conditions set forth in Rule 502. We filed a Form D notice of sale with
the Securities and Exchange Commission within 15 days after the first sale.
On December 31, 1999, The Neptune Society, Inc. issued 11,364 shares of its
common stock at $11.75 per share to Charles S. Wetmore as consideration for
entering into a non-compete agreement with us. The shares were issued in
reliance upon an exemption from registration under Rule 506 of Regulation D
promulgated under the Securities Act. The offering was made in compliance with
the definitions set forth in Rule 501 and certain applicable general conditions
set forth in Rule 502. We filed a Form D notice of sale with the Securities and
Exchange Commission within 15 days after the first sale.
On March 15, 2000, in connection with our acquisition of Cremation Society
of Iowa, The Neptune Society, Inc. issued John Bethel and David Noftsger, the
co-founders and shareholders of Cremation Society of Iowa, options for each of
them to purchase 10,000 shares common stock at $13.00 per share as consideration
for entering into employment and non-competition agreements.
Effective July 5, 2000, we purchased a funeral, burial and cremation
business in Portland Oregon known as Heritage Memorial, Heritage Memorial
Society, Heritage Memorial Cremation Society, The Heritage Society, Wilhelm
Funeral Home, Wilhelm Crematory, Oregon Cremation Company, Oregon Cremation &
Burial Company and AAA Cremation Company (the "Portland Business"). This
purchase was completed through the acquisition of the assets of Heritage
Memorial Society, L.L.C. and Community Memorial Centers, L.L.C., the merger of
the shares of Wilhelm Mortuary, Inc. with Neptune Acquisition, Inc., a newly
created subsidiary of The Neptune Society, Inc., and three non-compete
agreements with the principals of the Portland Business.
Under the terms of the purchase, we agreed paid the owners of the Portland
Business as follows: $500,000 cash, the issuance of a three year $1,000,000
convertible debenture and the
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issuance of 313,308 common shares of The Neptune Society, Inc. at $13.25 per
share. The convertible debenture and the common shares were issued in reliance
upon an exemption from registration under Rule 506 of Regulation D.
On August 9, 2000, The Neptune Society, Inc. issued 500,000 shares of our
common stock at $14.00 per share for total proceeds of $7,000,000 pursuant to a
private placement. The Neptune Society, Inc. also issued 150,000 shares of its
common stock to Systematic Investments Establishment as a finder's fee in
connection with the private placement. This offering was made to Engelbert
Schreiber, Jr., a non-U.S. person, outside the United States. We paid Standard
Securities Capital Corporation an agency fee of $75,000 in connection with the
transaction. The securities were issued pursuant to an exemption from
registration pursuant to Regulation S promulgated under the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our authorized capital consists of 25,000,000 common shares with a par
value of $0.002 per share of which 6,718,657 common shares were issued as of
June 30, 2000.
All shares of common stock are of the same class and have the same rights,
preferences and limitations. Holders of shares of common stock are entitled to
receive dividends in cash, property or shares when and if our Board of Directors
out of funds declares dividends legally available therefor. There are no
limitations on the payment of dividends. The rights of holders of shares of
common stock may not be modified other than by vote of majority of the shares of
common stock voting on such modification. Because a quorum for a general meeting
of shareholders can exist with one shareholder (proxy-holder) personally
present, the rights of holders of shares of common stock may be modified by less
than a majority of the issued shares of common stock. A quorum for a general
meeting of shareholders is one shareholder entitled to attend and vote at the
meeting who may be represented by proxy and other proper authority, holding at
least a 33-1/3% of the outstanding shares of common stock. Holders of shares of
common stock are entitled to one vote per share of common stock. Upon any
liquidation, dissolution or winding up of our business, if any, after payment or
provision for payment of all of our debts, obligations or liabilities shall be
distributed to the holders of shares of common stock. There are no pre-emptive
rights; subscription rights, conversion rights and redemption provisions
relating to the shares of common stock and none of the shares of common stock
carry any liability for further calls.
The declaration of dividends on our shares is within the discretion of our
board of directors and will depend upon the assessment of, among other factors,
earnings, capital requirements and our operating and financial condition. At the
present time, we anticipate that all available funds will be invested to finance
the growth of our business.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to our bylaws, we shall indemnify all of our officers and
directors for such expenses and liabilities, in such manner, under such
circumstances, and to such extent as permitted by the Florida Business
Corporation Act, Section 607.0850, as now enacted or
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hereafter amended. Unless otherwise approved by our board of directors, we shall
not indemnify any of our employees who are not otherwise entitled to
indemnification pursuant to our bylaws.
Florida law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if such directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, that is,
one by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Our Articles of Incorporation and Bylaws also contain provisions stating
that no director shall be liable to us or to any of our stockholders for
monetary damages for breach of fiduciary duty as a director, except with respect
to (1) a breach of the director's duty of loyalty to the corporation or its
stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) liability under
Florida law (for unlawful payment of dividends, or unlawful stock purchases or
redemptions) or (4) a transaction from which the director derived an improper
personal benefit. The intention of the foregoing provisions is to eliminate the
liability of our directors or our stockholders to the fullest extent permitted
by Florida law.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In April 2000, the Company changed auditors from Stonefield Josephson, Inc.
to KPMG LLP. This change was not a result of disagreements with the predecessor
auditors.
58
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
NEPTUNE SOCIETY, INC
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
Page
<S> <C>
Independent Auditors' Report ................................................................................F-1
Independent Auditors' Report ................................................................................F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets - As of December 31, 1998 and 1999 .........................................F-3
Consolidated Statements of Operations - For the years ended December 31, 1997 and 1998,
the three months ended March 31, 1999 and the nine months ended December 31, 1999 ......................F-4
Consolidated Statements of Shareholders' Equity - For the years ended December 31, 1997
and 1998, the three months ended March 31, 1999 and the nine months ended December 31, 1999 ............F-5
Consolidated Statements of Cash Flows - For the years ended December 31, 1997 and 1998,
the three months ended March 31, 1999 and the nine months ended December 31, 1999 ......................F-6
Notes to Consolidated Financial Statements .............................................................F-7
Unaudited Interim Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheet - As of December 31, 1999 and June 30, 2000 .............F-18
Unaudited Condensed Consolidated Statements of Operations- For the three months ended March 31,
1999 and June 30, 1999 and the six months ended June 30, 2000 ..........................................F-19
Unaudited Condensed Consolidated Statements of Cash Flows- For the three months ended March 31,
1999 and June 30, 1999 and the six months ended June 30, 2000 ..........................................F-20
Notes to Unaudited Condensed Consolidated Financial Statements .........................................F-21
</TABLE>
<PAGE>
Stonefield Josephson, Inc.
Certified Public Accountants
Business & Personal Advisors
Members: DFK, IAPA, Institute of Profit Advisors
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Neptune Society
Burbank, California
We have audited the accompanying combined balance sheet of The Neptune Society
as of December 31, 1998, and the related combined statements of operations,
stockholders' equity and cash flows for each of the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Neptune Society at
December 31, 1998, and the results of their operations and cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
June 11, 1999
1620 26th Street, Suite 400 South One Post Street, Suite 3300
Santa Monica, CA 90404-4041 San Francisco, CA 98104-9572
310 453-9400 FAX 310 453-1187 415 981-9400 FAX 415 391-2310
2121 N. California Blvd., Suite 900 4400 MacArthur Blvd., Suite 400
Walnut Creek, CA 94596-7306 Newport Beach, CA 92660-2519
925 938-9400 FAX 925 930-0107 949 653-9400 FAX 949 851-4669
www.sjaccounting.com
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Neptune Society, Inc.:
We have audited the accompanying consolidated balance sheet of Neptune Society,
Inc. and Subsidiaries (Successor Company) as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the nine months ended December 31, 1999 (Successor Company Period),
and the combined statements of operations, shareholders' equity, and cash flows
of Neptune Society (Predecessor Company) for the three month period ended March
31, 1999 (Predecessor Company Period). These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neptune Society,
Inc. and Subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the Successor Company Period, in conformity
with accounting principles generally accepted in the United States of America.
Further, in our opinion, the aforementioned Predecessor Company combined
financial statements present fairly, in all material respects, the financial
position of the Predecessor Company as of March 31, 1999, and the results of
their operations and their cash flows for the Predecessor Company Period, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in note 1 to the consolidated financial statements, effective March
31, 1999, all of the outstanding capital stock of the Predecessor Company was
acquired in a business combination accounted for as a purchase. As a result of
this acquisition, the consolidated financial information for the period after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
/s/ KPMG LLP
Los Angeles, California
September 25, 2000
F-2
<PAGE>
<TABLE>
Neptune Society, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1999
Predecessor Successor
Company Company
----------------- -----------------
December 31, 1998 December 31, 1999
----------------- -----------------
Assets
<S> <C> <C>
Current assets:
Cash $ 612,370 | 6,825,533
Accounts receivable 217,265 | 178,310
Prepaid expenses and other current assets 4,924 | 42,342
----------------- | -----------------
Total current assets 834,559 | 7,046,185
|
Property and equipment, net 218,450 | 544,194
Names and reputations, net - | 24,824,943
Non compete agreements, net - | 1,596,600
Deferred financing costs - | 920,313
Deferred tax asset - | 254,128
Deferred charges and other assets 4,694,504 | 662,101
----------------- | -----------------
$ 5,747,513 | 35,848,464
================= | =================
Liabilities and Shareholders' Equity |
|
Current liabilities: |
Current portion of long-term debt $ - | 10,629,778
Accounts payable 181,007 | 498,007
Accrued and other current liabilities 466,461 | 602,239
----------------- | -----------------
Total current liabilities 647,468 | 11,730,024
|
Long-term debt - | 5,721,912
Convertible debentures - | 4,329,591
Deferred preneed revenues 4,292,367 | 1,682,014
----------------- | -----------------
4,939,835 | 23,463,541
----------------- | -----------------
Shareholders' equity: |
Common stock, $.002 par value, |
25,000,000 shares authorized, |
6,597,727 shares issued and |
outstanding at December 31, 1999 | 13,195
|
Predecessor equity 807,678 | -
Additional paid-in capital - | 14,261,362
Accumulated deficit - | (1,889,634)
----------------- | -----------------
Total shareholders' equity 807,678 | 12,384,923
----------------- | -----------------
$ 5,747,513 | 35,848,464
================= | =================
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
Neptune Society, Inc.
Consolidated Statements of Operations
Years ended December 31, 1997 and 1998, the three months ended March 31, 1999
and the nine months ended December 31, 1999
Predecessor Company Successor Company
-------------------------------------------------------- -------------------
Year ended Year ended Three months
December 31, December 31, ended March 31, Nine months ended
1997 1998 2000 December 31, 1999
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Services and merchandise $ 8,047,910 6,895,833 2,654,324 | 4,595,014
Management and finance fees 918,000 969,300 307,196 | 1,093,156
-------------- -------------- -------------- | -----------------
Total revenues 8,965,910 7,865,133 2,961,520 | 5,688,170
|
Costs and expenses 3,661,669 3,757,829 1,198,469 | 2,252,169
-------------- -------------- -------------- | -----------------
Gross profit 5,304,241 4,107,304 1,763,051 | 3,436,001
|
General and administrative expenses 2,907,002 2,847,073 748,385 | 3,031,854
Compensation to principal shareholder 1,840,984 2,200,473 430,090 | -
Amortization expense - - - | 1,024,446
Professional fees 245,033 668,894 535,878 | 339,836
-------------- -------------- -------------- | -----------------
Total general and administrative expenses 4,993,019 5,716,440 1,714,353 | 4,396,136
|
Income (loss) from operations 311,222 (1,609,136) 48,698 | (960,135)
|
Interest expense - - - | 1,183,627
-------------- -------------- -------------- | -----------------
Income (loss) before income taxes 311,222 (1,609,136) 48,698 | (2,143,762)
|
Income tax benefit - - - | (254,128)
-------------- -------------- -------------- | -----------------
|
Net income (loss) $ 311,222 (1,609,136) 48,698 | (1,889,634)
============== ============== ============== | =================
|
Earnings (loss) per share - |
Basic and Diluted | (0.31)
|
Weighted average number of shares- |
Basic and Diluted | 6,122,569
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
Neptune Society, Inc.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997 and 1998, the three months ended
March 31, 1999 and the nine months ended December 31, 1999
Common Stock Total
---------------------------- Additional Accumulated shareholders'
Shares Amount paid-in capital deficit equity
------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Predecessor Company:
Balance at December 31, 1997 $ 2,577,814
Net Loss (1,609,136)
Distribution to owners (161,000)
------------- ------------- --------------- ------------- --------------
Balance at December 31, 1998 807,678
------------- ------------- --------------- ------------- --------------
Net Income 48,698
Distribution to owners (64,000)
------------- ------------- --------------- ------------- --------------
Balance at March 31, 1999 $ 792,376
============= ============= =============== ============= ==============
Successor Company:
Balance at March 31, 1999 1,500,000 $ 3,000 198,000 - 201,000
Exercise of warrants 4,000,000 8,000 792,000 - 800,000
Issuance of common stock for
acquisition of Predecessor 500,000 1,000 4,999,000 - 5,000,000
------------- ------------- --------------- ------------- --------------
Balance after effects of
acquisition of Predecessor 6,000,000 $ 12,000 5,989,000 - 6,001,000
Net loss - - - (1,889,634) (1,889,634)
Issuance of common stock, net
of $473,690 of offering costs 575,000 1,150 6,425,160 - 6,426,310
Issuance of common stock
for acquisitions 22,727 45 249,953 - 249,998
Discount on convertible debentures - - 562,000 - 562,000
Detachable warrants issued
with convertible debentures - - 670,409 - 670,409
Shares issued in connection with
long-term debt - - 364,840 - 364,840
------------- ------------- --------------- ------------- --------------
Balance at December 31, 1999 6,597,727 $ 13,195 14,261,362 (1,889,634) 12,384,923
============= ============= =============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
Neptune Society, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1998, the three months ended March 31,
1999 and the nine months ended December 31, 1999
Predecessor Company Sucessor Company
----------------------------------------------------- -----------------
December 31, 1997 December 31, 1998 March 31, 1999 December 31, 1999
----------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 311,222 (1,609,136) 48,698 | (1,889,634)
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) operating |
activities: |
Depreciation and amortization 86,779 50,786 9,611 | 1,069,898
(Gain) loss on sale of property and equipment: 2,460 (3,736) - | -
Accretion of discount on notes payable | 932,253
Deferred tax benefit - - - | (254,128)
Change in operating assets and liabilities: |
Accounts receivable (550,406) 1,154,296 145,811 | (178,310)
Prepaid expenses and other current assets (175) 30,022 4,924 | (32,642)
Deferred charges and other assets (269,018) (182,201) (65,659) | (660,101)
Accounts payable (66,436) (3,892) 306,892 | 10,108
Accrued and other current liabilities 202,349 160,198 (38,843) | 232,652
Deferred preneed revenues 790,938 573,026 149,082 | 1,682,014
---------------- ---------------- ------------- ----------------
Net cash provided by operating activities 507,713 169,363 560,516 | 912,110
---------------- ---------------- ------------- ----------------
|
Cash flows from investing activities: |
Purchases of property and equipment (164,943) 1,740 (7,934) | (156,872)
Acquisitions, net of cash acquired - - - | (1,814,455)
---------------- ---------------- ------------- | ---------------
Net cash provided by (used in) investing activities (164,943) 1,740 (7,934) | (1,971,327)
---------------- ---------------- ------------- | ---------------
|
Cash flows from financing activities |
Payments on notes payable - - - | (4,548,005)
Proceeds from issuance of debt, net - - - | 5,005,439
Net proceeds of common stock issued - - - | 6,426,310
Proceeds from exercise of warrants - - - | 800,000
Decrease in due from officer 17,567 - - | -
Distribution to owners (420,567) (160,500) (64,000) | -
---------------- ---------------- ------------- | ----------------
Net cash provided by (used in) financing activities (403,000) (160,500) (64,000) | 7,683,744
---------------- ---------------- ------------- | ----------------
|
Net increase (decrease) in cash (60,230) 10,603 488,582 | 6,624,527
|
Cash, beginning of period 661,997 601,767 612,370 | 201,006
---------------- ---------------- ------------- | ---------------
|
Cash, end of period $ 601,767 612,370 1,100,952 | 6,825,533
================ ================ ============= | ===============
|
Supplemental disclosure of cash flow information - |
cash paid during the period for - Interest $ - - - | 186,921
================ ================ ============= | ===============
|
Supplemental disclosure of noncash investing |
and financing activities: |
Detachable warrants issued with convertible |
debentures $ - - - | 670,409
Discount on note payable - - - | 926,840
Common stock issued for acquisitions - - - | 5,249,998
Notes issued for acquisition $ - - - | 19,968,529
================ ================ ============= | ================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
(1) The Business and Basis of Presentation
Neptune Society, Inc., a Florida Corporation, is the holding company for
Neptune America, Inc., a California Corporation. Neptune Management
Corporation and Heritage Alternatives, Inc. are wholly owned subsidiaries
of Neptune America, Inc. and engage in marketing and administering pre-need
and at-need cremation services in California, Florida, New York and
Washington. Neptune Society, Inc. operates crematories in Los Angeles,
California and Spokane, Washington.
On March 31, 1999, Lari Corp. paid $1,000,000 cash, $310,000 in transaction
costs, 500,000 shares of common stock valued at $5,000,000 and $21,000,000
of promissory notes valued at $19,968,529, (for total consideration of
$26,278,529, see Note 6 for allocation of the purchase price), to acquire
all of the outstanding shares and cause to be acquired the partnership
interests of the following entities (collectively referred to as the
Predecessor Company):
Neptune Management Corp.
Neptune Pre-Need Plan, Inc.
Heritage Alternatives, Inc.
Heritage Alternatives, L.P.
Neptune Funeral Services, Inc.
Neptune Funeral Services of Westchester, Inc.
Neptune-Los Angeles, Ltd.
Neptune-Santa Barbara, Ltd.
Neptune-Ft. Lauderdale, Ltd.
Neptune-St. Petersburg, Ltd.
Neptune-Miami, Ltd.
Neptune-Westchester, Ltd.
Neptune-Nassau, Ltd.
The business combination was accounted for using the purchase method of
accounting, and the excess of the purchase price over the fair value of
identifiable net assets acquired, $25,281,237, was recorded as names and
reputations. In addition, the Company entered into a three-year $1,000,000
consulting agreement with the former controlling owner of the Predecessor.
The financial statements of Lari Corp. prior to April 1, 1999 have not been
included as they are not material to the Predecessor Company financial
statements. In January 1999, Lari Corp. issued 1,000,000 shares of common
stock and 4,000,000 warrants to purchase common stock for $200,000. On May
3, 1999, Lari Corp. changed its name to Neptune Society, Inc. (the
Successor Company). Collectively, the Predecessor Company and Successor
Company are herein referred to as the Company.
Since purchase accounting was reflected on the opening balance sheet of the
Successor Company on April 1, 1999, the financial statements of the
Successor Company are not comparable to the financial statements of the
Predecessor Company. Accordingly, a vertical black line is shown to
separate Successor Company financial statements from those of the
Predecessor Company for periods ended prior to March 31, 1999.
F-7
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements as of and for the nine months
ended December 31, 1999 present the consolidated accounts of Neptune
Society, Inc. and subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The combined financial statements as of December 31, 1998 and for the
years ended December 31, 1997 and 1998 and the three months ended
March 31, 1999 present the combined financial position and results of
operations of the acquired Predecessor Companies.
All significant intercompany balances and transactions have been
eliminated in consolidation or combination.
(b) Pre-Need Cremation Arrangements
The Company sells pre-need cremation services under contracts that
provide for delivery of the services at the time of need. Revenues
related to pre-need cremation services are recorded as revenue in the
period the service is performed. Pre-need cremation merchandise
revenue is recognized upon delivery, which in some states is prior to
the performance of cremation services. Delivery is considered to have
occurred when a customer accepts the merchandise; however, at the
request of a customer, the Company will store the merchandise until
the time of need. Commissions relating to pre-need cremation services
and merchandise are accounted for in the same manner as the revenue to
which they relate. Where revenue is deferred, the related commissions
are deferred until the pre-need contracts are fulfilled. Indirect
costs of marketing pre-need cremation services are expensed in the
period in which incurred.
Pre-need cremation services and merchandise are funded either through
trust funds or escrow accounts. Principal amounts deposited in the
trust funds or escrow accounts are available to the Company as
cremation services and merchandise are delivered. Trust fund and
escrow deposits are refundable to the customer in those situations
where state law provides for the return of those amounts under the
customer's option to cancel the contract. As such, amounts deposited
in the trust funds or escrow accounts for pre-need contracts sold but
not yet fulfilled are not reflected in the accompanying consolidated
financial statements.
Trust income earned is paid to the Company in order to offset
inflation in costs to provide the service or delivery of merchandise
in the future and is recognized as management and finance fee income
at the time the Company is entitled to withdraw such funds. The
pre-need funeral trust assets were $32,055,000 and $33,314,000 at
December 31, 1998 and December 31, 1999, respectively, which in the
opinion of management, exceeds the future obligations under such
arrangements.
The Company is entitled to withdraw earnings on trust assets as
cremation services and merchandise are delivered or contracts are
cancelled, except in jurisdictions that permit
F-8
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
earnings to be withdrawn currently. Under pre-need cremation services
and merchandise arrangements funded through insurance purchased by
customers from third party insurance companies, the Company earns a
commission on the sale of the policies. Commission income, net of
related expenses, are recognized at the point at which the commission
is no longer subject to refund. Policy proceeds are available to the
Company as cremation services and merchandise are delivered.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost. The costs of ordinary
maintenance and repairs are charged to operations as incurred, while
renewals and betterments are capitalized. Depreciation of property and
equipment is computed based on the straight-line method over the
following estimated useful lives of the assets:
Leasehold improvements Useful life or remaining lease term,
whichever is shorter
Furniture and fixtures 5 to 7 years
Equipment 5 years
Nautical equipment 5 years
Automobiles 5 years
(e) Names and Reputations
Names and Reputations consist principally of the excess of the
purchase price over the fair value of identifiable net assets acquired
in transactions accounted for as purchases. Such amounts are amortized
over 20 years using the straight-line method. Many of the acquired
cremation service entities have provided high quality service to
customers for generations. The resulting loyalty often represents a
substantial portion of the value of a cremation business. The Company
continually monitors the recoverability of this intangible asset based
on the projections of future undiscounted cash flows of the acquired
businesses. If impairment is indicated, then an adjustment will be
made to reduce the carrying amount of the intangible asset to its fair
value. At December 31, 1999, no impairment was deemed to have
occurred.
(f) Advertising
Costs of advertising are expensed as incurred. Advertising expense was
approximately $278,000, $204,000, $59,000 and $185,000 for the years
ended December 31, 1997 and 1998, the three months ended March 31,
1999 and the nine months ended December 31, 1999.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on
F-9
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded to reduce deferred tax assets to their
estimated net realizable value.
(h) Stock Option Plan
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and continues to apply Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its
stock-based compensation plans.
(i) Deferred Obtaining Costs
Deferred obtaining costs consist of sales commissions applicable to
pre-need cremation service and merchandise sales. These costs are
deferred and amortized over the expected timing of the performance of
the services covered by pre-need arrangements.
(j) Deferred Financing Costs
Under certain debt agreements, the Company is obligated to pay a
portion of the lender's expenses and loan origination costs. These
costs are deferred and amortized as interest expense over the life of
the associated debt.
(k) Computation of Earnings (Loss) Per Common Share
For the nine months ended December 31, 1999, basic and diluted loss
per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Options to
purchase 426,750 shares of common stock at $11.75 per share and
337,500 warrants to purchase common stock at prices ranging from
$10.42 to $12.50 per share were not included in the computation of
diluted loss per share because the effect would be antidilutive. Per
share information for prior periods is not presented because such
information would not be meaningful in light of the business
combination described in note 1.
(l) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and current
receivables and payables approximate fair value due to the short-term
nature of these instruments. The fair value of the Company's long-term
fixed rate debt is estimated using future cash flows discounted at
rates for similar types of borrowing arrangements and approximates its
carrying value.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(n) Comprehensive Income (loss)
Except for net income (loss) the Company does not have any
transactions or other economic events that enter into other
comprehensive income (loss) during the periods presented.
F-10
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
(3) Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
Predecessor Successor
Company Company
-------------------- --------------------
December 31, December 31,
1998 1999
-------------------- ------------------
<S> <C> <C>
Furniture and fixtures $ 83,329 | 100,682
Nautical equipment 57,075 | 110,000
Automobiles 120,173 | 61,377
Equipment 309,084 | 186,018
Leasehold improvements 154,862 | 131,569
----------------- | -----------------
Total property and equipment 724,523 | 589,646
|
Less accumulated depreciation and amortization 506,073 | 45,452
----------------- | -----------------
Property and equipment, net $ 218,450 | 544,194
==================== | =================
</TABLE>
(4) Long Term Debt
Long-term debt is as follows:
<TABLE>
Successor
Company
----------------------
December 31,
1999
----------------------
<S> <C>
13% Convertible debentures, non-amortizing, interest accruing at 13%
per year payable monthly at 6.5% per year, due February 24, 2005.
Secured by a first trust deed on all assets of the Company.
The balance is net of unaccreted discount of $670,409, arising
from detachable warrants. $ 4,329,591
Note payable, non-amortizing, interest accruing at 9% per year on
$5,635,905 payable in monthly installments of $37,006. Non-interest
bearing on $9,238,313. Balance due in three payments of $4,874,216,
$5,275,562, and $4,724,440, on January 3, 2000 and July 31, 2000
and 2001, respectively. In July 2000, this note was amended to extend
the due date of $4,724,440 to July 31, 2001. As a result, such amount
is reflected as noncurrent on the December 31, 1999 balance sheet. 14,874,218
Note payable, non-interest bearing, payable in monthly installments of
$40,000 per month, and one payment of $596,742 on March 31, 2001, with
the $15,555 of monthly deferred principal earning 9% simple interest
until paid in full. The note has imputed interest of 9% and is net of
unaccreted discount of $350,306. 1,227,472
Note payable to a private investor, non-interest bearing,
non-amortizing, due on demand in March 2000. This Note was amended
to extend the due date to September 30, 2001. As a result, such amount
is reflected as noncurrent on the December 31, 1999 balance sheet. 250,000
--------------------
20,681,281
Less current installments 10,629,778
--------------------
$ 10,051,503
====================
</TABLE>
F-11
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
On December 30, 1999, the Company issued $5,000,000 of 13% convertible
debentures due February 24, 2004. The debentures were issued with
detachable warrants to acquire 100,000 common shares at $10.42 per share
and 100,000 common shares at $12.50 per share. The fair value of the
warrants, $670,409, was recorded as a credit to additional paid-in-capital
and a discount to the carrying value of the debentures. The discount
related to the warrants is being accreted to the redemption price of the
debentures and results in an effective interest rate of 15.8%. In addition,
the debentures are convertible to common stock at an initial conversion
ratio of 10:1 (adjustable based on certain anti-dilution rights), or a
total of 500,000 common shares. The intrinsic value of the conversion
feature, $562,000, has been credited to additional paid-in-capital and
recorded as a deferred financing cost in the consolidated balance sheet.
Such amount is being recognized as interest expense over the period up to
the initial conversion date, September 30, 2000. Under the terms of the
debenture purchase agreement, the Company has granted demand and piggy-back
registration rights, at the Company's expense, for the resale of any shares
received upon conversion or exercise of the debentures or warrants. The
Company is also obligated to adjust the number of shares issuable under the
convertible debentures and warrants if it issues additional shares under
the following scenarios: (i) the Company issues shares for less than $10.00
in cash, in which case the debenture shall be convertible at the lower
price or (ii) the Company issues shares without consideration in a
transaction that results in the issuance of shares for consideration of
less than $10.00 per share, in which case the debenture shall be
convertible at a price adjusted to give effect to the lower value of the
share issuance.
The aggregate maturities of long-term borrowings at December 31, 1999 are
as follows:
2000 $ 10,629,778
2001 5,204,440
2002 517,472
2003 --
2004 and thereafter 4,329,591
-------------------
$ 20,681,281
===================
(5) Shareholders' Equity
(a) Common Stock
Effective as of May 19, 2000, the Company's Board of Directors
authorized and effected a 1 for 2 reverse split of its common stock.
Per share amounts in the accompanying consolidated financial
statements give retroactive effect to the reverse stock split.
In January 1999, Neptune Society, Inc., the Successor, issued
1,000,000 shares of common stock at $0.20 per share in a private
placement. In addition, four share purchase warrants were issued with
each share. In April 1999, the Company received gross proceeds of
$800,000 from the exercise of the share purchase warrants. In July
1999, the Company entered into a private placement Agency Agreement
for the sale of 583,334 shares of the Company's common stock at $12.00
per share. During 1999, 575,000 shares were sold under such agreement
for gross proceeds of $6,900,000. The remaining 8,334 shares were sold
for gross proceeds of $100,000 in January 2000. The Company paid an
agency fee of $420,000 in connection with such private placement.
(b) Stock Option Plan
In 1999, the Board of Directors of the Company adopted the 1999 Stock
Incentive Plan (Stock Option Plan) for the grant of qualified
incentive stock options (ISO), stock options non qualified and
deferred stock and restricted stock. The exercise price for any option
granted may not be less than fair value (110% of fair value for ISOs
granted to certain employees). Under the Stock Option Plan, 900,000
shares are reserved for issuance. On December 31, 1999, 426,750
options to acquire common stock were granted at an exercise price of
$11.75 per share, which was equal to the market value on such date.
The options vest one year from the date of grant and expire three
years from the date of grant. No options were canceled during 1999. At
December 31, 1999, 473,250 options were available for grant.
F-12
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
(c) Stock Compensation
The Company accounts for stock compensation under SFAS No. 123,
Accounting for Stock-Based Compensation, and, as permitted by SFAS No.
123, has elected to measure compensation cost under Accounting
Principles Board Opinion No. 25 and comply with the pro forma
disclosure requirements of SFAS No. 123. Had compensation cost been
determined using the fair value method of SFAS No. 123 at the grant
date for awards during 1999, the Company's pro forma net loss and loss
per share would not have been different from the reported amounts as
the stock awards outstanding at December 31, 1999 were granted on
December 31, 1999 and were not vested.
The fair value of each option is estimated on the date of grant using
the Black Scholes option pricing model. The following weighted-average
assumptions were used in the Black Scholes option pricing model:
1999
------------
Dividend yield --
Expected volatility 20%
Risk-free interest rate 6.29%
Expected life of option 3 years
============
The weighted-average fair value of options granted on December 31,
1999 was $1.30.
(6) Acquisitions
As described in Note 1, during 1999, the Company acquired all of the
outstanding shares and caused to be acquired the limited partnership
interests of the Predecessor Company. This transaction has been accounted
for utilizing the purchase method of accounting and the results of
operations of the acquired businesses have been included in the Company's
results of operations from the respective dates of acquisition.
The amounts and components of the purchase price and the allocation of the
purchase price to assets and liabilities acquired are as follows:
Cash (including $310,000 of transaction costs) $ 1,310,000
Common Stock 5,000,000
Fair value of $21,000,000 of notes issued 19,968,529
================
$ 26,278,529
================
Property and equipment $ 326,774
Names and reputations 25,281,237
Non-compete agreement 1,528,000
Current liabilities (857,482)
-----------------
$ 26,278,529
=================
F-13
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
The unaudited pro forma results of operations as if the acquisition of the
Precedessor Company had occurred at the beginning of 1998 and at the
beginning of 1999 for the three months ended March 31, 1999 is a pro forma
net loss of $4,575,000 and $692,000, respectively. The effect of the
acquisition increased depreciation, amortization and interest expense by
$2,966,000 in 1998 and $741,000 for the three moths ended March 31, 1999.
There was no effect on revenue for such periods.
The unaudited pro forma results of operations does not necessarily reflect
the results of operations that would have occurred had the combined
companies constituted a single entity during such periods, and is not
necessarily indicative of results which may be obtained in the future.
On December 31, 1999, the Company acquired a crematory in Spokane,
Washington for $500,000 cash and 22,727 shares of common stock for a total
purchase price of $749,998 under an asset purchase agreement and a
non-compete agreement. The business combination was accounted for using the
purchase method of accounting and the excess of the purchase price over the
fair value of identifiable net assets acquired, $491,752, has been recorded
as names and reputations. The purchase agreement also contains provisions
for additional consideration to be paid based on future earnings of the
acquired entity. In addition, the Company is obligated to pay additional
consideration, not to exceed $125,000, based on the future market price of
the Company's common stock. Pro forma results of operations for 1998 and
1999 reflecting the Spokane, Washington acquisition and are not
significantly different from the reported operating results.
The purchase price of the above acquisitions was allocated to the net
assets acquired based on management's estimate of the fair value of the
acquired assets and liabilities at the dates of acquisition. The acquired
cremation services operations have provided high quality service to
families for generations. The resulting loyalty often represents a
substantial portion of the value of a cremation business. As a result, the
excess of the consideration paid over the fair value of net tangible and
other identifiable intangible assets has been allocated to Names and
Reputations.
(7) Commitments and Contingencies
(a) Leases
The Company leases facilities under operating lease agreements
expiring through November 2010. The Company also leases certain
equipment and automobiles under operating lease agreements expiring at
various dates through 2012. Rent expense for the years ended December
31, 1997, 1998 and for the three months ended March 31, 1999 and the
nine months ended December 31, 1999 approximated $212,000, $204,000,
$61,878 and $318,000, respectively.
Future minimum lease payments under noncancellable operating leases at
December 31, 1999 are as follows:
Year ending December 31:
2000 $ 377,000
2001 406,000
2002 388,000
2003 224,000
2004 219,000
Thereafter 413,000
-------------------
$ 2,027,000
===================
F-14
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
(b) Litigation
During March 1998, the Department of Consumer Affairs, Funeral and
Cemetery Division (the "Department") commenced an administrative
proceeding alleging various statutory and regulatory violations
arising from an incident occurring at the Heritage Crematory. This
proceeding was settled by the Predecessor Company agreeing to sell its
business by a date certain or surrender its funeral director's
license. A sale of the Predecessor Company to Lari Corp, Inc. (see
Note 1) was concluded in March 1999. The Department granted the
Company's funeral director license on July 22, 2000, under the same
probationary terms and conditions of the Predecessor Company.
The Company is a defendant in litigation over the use of the service
mark "Neptune Society" in certain geographic areas of southern
California. The Company is currently prohibited from using such
service mark in the disputed geographic areas and the plaintiff is
seeking monetary damages in an unspecified amount. The Company
believes the lawsuit is without merit and intends to defend the case
vigorously. No provision has been made in the financial statements for
the ultimate outcome of this uncertainty. Additionally, the Company is
from time to time subject to routine litigation arising in the normal
course of business. Management, with the advice of legal counsel,
believes that the results of any such routine litigation or other
pending legal proceedings will not have a material effect on the
Company.
(8) Income Taxes
The Predecessor Company filed separate federal and state income tax returns
for each of the combining entities. Since no taxes were due from the C
corporations and any income taxes from the limited partnerships and the S
corporation (other than state taxes on certain S corporation earnings) were
the obligations of the partners or shareholders, no income taxes have been
provided in the consolidated financial statements for periods through March
31, 1999.
Income tax benefit for the nine months ended December 31, 1999 is
summarized below.
Current expense:
Federal $ --
State 800
---------------
Total current 800
---------------
Deferred benefit:
Federal (217,629)
State (37,299)
---------------
Total deferred (254,928)
---------------
Income tax benefit (254,128)
===============
Income tax benefit differs from the expected statutory amount for the nine
months ended December 31, 1999 as follows:
F-15
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
Expected income tax expense(benefit) $ (728,879)
State income tax, net of federal benefit (125,076)
Nondeductible goodwill 377,682
Change in valuation allowance 200,773
Other 21,372
--------------
Total provision for income taxes
$ (254,128)
==============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999 is presented below:
Deferred tax assets:
Deferred revenue - California merchandise $ 271,675
State taxes 272
Net operating loss 200,773
Other 21,062
------------
Total gross deferred tax assets 493,782
Valuation allowance (200,773)
------------
Net deferred tax assets 293,009
Deferred tax liability:
Deferred commissions (38,881)
============
Net deferred taxes 254,128
============
The Company's net operating loss carryforwards are fully offset by a
valuation allowance. The management will continue to assess the valuation
allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the remaining net deferred tax assets
will be recognized in the future.
(9) Subsequent Events
On March 31, 2000, The Neptune Society, Inc. borrowed an additional
$750,000 from Private Investment Company, Ltd., bringing the total of the
promissory note to $1,000,000. The note is an interest-free,
non-amortizing, promissory note to be repaid no later than September 30,
2001. Financing costs of 12,000 common shares valued at $12.50 per share
were paid in connection with this loan.
In March 2000, the Company acquired all of the outstanding stock of the
Cremation Society of Iowa, Inc. (CSI) in exchange for 80,516 shares of the
Company's common stock with an aggregate value of $1,000,000 and $110,000
in cash. In August, 2000, the Company renegotiated the purchase price for
CSI to 48,309 shares of the Company's common stock and $110,000 in cash.
The renegotiated purchase price also includes earnout provisions based on
gross revenues and EBITDA, and a price guarantee on the shares issued in
the purchase such that the fair value of the total consideration will not
be less than $600,000 on December 1, 2000. The Company entered into
employment and non-compete agreements with David Noftsger and John Bethel,
the former owners, and issued a total of 20,000 options in consideration
therefor. This acquisition will be accounted for as a purchase.
In July 2000 the Company purchased all of the outstanding stock of Wilhelm
Mortuary, Inc., certain assets of Heritage Memorial Society, LLC. and
Community Memorial Centers, LLC in exchange for 313,308 shares of the
Company's common stock , cash of $500,000 and a debenture
F-16
<PAGE>
Neptune Society, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1998,
The Three Months Ended March 31, 1999 and the
Nine Months Ended December 31, 1999
of $1,000,000 maturing on July 17, 2003. The debenture bears interest at 8%
per year and is convertible into the Company's common stock at any time
after July 2001, based upon a conversion price of $12.00 per share. The
Company also guaranteed that if the value of the shares issued, based on
the average trading price of the common stock of The Neptune Society, Inc.
for the 60 day period preceding the first trading day following July 5,
2001, was less than $3,885,007, the Company must pay additional
consideration of the difference between $3,885,007 and the value of the
shares in cash or common stock, at the option of the Company. The
acquisition will be accounted for as a purchase. In connection with such
acquisition, the Company issued 85,000 options exercisable at $13.25 per
share to certain former employees of the acquired entities.
Also in July 2000, the Company entered into a private placement Agency
Agreement for the sale of 500,000 shares of the Company's common stock at
$14.00 per share. On August 9, 2000, the private placement was closed for
gross proceeds of $7,000,000. The Company incurred an agency fee of $75,000
and a finder's fee of 150,000 of the Company's common shares in connection
with such private placement.
On July 31, 2000, the balance due under the $19,000,000 note to the
Weintraub Trust was $5,065,836. The Company paid $341,396 on the principal
balance. In exchange for releasing the Weintraub Trust from liability for
loss of revenue or loss of projected revenue as a result of the pending
Leneda legal proceeding (See "Item 8 Legal Proceedings"), the due date on
the remaining $4,724,440 was extended for twelve months. The Company agreed
to guarantee the Weintraub Trust a selling price of $14.00 per share for
3,375 common shares per month for shares currently owned by the Weintraub
Trust by agreeing to repurchase treasury stock from the shareholder, up to
$45,000 per month, during each of the months in the twelve month period
ending July 31, 2001, if the shareholder exhausts all good faith efforts to
liquidate the stock through conventional means. In addition, the Company
agreed to repay the balance of $1,297,778 owed under the terms of the
$2,000,000 note.
F-17
<PAGE>
<TABLE>
Neptune Society, Inc.
Condensed Consolidated Balance Sheet
December 31, 1999 and June 30, 2000
(Unaudited)
Predecessor Successor
Company Company
------------------ ---------------
December 31, 1999 June 30, 2000
------------------ ---------------
<S> <C> <C>
Assets
Current Assets: |
Cash $ 6,825,533 | 2,407,841
Accounts receivable 178,310 | 250,754
Prepaid expenses and other current assets 42,342 | 409,396
------------------ | ---------------
Total current assets 7,046,185 | 3,067,991
|
Property and equipment, net 544,194 | 845,124
Non compete agreements, net 24,824,943 | 1,521,500
Names & recognition, net 1,596,600 | 25,186,357
Deferred financing costs 920,313 | 689,130
Deferred tax assets 254,128 | 788,880
Deferred charges and other assets 662,101 | 1,215,436
------------------ | ---------------
|
$ 35,848,464 | 33,314,418
================== | ===============
|
|
Liabilities and Shareholders' Equity |
|
Current liabilities: |
Current portion of long term debt $ 10,629,778 | $ 5,755,601
Accounts payable 498,007 | 878,148
Accrued and other current liabilities 602,239 | 1,270,757
------------------ | ---------------
Total current liabilities 11,730,024 | 7,904,506
|
Long term debt 5,721,912 | 6,297,851
Convertible debentures 4,329,591 | 4,395,918
Deferred preneed revenue 1,682,014 | 3,456,618
------------------ | ---------------
23,463,541 | 22,054,893
------------------ | ---------------
|
Shareholders' equity: |
Common stock 13,195 | 13,437
Additional paid-in capital 14,261,362 | 15,768,417
Accumulated deficit (1,889,634) | (4,522,329)
------------------ | ---------------
Total shareholders' equity 12,384,923 | 11,259,525
------------------ | ---------------
$ 35,848,464 | $ 33,314,418
================== | ===============
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
<TABLE>
Neptune Society Inc.
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1999 and June 30, 1999
and the six months ended June 30, 2000
(Unaudited)
Predecessor Company Successor Company
------------------- ------------------------------
Three months Six months
Three months ended ended June 30, ended June 30,
March 31, 1999 1999 2000
------------------- -------------------------------
<S> <C> <C> <C>
Revenues |
Services and merchandise $ 2,654,324 | 1,451,733 2,709,512
Management and finance fees 307,196 | 326,501 738,547
------------- | ------------- -----------
Total revenues 2,961,520 | 1,778,234 3,448,059
|
Cost and expenses 1,198,469 | 816,000 1,906,086
------------- | ------------- -----------
Gross profit 1,763,051 | 962,234 1,541,973
|
General and administrative expenses 748,385 | 556,685 2,109,844
Compensation to principal shareholder 430,090 |
Amortization expense - | 341,482 732,155
Professional fees 535,878 | 169,342 462,605
------------- | ------------- -----------
Total general and administrative expenses 1,714,353 | 1,067,509 3,304,604
|
Income (loss) from operations 48,698 | (105,275) (1,762,631)
|
Interest expense - | 505,854 1,404,816
------------- | ------------- -----------
|
Income (loss) before provision for taxes 48,698 | (611,029) (3,167,447)
|
Income tax benefit - | 85,131 534,752
------------- | ------------- -----------
Net income (loss) $ 48,698 | (525,998) (2,632,695)
============= | ============= ===========
Earnings (loss) per share - |
Basic and Diluted | (0.09) (0.39)
|
Weighted average number of shares - |
Basic and Diluted | 5,736,264 6,669,211
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
<TABLE>
Neptune Society Inc.
Condensed Consolidated Statements Of Cash Flows
For the three months ended March 31, 1999 and June 30, 1999
and the six months ended June 30, 2000
(Unaudited)
Predecessor Company Successor Company
------------------------------------------------
Three months Six months
Three months ended ended June 30, ended June 30,
March 31, 1999 1999 2000
------------------ -------------------------
<S> <C> <C> <C>
Cash flows from operating activities: |
Net loss $ 48,698 | (525,968) (2,632,695)
Adjustments to reconcile net loss ot net cash |
used in operating activities |
Depreciation and amortization 9,611 | 361,789 807,035
Amortization of deferred financing costs and debt |
discount - | 463,988 763,638
Deferred tax benefit - | (85,131) (534,752)
Noncash interest expense - | - 161,865
Stock compensation expense - | - 17,289
Changes in operating assets and liabilities: |
Accounts receivable 145,811 | (156,371) (70,099)
Prepaid expenses and other current assets 4,924 | (4,497) (358,246)
Deferred charges and other assets (65,659) | (228,378) (553,335)
Accounts payable 306,892 | 91,501 380,141
Accrued and other current liabilities (38,843) | 252,395 468,894
Deferred preneed revenue 149,082 | 483,033 1,774,604
--------------- | -------------- ------------
Net cash provided by operating activities 560,516 | 652,331 224,339
--------------- | -------------- ------------
|
Cash flows from investing activities: |
Purchases of property and equipment (7,934) | (79,380) (221,117)
Acquisitions, net of cash acquired - | (1,310,000) (146,746)
--------------- | -------------- ------------
Net cashed used in investing activities (7,934) | (1,389,380) (367,863)
|
Cash flows from financing activities: |
Proceeds from issuance of common stock, net - | - 100,008
Proceeds from issuance of long term-debt - | 100,000 750,000
Repayments on long-term debt - | (166,666) (5,114,176)
Proceeds from exercise of warrants - | 800,000 -
Payment of debt issuance costs - | - (10,000)
Distribution to owners (64,000) | - -
--------------- | -------------- ------------
Net cash provided by (used in) financing activities (64,000) | 733,334 (4,274,168)
|
Net increase (decrease) in cash 488,582 | (3,715) (4,417,692)
|
Cash, beginning of period 612,370 | 201,006 6,825,533
--------------- | -------------- ------------
Cash, end of period $ 1,100,952 | 197,291 2,407,841
=============== | ============== ============
|
Supplemental disclosure of cash flow information |
Cash paid during the period for interest $ - | $ - $ 383,201
=============== | ============== ============
|
Supplemental disclousre of noncash investing and |
financing activities: |
Common stock issued for acquisitions $ - | 5,000,000 1,000,000
Common stock issued for loan origination costs - | 390,000
Discounts on non-interest bearing debt - | 1,031,471 -
Notes issued for acquisition - | 19,968,529 -
Increase in note payable due to accrued interest expense $ - | $ - $ 161,865
=============== | ============== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
THE NEPTUNE SOCIETY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999, JUNE, 30, 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000
(1) The Business
Neptune Society, Inc., a Florida Corporation, is the holding company for
Neptune America, Inc., a California Corporation. Neptune Management
Corporation and Heritage Alternatives, Inc. are wholly owned subsidiaries
of Neptune America, Inc. and engage in marketing and administering pre-need
and at-need cremation services in California, Florida, New York and
Washington. Neptune Society, Inc. operates crematories in Los Angeles,
California and Spokane, Washington.
On March 31, 1999, Lari Corp., in exchange for $1,000,000 cash, 500,000
shares of common stock valued at $5,000,000 and $21,000,000 of promissory
notes valued at $19,968,529, acquired all of the outstanding shares and
caused to be acquired the partnership interests of the following entities
(collectively referred to as the Predecessor Company):
Neptune Management Corp.
Neptune Pre-Need Plan, Inc.
Heritage Alternatives, Inc.
Heritage Alternatives, L.P.
Neptune Funeral Services, Inc.
Neptune Funeral Services of Westchester, Inc.
Neptune-Los Angeles, Ltd.
Neptune-Santa Barbara, Ltd.
Neptune-Ft. Lauderdale, Ltd.
Neptune-St. Petersburg, Ltd.
Neptune-Miami, Ltd.
Neptune-Westchester, Ltd.
Neptune-Nassau, Ltd.
The business combination was accounted for using the purchase method of
accounting, and the excess of the purchase price over the fair value of
identifiable net assets acquired, $25,281,237, was recorded as names and
reputations. The financial statements of Lari Corp. prior to April 1, 1999
have not been included as they are not material to the Predecessor Company
financial statements. In January 1999, Lari Corp. issued 1,000,000 shares
of common stock and 4,000,000 warrants to purchase common stock for
$200,000. On May 3, 1999, Lari Corp. changed its name to Neptune Society,
Inc. (the Successor Company). Collectively, the Predecessor Company and
Successor Company are herein referred to as the Company.
Since purchase accounting was reflected on the opening balance sheet of the
Successor Company on April 1, 1999, the financial statements of the
Successor Company are not comparable to the financial statements of the
Predecessor Company. Accordingly, a vertical black line is shown to
separate Successor Company financial statements from those of the
Predecessor Company for periods ended prior to March 31, 1999.
F-21
<PAGE>
On December 31, 1999, the Company acquired a crematory in Spokane,
Washington for $500,000 cash and 22,727 shares of common stock for a total
purchase price of $749,998 under an asset purchase agreement and a
non-compete agreement. The business combination was accounted for using the
purchase method of accounting and the excess of the purchase price over the
fair market value of identifiable net assets acquired, $491,752, has been
recorded as names and reputations.
(2) Interim Financial Statements (Unaudited)
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
(3) Computation of Earnings (Loss) Per Common Share
For the six months ended June 30, 2000, and the three months ended June 30,
1999, basic and diluted loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the period.
For the six months ended June 30, 2000, options to purchase 170,000 shares
of common stock at prices ranging from $12.12 to $14.25 per share were not
included in the computation of diluted loss per share because the effect
would be antidilutive. No dilutive securities were outstanding during the
three month period ended June 30, 1999.
Per share information for prior periods is not presented because such
information would not be meaningful in light of the business combination
described in note 1.
(4) Shareholders' Equity
Effective as of May 19, 2000, the Company's Board of Directors authorized
and effected a 1 for 2 reverse split of its common stock. Per share amounts
in the accompanying consolidated financial statements give retroactive
effect to the reverse stock split.
During the six months ended June 30, 2000, 170,000 options to acquire
common stock were granted at exercise prices ranging from $12.12 to $14.25
per share. The options vest one year from the date of grant and expire
three years from the date of grant. In addition, 98,000 options were
canceled during the six month period. On July 5, 2000, 85,000 additional
options were granted at an exercise price of $13.25 per share.
At June 30, 2000, 6,718,657 shares of the Company's common stock were
issued and outstanding.
F-22
<PAGE>
(5) Financing
On March 31, 2000, The Neptune Society, Inc. obtained an additional
$750,000 from Private Investment Company, Ltd., bringing the total of the
promissory note to $1,000,000. The note is an interest-free,
non-amortizing, promissory note to be repaid no later than September 30,
2001. Financing costs of 12,000 common shares valued at $12.50 per share
were paid in connection with this loan.
(6) Acquisitions
In March 2000, the Company acquired all of the outstanding stock of the
Cremation Society of Iowa, Inc. (CSI) in exchange for 80,516 shares of the
Company's common stock with an aggregate value of $1,000,000 and $110,000
in cash. This acquisition was accounted for as a purchase and the excess of
the consideration paid over the net assets acquired was $1,018,470 and was
recorded as names and reputations.
(7) Subsequent Events
In July 2000 the Company purchased all of the outstanding stock of Wilhelm
Mortuary, Inc., certain assets of Heritage Memorial Society, LLC and
Community Memorial Centers, LLC in exchange for 313,308 shares of the
Company's common stock, $500,000 in cash and a convertible debenture of
$1,000,000 maturing on July 17, 2003. The debenture bears interest at 8%
per year and is convertible into the Company's common stock at any time
after July 2001, based upon a conversion price of $12.00 per share. This
acquisition will be accounted for as a purchase.
Also in July 2000, the Company entered into a private placement Agency
Agreement for the sale of 500,000 shares of the Company's common stock at
$14.00 per share. On August 9, 2000, the private placement was closed for
gross proceeds of $7,000,000. The Company paid an agency fee of $75,000 and
a finder's fee of 150,000 of the Company's common shares in connection with
such private placement.
On July 31, 2000, the balance due under the $19,000,000 note to the
Weintraub Trust was $5,065,836. The Company paid $341,396 on the principal
balance. In exchange for releasing the Weintraub Trust from liability for
loss of revenue or loss of projected revenue as a result of the pending
Leneda legal proceeding (See "Item 8 Legal Proceedings"), the due date on
the remaining $4,724,440 was extended for twelve months. The Company agreed
to guarantee the Weintraub Trust a selling price of $14.00 per share for
3,375 common shares per month for shares currently owned by the Weintraub
Trust by agreeing to repurchase treasury stock from the shareholder, up to
$45,000 per month, if the shareholder exhausts all good faith efforts to
liquidate the stock through conventional means.
In August, 2000, the Company renegotiated the purchase price for Cremation
Society of Iowa to 48,309 shares of the Company's common stock and $110,000
in cash. The renegotiated purchase price also includes certain earnout
provisions based on gross revenues and EBITDA, and a price guarantee on the
shares issued in the purchase such that the fair value of the total
consideration will not be less than $640,000 on December 1, 2000.
F-23
<PAGE>
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of L R Associates, Inc., filed January
4, 1985
3.2 Articles of Amendment of L R Associates, Inc. changing name to
Lari Corp., filed August 3, 1998
3.3 Articles of Amendment of Lari Corp. changing name to The Neptune
Society, Inc., filed April 26, 1999
3.4 Articles of Amendment of The Neptune Society, Inc. filed May 9,
2000, effecting a combination of the Corporation's shares of
common stock
3.5 Bylaws of The Neptune Society, Inc.
10.1 Form of Stock Option Plan
10.2 Share Purchase Agreement dated for reference March 26, 1999 by
and between Lari Acquisition Company, Inc., Emanuel Weintraub
Inter Vivos Trust, Emanuel Weintraub, Neptune Management Corp.,
Heritage Alternatives, Inc., Neptune Pre-Need Plan, Inc. and Lari
Corp.
10.3 Share Purchase Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc., Lari Corp. and Stanley Zicklin
10.4 Share Purchase Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc., Lari Corp. and Jill Schulman
10.5 Agreement dated August 1, 1999 by and between Lari Acquisition
Company, Inc., The Neptune Society, Inc. and Stanley Zicklin
10.6 Agreement dated August 1, 1999 by and between Lari Acquisition
Company, Inc., The Neptune Society, Inc., Emmanuel Weintraub and
Emmanuel Weintraub Inter Vivos Trust
<PAGE>
Exhibit
Number Description
------ -----------
10.7 Interest Purchase Agreement dated for reference March 31, 1999 by
and between Neptune Management Corp. Lari Corp., Lari Acquisition
Company, Inc. and the limited partners of Neptune-Los Angeles,
Ltd., Neptune-Santa Barbara, Ltd., Neptune-Miami, Ltd.,
Neptune-St. Petersburg, Ltd., Neptune-Ft. Lauderdale, Ltd.,
Neptune-Nassau, Ltd., Neptune-Yonkers, Ltd.
10.8 Interest Purchase Agreement dated for reference March 31, 1999 by
and between Heritage Alternatives, Inc., Lari Corp., Lari
Acquisition Company, Inc. and the limited partners of Heritage
Alternatives, L.P.
10.9 Consulting Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc. and Emanuel Weintraub
10.10 Amendment to Consulting Agreement dated August 1, 1999 by and
between Lari Acquisition Company, Inc. and Emanuel Weintraub
10.11 $19,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.12 Amendment to $19,000,000 Promissory Note dated August 1, 1999 by
Lari Acquisition Company, Inc. in favor of Emanuel Weintraub
Inter Vivos Trust
10.13 $2,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.14 Amendment to $2,000,000 Promissory Note dated August 1, 1999 by
Lari Acquisition Company, Inc. in favor of Emanuel Weintraub
Inter Vivos Trust
10.15 Pre-Need Trust Agreement dated October 1, 1993 by and between
Neptune Management Corp. and Sunbank/South Florida, N.A.
10.16 Asset Purchase Agreement dated March 31, 1992 by and between
Heritage Cremation Services, Inc., Joseph Estephan, Elie Estephan
and Emanuel Weintraub
<PAGE>
Exhibit
Number Description
------ -----------
10.17 Form of Commissioned Contractor Agreement
10.18 Agency Agreement dated for reference July 22, 1999 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
10.19 Amendment to Agency Agreement dated August 5, 1999 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
10.20 Form of Subscription Agreement
10.21 Form of Registration Rights Agreement
10.22 Debenture and Warrant Purchase Agreement dated November 24, 1999.
10.23 Form of Convertible Debenture
10.24 Asset Purchase Agreement dated December 31, 1999, by and among
The Neptune Society, Inc., Crematory Society of Washington, Inc.,
and John C. Ayres.
10.25 Asset Purchase Agreement dated March 15, 2000, by and among the
Neptune Society, Inc., Cremation Society of Iowa, Inc., Dave
Noftsger, and John Bethel
10.26 Asset Purchase Agreements and Merger Agreement dated July 5,
2000, by and among the Neptune Society, Inc., Heritage Memorial,
Community Memorial Centers, David Schroeder, and Michael Ashe
10.27 Agency Agreement dated for reference July 31, 2000 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Stonefield Josephson, Inc., Independent Auditors
27.1 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE NEPTUNE SOCIETY, INC.
Date: October 3, 2000 /s/ Marco Markin
----------------------------------
Marco Markin, President and Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of L R Associates, Inc., filed January
4, 1985
3.2 Articles of Amendment of L R Associates, Inc. changing name to
Lari Corp., filed August 3, 1998
3.3 Articles of Amendment of Lari Corp. changing name to The Neptune
Society, Inc., filed April 26, 1999
3.4 Articles of Amendment of The Neptune Society, Inc. filed May 9,
2000, effecting a combination of the Corporation's shares of
common stock
3.5 Bylaws of The Neptune Society, Inc.
10.1 Form of Stock Option Plan
10.2 Share Purchase Agreement dated for reference March 26, 1999 by
and between Lari Acquisition Company, Inc., Emanuel Weintraub
Inter Vivos Trust, Emanuel Weintraub, Neptune Management Corp.,
Heritage Alternatives, Inc., Neptune Pre-Need Plan, Inc. and Lari
Corp.
10.3 Share Purchase Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc., Lari Corp. and Stanley Zicklin
10.4 Share Purchase Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc., Lari Corp. and Jill Schulman
10.5 Agreement dated August 1, 1999 by and between Lari Acquisition
Company, Inc., The Neptune Society, Inc. and Stanley Zicklin
10.6 Agreement dated August 1, 1999 by and between Lari Acquisition
Company, Inc., The Neptune Society, Inc., Emmanuel Weintraub and
Emmanuel Weintraub Inter Vivos Trust
10.7 Interest Purchase Agreement dated for reference March 31, 1999 by
and between Neptune Management Corp. Lari Corp., Lari Acquisition
Company, Inc. and the limited partners of Neptune-Los Angeles,
Ltd., Neptune-Santa Barbara, Ltd., Neptune-Miami, Ltd.,
Neptune-St. Petersburg, Ltd., Neptune-Ft. Lauderdale, Ltd.,
Neptune-Nassau, Ltd., Neptune-Yonkers, Ltd.
10.8 Interest Purchase Agreement dated for reference March 31, 1999 by
and between Heritage Alternatives, Inc., Lari Corp., Lari
Acquisition Company, Inc. and the limited partners of Heritage
Alternatives, L.P.
10.9 Consulting Agreement dated March 31, 1999 by and between Lari
Acquisition Company, Inc. and Emanuel Weintraub
10.10 Amendment to Consulting Agreement dated August 1, 1999 by and
between Lari Acquisition Company, Inc. and Emanuel Weintraub
10.11 $19,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.12 Amendment to $19,000,000 Promissory Note dated August 1, 1999 by
Lari Acquisition Company, Inc. in favor of Emanuel Weintraub
Inter Vivos Trust
10.13 $2,000,000 Promissory Note dated March 31, 1999 by Lari
Acquisition Company, Inc.
10.14 Amendment to $2,000,000 Promissory Note dated August 1, 1999 by
Lari Acquisition Company, Inc. in favor of Emanuel Weintraub
Inter Vivos Trust
10.15 Pre-Need Trust Agreement dated October 1, 1993 by and between
Neptune Management Corp. and Sunbank/South Florida, N.A.
10.16 Asset Purchase Agreement dated March 31, 1992 by and between
Heritage Cremation Services, Inc., Joseph Estephan, Elie Estephan
and Emanuel Weintraub
<PAGE>
Exhibit
Number Description
------ -----------
10.17 Form of Commissioned Contractor Agreement
10.18 Agency Agreement dated for reference July 22, 1999 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
10.19 Amendment to Agency Agreement dated August 5, 1999 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
10.20 Form of Subscription Agreement
10.21 Form of Registration Rights Agreement
10.22 Debenture and Warrant Purchase Agreement dated November 24, 1999.
10.23 Form of Convertible Debenture
10.24 Asset Purchase Agreement dated December 31, 1999, by and among
The Neptune Society, Inc., Crematory Society of Washington, Inc.,
and John C. Ayres.
10.25 Asset Purchase Agreement dated March 15, 2000, by and among the
Neptune Society, Inc., Cremation Society of Iowa, Inc., Dave
Noftsger, and John Bethel
10.26 Asset Purchase Agreements and Merger Agreement dated July 5,
2000, by and among the Neptune Society, Inc., Heritage Memorial,
Community Memorial Centers, David Schroeder, and Michael Ashe
10.27 Agency Agreement dated for reference July 31, 2000 by and between
The Neptune Society, Inc. and Standard Securities Capital
Corporation
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Stonefield Josephson, Inc., Independent Auditors
27.1 Financial Data Schedule
